For The Fiscal Year Ended December 31, 2000
Bermuda Not applicable
(State of incorporation (I.R.S. Employer
or organization) Identification No.)
44 Church Street
P.O. Box HM 2064
Hamilton, Bermuda HM HX
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (441) 296-8560
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered - ------------------- ----------------------------------------- Common Stock, $0.01 par value New York Stock Exchange, Inc.
Securities to be registered pursuant to Section 12(g) of the Act: None
Indicate by check mark 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 ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of Registrant's voting common stock held by non-affiliates on March 10, 2001 was $22,658,517. For the purposes of this computation shares held by directors (and shares held by entities in which they serve as officers) and executive officers of the Registrant have been excluded. Such exclusion is not intended, nor shall it be deemed to be an admission that such persons are affiliates of Registrant.
The number of outstanding shares of Registrant's common stock on March 10, 2001 was 4,813,547.
Documents Incorporated by Reference: Part III of this Form 10-K incorporates by reference certain information from the Registrant's Proxy Statement for the 2001 Annual General Meeting of the Shareholders (the "2001 Proxy Statement").[The Remainder of this Page Intentionally Left Blank]
Page
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PART I
Item 1. Business......................................................... 1
Item 2. Properties........................................................ 25
Item 3. Legal Proceedings................................................. 25
Item 4. Submission of Matters to a Vote of Security Holders............... 25
PART II
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters.................................. 28
Item 6. Selected Financial Data........................................... 28
Item 7. Management's Discussion and Analysis of Results
of Operations and Financial Condition........................ 30
Item 7A. Quantitative and Qualitative Disclosures About Market Risk........ 38
Item 8. Financial Statements and Supplementary Data....................... 39
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.......................... 39
PART III
Item 10. Directors and Executive Officers of the Registrant................ 40
Item 11. Executive Compensation............................................ 40
Item 12. Security Ownership of Certain Beneficial Owners
and Management............................................... 40
Item 13. Certain Relationships and Related Transactions.................... 40
PART IV
Item 14. Exhibits, Financial Statements Schedules, and Reports
on Form 8-K.................................................. 41
General
American Safety Insurance Group, Ltd. (the “Company” or “American Safety”) is a specialty insurance and financial services holding company organized under the laws of Bermuda which, through its subsidiaries, develops, underwrites, manages and markets primary casualty insurance and reinsurance programs in the alternative insurance market in all 50 states for environmental remediation risks and other specialty risks. The Company also provides a broad range of financial services and products to middle market businesses throughout the United States and is the owner/developer of a residential condominium and marina project in Ponce Inlet, Florida. Unless the context indicates otherwise, all references to the “Company” or “American Safety” refer to American Safety Insurance Group, Ltd. and its subsidiaries.
American Safety was formed in Bermuda as a group captive insurance company in 1986 to provide stable, long term insurance protection for the asbestos abatement and environmental remediation industry in the United States which had suffered from disruptive market cycles in the standard insurance market. The Company now provides specialty insurance coverages and services in all 50 states and principally markets its insurance programs through approximately 275 independent insurance agency and brokerage firms.
The Company develops 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, surety, commercial automobile and property, 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, general construction and other specialty risks.
The Company insures and places risks through its two U.S. insurance subsidiaries, American Safety Casualty Insurance Company (“American Safety Casualty”) and American Safety Indemnity Company (“American Safety Indemnity”), as well as its U.S. non-subsidiary risk retention group affiliate, American Safety Risk Retention Group, Inc. (“American Safety RRG”) and substantial unaffiliated insurance companies. The Company also reinsures and places, through the Company’s Bermuda reinsurance subsidiary, American Safety Reinsurance, Ltd. (“American Safety Re”), and substantial unaffiliated reinsurers, a portion of the risks underwritten directly by its two U.S. insurance subsidiaries, its risk retention group affiliate and other insurers. Substantially all of the reinsurance
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business that the Company currently assumes is for primary insurance programs that the Company has developed and underwritten.
The Company also provides specialized insurance program development, underwriting, risk placement, reinsurance, program management, brokerage, loss control, claims administration and marketing services through American Safety Insurance Services, Inc. (“ASI Services”), its principal U.S. program development, underwriting, brokerage and administrative services subsidiary. The Company selects 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.
Industry Ratings
In December 1995, A.M. Best Company (“A.M. Best”), an independent, nationally recognized insurance industry rating service and publisher, assigned a rating of “A (Excellent)” on a group basis to American Safety, as well as its U.S. insurance subsidiary, American Safety Casualty Insurance Company (“American Safety Casualty”), its Bermuda reinsurance subsidiary, American Safety Reinsurance, Ltd. (“American Safety Re”) and its non-subsidiary risk retention group affiliate, American Safety Risk Retention Group, Inc. (“American Safety RRG”). The rating of “A (Excellent)” is the third highest of A.M. Best’s 16 letter ratings. 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. In June 1998, A.M. Best assigned a higher financial size rating (VII) on a group basis to American Safety representing capital and surplus in excess of $50 million as a result of the Company’s completion of its initial public offering in February 1998.
In June 2000, A.M. Best reaffirmed its rating of “A (Excellent)” on a group basis to American Safety and assigned an “A (Excellent)” rating to its recently acquired excess and surplus lines insurance company, American Safety Indemnity.
Alternative Insurance Market
The alternative insurance market has developed over the past two decades to serve insureds whose insurance needs have not been adequately met by the standard insurance market. According to A.M. Best, the alternative insurance market has grown to approximately 48% of the total U.S. commercial property and casualty insurance market.
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Alternative insurance programs generally involve (i) the underwriting of risks which are characterized by the standard insurance market as difficult or which generate too little premium for standard insurance companies; and/or (ii) the design of specialized insurance programs, such as deductible or risk retention programs, and captive or rent-a-captive programs, which enable insureds to assume a portion of their own risks and share in the underwriting profitability or losses of the program. Originally developed to respond to the needs of insureds for adequate insurance coverage and affordable premium rates, the alternative insurance market also responds to strategic needs of insureds for better financial management, improved claims handling, more effective risk management, customized insurance programs, direct access to the worldwide reinsurance market and greater control over loss prevention. The benefits of such alternative insurance market techniques typically include lower and more stable costs, greater control by the client of its risk management program and an increased emphasis within the client’s organization on loss prevention and loss control.
Business Strategy
The Company’s business strategy is to develop insurance programs for the environmental remediation industry and other specialty industries and risks. The Company targets niche insurance markets and opportunities where its expertise is required and where competition is limited. The Company seeks to generate underwriting profits, program management fees and brokerage commissions through such insurance programs. The Company utilizes a flexible approach to accomplish its strategy by combining (i) intensive underwriting, (ii) value-added services, including quality coverage enhancements, professional risk management, dedicated loss control and claims management, and (iii) superior service to insurance agents, brokers and insureds. Further, the Company differentiates itself by its ability to select its roles as program developer, primary underwriter, reinsurer, program manager and broker based on its assessment of each specialty risk profile.
The Company’s financial services subsidiary, American Safety Financial Corp. (“American Safety Financial”), arranges debt and equity financing for middle market businesses, and provides integrated insurance and financial programs to a broad range of industries. The Company’s real estate development subsidiary, Ponce Lighthouse Properties, Inc., is the owner/developer of the Harbour Village Golf and Yacht Club (“Harbour Village”) project in Ponce Inlet, Florida. The Company organized Rivermar Contracting Company, a subsidiary, to be the general contractor for the construction of the Harbour Village project. The Company acquired the property which is being developed as Harbour Village through foreclosure in April 1999. Management believes the development
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of Harbour Village will provide significant value to the Company’s shareholders over the anticipated three to five year development period.
Insurance Program Development, Management and Administrative Operations
The Company’s U.S. brokerage and management subsidiaries, in combination with the Company’s primary insurance and reinsurance companies, provide a broad range of dedicated services in connection with the development and implementation of specialty risk insurance programs.
Insurance Services. American Safety Insurance Services, Inc. ("ASI Services") provides insurance program development, underwriting, risk placement, reinsurance placement, program management, brokerage, loss control, claims administration, marketing and administrative services to the Company's U.S. insurance operations, its risk retention group affiliate, and unaffiliated insurers and reinsurers.
ASI Services identifies and evaluates potential new program business and also receives submissions for new programs from insurance brokers and other intermediaries throughout the United States. When a submission for a new program is received, ASI Services identifies the resources needed to evaluate and develop the program. In evaluating and developing a new program, ASI Services considers the following factors: whether the submitting party will bear risk and the collateral security required therefor; the analysis of historic loss data; the integrity and experience of the submitting party; the availability of reinsurance; and the potential profitability of the program to the Company. If the prospects for a new program appear favorable, ASI Services designs the structure for the new program and determines what additional services, such as program management, brokerage, reinsurance, loss control, claims administration, marketing, or other services will be required. ASI Services determines which entities, both affiliated and unaffiliated, are best able to provide such services in a cost-effective manner and implements the program.
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ASI Services has developed many of the Company’s primary insurance and reinsurance programs. ASI Services has also served since 1990 as the program manager for the Company’s risk retention group affiliate, providing it with program management, underwriting, loss control, brokerage, marketing and financial services pursuant to guidelines and procedures established by the board of directors of the risk retention group.
Management and Administrative Services. In the development and implementation of programs, ASI Services provides a number of fee and commission-based services. ASI Services provides (i) program management services for the overall management and administration of a program; (ii) underwriting services for evaluating individual risks or classes of risk; (iii) risk placement services for determining the most effective means of providing particular coverages; (iv) brokerage services for placing risks with affiliated or unaffiliated insurers; (v) reinsurance intermediary services for placing ceded reinsurance for a program; (vi) loss control services for evaluating the risks posed by a particular class of risk, as well as the ability of insureds to control their losses; (vii) claims administration services for the prompt reporting and handling of claims, and the supervision of claims adjusters and third party administrators; (viii) marketing services for designing and placing advertisements and other marketing materials, as well as marketing insurance programs to independent agents and brokers; and (ix) administrative services, including for billing, collecting and reporting primary and reinsurance premiums, producing financial reports on programs and paying claims.
Other Insurance Service Subsidiaries. The Company has three other U.S. subsidiaries engaged, under the direction of ASI Services, in various administrative and insurance agency services. Environmental Claims Services, Inc. operates as a specialized claims administration facility engaged in the administration and analysis of environmental and other specialty program claims. Sureco Bond Services, Inc. is a surety bond agency authorized to write contract performance and payment bonds for unaffiliated insurers. American Safety Purchasing Group, Inc. was formed to facilitate the provision of certain insurance coverages through a purchasing group (as defined by the Risk Retention Act) by licensed insurance companies.
Primary Insurance Operations
The Company, through its two U.S. insurance subsidiaries and its risk retention group affiliate, provides primary casualty insurance in the alternative insurance market in all 50 states for environmental remediation risks and other specialty risks. The Company’s specialty insurance programs include coverages for general liability, pollution liability, professional liability, workers’ compensation, surety, commercial automobile and property, as well as custom designed risk management programs (including captive and rent-a-captive
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programs), for contractors, consultants and other businesses and property owners who are involved with environmental remediation, general construction and other specialty risks.
Environmental Insurance Programs. The Company has developed specialty insurance programs for a broad range of environmental concerns and believes that its intensive underwriting, dedicated loss control and claims management, and superior service orientation will enable it to expand its insurance program base to other environmental coverages not currently being provided. Since 1986, the Company’s insurance programs have helped asbestos abatement and other environmental remediation contractors and consultants, as well as property owners, perform remediation work in schools, hospitals, commercial, industrial and other facilities, thereby protecting school children, factory workers, and numerous public and private employees from the potential threat of environmental health hazards.
The Company’s in-house underwriting department consists of trained environmental and other specialty risk underwriters. The underwriting staff analyzes loss histories of prospective insureds, as well as the insureds’ technical capabilities and experience with similar projects to those for which insurance is being requested. The underwriting staff may also request references and financial information. Some of the underwriters have technical backgrounds and experience in various environmental fields. The Company’s in-house loss control department is also involved in the underwriting process, in reviewing technical work guidelines provided by insureds, such as safety and health practices and procedures, as well as inspecting contractor insureds’ environmental remediation project sites and recordkeeping throughout the United States.
The Company's general and pollution liability policies for environmental risks cover bodily injury and property damage to third parties arising out of the operations of insureds, which may include losses arising from exposure to specific hazardous substances that are released during a remediation project. Coverages provided for professional liability protect insureds against claims arising out of bodily injury or property damage which occurs as a result of the performance of professional consulting, testing, laboratory and similar services, such as the failure to detect hazardous materials in connection with assessments for same, or the failure to properly design or monitor performance on remediation projects in accordance with contracts entered into by such insureds. The Company also provides workers' compensation coverage for contractors involved in environmental remediation, which may include risks such as occupational diseases from exposure to hazardous substances.
The Company provides insurance coverage for a broad range of environmental risks, including:
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Asbestos Abatement. Asbestos is a fibrous mineral which has been commercially produced for, among other things, insulation and reduction of fire and heat in buildings and products. In spite of the usefulness of asbestos, health problems have arisen with its use. In response to the need for detection, abatement and removal of asbestos, the asbestos abatement industry developed in the mid-1980‘s and sought insurance for risks involved with its business. Since 1986, the Company has provided general, pollution and professional liability coverages as well as workers’ compensation coverage for contractors, consultants, other businesses and property owners involved with asbestos abatement.
Lead Abatement. The Company provides general, pollution and professional liability coverages and workers’ compensation coverage for lead paint abatement contractors, consultants and property owners in connection with the abatement of lead paint from both public and private facilities, including housing authority complexes.
Underground Storage Tank Removal. The Company provides general, pollution and professional liability coverages as well as workers’ compensation coverage to contractors and consultants for the removal and replacement of underground storage tanks, including associated soil remediation activities attributed to leaking underground storage tanks.
Other Hazardous Substances. The Company provides general, pollution and professional liability coverages, and workers’ compensation coverage in connection with the removal and remediation of other hazardous substances, including hazardous waste, polychlorinated biphenyls (PCBs) and various petroleum products.
Other Environmental Risks. The Company provides environmental insurance coverages that offer protection against environmental exposures arising from general business or fixed site operations. Environmental impairment liability insurance is offered for varied purposes such as facilitating the financing of real estate transactions, transferring real estate and protecting against the release of hazardous substances from disposal sites.
Surety. The Company’s U.S. insurance subsidiary, American Safety Casualty, is licensed to write surety bonds in 47 states and the District of Columbia primarily providing contract performance and payment bonds to environmental and general construction contractors. American Safety Casualty is listed as an acceptable surety on federal bonds, commonly known as a “Treasury Listed” or “T-listed” surety, enabling it to issue surety bonds for federal projects, as well as state and private projects that utilize such designation as a reference in determining the acceptability of surety companies. American Safety Casualty’s underwriting limitation, as determined by the Department of the Treasury as of July 1, 2000, was $501,000 on a per-bond basis; however, this limitation does not constrain the amount of a bond that can be written, provided that the excess exposure is protected with
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approved reinsurance or other methods prescribed by the Department of the Treasury. American Safety Casualty maintains reinsurance with approved reinsurers for the purpose of issuing bonds in excess of its underwriting limitation.
The Company also provides insurance coverage for a broad range of specialty risks, including:
Excess and Surplus Lines. The Company’s excess insurance subsidiary, American Safety Indemnity, writes excess and surplus lines insurance. These risks are generally of a specialized or unique nature which are not served by the standard insurance market. The Company’s excess and surplus lines insurance typically covers general liability and products liability.
Commercial Lines. The Company’s U.S. insurance subsidiary, American Safety Casualty, writes commercial lines insurance for insureds, including retail stores, strip shopping centers, office buildings and hotel/motel franchisees. The Company’s commercial lines insurance typically covers general liability, property, burglary and theft, automobile liability and workers’ compensation. The Company obtains reinsurance for such risks and also protects its property exposure by obtaining catastrophe reinsurance.
Program Business. The Company, through its U.S. brokerage and management services subsidiaries, works with brokers and program administrators to develop and design tailor-made programs for a wide range of specialty industries, including environmental, construction, pest control, bail bond, transportation and professional liability. The Company can serve as the policy-issuing insurer, place reinsurance, coordinate claims handling, implement loss control services, and complete regulatory filings as may be required by the program.
Employee Leasing and Staffing Industry. The Company, through its U.S. insurance services subsidiary, American Safety Casualty, writes workers’ compensation and general liability insurance for employee leasing companies (also known as professional employer organizations) and staffing industry companies. These insurance programs were originally developed to enable employee leasing and staffing industry companies to obtain environmental services industry clients; subsequently, these programs have been expanded to cover non-environmental clients as well. Staffing industry companies provide temporary employees to a broad range of industries and businesses, with the staffing companies directly employing the workers and remaining responsible for payroll, workers’ compensation insurance coverage and human resource functions.
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Underwriting. ASI Services’s underwriting staff handles all insurance underwriting functions for programs on which the Company assumes risk, with specific underwriting authority related to the experience and knowledge level of each underwriter. Risks that are perceived to be more difficult and complex are underwritten by experienced staff and reviewed by management. ASI Services uses management information reports to measure risk selection and pricing in order to control underwriting performance. The principal underwriting factors used by ASI Services for underwriting liability, workers’ compensation and surety coverages, are a financially stable business, an established operating history, favorable loss histories and a demonstrated commitment to loss control practices.
Claims. Claims arising under the policies and treaties issued or reinsured by the Company are reviewed and managed by ASI Services’s internal claims department. When ASI Services receives notice of a loss, its claims personnel open a claim file and establish a reserve with respect to the loss. For programs on which the Company assumes risk, ASI Services retains claims settlement authority, delegating only limited settlement authority to certain third party administrators. ASI Services emphasizes prompt and fair settlement of meritorious claims, maintenance of adequate loss reserves and careful control of claims adjustment and legal expenses.
Reinsurance Assumed
Reinsurance is a contractual arrangement under which one insurer (the ceding company) transfers to another insurer (the reinsurer) all or a portion of the risk(s) that the ceding company has assumed under the insurance policy or policies it has issued. A ceding company may purchase reinsurance for any number of reasons, including to obtain, through the transfer of a portion of its liabilities, greater underwriting capacity than its own capital resources would support, to stabilize its underwriting results, to protect against catastrophic loss, and to enter into or withdraw from a line of business. Reinsurance can be written on either a quota share or excess of loss basis, under either a treaty or facultative reinsurance agreement.
Substantially all of the reinsurance business that the Company currently assumes is for primary insurance coverages that the Company has developed and underwritten. The Company, through its reinsurance subsidiary, enters into treaties with its U.S. insurance subsidiary, its risk retention group affiliate and unaffiliated insurers with whom the Company has developed insurance programs. The Company reinsures, generally on an excess of loss basis, the general liability, pollution liability, professional liability, workers’ compensation and surety risks for contractors, consultants and other businesses and property owners who are involved with environmental remediation, as well as programs for the employee leasing and staffing industry and other specialty risks.
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For the year ended December 31, 1999, of the $12.6 million of gross reinsurance premiums written by the Company, approximately $4.1 million was assumed from its risk retention group affiliate, with the balance of approximately $8.5 million assumed from unaffiliated insurers. For the year ended December 31, 2000, of the $22.6 million of gross reinsurance premiums written by the Company, approximately $7.9 million was assumed from its risk retention group affiliate, with the balance of approximately $14.7 million assumed from unaffiliated reinsurers.
The Company’s assumed reinsurance business for general liability, pollution liability, and professional liability is written under excess of loss treaties primarily with its risk retention group affiliate. In the layer of the first $250,000 of loss per occurrence, the Company assumes 75% of the losses arising from claims covered under the policies written after the reinsured pays the first $100,000 of claims in the aggregate on an annual basis; and the reinsured retains 25% of the risk after payment of the aggregate amount.
The Company’s two U.S. insurance subsidiaries cede certain risks on a quota share basis to the Company’s Bermuda reinsurance subsidiary in order to provide for a spread of risk among the respective companies as well as to increase the capacity of the Company’s U.S. insurance subsidiaries to write insurance business.
Management’s reinsurance underwriting strategy is to utilize the underwriting expertise of ASI Services, the Company’s principal U.S. program development, underwriting and administrative services subsidiary, to practice discipline in selecting and retaining risks and structuring insurance programs which the Company reinsures. The Company’s reinsurance treaties with its two U.S. insurance subsidiaries and its risk retention group affiliate automatically cover primary insurance programs written by such insurers. The Company utilizes ASI Services to provide direct contact with reinsureds, either by underwriting or claim audits or periodic loss control visits to the insureds and the producing brokers, both to enhance the quality of the underwriting process and to develop and retain business relationships.
Selected Operating Information
Gross Premiums Written and Produced. As a result of the Company’s roles in connection with insurance program development, risk bearing on a primary and reinsurance basis, insurance and reinsurance brokerage, and production and administration, the Company is involved in a number of insurance and reinsurance premium and fee-generating activities. The Company places insurance and reinsurance with its insurance and reinsurance subsidiaries and its risk retention group affiliate, and also acts as an agency and broker for its risk retention group affiliate, unaffiliated insurers and reinsurers for which the Company
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receives brokerage commissions of approximately 10% of gross premiums written and produced. For the year ended December 31, 2000, the Company was involved with the placement of approximately $110.2 million of gross premiums through its various programs and subsidiaries.
The following table sets forth the Company’s premiums written and produced for the years ended December 31, 1999 and December 31, 2000:
Year Ended Year Ended
December 31, 1999 December 31, 2000
Gross Ceded Net Gross Ceded Net
----- ----- --- ----- ----- ---
(Dollars in thousands)
The Company $ 23,405 $ 8,864 $ 14,541 $86,872 $44,872 $42,000
American Safety RRG (1) 7,469 18,683
Other Insurers and Reinsurers (2) 5,926 12,594
Less: Ceded from American Safety RRG to
the Company (3) (4,560) (7,923)
$ 32,240 $110,226
Net Premiums Written. The following table sets forth the Company's net premiums written by principal lines of insurance and reinsurance for the years ended December 31, 1999 and December 31, 2000:
Net Premiums Written December 31, 1999 December 31, 2000
----------------- -----------------
(Dollars in thousands)
General Liability $ 4,071 28.0% $ 11,731 27.9%
Workers' Compensation 7,308 50.3 13,318 31.7
Surety 1,997 13.7 8,387 20.0
Commercial Lines 520 3.6 4,293 10.2
Program Business 645 4.4 4,271 10.2
Total $14,541 100.0% $42,000 100.0%
The following table sets forth the Company’s net premiums written by specialty industry for the years ended December 31, 1999 and December 31, 2000:
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December 31, 1999 December 31, 2000
----------------- -----------------
(Dollars in thousands)
Environmental $ 9,424 64.8% $17,545 41.8%
Employee Leasing 3,898 26.8 9,226 22.0
Program Business and Other 377 2.6 6,602 15.7
Commercial Lines 520 3.6 4,292 10.2
Excess & Surplus Lines 322 2.2 4,335 10.3
Total $14,541 100.0% $42,000 100.0%
Commissions and Fees. The Company generates fee and commission income in connection with the Company’s program development and management, insurance and reinsurance brokerage services, and production and other insurance related services. Fee and commission income was $2.8 million for the year ended December 31, 1999, and $4.7 million for the year ended December 31, 2000.
Combined Ratio. The combined ratio is a standard measure of a property and casualty insurer’s performance in managing its losses and expenses. Underwriting results are generally considered profitable when the combined ratio is less than 100%. The following table compares the statutory combined ratios of the Company with the property and casualty industry over the past three years.
1998 1999 2000
---- ---- ----
The Company(1)(2)...................... 79.4% 70.9% 80.9%
Property and casualty industry(3)...... 105.6 107.5 110.3
Although the combined ratio is the generally accepted measure for comparing results within the property and casualty insurance industry, the combined ratio does not distinguish between property and casualty companies based upon their mix of business. The Company focuses primarily on long-tail liability coverages and writes a very limited amount of short-tail liability coverages. Long-tail liability insurance coverages often produce greater underwriting losses than short-tail liability insurance. Long-tail liability coverages also produce more investable cash flow for an insurance company because the losses may not be paid out for many years. Therefore, the companies writing long-tail insurance coverages
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may be able to mitigate their higher underwriting losses by deriving investment income. Accordingly, a higher combined ratio (on a statutory basis) for a company writing long-tail liability insurance does not necessarily mean lower profitability.
Premium and Loss Summary. The Company is engaged in the development of programs and underwriting of coverages as both a primary casualty insurer and a reinsurer. The following table provides selected historical information on generally accepted accounting principles ("GAAP") basis concerning the business written by the Company and the associated underwriting risks. This data should be read in conjunction with the consolidated financial statements and notes thereto and the Selected Financial Data included elsewhere in this Report.
1998 1999 2000
---- ---- ----
(In thousands, except ratio data)
Reinsurance :
Gross Premiums Written $ 10,136 $ 12,584 $22,646
Net Premiums Written 8,996 11,647 20,448
Net Premiums Earned 8,539 10,609 16,706
Loss & Loss Adjustment Expense Ratio 57.3% 54.3% 73.7%
Primary:
Gross Premiums Written $ 4,603 $ 10,821 $64,226
Net Premiums Written 656 2,894 21,552
Net Premiums Earned 581 1,516 10,099
Loss & Loss Adjustment Expense Ratio 41.5% 35.2% 58.0%
Combined:
Gross Premiums Written $ 14,739 $ 23,405 $86,872
Net Premiums Written 9,652 14,541 42,000
Net Premiums Earned 9,120 12,125 26,805
Loss & Loss Adjustment Expense Ratio 56.8% 56.9% 69.0%
Expense Ratio 23.9% 16.7% 18.6%
-------- ---------- ------
Combined 80.7% 73.6% 87.6%
======== ========= =====
Significant fluctuations in demand for and supply of various casualty insurance and reinsurance lines of business have led to substantial price fluctuations over time. The Company’s management seeks to expand and contract various lines of business based on the relative favorability of the pricing environment for its products. As a writer of both primary
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insurance and reinsurance, the Company has additional flexibility to adjust its business mix in response to price differences in these markets and to utilize its knowledge of primary insurance markets to guide its assumption of insurance and reinsurance risks. During the past decade, the Company has operated in a soft market cycle which was characterized by excess insurance capacity and declining insurance premium rates; however, commencing in fiscal year 2000 the Company has operated in a hardening market with increased insurance premium rates for workers’ compensation and excess and surplus lines.
Reinsurance Ceded
The Company obtains reinsurance for its primary insurance and reinsurance operations from unaffiliated reinsurers to protect and mitigate the exposures of the Company. The Company’s reinsurance program for general and pollution liability risks operates on an excess of loss basis, with the Company’s maximum exposure, on a per occurrence basis, limited to $187,500. For excess and surplus lines business, the Company maintains a quota share and an excess of loss treaty. The Company’s maximum exposure, on a per occurrence basis, is limited to 30% of the first $500,000 of loss or $150,000. For surety business written by American Safety Casualty, the Company maintains an excess of loss treaty on a per bond and a per principal basis, thereby limiting the Company’s maximum exposure on a per principal basis to $250,000. For commercial lines business, the Company maintains various excess of loss treaties, limiting the Company’s maximum exposure, on a per occurrence basis, to $100,000. The Company also maintains catastrophe reinsurance excess of $500,000. For workers’ compensation reinsurance business assumed by the Company, the Company’s maximum exposure is $250,000 per occurrence, and aggregate stop loss reinsurance is maintained for losses above a 70% loss ratio. Some of the reinsurance treaties maintained by the Company for its protection have certain aggregate limits of liability.
The Company purchases reinsurance for its primary insurance business lines and its reinsurance business. Gross reinsurance premiums ceded in 1999 were $8.9 million, which constituted 38% of the gross premiums written, and in 2000 were $44.9 million, which constituted 52% of the gross premiums written. The amount of reinsurance obtained by the Company varies with the line of business insured or reinsured. The Company has experienced increased reinsurance costs in 2001 as a result of a hardening reinsurance market.
The Company evaluates the credit quality of the U.S. reinsurers and retrocessionaires to which it cedes business. The following table sets forth certain information relating to the Company’s unaffiliated reinsurers and retrocessionaires as of December 31, 2000.
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for Year Ended A.M. Best
Reinsurers December 31, 2000 Rating(1)
---------- ----------------- ---------
(In thousands)
Signet Star Reinsurance Company 14,588 A
Everest Reinsurance Co. 3,855 A+
Louisiana Pest Control Insurance Co. 3,476 B+
Dorinco Reinsurance Co. 2,142 A
Transatlantic Reinsurance Co. 1,713 A++
Houston Casualty Company 1,499 A+
Folksamerica Reinsurance Co. 579 A
American Re-insurance Co. 391 A++
St. Paul Fire and Marine Insurance Co. 351 A+
Reliance Insurance Co. 351 E
TIG Reinsurance Co. 331 A
The Travelers Indemnity Co. 320 A++
Midwest Employers Casualty Co. 274 A
Sorema North America Reinsurance Co. 249 A
Hartford Fire Insurance Co. 144 A+
Overseas Partners U.S. Reinsurance Co. 129 A
Odyssey Reinsurance Corp. 114 A
Sydney Reinsurance Corp. 83 A
Partner Reinsurance Co. of the U.S. 72 A++
Top Flight Insurance 72 NR-2
General Reinsurance Corp. 69 A++
Doctors Company An Interinsurance Exchange 63 A
PMA Capital Insurance Co. 38 A
GE Reinsurance Corp. 36 A++
Commercial Underwriters Insurance Co. 9 A+
Loss and Loss Adjustment Expense Reserves
The Company is required to maintain reserves to cover its estimated ultimate 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 ultimate payments will not materially exceed the Company's reserves.
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With respect to reported claims, reserves are established on a case-by-case basis. The reserve amounts on each reported claim are determined by taking into account the circumstances surrounding each claim and policy provisions relating to the type of loss. Loss reserves are reviewed on a regular basis, and as new data becomes available, appropriate adjustments are made to reserves.
Approximately 32% of the Company's net reserves relate to liability associated with its asbestos abatement and other environmental general liability insurance programs. Another 41% of net reserves are attributable to the workers' compensation insurance program. The 27% balance of reserves is spread among surety and other coverages.
In establishing reserves for its general liability insurance program, the Company uses paid and reported Bornhuetter-Ferguson methods which are based in part on developing paid and reported losses and an initial expected loss level. Initial expected losses reflect an expected loss ratio estimated from the ten year experience of the Company and a loss cost model applied to premium by coverage year. This loss indication and paid/reported losses are assigned respective weights to obtain estimates of ultimate losses which are considered in establishing ultimate loss levels.
In establishing reserves for its workers' compensation insurance program, several methods are employed in determining ultimate losses: a pure premium method; two Bornhuetter-Ferguson methods - paid and reported; and two loss development methods - paid and incurred. The first three methods use industry expected losses adjusted for the Company's experience while the last two methods rely on industry payment and reporting patterns to develop the Company's actual losses. The Company reviews all methods each coverage year in determining ultimate losses.
In establishing reserves for its surety and other coverages, the Company uses an expected loss ratio method due to the limited amount of exposure assumed and the lack of historical Company specific information available.
All the methods used are generally accepted actuarial methods and, with the exception of the pure premium method, rely in part on loss reporting and payment patterns while considering the long tail nature of the coverages and inherent variability in projection results from year-to-year. The patterns used are generally based on industry data with supplemental consideration given to Company experience as deemed warranted.
The Company's independent actuarial consulting firm also relies on industry data to provide the basis for reserve analysis on newer lines of business. Provisions for inflation are implicitly considered in the reserving process. For GAAP purposes, the Company's reserves are carried at the total estimate for ultimate expected loss, without any discount to reflect the time value of money. Reserve calculations are reviewed regularly by management and periodically by regulators. The Company's independent actuarial consulting firm
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annually expresses an opinion on the adequacy of statutory reserves established by management, which opinion is filed with the various jurisdictions in which the Company's insurance and reinsurance subsidiaries and its risk retention group affiliate are licensed. Based upon practices and procedures employed by the Company, without regard to independent actuarial opinions, management believes that the Company's reserves are adequate.
The following table provides a reconciliation of beginning and ending liability balances on a GAAP basis for the years indicated:
1998 1999 2000
---- ---- ----
(In thousands)
Gross losses and loss adjustment expense
reserves at beginning of year $ 11,572 $14,701 $20,413
Ceded reserves at beginning of year 779 1,841 6,065
------- ----- --------
Net losses and loss adjustment expense
reserves at beginning of year 10,793 12,860 14,348
------- ------ -------
Add:
Incurred losses related to:
Current accident years 4,383 7,449 17,356
Prior accident years 794 (553) 1,150
------ ----- ---------
Total incurred losses 5,177 6,896 18,506
------ ----- -------
Less:
Claims payments related to:
Current accident years 103 1,707 4,291
Prior accident years 3,007 3,701 5,243
------- ----- ---------
Total claims paid 3,110 5,408 9,534
------ ----- ---------
Net losses and loss adjustment expense
reserves at end of year 12,860 14,348 23,320
Ceded reserves at end of year 1,841 6,065 27,189
------ ----- -------
Gross losses and loss adjustment expense
reserves at end of year $ 14,701 $20,413 $50,509
======== ======= =======
The following table shows the development of the reserves for unpaid losses and loss adjustment expenses from 1990 through 2000 for the Company’s primary insurance and reinsurance subsidiaries on a GAAP basis. The top line of the table shows the liabilities at the balance sheet date for each of the indicated years and reflects the estimated amounts for losses and loss adjustment expenses for claims arising in that year and all prior years that are unpaid at the balance sheet date, including losses incurred but not yet reported to the Company. The upper portion of the table shows the re-estimated amount of previously recorded liability based on experience as of the end of each succeeding year. The lower portion of the table shows the cumulative amounts subsequently paid as of successive years
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with respect to the liability. The estimates change as more information becomes known about the frequency and severity of claims for individual years. A redundancy (deficiency) exists when the re-estimated liability at each December 31 is less (greater) than the prior liability estimate. The “cumulative redundancy” or deficiency depicted in the table, for any particular calendar year, represents the aggregate change in the initial estimates over all subsequent calendar years.
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
(In thousands)
Reserves for unpaid losses
and loss adjustment
expense $4,359 $4,552 $4,135 $4,798 $6,048 $8,288 $8,869 $10,793 $12,860 $14,348 23,320
Reserves re-estimated at
December 31:
1 year later 2,786 3,264 4,266 4,653 5,854 7,482 9,850 11,587 12,307 15,498
2 years later 2,327 3,057 4,100 4,584 5,381 7,518 9,926 12,253 12,967
3 years later 2,169 2,956 4,148 3,920 4,823 7,398 9,606 12,550 -
4 years later 2,119 2,933 3,644 3,063 4,373 7,027 9,767 - -
5 years later 1,967 2,607 2,987 2,740 3,941 7,251 - - -
6 years later 1,948 1,953 2,765 2,535 4,062 - - - -
7 years later 1,438 1,693 2,504 2,641 - - - - -
8 years later 1,310 1,422 2,630 - - - - - -
9 years later 1,253 1,456 - - - - - - -
10 years later 1,283 - - - - - - - -
Cumulative redundancy
(deficiency) 3,076 3,096 1,505 2,157 1,986 1,037 (898) (1,757) (107) (1,150)
Cumulative amount of
liability paid through
December 31:
1 year later 319 99 524 152 501 931 1,827 3,007 3,701 5,243
2 years later 378 308 651 382 997 2,056 3,506 5,707 6,565
3 years later 554 380 872 621 1,552 2,906 4,918 7,443 -
4 years later 611 531 1,095 776 1,899 3,656 6,034 - -
5 years later 693 697 1,235 1,064 2,162 4,619 - - -
6 years later 757 701 1,511 1,252 2,428 - - - -
7 years later 757 699 1,516 1,500 - - - - -
8 years later 755 700 1,733 - - - - - -
9 years later 755 820 - - - - - - -
10 years later 902 - - - - - - - -
Net reserve
December 31 12,860 14,348 23,320
Ceded Reserves 1,841 6,065 27,189
------ ----- ------
Gross Reserve 14,701 20,413 50,509
====== ====== ======
Investments
The Company entered into an Investment Services Agreement with Invesco Capital Management, Inc. (“Invesco”) in September 1999 whereby Invesco provides investment advisory services to the Company, subject to the investment policies and guidelines established by the Company’s Board of Directors. The Company has consistently invested primarily in investment grade fixed income securities, with the objective of providing reasonable returns while limiting liquidity risk and credit risk. The Company’s investment strategy has been to increase its investments in high quality bonds, as opposed to equity securities, in order to avoid market fluctuations. The investment portfolio consists primarily of government and governmental agency securities and high quality marketable corporate securities which are rated at investment grade level.
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At December 31, 2000, the Company’s total assets of $207 million consisted of the following: cash, investments and notes receivable 53%; premiums receivable and agent’s balances 16%; reinsurance recoverables 24%; and other assets 7%. At December 31, 2000, the Company held investment grade fixed income debt securities valued at $46 million and secured notes receivable valued at $8.9 million which represented secured loans to unaffiliated parties, at or above market rates, secured by corporate and personal guarantees, real estate and other collateral.
The Company’s cash and investments at December 31, 2000 totaled approximately $95 million, and were classified as follows:
Type of Investment (In thousands) Portfolio
------------------ ---------
Cash and short-term investments $ 25,214 24.9%
United States government securities 31,455 31.1
Mortgage-backed securities 1,592 1.6
Corporate bonds 3,620 3.6
Foreign investments 3,044 3.0
Municipal bonds 6,275 6.2
Equity securities 162 0.2
Real estate 29,786 29.4
-------- ----
Total $101,148 100.0%
======== =====
The statement and fair values of the bond portfolio, classified by rating, as of December 31, 2000 were as follows:
S&P's/Moody's Rating(1) Value on Balance Sheet Total
----------------------- ----- ---------------- -----
(In thousands)
AAA/Aaa (including United States
Treasuries of
$29,730) ...................... $ 42,364 $ 42,364 92.1%
AA/Aa ...................... 1,455 1,455 3.2
A/A ...................... 1,973 1,973 4.3
BBB/Baa ...................... 194 194 .4
----- ------ -----
Total...................... $ 45,986 $ 45,986 100.0%
====== ====== ======
The National Association of Insurance Commissions ("NAIC") has a bond rating system by which it assigns securities to classes called "NAIC designations" that are used by insurers when preparing their annual financial statements. The NAIC assigns designations to publicly traded as well as privately placed securities. The designations assigned by the NAIC range from class 1 to class 6, with a rating in class 1 being the highest quality. As of
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December 31, 2000, all of the Company's bond portfolio, measured on a statutory carrying value basis, was invested in securities rated in class 1 or class 2 by the NAIC, which are considered investment grade.
The weighted average maturity of the Company's bond portfolio at December 31, 2000 was 5.5 years. The composition of the Company's bond portfolio, classified by maturity, as of December 31, 2000 was as follows:
Maturity Cost Value
-------- ---- -----
(In thousands)
Due in one year or less........... $ 1 ,818 $ 1,825
Due from one to five years........ 25,297 25,573
Due from five to ten years........ 11,736 12,039
Due after ten years............... 4,984 4,957
Mortgage-backed securities........ 1,563 1,592
------- -------
Total ................. $ 45,398 $ 45,986
====== ======
The Company's investment grade fixed maturity securities included mortgage backed bonds of $1.6 million, which are subject to risks associated with the variable prepayments of the underlying mortgage loans.
At December 31, 2000, the Company had secured notes receivable from unrelated parties in the amount of $8.9 million. These notes mature over the next two years and carry interest rates between 9% to 12%. All of these loans are collateralized with various forms of real estate, and personal and corporate guarantees. At December 31, 2000, all payments on these notes were current. Of the three notes receivable from unrelated parties, one of these notes requires monthly interest payments at December 31, 2000. Accrued interest on this interest paying note was $15,000 at December 31, 2000, which represents current amounts due. Accrued interest on the interest accruing notes was $621,000 at December 31, 2000.
American Safety Risk Retention Group, Inc.
Organization History. Following the enactment of the Risk Retention Act, American Safety, in order to establish a U.S. insurance company to market and underwrite specialty environmental coverages, provided financial and technical assistance in connection with the organization of American Safety RRG in 1988. American Safety RRG is not owned by the Company but is managed by ASI Services, the Company's principal U.S. program development, underwriting and administrative services subsidiary, on a fee-for-service basis.
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American Safety RRG is authorized to write liability insurance in all 50 states as a result of the Risk Retention Act, its license from the Vermont Department of Banking, Insurance, Securities and Health Care Administration (the "Vermont Department") under the Vermont Captive Act as a stock captive insurance company, and other state insurance filings. Presently, five of the directors of American Safety RRG are also directors of the Company. The directors of American Safety RRG are elected annually by the insureds/shareholders of American Safety RRG.
American Safety transferred its book of primary insurance business to American Safety RRG in 1988 and American Safety RRG replaced American Safety as the policy issuing carrier insuring general, pollution and professional liability risks for contractors, consultants and other businesses and property owners who are involved with environmental remediation. American Safety then became the quota share reinsurer of the risks transferred and subsequently underwritten by American Safety RRG. All reinsurers of American Safety RRG are required to be approved as reinsurers by the Vermont Department, and American Safety has been an authorized reinsurer of American Safety RRG since 1988. The Company, through its insurance subsidiaries, participates in the business of American Safety RRG as its primary reinsurer under an excess of loss/quota share reinsurance arrangement. For policies written by American Safety RRG, the Company receives 45% of the premium and assumes 75% of the risk in the layer of the first $250,000 of loss per occurrence, subject to American Safety RRG's retention of the first $100,000 of loss in the aggregate each year. American Safety RRG also cedes 100% of the risk in the layer of $750,000 in excess of $250,000 per occurrence, 100% of the risk in the layer of $4 million in excess of $1 million, to unaffiliated reinsurers, and 100% of the risk in the layer of $10 million in excess of $5 million, to unaffiliated reinsurers.
Regulation. The Risk Retention Act facilitates the establishment of risk retention groups to insure certain liability risks of its members. The statute applies only to "liability" insurance and does not permit coverage of personal risk liability or workers' compensation. Membership in a risk retention group is limited to persons engaged in businesses or activities that are similar or related with respect to the liability to which the members are exposed by virtue of any related, similar, or common business, trade, products, services (including professional services), premises or operations. Ownership in a risk retention group is limited to persons who are members of the group and who are provided insurance by the group.
The Risk Retention Act and the Vermont Captive Act require that each insured of American Safety RRG be a shareholder. Each insured is required to purchase one share of the American Safety RRG's common stock upon the acceptance of the applicant as an insured. There is no trading market for the shares of common stock of American Safety RRG and each share is restricted as to transfer. If and when a holder of American Safety RRG common stock ceases to be an insured, whether voluntarily or involuntarily, such
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person's share of common stock is automatically canceled and such person is no longer a shareholder of American Safety RRG. The ownership interests of members in a risk retention group are considered to be exempt securities for purposes of the registration provisions of the Securities Act and the Securities and Exchange Act and are likewise not considered securities for purposes of any state securities law.
Congress intended under the Risk Retention Act that the primary responsibility for regulating the financial condition of a risk retention group would rest on the state in which the group is licensed or chartered. American Safety RRG is subject to regulation as a captive insurer under the insurance laws of Vermont and, to a lesser extent, under the laws of each state in which it is doing business. The Risk Retention Act requires a risk retention group to provide a notice on each insurance policy which it issues to the effect that (i) the policy is issued by a risk retention group; (ii) the risk retention group may not be subject to all of the insurance laws and regulations of the state in which the policy is being issued; and (iii) no state insurance insolvency guaranty fund is available to the policies issued by the risk retention group.
Management. Since 1990, ASI Services has managed the nationwide operations of American Safety RRG from its offices in Atlanta, Georgia pursuant to a program management agreement with a three year term. American Safety RRG has also entered into local management services agreements since 1988 with captive management companies of national insurance brokerage or insurance companies with offices located in Burlington, Vermont to provide local administrative services.
ASI Services acts as the program manager for American Safety RRG pursuant to the program management agreement and is authorized to solicit and accept applications for insurance and to issue insurance policies on behalf of American Safety RRG subject to guidelines and procedures established by the board of directors of American Safety RRG. For 2000, the program management agreement between American Safety RRG and ASI Services provided for payment of a monthly program management fee of $114,000 and a managing general agency commission of 10-15% of premium paid by insureds. The Company's recognized revenues from American Safety RRG for the years ended December 31, 1999 and December 31, 2000 are as follows:
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December 31, 1999 December 31, 2000
----------------- -----------------
(In thousands)
Assumed earned premiums from
American Safety RRG.................... $ 3,449 $5,761
Ceded earned premiums to American
Safety RRG ....................... 3,973 4,469
----- -----
Net premiums earned .................... (524) 1,292
Management fees......................... 722 1,424
Brokerage commission income............. 1,080 2,515
Loss control fees....................... 75 -
In the table above, assumed earned premiums represent the assumption of a portion of liability risks by the Company from American Safety RRG, and ceded earned premiums represent the transfer of a portion of liability risks from the Company to American Safety RRG. Management fees include administrative services, underwriting services, claims administration services, financial, accounting, billing and collection services and consulting services.
The Company derived approximately 6.1% ($1.4 million) of its revenues in 1999 and 14.5% ($5.2 million) of its revenue in 2000 from American Safety RRG for administrative and management fees, managing agent commissions, loss control fees, reinsurance intermediary fees and reinsurance premiums.
Insurance Regulation
The Company’s primary insurance and reinsurance operations are subject to regulation under applicable insurance statutes of the jurisdictions or states in which each subsidiary is domiciled and writes insurance. Insurance regulations are intended to provide safeguards for the policyholders rather than to protect shareholders of insurance companies or their holding companies.
The nature and extent of state regulation varies from jurisdiction to jurisdiction, but typically involves prior approval of the acquisition of control of an insurance company or of any company controlling an insurance company, regulation of certain transactions entered into by an insurance company with an affiliate, approval of premium rates for lines of insurance, standards of solvency and minimum amounts of capital and surplus which must be maintained, limitations on types and amounts of investments, restrictions on the size of risks which may be insured by a single company, deposits of securities for the benefit of policyholders, and reports with respect to financial condition and other matters. In addition, state regulatory examiners perform periodic examinations of insurance companies.
Although the federal government does not directly regulate the business of insurance in the United States, federal initiatives often affect the insurance business in a variety of
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ways. The insurance regulatory structure has also been subject to scrutiny in recent years by the National Association of Insurance Commissioners (“NAIC”), federal and state legislative bodies and state regulatory authorities. Various new regulatory standards have been adopted and proposed in recent years. The development of standards to ensure the maintenance of appropriate levels of statutory surplus by insurers has been a matter of particular concern to insurance regulatory authorities.
Bermuda Regulation
American Safety, as a licensed Bermuda insurance company, and its Bermuda reinsurance subsidiary, American Safety Re, are subject to regulation under The Insurance Act 1978, as amended, and related regulations (the “Bermuda Act”), which provides that no person shall conduct insurance business (including reinsurance) in or from Bermuda unless registered as an insurer under the Bermuda Act by the Minister of Finance (the “Minister”).
The Bermuda Act requires, among other things, Bermuda insurance companies to meet and maintain certain standards of solvency, to file periodic reports in accordance with the Bermuda Statutory Accounting Rules, to produce annual audited financial statements and to maintain a minimum level of statutory capital and surplus. In general, the regulation of insurers in Bermuda relies heavily upon the auditors, directors and managers of the Bermuda insurer, each of which must certify that the insurer meets the solvency capital requirements of the Bermuda Act. Furthermore, the Minister is granted powers to supervise, investigate and intervene in the affairs of insurance companies.
Neither American Safety nor American Safety Re is registered or licensed as an insurance company in any state or jurisdiction in the United States.
U.S. Regulation
American Safety, as a specialty insurance and financial services holding company, does not itself do business in the United States. The Company, through its U.S. subsidiaries, does business in the United States. The Company’s two U.S. insurance subsidiary’s operations are subject to state regulation where each is domiciled and where each writes insurance.
American Safety Casualty, a U.S. insurance subsidiary domiciled in Delaware, was acquired by the Company in 1993. American Safety Casualty is currently licensed as a property and casualty insurer in 48 states and the District of Columbia. The insurer is subject to regulation and examination by the Delaware Insurance Department and the other states in which it is an admitted insurer. The Delaware Insurance Department examines American Safety Casualty on a triennial basis. No other state has examined American Safety Casualty since it was acquired by the Company. The insurance laws of Delaware place restrictions on a change of control of American Safety as result of its ownership of American
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Safety Casualty. Under Delaware law no person may obtain 10% or more of the voting securities of American Safety without the prior approval of the Delaware Insurance Department.
American Safety Indemnity, a licensed insurer in the State of Oklahoma and an approved excess and surplus lines insurer in other states, is subject to state regulation. As an excess and surplus lines insurer, premium rates are not filed and approved with the various state insurance departments, but certain restrictions regarding the types of insurance written by excess and surplus lines insurers must be met. Generally, excess and surplus lines insurers may only write coverage that is not available in the "admitted" market and strict guidelines regarding the coverages are set forth in various state statutes. Surplus lines brokers are the licensed individuals or entities placing coverage with excess and surplus lines insurers, and in most states, the broker is responsible for the payment of surplus lines taxes which are payable to the state in which the surplus lines risk is located. Surplus lines insurers are exempt from participation in state insolvency funds which are designed to protect insureds if "admitted" insurers become insolvent and are unable to pay claims. While American Safety Indemnity is exempt from the majority of state regulatory requirements, it must be "approved" to write the type of insurance in the states where its surplus lines insurance is written. The Oklahoma Insurance Department retains primary regulatory authority over American Safety Indemnity, as a licensed and admitted insurance company in Oklahoma.
American Safety Indemnity, a U.S. insurance subsidiary domiciled in Oklahoma was acquired by the Company in 2000. American Safety Indemnity is currently licensed or approved as an excess and surplus lines insurer in 34 states and the District of Columbia. The insurer is subject to regulation examination by the Oklahoma Insurance Department and the other states in which it is approved as an excess and surplus lines insurer. The Oklahoma Insurance Department examines American Safety Indemnity on a triennial basis. No other state has examined American Safety Indemnity since it was acquired by the Company. The insurance laws of Oklahoma place restrictions on a change of control of American Safety as a of its ownership of American Safety Indemnity. Under Oklahoma law no person may obtain 10% or more of the voting securities of American Safety without the prior approval of the Oklahoma Insurance Department.
American Safety Indemnity, as a licensed insurer in the State of Oklahoma, and as an approved excess and surplus lines insurer in other states, is subject to state regulation. As an excess and surplus lines insurer, premium rates are not filed and approved with the various state insurance departments, but certain restrictions regarding the types of insurance written by excess and surplus lines insurers must be met. Generally, excess and surplus lines insurers may only write coverage that is not available in the “admitted” market and strict guidelines regarding the coverages are set forth in various state statutes. Surplus lines brokers are the license individuals or entities placing coverage with excess and surplus lines insurers, and in most states, the broker is responsible for the payment of surplus lines taxes which are payable to the state in which the surplus lines risk is located. Surplus lines insurers are exempt from participation in state insolvency funds which are designed to protect insureds if “admitted” insurers become insolvent and are unable to pay claims. While American Safety Indemnity is exempt from the majority of state regulatory requirements, it must be “approved” to write the type of insurance in the states where surplus
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lines insurance is written. The Oklahoma Insurance Department retains primary regulatory authority over American Safety Indemnity, as a licensed and admitted insurance company in Oklahoma.
Competition
The casualty insurance and reinsurance business is highly competitive with respect to a number of factors, including overall financial strength of the insurer or reinsurer, ratings by rating agencies, premium rates, policy terms and conditions, services offered, reputation and commission rates. The Company faces competition from a number of insurers who have greater financial and marketing resources and greater name recognition than the Company. Although the Company’s business strategy is to develop insurance programs for the environmental remediation industry, the employee leasing and staffing industry, as well as other specialty industries and risks by targeting niche markets where its expertise is required and where competition is limited, the Company nevertheless encounters competition from other insurance companies engaged in insuring risks in broader lines of business which encompass the Company’s niche markets and specialty programs, and such competition is expected to increase as the Company expands its operations.
Employees
At December 31, 2000, the Company employed 115 persons, none of whom was represented by a labor union. ASI Services employs all of the Company’s employees and manages the Company’s U.S. business operations, while the Company’s Bermuda operations are managed under contract by Mutual Risk Management (Bermuda), Ltd., an unaffiliated party.
The Company’s Bermuda offices are located at 44 Church Street, Hamilton, Bermuda, and the telephone number is (441) 296-8560. The principal offices of the Company’s U.S. subsidiaries are located at 1845 The Exchange, Suite 200, Atlanta, Georgia 30339, and the telephone number is (770) 916-1908.
The Company, through its subsidiaries, is routinely a party to pending or threatened litigation in the normal course of its business. Based upon information presently available, in view of legal and other defenses available to the Company’s subsidiaries, management does not believe that any pending or threatened litigation or disputes will have any material adverse effect on the Company’s financial condition.
On January 6, 2000, the Company acquired (i) the stock of L&W Holdings, Inc. and its wholly-owned subsidiary, RCA Syndicate #1, Ltd., an Illinois licensed insurance carrier operating on the INEX (formerly the Illinois Insurance Exchange), (ii) the stock of Principal
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Management, Inc., an insurance program development and management company headquartered in Okemos, Michigan, and in a related transaction, the Company also acquired (iii) the stock of Pegasus Insurance, a Cayman Islands licensed insurance carrier. The transactions were structured as stock acquisitions, with the purchase price payable by the Company consisting of $3,500,000 plus 200,000 American Safety common shares and earnout provisions for up to an additional 254,000 American Safety common shares over a five-year period. Of the purchase price, $1,000,000 of cash and 109,086 shares of stock are held in escrow to secure the obligations of the sellers.
When RCA Syndicate #1, Ltd. filed its 1999 Annual Statement with the Illinois Department of Insurance in March 2000, the Company first became aware that there had been a material adverse change in the business affairs and financial condition of the acquired companies from that represented by the sellers. The Company launched an investigation which disclosed that the insurance claims experience of the acquired companies had been misrepresented and that incurred losses from insurance claims were significantly in excess of the amounts reported in their claims records and their financial statements. As a result, the Company then made written demand upon the selling shareholders of the acquired companies for rescission of the acquisitions, including a return of the purchase price paid for the companies. The Company filed a lawsuit on April 21, 2000 in the United States District Court for the Northern District of Georgia to rescind the acquisitions based upon the sellers’ breach of the representations and warranties made concerning the business affairs and financial condition of the acquired companies. The sellers’ misrepresentations as to the business affairs and financial condition of the acquired companies, and the under-reserving for claims, relate only to the operations of the acquired companies. The lawsuit is in the preliminary stages of pre-trial discovery.
No matter was submitted to a vote of the Company’s security holders during fourth quarter of the fiscal year ended December 31, 2000.
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The following table provides information regarding the management of the Company. Biographical information for each of such persons is set forth immediately following the table.
Lloyd A. Fox..............55 President and Director
Stephen R. Crim...........37 Executive Vice President
Joseph D. Scollo, Jr......37 Senior Vice President - Operations
Fred J. Pinckney..........53 General Counsel and Secretary
Steven B. Mathis..........33 Chief Financial Officer
J. Jeffrey Hood...........37 Senior Vice President-Technical Services
Kenneth A. Schneider......40 Senior Vice President-Underwriting
Lloyd A. Fox has been a director of the Company since 1996 and is President of the Company. Since 1990, Mr. Fox has headed the management of the Company’s U.S. subsidiaries. He assisted as general legal counsel in the formation of American Safety in 1986. Previously, Mr. Fox was an attorney for 16 years in Atlanta, Georgia, where his practice centered on insurance, the environmental and construction industries, as well as corporate and taxation matters. He received a juris doctor degree from the University of Michigan Law School in 1974 and a bachelor of science degree in pharmacy from Brooklyn College of Pharmacy in 1968.
Stephen R. Crim is Executive Vice President of the Company and has been responsible for all underwriting functions since joining the Company in 1990.Previously, Mr. Crim was employed in the underwriting department of Aetna Casualty and Surety and The Hartford Insurance Co. between 1986 and 1990. Mr. Crim has 14 years experience in the insurance industry. Mr. Crim received a bachelors degree in mathematics from the Indiana University in 1986.
Joseph D. Scollo, Jr. is Senior Vice President - Operations of the Company since November 1998. Previously, Mr. Scollo served as senior vice president -operations of United Coastal Insurance Company, New Britain, Connecticut since 1989. Mr. Scollo has 12 years experience in the insurance industry. Mr. Scollo received a bachelor of science degree in economics from Western New England College in 1985 and is a certified public accountant.
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Fred J. Pinckney became General Counsel and Secretary of the Company in October 1997. Previously, Mr. Pinckney was an attorney for 25 years in Atlanta, Georgia, where his practice centered on securities and corporate matters. Since 1988, Mr. Pinckney was a partner in the law firm of Parker, Johnson, Cook & Dunlevie, which merged in 1996 with Womble Carlyle Sandridge & Rice, PLLC, where he was a member until he joined the Company. He was involved as special legal counsel in the formation of American Safety in 1986 and acted as outside legal counsel to the Company prior to joining the Company. Mr. Pinckney received a juris doctor degree from the University of Michigan Law School in 1973 and a bachelor of arts degree in political science from the University of Pittsburgh in 1969.
Steven B. Mathis became Chief Financial Officer of the Company in August 1998. Previously he was the Company's controller since 1992 and he is currently responsible for all accounting and treasury functions of the Company. Mr. Mathis has 11 years accounting experience in the insurance industry having held accounting positions with American Insurance Managers, Inc. and American Security Group. Mr. Mathis received a bachelor of business administration degree in accounting from the University of Georgia in 1989.
J. Jeffrey Hood is Senior Vice President-Technical Services of ASI Services and is responsible for loss control, claims and regulatory matters. Prior to joining the Company in 1990, Mr. Hood served as a loss control and safety coordinator for a national technical consulting firm for four years. Mr. Hood received a bachelor of science degree in petroleum engineering from Mississippi State University in 1985.
Kenneth A. Schneider is Senior Vice President-Underwriting of ASI Services. Prior to joining the Company in 1997, Mr. Schneider was a senior vice president/managing director of Alexander & Alexander’s environmental underwriting, risk management and consulting division from 1993 to 1997, a regional manager for marketing and underwriting for The ERIC Group from 1990 to 1993, and an environmental business manager for AIG Consultants from 1989 to 1990. Mr. Schneider has 17 years experience in the insurance and environmental industry. Mr. Schneider received a masters of business administration degree from the George Washington University in 1988 and a bachelor of science degree in geology from Beloit College in 1983.
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The Company’s common shares commenced trading on the National Association of Security Dealers, Inc. ‘s National Market on February 13, 1998 as a result of the Company’s completion of its initial public offering. On February 5, 1999, the Company’s common shares were listed and traded on the New York Stock Exchange, Inc. under the symbol “ASI” and the Company’s prior listing on the National Association of Security Dealers, Inc.‘s National Market ceased. As of March 10, 2001, there were approximately 2,200 holders of the Company’s common shares.
The following table sets forth the high and low prices per share of the Company’s common shares for the periods indicated.
First Quarter $ 7.38 $ 5.50
Second Quarter 5.94 3.75
Third Quarter 4.63 3.75
Fourth Quarter 6.94 3.25
The Company does not anticipate paying cash dividends on its common shares in the foreseeable future. As an insurance holding company, the Company’s ability to pay cash dividends to its shareholders will depend, to a significant degree, on the ability of the Company’s subsidiaries to pay cash 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. The Company’s current plans are for its insurance and reinsurance subsidiaries to retain their capital for growth.
The following table sets forth selected consolidated financial data with respect to the Company for the periods indicated. The balance sheet data have been derived from the audited financial statements of the Company. This information should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Company’s consolidated financial statements and notes thereto included elsewhere in this Report.
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Year Ended December 31,
1996 1997 1998 1999 2000 ---- ---- ---- ---- ---- (In thousands, except per share and ratio data) Income Statement Data: Revenues: Direct and assumed premiums earned $ 5,316 $ 10,590 $ 13,114 $ 18,140 $54,079 Ceded premiums earned......... (1,044) (2,243) (3,994) (6,015) (27,274) ------- --------- --------- ------- -------- Net premiums earned........... 4,272 8,347 9,120 12,125 26,805 Net investment income......... 1,207 1,647 2,847 2,878 2,605 Interest on notes receivable.. 885 798 2,409 2,614 1,531 Brokerage commission income... 2,341 2,589 1,183 1,389 3,291 Management fees from affiliate 479 601 1,344 1,386 1,425 Net realized gains (losses) 177 84 443 174 (518) Other income.................. 5 14 24 921 939 ---------- ---------- ----------- -------- --------- Total revenues............ 9,366 14,080 17,370 21,487 36,078 ------- ------- -------- ------ ------ Expenses: Losses and loss adjustment expenses incurred 2,056 4,093 5,177 6,896 18,506 Acquisition expenses 646 2,336 1,192 894 3,792 Other expenses 3,570 4,084 5,246 7,694 12,758 Expenses due to rescission - - - - 3,542 Total expenses 6,272 10,513 11,615 15,484 38,598 ----- ------ ------ ------ ------ Earnings (loss) before income taxes 3,094 3,567 5,755 6,003 (2,520) Income Taxes 177 356 (199) 83 (1,157) ------- ------- -------- -------- -------- Net earnings (loss) $ 2,917 $ 3,211 $ 5,954 $ 5,920 $(1,363) ======= ======= ======= ======= ======== Net diluted earnings (loss) per share $ 0.98 $ 1.08 $ 1.04 $ 0.98 $(0.25) Common shares and common share equivalents used in computing net diluted earnings per share 2,964 2,964 5,738 6,032 5,497 GAAP Ratios: Loss and loss adjustment expense ratio 48.1% 49.0% 56.8% 56.9% 69.0% Expense Ratio 29.3 32.8 23.9 16.7 18.6 Combined ratio 77.4% 81.8% 80.7% 73.6% 87.6% Net premiums written to Equity 0.3x 0.4x 0.2x 0.3x 0.7x Statutory Ratios: Loss and loss adjustment expense ratio 48.1% 49.0% 56.8% 56.9% 69.1% Expense ratio 27.1 30.5 22.6 14.0 11.8 Combined ratio 75.2% 79.5% 79.4% 70.9% 80.9% Balance Sheet Data (at end of period) Total investments $ 17,964 $ 29,341 $ 51,048 $59,648 $ 91,247 Total assets 31,299 47,668 86,147 104,017 207,298 Unpaid losses and loss adjustment expenses 8,914 11,572 14,700 20,413 50,509 Total liabilities 13,267 25,827 26,878 42,978 149,495 Total shareholders' equity 18,032 21,841 59,269 61,039 57,803
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The information in the following discussion is presented on the basis of generally accepted accounting principles (“GAAP”) and should be read in conjunction with the Company’s consolidated financial statements and notes thereto included elsewhere in this Report. All amounts and percentages are approximations.
The following table sets forth the Company’s consolidated revenues:
Percent Increase
Year Ended December 31, Decrease
----------------------- --------
1998 to 1999 to
1998 1999 2000 1999 2000
---- ---- ---- ---- ----
(In thousands)
Net Premiums earned:
Reinsurance:
Workers' Compensation $ 6,066 $ 7,384 $11,151 21.7% 51.0%
General Liability 2,381 3,149 5,479 32.3 74.0
Auto Liability 96 30 - (68.8) -
----- ------ ------ ------ -----
Total reinsurance 8,543 10,563 16,630 23.6 57.4
----- ------ ------ ---- -----
Primary Insurance:
Commercial Lines - 39 2,638 - 6,664.1
Workers' Compensation - - 249 - -
Surety 577 1,302 4,539 125.6 248.6
General Liability - - 845 - -
Program Business - 221 1,904 - 761.5
------ ------ ------ ------ -----
Total primary insurance 577 1,562 10,175 170.7 551.4
------ ------ ------ ----- -------
Total net premiums earned 9,120 12,125 26,805 32.9 121.1
------ ------ ------ ------ -------
Net Investment Income 2,847 2,878 2,605 1.1 (9.5)
Interest on notes receivable 2,409 2,614 1,531 8.6 (41.4)
Commission and fee income:
Brokerage commission income 1,183 1,389 3,291 17.4 136.9
Management fees from affiliates 1,344 1,386 1,425 3.1 2.8
------ ------ ----- --- -------
Total commission and fee income 2,527 2,775 4,716 9.8 69.9
----- ------ ----- ---- ------
Net realized gains (losses) 443 174 (518) (60.7) (397.7)
Other income 24 921 939 3,737.5 2.0
-------- ------- ------- ---------- --------
Total Revenues $ 17,370 $21,487 $36,078 23.7% 67.9%
-------- ------- ------- ---------- --------
- -
The following table sets forth the components of the Company's statutory combined ratio for the period indicated:
Insurance Operations
Loss & Loss Adjustment Expense Ratio 56.8% 56.9% 69.1%
Expense Ratio 22.6 14.0 11.8
------- ------- ----
Combined Ratio 79.4% 70.9% 80.9%
===== ===== =====
Net Premiums Earned. Net premiums earned increased 121.1% from $12.1 million in 1999 to $26.8 million in 2000. The principal factors accounting for the increase were an increase in workers’ compensation premiums by 54.4% or $4.0 million, an increase of general liability reinsurance premiums by 100.8% or $3.2 million, an increase in surety premiums by 248.6% or $3.2 million, an increase in commercial lines premiums by 6,664% or $2.6 million, and an increase in program business premiums by 761.5% or $1.7 million.
Net Investment Income. Net investment income decreased 9.5% from $2.9 million in 1999 to $2.6 million in 2000 as a result of higher levels of short term investments to enable the Company to fund its stock repurchase programs. The average annual pre-tax yield on investments was 5.8% in 1999 and 4.8% in 2000. The average annual after-tax yield on investments was 5.4% in 1999 and 4.0% in 2000.
Interest from Notes Receivable. Interest from notes receivable decreased 41.4% from $2.6 million in 1999 to $1.5 million in 2000. The main reason for the decrease relates to repayment of various loans. Average notes receivable has decreased to $10.9 million from $14.6 million. The average annual pretax yield on notes receivable was 18.0% and 12.2% in 1999 and 2000, respectively.
Brokerage Commission Income. Income from insurance brokerage operations increased 136.9% from $1.4 million in 1999 to $3.3 million in 2000 as a result of increased commissions derived from insurance premiums produced through the Company’s risk retention group affiliate. However, commencing in late fiscal 2000 a portion of these insurance premiums are being written by the Company (rather than the Company’s risk retention group affiliate), and revenues will be recognized as premiums earned over the life of the underlying policies and not recognized as brokerage commission income.
Management Fees. Management fees received from the Company’s risk retention group affiliate increased 2.8% from $1.39 million in 1999 to $1.43 million in 2000 and is consistent with the prior year.
Net Realized Gains. Net realized gains (losses) from the sale of investments decreased from a gain of $174,000 in 1999 to a loss of $518,000 in 2000. These losses were realized from the sale of bonds in the Company’s investment portfolio.
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Losses and Loss Adjustment Expenses. Loss and loss adjustment expenses increased 168.3% from $6.9 million in 1999 to $18.5 million in 2000 primarily due to an increase in net earned premiums and release of reserve redundancies in 1999. Increases in general liability, workers’ compensation and surety business accounted for the largest portion of the increase in loss and loss adjustment expenses.
Acquisition Expenses. Acquisition expenses increased 324.3% to $3.8 million from $894,000 as a result of increased production of surety, commercial lines and powersports premiums, which are product lines that produce higher acquisition expenses. Premium tax expense has increased to $1.0 million from $341,000 due to higher volumes of direct premiums earned.
Payroll and Other Expenses. Payroll and other expenses increased 66.2% from $7.7 million in 1999 to $12.8 million in 2000. The principal factors accounting for the result were payroll and related expenses increased $2.5 million in part due to increased staffing of the Company's newer business units; operating expenses associated with the Company's financial services subsidiary increased to $430,000 for the year due to additional staff and related expenses; noncapitalized expenses associated with the Company's Harbour Village real estate development were $542,000; and expenses for licenses and fees increased $525,000 as the Company expanded its capability to direct write more lines of insurance business.
Expense Due to Rescission. Expense for rescission was $3.5 million for 2000 as a result of the rescission of the previously acquired Michigan agency and two related insurance companies.
Income Taxes. Federal and state income taxes decreased from an expense of $82,722 in 1999 to a benefit of $1.2 million in 2000 due to decreased taxable income in the Company's U.S. subsidiaries and as a result of the rescission charge.
Net Premiums Earned. Net premiums earned increased 32.9% from $9.1 million in 1998 to $12.1 million in 1999. The principal factors accounting for the result were an increase of workers’ compensation reinsurance premiums by 21.7% or $1.3 million, an increase of general liability reinsurance premiums by 32.3% or $768,000 and an increase of surety premiums by 125.6% or $725,000.
Net Investment Income. Net investment income increased 1.1% from $2.8 million in 1998 to $2.9 million in 1999 as a result of the investment of additional cash flows from insurance operations offset by additional investments in notes receivable and real estate. The average annual after-tax yield on investments was 6.7% in 1998 and 5.4% in 1999. The average annual after-tax yield on investments was 5.4% in 1999 and 4.0% in 1999.
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Interest from Notes Receivable. Interest from notes receivable increased 8.5% from $2.4 million in 1998 to $2.6 million in 1999 as a result of an increase of the average outstanding secured notes receivable. The average annual pretax yield on notes receivable was 22.4% and 18.0% in 1998 and 1999, respectively.
Brokerage Commission Income. Income from insurance brokerage operations increased 17.4% from $1.1 million in 1998 to $1.4 million in 1999 as a result of increased commissions derived from insurance business produced through the Company’s risk retention group affiliate which was offset by lower commissions from the Company’s brokerage operations.
Management Fees. Management fees increased 3.1% from $1.3 million in 1998 to $1.4 million in 1999 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 decreased from $443,00 1998 to $174,000 in 1999.
Losses and Loss Adjustment Expenses. Loss and loss adjustment expenses increased 33.2% from $5.2 million in 1998 to $6.9 million in 1999 primarily due to an increase in net earned premiums. Increases in general liability and surety business accounted for the largest portion of the increase in loss and loss adjustment expenses. During 1999, the Company experienced favorable development on prior accident years and released approximately $553,000 of reserves.
Acquisition Expenses. Policy acquisition expenses decreased 25% from $1.2 million in 1998 to $894,000 in 1999.
Payroll and Other Expenses. Payroll and other expenses increased 53.6% from $5.2 million in 1998 to $7.7 million in 1999 as a result of increases in salary, benefits and operating expense primarily due to increased staffing for new and existing programs combined with operating expenses from the Company’s new financial services subsidiary.
Income Taxes. Federal and state income taxes increased from a benefit of $199,244 in 1998 to an expense of $82,722 in 1999 due to increased taxable income in the Company's U.S. subsidiaries.
Certain items reflected in the Net Premiums Earned, Brokerage Commission Income, Management Fees, Acquisition Expenses and Payroll and Other Expenses categories above have been reclassified to conform to the presentation in the Company’s consolidated financial statements for fiscal year 2000. These reclassified items had no effect on the previously reported net earnings or shareholders’ equity of the Company.
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The Company historically has met its cash requirements and financed its growth principally through cash flows generated from operations. During the past decade, the Company has operated in a soft market cycle which was characterized by excess insurance capacity and declining insurance premium rates; however, commencing in fiscal year 2000 the Company has operated in a hardening market with increased insurance premium rates for workers’ compensation and excess and surplus lines. 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 the short-term needs of its insurance business and the Company’s invested assets are sufficient for the long-term needs of its insurance business. The Company also purchases reinsurance to mitigate the effect of large claims and to help stabilize demands on its liquidity.
On a consolidated basis, net cash provided from operations was $2.4 million for 1998, $5.5 million for 1999 and $24.4 million for 2000. The positive cash flows for said periods were primarily attributable to net premiums written and net earnings. Because workers' compensation and general liability claims may be paid over an extended period of time, the Company has established loss reserves for such lines of business. The assets supporting the Company's reserves continue to earn investment income until claim payments are made.
Total assets increased from $86.1 million at December 31, 1998 to $104.4 million at December 31, 1999, and to $207.3 at December 31, 2000, primarily due to increases in premiums receivable, reinsurance recoverables and real estate investments. Cash, invested assets and notes receivable increased from $72 million at December 31, 1998 to $73 million at December 31, 1999, and to $100.1 million at December 31, 2000, as a result of increases in net premiums written and investment income and real estate. At December 31, 2000, the Company has repurchased 1,267,200 shares of its common stock at a total cost of $7.1 million since January 1999.
American Safety is an insurance and financial services holding company whose principal assets are its investment portfolio and its investment in the capital stock of its subsidiaries. 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
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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.
Harbour Village Development. The Company announced in March 2000 its plans to complete development of the Harbour Village Golf and Yacht Club (“Harbour Village”), located in Ponce Inlet, Florida, consisting of 786 residential condominium units, a marina containing 142 boat slips, a par 3 golf course and beach club. The Harbour Village property (comprising 173 acres) was acquired by the Company through foreclosure in April 1999, and has been under development by its subsidiary, Ponce Lighthouse Properties, Inc. and its general contracting subsidiary, Rivermar Contracting Company. The number of residential condominium units planned for the project has been increased from 786 to 809. As of February 28, 2001, the Company’s marketing efforts had generated approximately $80 million of pre-sales of condominium units and boat slips.
It is anticipated that Harbour Village will be developed in three Phases over the next three to five years, depending on future sales activities and economic conditions that may impact the marketing of the condominium units. In July 2000, the Company closed a $37 million acquisition, development and construction loan facility in order to commence construction of Phase I of the project. Through December 31, 2001, the Company had borrowed approximately $11 million from this loan facility. The estimated construction and development cost for the entire Harbour Village project is approximately $200 million over a three to five year period. Phase I of the development currently under construction consists of site work including a 142-boat slip marina, 294 residential units, and related amenities. No assurance can be given, however, as to either future sales activities of the condominium units or the impact of local and national economic conditions on the Company's marketing efforts for the development of the Harbour Village project.
Management believes that the bank credit facility, together with anticipated cash flows from marketing and sales operations, will meet the liquidity needs for the construction and development of Phase I of the Harbour Village project during the first 24 months of development. There can be no assurance, however, that the amounts available from the Company’s sources of liquidity, exclusive of the bank credit facility for the project, will be sufficient or available to meet the Company’s future capital needs for the project.
Income Taxes
American Safety is incorporated under the laws of Bermuda and, under current Bermuda law, is not obligated to pay any taxes in Bermuda based upon income or capital gains. American Safety has received an undertaking from the Minister of Finance in Bermuda pursuant to the provisions of The Exempted Undertakings Tax Protection Act
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1966, which exempts American Safety and its shareholders, other than shareholders ordinarily resident in Bermuda, from any Bermuda taxes computed on profits, income or any capital asset, gain or appreciation, or any tax in the nature of estate, duty or inheritance until March 28, 2016. The Company, exclusive of its United States subsidiaries, does not consider itself to be engaged in a trade or business in the United States and accordingly does not expect to be subject to direct United States income taxation. The Company’s U.S. subsidiaries are subject to taxation in the United States.
Impact of Inflation
Property and casualty insurance premiums are established before the amounts of losses and loss adjustment expenses are known and therefore before the extent by which inflation may affect such expenses is known. Consequently, the Company attempts, in establishing its premiums, to anticipate the potential impact of inflation. However, for competitive and regulatory reasons, the Company may be limited in raising its premiums consistent with anticipated inflation, in which event the Company, rather than its insureds, would absorb inflation costs. Inflation also affects the rate of investment return on the Company’s investment portfolio with a corresponding effect on the Company’s investment income.
Combined Ratio
The combined ratio of an insurance company measures only the underwriting results of insurance operations and not the profitability of the overall company. The Company’s reported combined ratio for its insurance operations may not provide an accurate indication of the Company’s overall profitability from insurance and reinsurance programs due to the exclusion of fee and commission income and expenses generated in related management and agency subsidiaries. Depending on the Company’s mix of business going forward, the combined ratio may fluctuate from time to time and may not reflect the overall profitability of insurance programs to the Company.
Reserves
Certain of the Company’s insurance policies and reinsurance assumed, including general and pollution liability policies covering environmental remediation risks, as well as workers’ compensation policies, may be subject to claims brought years after an incident has occurred or the policy period has ended. The Company is required to maintain reserves to cover its estimated liability for losses and loss adjustment expenses with respect to reported and unreported claims incurred. The Company engages an independent internationally recognized actuarial consulting firm to provide reserve studies, opinions and rate studies. Reserves are estimates at a given time, which are established from actuarial and statistical projections by the Company of the ultimate settlement and administration costs of claims occurring on or prior to such time, including claims that have not yet been reported to the
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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.
Forward Looking Statements
This Report contains certain forward-looking statements within the meaning of United States’ securities laws which are intended to be covered by the safe harbors created thereby. Forward-looking statements involve risks and uncertainties which may cause actual results to differ, and are subject to change based on various insurance industry factors, including, without limitation, competitive conditions in the insurance industry, unpredictable developments in loss trends, adequacy and changes in loss reserves, market acceptance of new coverages and enhancements, changes in reinsurance costs and availability, and changes in levels of general business activity and economic conditions. With respect to the development of the Harbour Village property, such forward-looking statements involve risks and uncertainties which may cause actual results to differ, and are subject to change based on various real estate development industry factors, including competitive housing conditions in the local market area, risks inherent in new construction, changes in interest rates and the availability of mortgage financing for prospective purchasers of condominium units and boat slips, and changes in local and national levels of general business activity and economic conditions. All statements, other than statements of historical facts, included or incorporated by reference in this Report that address activities, events or developments that the Company expects or anticipates will or may occur in the future constitute forward-looking statements. Although the Company believes that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could over time prove to be inaccurate and therefore, there can be no assurance that the forward-looking statements included in this Report will themselves prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by the Company or any other person that the objectives and plans of the Company will be achieved.
Market risk is the risk of economic losses due to adverse changes in the estimated fair value of a financial instrument as the result of changes in equity prices, interest rates, foreign exchange rates and commodity prices. The Company’s Consolidated Balance Sheets includes assets whose estimated fair values are subject to market risk. The primary market risks to the Company are equity price risk associated with investments in equity securities and interest rate risk associated with investments in fixed maturities. The Company has no direct commodity or foreign exchange risk as of December 31, 2000. The estimated fair value of the Company’s investment portfolio at December 31, 2000 was $91 million, 78%
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of which was invested in fixed maturities and short-term investments, and 33% of which was invested in real estate.
Equity Price Risk
The Company invests funds in equity securities which have historically, over long periods of time, produced higher returns relative to fixed income investments. The Company intends to hold these investments over the long term. This focus on long-term total investment returns may result in variability in the level of unrealized investment gains and losses from one period to the next. The changes in the estimated fair value of the equity portfolio are presented as a component of shareholders’ equity in accumulated other comprehensive income, net of taxes.
The table below summarizes the Company’s equity price risk and shows the effect of a hypothetical 20% increase and a 20% decrease in market prices as of December 31, 2000. The selected hypothetical changes do not indicate what could be the potential best or worst case scenarios (dollars in thousands):
Estimated Value after Percentage Increase
Fair Value at Hypothetical Hypothetical (Decrease) in
December 31, 2000 Price Change Change in Prices Shareholders' Equity
- ----------------- ----------------- ----------- ---------------- ---------------------
Equity Securities $ 162 20% increase $ 194 0.1%
20% decrease 130 -0.1
Interest Rate Risk
The Company’s fixed maturity investments and borrowings are subject to interest rate risk. Increases and decreases in interest rates typically result in decreases and increases in the fair value of these financial instruments.
Approximately three quarters of the Company’s investable assets come from premiums paid by policyholders. These funds are invested predominantly in high quality corporate, government and municipal bonds with relatively short durations. The fixed maturity portfolio is exposed to interest rate fluctuations; as interest rates rise, their fair values decline and as interest rates fall, the fair value of the fixed maturity portfolio rises. The changes in the fair market value of the fixed maturity portfolio are presented as a component shareholders’ equity in accumulated other comprehensive income, net of taxes.
The Company works to manage the impact of interest rate fluctuations on its fixed maturity portfolio. The effective duration of the fixed maturity portfolio is managed with consideration given to the estimated duration of the Company’s liabilities. The Company has investment policies which limit the maximum duration and maturity of the fixed maturity portfolio.
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The table below summarizes the Company’s interest rate risk and shows the effect of a hypothetical change in interest rates as of December 31, 2000. The selected hypothetical changes do not indicate what would be the potential best or worst case scenarios (dollars in thousands):
Estimated Fair Percentage
Fixed Maturity Estimated Fair Estimated Change Value after Increase (Decrease)
Investments Value at in Interest Rate Hypothetical in Shareholders's
December 31, (bp=basis points) Change in Interest Equity
2000 Rate
- -------------------------------- ----------------- --------------------- --------------------- ------------------------
Total Fixed Maturity $61,298 200bp decrease $ 64,629 5.8%
Investments (including 100bp decrease 62,892 2.8
short-term investments) 100bp increase 59,732 -2.7
200bp increase 58,248 -5.3
- -------------------------------- ----------------- --------------------- --------------------- ------------------------
The Company’s consolidated financial statements required under this Item 8 are included as part of Item 14 of this Report.
None.
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The information required by this Item 10 regarding directors and executive officers of the Company will be set forth in the Company’s 2001 Proxy Statement which will be filed with the Securities and Exchange Commission pursuant to applicable regulations, and is hereby incorporated by this reference. Additional information required by this Item 10 with respect to executive officers is set forth in Part I, Item 4 of this Report.
The information required by this Item 11 regarding executive compensation will be set forth in the Company’s 2001 Proxy Statement which will be filed with the Securities and Exchange Commission pursuant to applicable regulations, and is hereby incorporated by this reference.
The information required by this Item 12 regarding security ownership of certain beneficial owners and management of the Company will be set forth in the Company’s 2001 Proxy Statement which will be filed with the Securities and Exchange Commission pursuant to applicable regulations, and is hereby incorporated by this reference.
The information required by this Item 13 regarding certain relationships and related transactions of the Company will be set forth in the Company’s 2001 Proxy Statement which will be filed with the Securities and Exchange Commission pursuant to applicable regulations, and is hereby incorporated by this reference.
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(a) Financial Statements Schedules, and Exhibits
1. Financial Statements
The following is a list of financial statements, together with reports thereon,
filed as part of this Report:
- Independent Auditors' Report
- Consolidated Balance Sheets at December 31, 1999 and 2000
- Consolidated Statements of Earnings for the Years Ended December
31, 1998, 1999 and 2000
- Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 1998, 1999 and 2000
- Consolidated Statements of Cash Flows for the Years Ended December
31, 1998, 1999 and 2000
- Consolidated Statements of Comprehensive Earnings for the Years
Ended December 31, 1998, 1999 and 2000
- Notes to Consolidated Financial Statements
2. Financial Statement Schedules
The following is a list of financial statement schedules filed as part of this
Report:
Schedule Number Page
--------------- ----
- Schedule II - Condensed Financial Statements 91
(Parent only)
- Schedule III - Supplemental Information 92
- Schedule IV - Reinsurance 93
Other schedules have been omitted as they are not applicable to the Company, or the required information
has been included in the financial statements and related notes.
3. Exhibits
The following is a list of exhibits required to be filed as part of this
Report:
Exhibit
Number Title
------ -----
3.1* Memorandum of Association of the Company
3.2* Form of Bye-Laws of the Company
4.1* Common Share Certificate
10.1* Employment Contract between the Company and Lloyd A. Fox
10.2* Incentive Stock Option Plan
10.3* Directors Stock Award Plan
10.4** Lease Agreement between 1845 Tenants-In-Common (formerly
known as Windy Hill Exchange, L.L.C.) and American Safety
Insurance Services, Inc. (formerly known as Environmental
Management Services, Inc. ) for office space in Atlanta, Georgia.
10.5* Program Management Agreement between Synergy Insurance
Services, Inc. (now known as American Safety Insurance
Services, Inc.) and American Safety Risk Retention Group, Inc.
21 Subsidiaries of the Company
*Incorporated by reference to the Exhibits to Registrant’s Amendment No. 1 to
Registration Statement filed January 27, 1998 on Form S-1 (Registration No.
333-42749)
**Incorporated by reference to the Exhibits to Registrant’s Registration Statement
filed December 19, 1997 on Form S-1 (Registration No. 333-42749)
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the fourth quarter of the year ended
December 31, 2000.
- -
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized on March 30, 2001.
By:
--------------------------------------
Lloyd A. Fox
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed by the following persons in the capacities indicated on March 30, 2001.
- -------------------------------------
Lloyd A. Fox President and Director
(Principal Executive Officer)
- -------------------------------------
Steven B. Mathis Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
- -------------------------------------
Frederick C. Treadway Chairman of the Board of Directors
- -------------------------------------
David V. Brueggan Director
- -------------------------------------
Cody W. Birdwell Director
- -------------------------------------
William O. Mauldin, Jr. Director
- -------------------------------------
Thomas W. Mueller Director
- -------------------------------------
Timothy E. Walsh Director
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Independent Auditors' Report
The Board of Directors
American Safety Insurance Group, Ltd.:
We have audited the consolidated financial statements of American Safety Insurance Group, Ltd. and subsidiaries as listing in the accompanying index. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedules as listed in the accompanying index. These consolidated financial statements and financial statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of American Safety Insurance Group, Ltd. and subsidiaries as of December 31, 1999 and 2000, and the results of their operations and their cash flow for each of the years in the three-year period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
KPMG Hamilton, Bermuda
March 9, 2001
Investments:
Securities available for sale, at fair value:
Fixed maturities $ 40,694,556 $45,985,656
Common stock 163,968 162,322
Investment in real estate 12,039,842 29,786,224
Short-term investments 6,749,791 15,312,377
----------- ----------
Total investments 59,648,157 91,246,579
Cash 427,154 3,784,102
Restricted cash - 6,117,682
Accrued investment income 2,783,663 1,543,675
Notes receivable:
Related parties 1,700,000 -
Other 11,255,264 8,878,018
Premiums receivable 12,239,544 33,344,382
Commissions receivable 5,948 -
Ceded unearned premium 4,591,075 22,190,095
Reinsurance recoverable 6,065,502 27,929,794
Funds on deposit 353,407 298,000
Due from affiliate 2,088,748 985,320
Income tax recoverable - 160,333
Deferred income taxes 733,227 1,543,272
Deferred acquisition costs 274,701 3,039,144
Property, plant and equipment 1,234,294 935,743
Prepaid items 267,594 1,755,191
Goodwill 234,467 1,553,863
Other assets 113,846 1,992,923
--------- -----------
Total assets $104,016,591 $207,298,116
=========== ===========
Liabilities and Shareholders' Equity
------------------------------------
Liabilities:
Unpaid losses and loss adjustment
expenses 20,413,236 50,508,627
Unearned premiums 9,159,399 41,953,354
Reinsurance on paid losses and loss
adjustment expenses 1,419,536 928,865
Reinsurance deposits on retroactive contract 48,375
Ceded premiums payable 6,739,068 24,311,656
Due to affiliate:
Ceded premiums payable 1,636,207 567,786
Reinsurance on paid losses and loss
adjustment expenses 79,198 229,790
Escrow deposits - 6,200,182
Accounts payable and accrued expenses 1,893,470 6,384,429
Funds held 357,509 4,861,472
Loan payable - 11,435,221
Collateral held 1,208,976 1,544,839
Unearned loan fees - 568,750
Income tax payable 22,857 -
----------- -----------
Total liabilities 42,977,831 149,494,971
---------- -----------
Shareholders' equity:
Preferred stock, $0.01 par value;
authorized 5,000,000 shares;
no shares issued and outstanding - -
Common stock, $0.01 par value; authorized
15,000,000 shares; issued and outstanding
at December 31, 1999, 6,077,750 shares, and
atDecember 31, 2000, 6,281,386 shares 60,777 62,814
Additional paid-in capital 33,810,387 35,148,577
Retained earnings 30,625,739 29,262,582
Accumulated other comprehensive income (loss), net (1,288,804) 428,085
Treasury stock, 300,000 shares at December 31,1999,
and 1,267,200 shares (2,169,339) (7,098,913)
----------- -----------
at December 31, 2000
Total shareholders' equity 61,038,760 57,803,145
---------- ----------
Total liabilities and shareholders' equity $104,016,591 $207,298,116
============ ============
See accompanying notes to consolidated financial statements.
-51-
Revenues:
Direct premiums earned $ 3,532,154 $ 6,625,018 $35,602,221
Assumed premiums earned:
Affiliate 2,834,855 3,449,178 5,760,586
Nonaffiliates 6,746,983 8,065,737 12,715,642
--------- ---------- ----------
Total assumed premiums earned 9,581,838 11,514,915 18,476,228
--------- ---------- -----------
Ceded premiums earned:
Affiliate 2,317,414 3,972,686 4,468,674
Nonaffiliates 1,676,677 2,042,216 22,805,125
--------- --------- ----------
Total ceded premiums earned 3,994,091 6,014,902 27,273,799
--------- --------- ----------
Net premiums earned 9,119,901 12,125,031 26,804,650
--------- ---------- ----------
Net investment income 2,847,359 2,877,771 2,605,218
Interest on notes receivable 2,408,908 2,614,572 1,531,183
Brokerage commission income 1,182,556 1,389,242 3,291,605
Management fees from affiliate 1,344,091 1,386,108 1,424,986
Net realized gains (losses) 443,230 173,605 (517,857)
Other income 24,367 920,926 938,570
-------- ---------- ----------
Total revenues 17,370,412 21,487,255 36,078,355
---------- ---------- ----------
Expenses:
Losses and loss adjustment
expenses incurred 5,177,033 6,896,423 18,506,290
Acquisition expenses 1,191,755 893,737 3,792,040
Payroll and related expenses 3,500,676 5,032,382 7,561,311
Other expenses 1,745,943 2,661,723 5,196,751
Expenses due to recission - - 3,541,848
----------- ---------- -----------
Total expenses 11,615,407 15,484,265 38,598,240
---------- ---------- ----------
Earnings (loss) before income taxes 5,755,005 6,002,990 (2,519,885)
Income taxes (199,244) 82,722 (1,156,728)
--------- ----------- -----------
Net earnings (loss) $ 5,954,249 $ 5,920,268 $ (1,363,157)
========= ========= ===========
Net earnings (loss) per share:
Basic $1.05 $0.99 $(0.25)
----- ----- -------
Diluted $1.04 $0.98 $(0.25)
----- ----- -------
Average number of shares outstanding:
Basic 5,661,700 6,006,605 5,496,106
--------- --------- ---------
Diluted 5,738,039 6,032,364 5,497,434
--------- --------- ---------
See accompanying notes to consolidated financial statements.
-52-
Common stock - number of shares:
Balance at beginning of period 2,925,230 6,074,770 6,077,750
Issuance of common shares 3,149,540 2,980 203,636
--------- -------------- -----------
Balance at end of period 6,074,770 6,077,750 6,281,386
========= ========= =========
Common stock:
Balance at beginning of period $ 29,252 $ 60,747 $ 60,777
Issuance of common shares 31,495 30 2,037
------ --------- ---------
Balance at end of period 60,747 60,777 62,814
------ ------ --------
Additional paid-in capital:
Balance at beginning of period 2,751,789 33,809,141 33,810,387
Issuance of common shares 31,057,352 1,246 1,338,190
---------- -------------- -----------
Balance at end of period 33,809,141 33,810,387 35,148,577
---------- ---------- ----------
Retained earnings:
Balance at beginning of period 18,751,222 24,705,471 30,625,739
Net earnings (loss) 5,954,249 5,920,268 (1,363,157)
----------- ----------- ------------
Balance at end of period 24,705,471 30,625,739 29,262,582
---------- ----------
Accumulated other comprehensive income:
Balance at beginning of period 308,633 693,934 (1,288,804)
Unrealized gain (loss) during the period (net of deferred
tax benefit (expense) of $(6,236), $180,514, and
$(240,095), respectively) 385,301 (1,982,738) 1,716,889
------- ----------- ---------
Balance at end of period 693,934 (1,288,804) 428,085
------- ----------- ----------
Treasury Stock:
Balance at beginning of period - - (2,169,339)
Shares purchased, 300,000 shares in 1999 and 967,200 - (2,169,339) (4,929,574)
----------- -----------
shares in 2000
Balance at end of period - (2,169,339) (7,098,913)
----------- -----------
Total shareholders' equity $ 59,269,293 $ 61,038,760 $ 57,803,145
========== ========== ==========
See accompanying notes to consolidated financial statements.
-53-
AMERICAN SAFETY INSURANCE GROUP, LTD. AND SUBSIDIARIES
Consolidated Statements of Cash Flow
Years ended December 31, 1998, 1999, and 2000
1998 1999 2000
Cash flow from operating activities:
Net earnings (loss) $ 5,954,249 $ 5,920,268 $ (1,363,157)
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Realized losses (gains) on sale of investments (443,230) (173,605) 517,857
Amortization (deferral) of deferred acquisition costs, net 153,075 (334,906) (2,764,443)
Accretion of loan discount (297,871) (510,636) -
Change in:
Accrued investment income (1,660,059) (1,321,926) 1,239,988
Premiums receivable 612,725 (6,400,977) (21,104,838)
Commissions receivable (3,939) 16,621 5,948
Reinsurance recoverable and ceded unearned premiums (2,154,755) (6,034,994) (39,953,983)
Unearned loan fees - - 568,750
Due from affiliate (20,979) (1,420,674) 1,103,428
Prepaid items (5,644) (261,950) (1,317,597)
Funds held - (357,509) 4,503,963
Funds deposited - 353,407 55,407
Collateral held - 1,208,976 335,863
Income taxes (277,646) (70,127) (993,235)
Unpaid losses and loss adjustment expenses 3,128,934 5,712,763 30,095,391
Unearned premiums 1,562,989 5,264,831 32,793,955
Liability for deductible fees held (3,499,104) (529,053) -
Ceded premiums payable (1,535,283) 2,356,146 17,572,588
Due to affiliate (76,920) 1,461,476 (917,829)
Accounts payable and accrued expenses 1,285,281 (794,531) 4,490,959
Other, net (286,056) 1,427,631 (503,562)
------------ ------------ ------------
Net cash provided by operating activities 2,435,767 5,511,231 24,365,453
------------ ------------ ------------
Cash flow from investing activities:
Purchases of fixed maturities (82,199,114) (9,775,786) (15,549,384)
Purchase of common stocks (3,526,905) (1,305,656) (5,908,304)
Proceeds from maturity and redemption of fixed maturities 22,543,671 7,732,263 868,191
Proceeds from sales of fixed maturities 41,620,120 4,034,887 16,358,289
Proceeds from sales of common stock 1,129,500 4,467,664 5,771,377
Purchase of Trafalgar Insurance Company, net of cash of - - (7,050,877)
acquired company
Proceeds from notes receivable - related parties 300,000 - 1,530,000
Decrease (increase) in short-term investments (462,490) (4,463,471) (8,562,586)
Advance in notes receivable - other (10,944,219) (3,967,511) (2,572,754)
Advance on notes receivable - related parties - (1,420,000) -
Decrease (increase) in investment in real estate - (1,842,983) (12,796,382)
Sales (purchases) of fixed assets, net (16,876) (1,112,553) 298,551
------------ ------------ ------------
Net cash used in investing activities (31,556,313) (7,653,146) (27,613,879)
------------ ------------ ------------
Cash flow from financing activities:
Proceeds from sale of common stock 31,088,847 1,276 17,227
Purchase of treasury stock - (2,169,339) (4,929,574)
Proceeds from loan payable - - 11,435,221
Proceeds from escrow deposits - - 6,200,182
Net cash provided by (used in) financing activities $31,088,847 $(2,168,063) $12,723,056
Net increase (decrease) in cash 1,968,301 (4,309,978) 9,474,630
Cash at beginning of period 2,768,831 4,737,132 427,154
Cash at end of period $ 4,737,132 $ 427,154 $9,901,784
Non-Cash Items: Operating activities:
Change in accrued interest income - 980,120 -
Recoverable due to rescission in other assets - - (1,323,000)
Change in prepaid items - - (170,000)
Investing activities:
Decrease in notes receivable-other - 9,162,777 4,950,000
Purchase of real estate - (10,142,897) (4,950,000)
Financing activities:
Issuance of common stock - - 1,323,000
Notes receivable related parties - - 170,000
Net noncash adjustments - - -
Supplemental disclosure of cash flow information:
Income taxes paid (recovered) $ 80,000 $ (217,427) $ 114,572
Interest paid $ - $ - $ -
See accompanying notes to consolidated financial statements.
AMERICAN SAFETY INSURANCE GROUP, LTD. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Earnings
Years ended December 31, 1998, 1999 and 2000
1998 1999 2000
---- ---- ----
Net earnings (loss) $ 5,954,249 $ 5,920,268 $ (1,363,157)
Other comprehensive earnings (loss) before income taxes:
Unrealized gains (losses) on securities available for sale (51,694) (2,282,895) 2,499,072
Reclassification adjustment for realized gains (losses) included in
net earnings 443,230 119,643 (542,088)
---------- ----------- -----------
Total other comprehensive earnings (loss) before taxes 391,536 (2,163,252) 1,956,984
Income tax expense (benefit) related to items of comprehensive
income 6,236 (180,514) 240,095
---------- ----------- -----------
Other comprehensive earnings (loss) net of income taxes 385,300 (1,982,738) 1,716,889
---------- ----------- -----------
Total comprehensive earnings $ 6,339,549 $ 3,937,530 $ 353,732
========== ========== ==========
See accompanying notes to consolidated financial statements.
AMERICAN SAFETY INSURANCE GROUP, LTD. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1999 and 2000
(1) Summary of Significant Accounting Policies
(a) Basis of Presentation
The accompanying consolidated financial statements of American Safety
Insurance Group, Ltd. ("American Safety") and its subsidiaries (collectively,
the "Company") are prepared in accordance with accounting principles
generally accepted in the United States of America. 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.
(b) Description of Common Stock - Voting and Ownership Rights
The authorized share capital of the Company is 20 million shares, consisting
of 15 million common shares, par value $.01 per share ("Common Shares"),
and 5 million preferred shares, par value $.01 per share ("Preferred Shares").
The Common Shares are validly issued, fully paid, and non-assessable. There
are no provisions of Bermuda law or the Company's Bye-Laws which impose
any limitations on the rights of shareholders to hold or vote Common Shares
by reason of such shareholders not being residents of Bermuda. Holders of
Common Shares are entitled to receive dividends ratably when and as declared
by the Board of Directors out of funds legally available therefor.
Each holder of Common Shares is entitled to one vote per share on all matters
submitted to a vote of the Company's shareholders, subject to the 9.5% voting
limitation described below. All matters, including the election of directors,
voted upon at any duly held shareholders meeting shall be authorized by a
majority of the votes cast at the meeting by shareholders represented in person
or by proxy, except (i) approval of a merger, consolidation or amalgamation;
(ii) the sale, lease, or exchange of all or substantially all of the assets of the
Company; and (iii) amendment of certain provisions of the Bye-Laws, which
each require the approval of at least 66-2/3% of the outstanding voting shares
(in addition to any regulatory or court approvals). The Common Shares have
noncumulative voting rights, which means that the holders of a majority of the
Common Shares may elect all of the directors of the Company and, in such
event, the holders of the remaining shares will not be able to elect any
directors.
The Bye-Laws contain certain provisions that limit the voting rights that may
be exercised by certain holders of Common Shares. The Bye-Laws provide
that each holder of Common Shares is entitled to one vote per share on all
matters submitted to a vote of the Company's shareholders, except that if, and
so long as, the Controlled Shares (as defined below) of any person constitute
9.5% or more of the issued and outstanding Common Shares, the voting rights
with respect to the Controlled Shares owned by such person shall be limited,
in the aggregate, to a voting power of 9.5%, other than the voting rights of
Frederick C. Treadway or Treadway Associates, L.P., affiliates of a founding
shareholder of the Company. "Controlled Shares" mean (i) all shares of the
Company directly, indirectly, or constructively owned by any person and (ii)
all shares of the Company directly, indirectly, or beneficially owned by such
person within the meaning of Section 13(d) of the Exchange Act (including
any shares owned by a group of persons, as so defined and including any
shares that would otherwise be excluded by the provisions of Section 13(d)(6)
of the Exchange Act). Under these provisions, if, and so long as, any person
directly, indirectly, or constructively owns Controlled Shares having more
than 9.5% of the total number of votes exercisable in respect of all shares of
voting stock of the Company, the voting rights attributable to such shares will
be limited, in the aggregate, to 9.5% of the total number of votes.
No holder of Common Shares of the Company shall, by reason only of such
holder, have any preemptive right to subscribe to any additional issue of
shares of any class or series nor to any security convertible into such shares.
(c) Principles of Consolidation
The consolidated financial statements include the accounts of American
Safety Insurance Group, Ltd., a Bermuda company, American Safety
Reinsurance, Ltd. ("American Safety Re") formed in January 1998 to serve as
the successor for the reinsurance business of American Safety, as a
100%-owned licensed Bermuda insurance company, and American Safety
Holdings Corp. ("American Safety Holdings"), formed in July 1999 to serve
as a 100%-owned insurance and financial services holding company.
American Safety Holdings in turn wholly owns American Safety Casualty
Insurance Company ("American Safety Casualty"), a property and casualty
insurance company, American Safety Insurance Services, Inc. ("ASI
Services"), an insurance management and brokerage company, Ponce
Lighthouse Properties, Inc. ("Ponce"), the development company of the
Harbour Village project, and Rivermar Contracting Company ("Rivermar"),
the general contractor of the Harbour Village project. American Safety
Casualty wholly owns American Safety Indemnity Company, a property and
casualty excess and surplus lines company. ASI Services wholly owns the
following subsidiaries: Sureco Bond Services, Inc. ("Sureco"), a bonding
agency; Environmental Claims Services, Inc. ("ECSI"), a claims consulting
firm; American Safety Financial Corp., a financial services subsidiary; and
American Safety Purchasing Group, Inc. ,which acts as a purchasing group for
the placement of business with American Safety Casualty. All significant
intercompany balances have been eliminated in consolidation.
(d) Business Environment
The following is a description of certain risks facing the Company and its
subsidiaries:
Legal/Regulatory Risk is the risk that changes in the legal or regulatory
environment in which an insurer operates will create additional expenses not
anticipated by the insurer in pricing its products and beyond those recorded
in the financial statements. That is, regulatory initiatives designed to reduce
insurer profits or otherwise affecting the industry in which the insurer
operates, new legal theories or insurance company insolvencies through
guaranty fund assessments, may create costs for the insurer beyond those
recorded in the financial statements. The Company attempts to mitigate this
risk by actively writing insurance business in several states, thereby spreading
this risk over a large geographic area.
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 sole business is reinsuring contracts via treaty reinsurance agreements,
which are all signed outside of the United States, American Safety does not
consider itself to be engaged in a trade or business in the United States and,
accordingly, does not expect to be subject to United States income taxes. This
position is consistent with the position taken by various other entities that
have similar operational structures as American Safety.
However, because the Internal Revenue Code of 1986, as amended, the
Treasury Regulations and court decisions do not definitively identify activities
that constitute being engaged in a United States trade or business, and because
of the factual nature of the determination, there can be no assurance that the
Internal Revenue Service will not contend that American Safety or its
Bermuda insurance subsidiary are engaged in a United States trade or
business. In general, if American Safety or its Bermuda insurance 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. Certain subsidiaries
of American Safety are, however subject to U.S. Federal and state income
tax, as they are domiciled and conduct business in the United States.
Credit Risk is the risk that issuers of securities owned by the insurer or secured
notes receivable will default or that other parties, including reinsurers that
have obligations to the insurer, will not pay or perform. The Company
attempts to mitigate this risk by adhering to a conservative investment
strategy, by obtaining sufficient collateral for secured note obligations and by
maintaining sound reinsurance, credit and collection policies.
Interest Rate Risk is the risk that interest rates will change and cause a
decrease in the value of an insurer's investments. The Company attempts to
mitigate this risk by attempting to match the maturities of its assets with the
expected payouts of its liabilities.
(e) Investments
Fixed maturity securities for which the Company has the positive intent and
ability to hold to maturity are classified as "held to maturity" and are reported
at amortized cost. Fixed maturity and equity securities that are bought and
held principally for the purpose of selling them in the near term are classified
as "trading" and are reported at fair value, with unrealized gains and losses
included in earnings. Fixed maturity and equity securities not classified as
either held to maturity or trading are classified as "available for sale" and are
reported at fair value, with unrealized gains and losses (net of deferred taxes)
charged or credited as a component of accumulated other comprehensive
income.
While it is the Company's intent to hold fixed maturity securities until the
foreseeable future or until maturity, it may sell such securities in response to,
among other things, market conditions, liquidity needs, or interest rate
fluctuations. At December 31, 1999 and 2000, the Company considered all
of its fixed maturity and equity securities as available for sale.
Investment income is recorded as earned on the accrual basis and includes
amortization of premiums and accretion of discounts using the interest
method. Realized gains or losses on disposal of investments are determined
on a specific identification basis and are included in revenues. Investments
in real estate are carried at the lower of cost or market plus capitalized
development costs.
The Company owns no on-balance sheet or off-balance sheet derivative
instruments.
(f) Notes Receivable
Notes receivable represent indebtedness under various secured lending
arrangements with related and unrelated parties. Interest income, loan fees,
and deferred loan costs are recognized on an effective yield basis over the life
of the loan. The allowance for possible loan losses has been determined based
on those losses management considers probable at each reporting date. At
December 31, 1998, 1999 and 2000, no allowance was deemed necessary by Company management.
The Company ceases the accrual of interest on loans when any payment is past
90 days or more. Additionally, the Company assesses loan impairment by
comparing the carrying value of such loan, including accrued but unpaid
interest at the valuation date to the fair market value of collateral held with
respect to such loan. Any shortage of fair value over carrying value is first
recognized by reversing interest income recognized for the year of impairment
and then recognizing any further loss against the allowance for loan losses.
At December 31, 1999 and 2000, the Company did not maintain an allowance
for loan losses as it believes that the value of collateral held is sufficient to
preclude any losses. For the years ended December 31, 1998, 1999 and 2000
the Company did not incur any losses in its secured notes receivable portfolio.
(g) Recognition of Premium Income
General liability premiums are primarily assumed from American Safety Risk
Retention Group, Inc. ("American Safety RRG"), a non-subsidiary affiliate.
General liability premiums are estimated based upon the annual revenues of
the underlying insureds. Additional or return premiums are recognized for
differences between provisional premiums billed and estimated ultimate
general liability premiums due. General liability, surety, commercial auto,
other commercial lines and workers' compensation premiums are recorded
ratably over the policy period with unearned premium calculated on a pro rata
basis over the lives of the underlying coverages.
(h) Brokerage Commission Income
Brokerage commissions on business produced by Sureco are recognized as
income when the related insurance policies are underwritten. Commissions
on business produced by ASI Services are recognized as the related insurance
premiums are written. For ASI Services produced business which remains in
the consolidated group, any commissions recognized are eliminated in
consolidation or otherwise recognized in revenue consistent with the
recognition of premiums earned.
(i) Management Fees from Affiliate
The program management agreement between American Safety RRG and ASI
Services provided for payment of a monthly program management fee, a
managing general agency commission and producing agent commissions.
The level of program management fees are designed to reimburse the
Company for the allocable share of expenses incurred in managing the
American Safety RRG program. The fees are earned as expenses are incurred.
(j) Deferred Policy Acquisition Costs
The costs of acquiring business, primarily commissions and underwriting
expenses, are deferred (to the extent they are recoverable from future premium
income) and amortized to earnings in relation to the amount of premiums
earned. If necessary, investment income is considered in the determination of
the recoverability of deferred policy acquisition costs. Deferred revenue
results when reinsurance ceding commissions received exceed the related
deferred acquisition costs for direct and assumed business.
An analysis of deferred policy acquisition costs (deferred revenue) follows:
Years ended December 31,
1998 1999 2000
Balance, beginning of period $ 92,870 (60,205) 274,701
Acquisition costs deferred 112,511 1,499,496 7,479,745
Amortized during the period (265,586) (1,164,590) (4,715,302)
Balance, end of period $ (60,205) $ 274,701 $3,039,144
(k) Unpaid Losses and Loss Adjustment Expenses
The Company provides a liability for unpaid losses and loss adjustment
expenses based upon aggregate case estimates for reported claims and
estimates for incurred but not reported losses. Because of the length of time
required for the ultimate liability for losses and loss adjustment expenses to
be determined for certain lines of business underwritten, the Company has
limited experience upon which to base an estimate of the ultimate liability.
For this business, management has established loss and loss adjustment
expense reserves based on an independent actuarial valuation that it believes
is reasonable and representative of anticipated ultimate experience. Beginning
in 1996, the Company's actuarial consultant refined the estimation process for
the determination of ultimate loss and loss adjustment expense to begin to
recognize differences between the Company's reporting and settlement
patterns and industry patterns as sufficient Company specific data (10 years
of Company specific actuarial data) was then available. This method
(Bornhuetter-Ferguson) entails developing an initial expected loss ratio based
upon gross ultimate losses from prior accident years, estimating the portion of
ultimate losses expected to be reported and unreported, and adding the actual
reported losses to the expected unreported losses to derive the indicated
ultimate losses. However, the net amounts that will ultimately be paid to settle
the liability may be more or less than the estimated amounts provided.
(l) Income Taxes
For subsidiaries subject to taxation, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
(m) Reinsurance
Reinsurance contracts do not relieve the Company from its obligation to
policyholders. Failure of reinsurers to honor their obligations could result in
losses to the Company. The Company evaluates the financial condition of its
reinsurers and monitors concentration of credit risk to minimize its exposure
to significant losses from reinsurer insolvencies. Reinsurance recoverables on
unpaid losses and prepaid reinsurance represent amounts recoverable from
reinsurers for unpaid losses and unearned ceded reinsurance premiums,
respectively.
(n) Goodwill
On April 2, 1993, American Safety Casualty exchanged 8% of its common
shares for 100% of the common stock of ASI Services, which shares were
subsequently re-acquired by the Company. The goodwill created
from this transaction is being amortized ratably over 20 years. In March 2000,
American Safety Holdings Corp. purchased 100% of the common stock of
Trafalgar Insurance Company and renamed it American Safety Indemnity
Company. The goodwill created from this transaction is being amortized
ratably over 20 years. Accumulated amortization was $123,713 at December
31, 1999 and $193,582 at December 31, 2000.
(o) Net Earnings Per Share
Basic earnings (loss) per share and diluted earnings (loss) per share are
computed by dividing net earnings (loss) by the weighted average number of
shares outstanding for the period (basic EPS) plus dilutive shares subject to
stock options (diluted EPS).
Earnings (loss) per share are as follows:
1998 1999 2000
Weighted average shares outstanding 5,661,700 6,006,605 5,496,106
Shares attributable to stock options 76,339 25,759 1,328
Weighted average common and common
equivalents 5,738,039 6,032,364 5,497,434
Earnings (loss) per share:
Basic $ 1.05 $ 0.99 $(0.25)
Diluted $ 1.04 $ 0.98 $(0.25)
(p) Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133, as amended, is effective for
years beginning after June 15, 2000. The standard requires that all derivatives be
recorded as an asset or liability, at estimated fair value, regardless of the purpose
or intent for holding the derivative. If a derivative is not utilized as a hedge, all
gains or losses from the change in the derivative's estimated fair value are
recognized in earnings. The gains or losses from the change in estimated fair
value of certain derivatives utilized as hedges are recognized in earnings or other
comprehensive income depending on the type of hedge relationship. The
Company expects that adoption of SFAS No. 133, as amended, will have an
immaterial impact on the Company's consolidated financial position and results
of operations.
In September 2000, the FASB issued SFAS No. 140, Accounting for Transfers
and Servicing of Financial Assets and Extinguishment of Liabilities - a replacement
of FASB Statement No. 125. SFAS No. 140 revises the standards of accounting
for securitizations and other transfers of financial assets and collateral and requires
certain disclosures not previously required under SFAS No. 125. This statement
is effective for all transfers and servicing of financial assets and liabilities
occurring after March 31, 2001. For recognition and reclassification of collateral
and for disclosures relating to securitization transactions and collateral, it is
effective for fiscal years ended after December 15, 2000. The Company is
currently assessing the impact of SFAS No. 140, but does not believe that the
statement will have a material impact on the Company's consolidated financial
position and results of operation.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 101 - Revenue Recognition in Financial
Statements. SAB 101, as amended, is effective for fiscal years ended after
December 15, 2000. The bulletin further defines when revenues are recognizable
and provides a series of questions and answers related to specific revenue
recognition topics. The adoption of SAB 101 did not have a material impact on
the Company's consolidated financial position and results of operation.
(q) Reclassifications
Certain items in the prior periods' financial statements have been
reclassified to conform with the 2000 presentation.
(2) Investments
Net investment income is summarized as follows:
Years ended December 31,
1998 1999 2000
Fixed maturities $ 2,571,518 $ 2,449,362 $2,183,392
Equity securities 34,301 1,507 48,760
Short-term investments and cash 360,542 422,173 460,777
2,966,361 2,873,042 2,692,929
Less investment expenses 119,002 (4,729) 87,711
Net investment income $ 2,847,359 $ 2,877,771 $2,605,218
Realized and unrealized gains and losses were as follows:
Years ended December 31,
1998 1999 2000
Realized gains:
Fixed maturities $ 457,066 $ 16,608 $37,757
Equity securities - 124,637 -
Real estate - 53,962 24,231
Total gains 457,066 195,207 61,988
Realized losses:
Fixed maturities (13,836) (17,171) (573,884)
Equity securities - (4,431) (5,961)
Total losses (13,836) (21,602) (579,845)
Net realized gains (losses) $443,230 $ 173,605 $ (517,857)
Changes in unrealized gains (losses):
Fixed maturities $387,179 $(2,144,359) $ 1,951,504
Equity securities 4,357 (18,893) 5,480
Net unrealized gains (losses) $391,536 $(2,163,252) $ 1,956,984
At December 31, 1999 and 2000, the Company did not hold fixed-maturity securities
which individually exceeded 10% of shareholders' equity, except U.S. government
and government agency securities.
The amortized cost and estimated fair values of investments at December 31, 1999
and 2000 are as follows:
Gross Gross
Amortized unrealized unrealized Estimated
cost gains losses fair value
December 31, 1999:
Securities available for sale:
Fixed maturities:
U.S. Treasury securities and obligations
of U.S. Government corporations
and agencies $17,475,473 $ - $624,997 $16,850,476
Obligations of states and political
subdivisions 6,526,137 38,835 104,972 6,460,000
Corporate securities 14,623,165 2,427 519,015 14,106,577
Mortgage-backed securities 3,433,949 209 156,655 3,277,503
Total fixed maturities 42,058,724 41,471 1,405,639 40,694,556
Equity investments - common stocks 169,448 - 5,480 163,968
Total $42,228,172 $ 41,471 $1,411,119 $40,858,524
December 31, 2000:
Securities available for sale:
Fixed maturities:
U.S. Treasury securities and obligations
of U.S. Government corporations
and agencies $ 30,952,452 $ 615,498 $ 112,524 $ 31,455,426
Obligations of states and political
subdivisions 6,083,661 190,974 - 6,274,635
Corporate securities 6,799,319 17,688 153,243 6,663,764
Mortgage-backed securities 1,562,888 31,997 3,054 1,591,831
Total fixed maturities 45,398,320 856,157 268,821 45,985,656
Equity investments - common stocks 162,322 - - 162,322
Total $ 45,560,642 $ 856,157 $ 268,821 $ 46,147,978
The amortized cost and estimated fair values of fixed maturities at December 31,
2000, by contractual maturity are shown below. Expected maturities may differ from
contractual maturities as certain borrowers may have the right to call or prepay
obligations with or without call or prepayment penalty.
Amortized Estimated
cost fair value
Due in one year or less $ 1,818,412 $ 1,825,000
Due after one year through five years 25,297,223 25,573,075
Due after five years through ten years 11,735,664 12,038,857
Due after ten years 4,984,133 4,956,892
Mortgage-backed securities 1,562,888 1,591,832
Total $45,398,320 $45,985,656
Bonds with an amortized cost of $6,232,836 and $12,648,910 were on deposit with
insurance regulatory authorities at December 31, 1999 and 2000 in accordance with
statutory requirements.
(3) Investment in Real Estate
The Company's investment in real estate is comprised of 173 acres of property in
Ponce Inlet, Florida that was acquired in foreclosure during April 1999. At the date
of foreclosure the Company evaluated the carrying value of its investment in real
estate by comparing the fair value of the foreclosed collateral to the book value of the
underlying loan and accrued interest. As the book value of the loan and accrued
interest was less than the fair value of the collateral, no loss was recognized on
foreclosure and the book balance of the loan and accrued interest became the basis
of the real estate.
Throughout 1999, it was the Company's intent to sell the property known as Harbour
Village Golf and Yacht Club ("Harbour Village") and the Company negotiated with
a potential purchaser who was interested in developing the property. During the
negotiation period, the Company agreed to manage the property development on the
potential purchaser's behalf.
On February 17, 2000 the Company was informed that the potential purchaser was
unable to secure acceptable construction financing terms and requested an extension
of time to seek other financing. The Company denied the potential purchaser's
request and has decided to develop the property for its own account.
During 1999, the Company recognized $360,000 in property management fees for
the management of the property during the due diligence period on behalf of the
potential purchaser and applied $140,000 in nonrefundable earnest monies against
the carrying value of its investment in real estate.
As of December 31, 1999 and 2000, the investment in real estate for the Harbour
Village project is broken down as follows (in thousands):
1999 2000
Land $9,664 $11,989
Capitalized overhead,
interest and taxes 1,374 3,886
Work in process 1,002 8,961
Total $12,040 $24,836
In October 2000, the Company refinanced several secured notes receivable into one
secured note receivable and the Company took title to several parcels of land as
partial payment of the notes receivable. The repayment value given to the borrower
was $4.27 million and the fair market value of the land was recorded at $4.95 million.
The Company was paid a fee of $650,000 for this consolidation of notes receivable
and is earning this fee over a two year period in accordance with SFAS 91.
(4) Notes Receivable
As of December 31, 2000, other notes receivable consists of three notes which are secured
by real and personal property and various corporate and personal guarantees. These notes
bear interest rates ranging from 9% to 12% and are payable on various dates.
As of December 31, 2000, there are no delinquent note payments and no losses have been
incurred on the Company's notes receivable for any period presented herein.
(5) Financial Instruments
The carrying amounts for short-term investments, cash, premiums receivable, commissions
receivable, accrued investment income, liability for deductible fees held, ceded premiums
payable, funds held, collateral held and accounts payable and accrued expenses approximate
their fair values due to the short-term nature of these instruments.
Estimated fair values for fixed maturities were provided by outside consultants using market
quotations, prices provided by market makers or estimates of fair values obtained from yield
data relating to investment securities with similar characteristics.
The estimated fair values for equity securities were determined by using market quotations
on the principal public exchange markets for which such securities are traded.
Of the eleven notes receivable at December 31, 1999, all have fair values which approximate
market values, and have maturity dates in 2000 and 2001. Of the three notes receivable
at December 31, 2000, all have fair values which approximate market values, and
have maturity dates in 2001 and 2002.
(6) Reinsurance
General Liability
Effective January 1, 2000, the Company entered into Excess of Loss Reinsurance
treaties with Signet Star Reinsurance Company, Terra Nova Insurance Company, Lloyds of
London, and Zurich-American Insurance Group (the "Reinsurers") for the Company's
general liability lines of business. The treaties provide $750,000 excess $250,000 and $4
million excess $1 million, and $10 million excess $5 million of coverage to the Company
on a 100% basis. The treaties also provide reinsurance coverage beginning at $100,000 for
occupational disease, cumulative trauma, employers' liability and "action over" claims.
COVERAGE LAYER--$10,000,000 X $5,000,000
Lloyd's of London 87.56%
Terra Nova Insurance Company 12.44
100.0%
COVERAGE LAYER--$4,000,000 X $1,000,000
Lloyd's of London 60.0%
Signet Star Reinsurance Company 30.0
Terra Nova Insurance Company 10.0
100.0%
COVERAGE LAYER--$750,000 X $250,000
Signet Star Reinsurance Company 100.0%
COVERAGE LAYER--$0-$250,000(1)
American Safety Indemnity Company 25.0%
American Safety Reinsurance, Ltd. 25.0
American Safety RRG 25.0
American Safety Casualty 25.0
100.0%
(1) The above percentages are after American Safety RRG retains the first $100,000 in the aggregate.
Workers' Compensation
The Company assumes workers' compensation business from Legion Insurance
Company ("Legion"). This business is produced by ASI Services, which bills and
collects the premiums on behalf of Legion and remits net of its agent's commissions.
Legion then deducts its expenses for the program as well as 10% of the premium to
deposit in its loss fund. The balance of the premium is ceded to American Safety
Casualty. Legion uses the 10% loss fund to pay claims, and when this fund is
extinguished, Legion cedes the losses to American Safety Casualty. American Safety Casualty
has a 50% quota share arrangement between itself and American Reinsurance, Ltd.
Pursuant to the arrangement with Legion Insurance Company, the Company's
exposure is limited to $250,000 per occurrence and a 70% aggregate stop-loss ratio
percentage. As discussed above in "General Liability", the general liability treaties
also provide occupational disease, cumulative trauma, and employers' liability
coverage up to $100,000 for this program as well.
The following table shows the income statement effects to the Company from its
arrangement with Legion Insurance Company:
Years ended December 31,
1998 1999 2000
(In thousands)
Premiums assumed $ 6,017 $ 7,391 $11,242
Premiums ceded 124 - -
Net premiums - earned 5,893 7,391 11,242
Loss and LAE incurred 4,552 5,845 9,997
Commissions 1,312 1,686 2,971
The following table shows the balance sheet effects to the Company from its
arrangement with Legion Insurance Company:
December 31,
1998 1999 2000
Assets (In thousands)
Premium receivable $ 1,485 $2,174 $ 2,687
Liabilities
Unpaid loss and LAE 7,066 7,856 10,927
Unearned premiums 732 989 1,051
Reinsurance payable on paid loss and LAE 636 1,420 897
During 2000, American Safety Casualty began direct writing the workers'
compensation business that had been previously written by Legion. The reinsurance
structure described above is also utilized by American Safety Casualty except the
10% loss fund is not applicable to business directly written by American Safety
Casualty. Effective January 2001, Legion terminated new and renewal
writings under the program.
Surety
Effective January 1, 2000, the Company entered into excess of loss reinsurance
treaties with Signet Star Reinsurance Company, Terra Nova Insurance Company, and
Lloyds of London (the "Reinsurers") for the Company's surety line of business. The
treaties provide per bond and per principal reinsurance of $750,000 excess $250,000,
$4 million excess $1 million, and $10 million excess $5 million of coverage to the
Company on a 100% basis. American Safety Casualty also has a 50% quota share
arrangement between itself and American Safety Reinsurance, Ltd.
COVERAGE LAYER--$10,000,000 X $5,000,000
Lloyd's of London 87.56%
Terra Nova Insurance Company 12.44
100.0%
COVERAGE LAYER--$4,000,000 X $1,000,000
Lloyd's of London 60.0%
Signet Star Reinsurance Company 30.0
Terra Nova Insurance Company 10.0
100.0%
COVERAGE LAYER--$750,000 X $250,000
Signet Star Reinsurance Company 100.0%
COVERAGE LAYER--$0-$250,000
American Safety Reinsurance, Ltd. 50.0%
American Safety Casualty 50.0
100.0%
Excess and Surplus
Effective January 1, 2000, for excess and surplus lines risks the Company entered
into a 70% quota share arrangement with Signet Star Reinsurance Company and an
excess of loss reinsurance treaty with Folks America Reinsurance Company, TIG
Reinsurance Company, Signet Star Reinsurance Company, Sorema North American
Reinsurance and Sydney Reinsurance Corporation. The quota share covers the first
$500,000 of limits and the excess of loss provides $500,000 excess $500,000 on a
90% basis.
Commercial Lines
Effective January 1, 2000, the Company entered into various reinsurance treaties to
limit its commercial lines exposure. A liability treaty with Signet Star Reinsurance
Company provides $900,000 excess of $100,000. Three property treaties provide
$400,000 excess $100,000 and $500,000 excess $500,000 and $2 million excess $1
million of coverage to the Company on a 100% basis. Two property catastrophe
treaties provide $500,000 excess $500,000 and $2.5 million excess $1 million of
coverage to the Company on a 100% basis.
The approximate effect of reinsurance on the financial statement accounts listed
below is as follows:
Years ended December 31,
1998 1999 2000
(In thousands)
Written premiums:
Direct $ 4,603 $10,820 $64,227
Assumed 10,067 12,585 22,646
Ceded (5,087) (8,864) (44,873)
Net $ 9,583 $14,541 $42,000
Earned premiums:
Direct $ 3,532 $ 6,625 $35,602
Assumed 9,582 11,515 18,477
Ceded (3,994) (6,015) (27,274)
Net $ 9,120 $12,125 $26,805
Losses and loss adjustment expenses incurred:
Direct $ 928 $ 4,800 $ 29,291
Assumed 5,095 6,045 13,739
Ceded (846) (3,949) (24,524)
Net $ 5,177 $ 6,896 $ 18,506
Unpaid loss and loss adjustment expenses:
Direct $ 1,749 $ 5,638 $28,431
Assumed 12,952 14,775 22,077
Ceded (1,841) (6,065) (27,930)
Net $ 12,860 $14,348 $22,578
(7) Income Taxes
Total income tax expense (benefit) for the years ended December 31, 1998, 1999 and
2000 were allocated as follows:
Years ended December 31,
1998 1999 2000
Tax expense (benefit) attributable to:
Income from continuing operations $ (199,244) 82,722 $(1,156,728)
Unrealized gains (losses) on securities
available for sale 6,236 (180,514) 240,095
Total $ (193,008) $ (97,792) $ (916,633)
U.S. Federal and state income tax expense from continuing operations consists
of the following components:
Current Deferred Total
December 31, 1998 (39,850) (159,394) (199,244)
December 31, 1999 272,484 (189,762) 82,722
December 31, 2000 (106,588) (1,050,140) (1,156,728)
The state income tax components aggregated $(74,698), $93,627 and $(43,357) for
the years ended December 31, 1998, 1999, and 2000, respectively. Income tax
expense for the years ended December 31, 1998, 1999, and 2000 differed from the
amount computed by applying the U.S. Federal income tax rate of 34% to earnings
before Federal income taxes as a result of the following:
1998 1999 2000
Expected income tax expense $ 1,956,701 $ 2,041,017 $ (856,761)
Foreign earned income not subject to
direct taxation (2,034,446) (2,028,352) (169,124)
Tax-exempt interest (89,706) (77,895) (151,738)
State taxes and other (31,793) 147,952 20,895
$ (199,244) $ 82,722 $(1,156,728)
Deferred income taxes are based upon temporary differences between the financial
statement and tax bases of assets and liabilities. The following deferred taxes are
recorded:
December 31,
1999 2000
Deferred tax assets:
Loss reserve discounting $ 509,011 $1,075,061
Unearned premium reserves 185,459 1,209,162
Net operating loss carry forward - 398,597
Unrealized loss on securities 80,844
Gross deferred tax assets 775,314 2,682,820
Deferred tax liabilities:
Deferred acquisition costs 42,087 978,785
Unrealized gain on securities - 159,251
Other - 1,512
Gross deferred tax liabilities 42,087 1,139,548
Net deferred tax asset $ 733,227 $1,543,272
A valuation allowance has not been established as the Company believes it is more
likely than not that the deferred tax asset will be realized.
(8) Insurance Accounting
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles which vary in certain respects, for the
Company and American Safety Casualty, from statutory accounting practices
prescribed or permitted by regulatory authorities. Statutory accounting practices
includes state laws, regulations, and general administrative rules, as well as a variety
of publications of the National Association of Insurance Commissioners (the
"NAIC"). In its March 1998 meeting, the NAIC membership adopted the
Codification of Statutory Accounting Principles Project (the "Codification") as the
NAIC-supported basis of accounting. The Codification was approved with a
provision allowing for commissioner discretion in determining appropriate statutory
accounting for insurers. Accordingly, such discretion will continue to allow
prescribed or permitted accounting practices that may differ from state to state.
The implementation date of Codification for the Company is January 1, 2001. The
Company has evaluated the impact of adopting Codification on statutory capital and
surplus at January 1, 2001 and determined that statutory capital and surplus will
increase by $803,935 due to the recognition of a deferred tax asset for statutory
reporting.
The Bermuda Insurance Act of 1978 and related regulations (the "Act") requires the
Company to meet a minimum solvency margin. Statutory capital and surplus as of
December 31, 1998, 1999 and 2000 were $59,269,293, $61,038,760 and
$57,803,105, respectively, and the amounts required to be maintained by the
Company were $1,928,938, $2,350,928 and $3,179,716, respectively. In addition,
a minimum liquidity ratio must be maintained whereby relevant assets, as defined by
the Act, must exceed 75% of relevant liabilities. Once these requirements have been
met, there is no restriction on the retained earnings available for distribution.
As reported in American Safety Casualty's 2000 annual statement, the statutory
capital and surplus of American Safety Casualty approximated $23,914,049. The
maximum amount of dividends which can be paid, without prior written approval of
the Commissioner of Insurance of the State of Delaware, is limited to the greater of
10% of surplus as regards policyholders or net income, excluding realized capital
gains, of the preceding year. Accordingly, American Safety Casualty can pay
dividends in 2001 of approximately $2,391,405.
The National Association of Insurance Commissioners (the "NAIC") has established
risk-based capital ("RBC") requirements to help state regulators monitor the financial
strength and stability of property and casualty insurers by identifying those companies
that may be inadequately capitalized. Under the NAIC's requirements, each insurer
must maintain its total capital above a calculated threshold or take corrective
measures to achieve the threshold. The threshold of adequate capital is based on a
formula that takes into account the amount of risk each company faces on its products
and investments. The RBC formula takes into consideration four major areas of risk:
(i) asset risk which primarily focuses on the quality of investments; (ii) insurance risk
which encompasses coverage-related issues and anticipated frequency and severity
of losses when pricing and designing insurance coverages; (iii) interest rate risk
which involves asset/liability matching issues; and (iv) other business risks.
American Safety Casualty and American Safety Indemnity have calculated their RBC
level and have determined that their capital and surplus is significantly in excess of
threshold requirements.
(9) Loans Payable
Acquisition and Development Loan
In August 2000, the Company, through its subsidiary, Ponce Lighthouse Properties,
Inc., entered into a $37,900,000 loan agreement with a commercial bank. The
loan agreement provides acquisition, development and construction financing for the Harbour
Village Golf and Yacht Club project. As of December 31, 2000, $11,021,976 was
outstanding. Interest only is due monthly until September 1, 2002, at which time all
outstanding principal and interest is due. Partial repayments are required as
residential condominium units and boat slips are sold to others. The loan bears
interest at a variable rate equal to 30 day LIBOR plus 2.25%, adjusted monthly. The
loan is secured by a first mortgage on the real estate and a first priority security
interest in all contracts for the sale of condominium units and boat slips, as well as
all personal property used in the project. Both the Company and American Safety
Holdings Corp., a subsidiary, have provided partial loan guarantees. The Company
has also provided a $1,928,932 letter of credit as additional security.
Finance of Insurance Premiums
The Company through its subsidiary, Ponce Lighthouse Properties, Inc., financed
various insurance premiums in connection with the Harbour Village project. The premium financing
loans are unsecured and bear interest at rates from 7.7% to 8.5%. The outstanding balance
at December 31, 2000 was $413,245. The outstanding principal is due
as follows: $368,915 in 2001 and $44,330 in 2002.
Maturities of Loans Payable
Loans payable mature as follows: $368,915 in 2001, $11,066,306 in 2002.
Interest Cost
The Company capitalizes interest as a component of cost during the development and
construction period. In 2000, the Company incurred $360,565 in interest cost, all of
which was capitalized.
(10) Related Party and Affiliate Transactions
The Company has entered into reinsurance agreements with two companies, Intersure
Reinsurance Company ("Intersure Re") and Omega Reinsurance Company ("Omega
Re"), both of which are owned and controlled by certain officers of the Company, in
order to provide limits of coverage not readily available in the commercial
reinsurance market. Reinsurance premiums ceded and earned aggregated $368,000,
$206,000 and $302,875 for the years ended December 31, 1998, 1999 and 2000,
respectively. Additionally, Intersure Re was granted an option to purchase common
shares of American Safety at an option price approximating fair value at the date of
the grants. See note 14.
During the second quarter of 2000, the Company capitalized $246,301 of a loan and other
advances previously made by the Company to an employee of its financial services
subsidiary in connection with the restructuring of the employee's compensation arrangement.
ASI Services, American Safety's underwriting and administrative services subsidiary,
leases office space from an entity which is owned by certain directors and
shareholders of the Company. The lease commenced on March 1, 1996 and expires
on February 28, 2001. At this expiration date, the lease was extended for a five year
term. The Company pays base annual rent of $339,873 plus an annual increase based
on the consumer price index of at least 4%.
The following tables reconcile the income statement effects to the Company from
American Safety RRG:
Years Ended December 31,
1998 1999 2000
(In thousands)
Assumed premiums from American Safety RRG $ 2,835 $ 3,449 $ 5,761
Ceded premiums to American Safety RRG 2,318 3,973 4,469
517 (524) 1,292
Net premiums earned
Management fee 1,344 1,386 1,424
Loss control 73 75 -
Brokerage commission income 634 1,080 2,515
$ 2,568 $ 2,017 $ 5,231
Total revenues
Loss and Loss adjustment expense incurred $ 346 $ 181 $ 535
For the years ended December 31, 1998, 1999, and 2000, ASI Services and ECSI
received fees from American Safety RRG for risk management, claims administration
and other management services. ASI Services also recognized brokerage commission
income from American Safety RRG.
The following table shows the balance sheet effects to the Company from American
Safety RRG:
December 31, December 31,
Assets 1998 1999 2000
Due from affiliate $ 668,074 $ 2,088,748 985,320
Liabilities
Unpaid loss and Loss adjustment expenses 5,491,731 6,541,918 5,902,643
Unearned premiums 1,028,600 2,114,813 1,508,781
Ceded premiums payable 201,778 1,636,207 567,786
Reinsurance payable on paid loss
and Loss adjustment expenses 82,853 79,198 229,790
(11) Segment Information
Factors used to identify the Company's reportable segments
The Company's United States and Bermuda operating segments were identified by
management as separate operating segments based upon the regulatory environments
of each of these countries. Significant differences exist under United States and
Bermuda law concerning the regulation of insurance entities, including differences
in: types of permissible investments, minimum capital requirements, solvency
monitoring, pricing, corporate taxation, etc.
Products and services from each reportable segment
The Company is a specialty insurance holding company which, through its United
States and Bermuda operating segments, develops, underwrites, manages and markets
primary casualty insurance and reinsurance programs in the alternative insurance
market for environmental remediation risks, employee leasing and staffing industry
risks, and other specialty risks. 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 is the owner/developer of the Harbour Village project in Ponce Inlet,
Florida, as discussed in Note 3, and this item is reflected in the segment United
States-Real Estate.
The United States operating segment's specialty insurance programs include
insurance and reinsurance for general, pollution and professional liability, workers'
compensation, surety, commercial automobile and property, as well as custom
designed risk management programs for contractors, consultants and other business
and property owners who are involved with environmental remediation, general
construction and other specialty risks.
Through its United States brokerage and management services subsidiaries, the
Company also provides specialized insurance program development, underwriting,
risk and reinsurance placement, program management, brokerage, loss control, claims
administration and marketing services. The Company also insures and places risks
through two United States insurance subsidiaries, as well as its non-subsidiary risk
retention group affiliate and other unaffiliated insurance companies.
Through its Bermuda operating segment, the Company places and reinsures a portion
of the risks underwritten directly by its United States segment, its risk retention group
affiliate and other insurers.
Information about segment profit or loss and assets
December 31,
1998 1999 2000
(In thousands)
United States - Insurance
Net premiums earned - All other $ 4,819 $ 9,626 $ 24,413
Net premiums earned - Intersegment (416) (4,082) (8,501)
Net investment income and interest on notes receivable 817 807 1,955
Other income 2,778 4,061 3,804
Total revenues 7,998 10,412 21,671
Interest expense - - -
Depreciation and amortization expense 90 126 21,671
Equity in net earnings of subsidiaries - 437* -
Income taxes (199) 83 240
Segment earnings (loss) (30) (45) (816)
Significant noncash items other than depreciation
and amortization - - -
Property, plant and equipment 186 393 702
Total investments 15,678 31,508 56,032
Total assets 29,304 48,316 155,821
Total policy and contract liabilities 12,541 23,042 87,149
Total liabilities 19,375 38,782 127,480
*Represents earnings during 1999 prior to transfer of American Safety
Casualty from Bermuda segment to the U.S. segment in August 1999
United States - Real Estate
Net premiums earned - All other - - -
Net premiums earned - Intersegment - - -
Net investment income and interest on notes receivable - - -
Other revenues - - 1
Total revenues - - 1
Interest expense - -
Depreciation and amortization expense - - 44
Equity in net earnings of subsidiaries - - -
Income taxes - - (184)
Segment earnings (loss) - - (357)
Significant noncash items other than depreciation
and amortization - - -
Property, plant and equipment - - 234
Total investments - - 24,836
Total assets - - 28,975
Total policy and contract liabilities - - -
Total liabilities - - 19,658
Bermuda
Net premiums earned - All other 4,301 2,499 2,392
Net premiums earned - Intersegment 416 4,082 8,501
Net investment income and interest on notes receivable 4,439 4,686 2,181
Other income 437 327 491
Total revenues 9,593 11,594 13,565
Interest expense - - -
Depreciation and amortization expense - 12 16
Equity in net earnings of subsidiaries 2,116 2,713 721
Income taxes - - -
Segment earnings (loss) 5,984 5,965 497
Significant noncash items other than depreciation
and amortization - - -
Property, plant and equipment - 841 -
Total investments 58,544 53,676 58,200
Total assets 87,309 93,022 85,486
Total policy and contract liabilities 11,193 12,262 16,501
Total liabilities 14,794 15,979 17,520
December 31,
1998 1999 2000
(In thousands)
Intersegment Eliminations
Net premiums earned - All other $ - $ - $ -
Net premiums earned - Intersegment - - -
Net investment income and interest on notes receivable - - -
Other income (221) (519) 841
Total revenues (221) (519) 841
Interest expense - - -
Depreciation and amortization expense - - -
Equity in net earnings of subsidiaries (2,116) (3,150) 96
Income taxes - - -
Segment earnings (loss) - - -
Significant noncash items other than depreciation
and amortization - - -
Property, plant and equipment - - -
Total investments (23,174) (25,536) (47,821)
Total assets (30,465) (37,321) (62,984)
Total policy and contract liabilities (4,561) (5,732) (11,188)
Total liabilities (7,291) (11,784) (15,163)
Total
Net premiums earned - All other 9,120 12,125 26,805
Net premiums earned - Intersegment - - -
Net investment income and interest on notes receivable 5,256 5,493 4,136
Other income 2,994 3,869 5,137
Total revenues 17,370 21,487 36,078
Interest expense - - -
Depreciation and amortization expense 90 138 300
Equity in net earnings of subsidiaries - - -
Income taxes (199) 83 (1,157)
Net earnings (loss) 5,954 5,920 (1,363)
Significant noncash items other than depreciation
and amortization - - -
Property, plant and equipment 186 1,234 936
Total investments 51,048 59,648 91,247
Total assets 86,148 104,017 207,298
Total policy and contract liabilities 19,173 29,572 92,462
Total liabilities 26,878 42,977 149,495
(12) Commitments and Contingencies
At December 31, 1999 and 2000, the Company had aggregate outstanding
irrevocable letters of credit which had not been drawn amounting to $1,000,000 in
favor of the Vermont Commissioner of Banking, Insurance, and Securities.
Investments in the amount of $1,000,000 have been pledged as collateral to the
issuing bank.
(13) Liability for Unpaid Loss and Loss Adjustment Expenses
Activity in the liability for unpaid claims and claim adjustment expenses is
summarized as follows:
Years ended December 31,
1998 1999 2000
(In thousands)
Unpaid loss and loss adjustment expenses, January 1 $11,572 $14,701 $20,413
Reinsurance recoverable on unpaid losses and loss
adjustment expenses at end of period 779 1,841 6,065
Net unpaid loss and loss adjustment
expenses, January 1 10,793 12,860 14,348
Incurred related to:
Current year 4,383 7,449 17,356
Prior years 794 (553) 1,150
Total incurred 5,177 6,896 18,506
Paid related to:
Current year 103 1,707 4,291
Prior years 3,007 3,701 5,243
Total paid 3,110 5,408 9,534
Net unpaid losses and loss adjustment
expenses at end of period 12,860 14,348 23,320
Reinsurance recoverable on unpaid losses and loss
adjustment expenses at end of period 1,841 6,065 27,189
Unpaid loss and loss adjustment end
expenses at of period $14,701 $20,413 $50,509
The negative development in 1998 and 2000 is attributable to the Company's
workers' compensation and surety lines of business. Management continually
attempts to improve its loss estimation process by refining its ability to analyze loss
development patterns, claims payments and other information, but many reasons
remain for potential adverse development of estimated ultimate liabilities. For
example, the uncertainties inherent in the loss estimation process have become
increasingly subject to changes in legal trends. In recent years, this trend has
expanded the liability of insureds, established new liabilities and reinterpreted
contracts to provide unanticipated coverage long after the related policies were
written. Such changes from past experience significantly affect the ability of insurers
to estimate liabilities for unpaid losses and related expenses.
Management recognizes the higher variability associated with certain exposures and
books of business and considers this factor when establishing liabilities for losses.
Management currently believes the Company's gross and net liabilities are adequate.
The net liabilities for losses and loss adjustment expenses maintained by the
Company's insurance subsidiaries are equal under both statutory and generally
accepted accounting principles.
(14) Stock Options
The following table shows the stock option activity for the Company during 1998,
1999 and 2000.
Weighted
Option average
shares exercise price
1998 activity:
Granted 347,500 $ 11.00
Exercised (44,540) 5.96
Canceled (22,000) 11.00
-------- -------
Outstanding at December 31, 1998 451,181 9.86
======= =======
1999 activity:
Granted 106,500 9.50
Canceled (15,250) -
-------- -------
Outstanding at December 31, 1999 542,431 $ 9.78
======= =======
2000 activity:
Granted 99,650 6.00
Canceled (17,891) -
-------- -------
Outstanding at December 31, 2000 624,190 $ 9.20
======= =======
Of the 624,190 outstanding options at December 31, 2000, 361,140 were exercisable.
Of the 542,431 outstanding options at December 31, 1999, 232,348 were exercisable.
Of the 451,181 outstanding options at December 31, 1998, 125,681 were exercisable.
The remainder of the options vest evenly over a three year period.
The following table summarizes information about stock options outstanding at
December 31, 2000:
Options Options exercisable
outstanding
Weighted
average Weighted Weighted
Range of Number remaining average Number average
exercise prices outstanding contractual life exercise price Grant Year exercisable exercise price
$ 5.96 51,090 1.18 $ 5.96 1997 51,090 $ 5.96
7.08 65,500 6.75 7.08 1997 65,500 7.08
11.00 320,000 7.13 11.00 1998 213,333 11.00
9.50 93,650 8.13 9.50 1999 31,217 9.50
6.00 93,950 8.50 6.00 2000 - 6.00
------- ------
$5.96-11.00 624,190 6.96 $ 9.20 361,140 $ 9.45
======= ==== ====== ======= ======
Had compensation cost for the Company's stock options granted in 1998, 1999 and
2000 been determined using the fair-value-based method as described in SFAS No.
123, the Company's net earnings (loss) and earnings (loss) per share would
approximate the pro forma amounts indicated below:
December 31, December 31, December 31,
1998 1999 2000
------------ ------------ ------------
(In thousands, except
per share amounts)
Net earnings (loss):
As reported $ 5,954 $ 5,920 $ (1,363)
Effect of stock options 418 736 886
------- ------- ---------
Pro forma net earnings (loss) $ 5,536 $ 5,184 $ (2,249)
======= ======= =========
Net earnings (loss) per share:
As reported $ 1.04 $ .98 $ (.25)
Effect of stock options .07 .12 (.16)
------- -------- ----------
Pro forma net earnings (loss) per share $ .97 $ .86 $ (.41)
======= ======= =========
The fair value of each option granted during 1998, 1999 and 2000 was estimated on
the date of grant using the Black-Scholes multiple option approach with the
following assumptions: dividend yield of 0.0%; expected volatility of 0.0%, 37.87%
and 51.08% in 1998, 1999 and 2000, respectively; risk-free interest rate of 5.44%;
and expected life from the vesting dates ranging from 0.50 years to 10.00 years.
The effects of applying SFAS No. 123 in this pro forma disclosure are not indicative
of future amounts. The provisions of SFAS No. 123 are applicable prospectively.
The Company expects to grant additional awards in future years. The Company
granted options in 1998, 1999 and 2000 at an amount deemed to be fair market value
at the date of grant.
(15) Acquisitions
On March 24, 2000, the Company purchased Trafalgar Insurance Company, an
Oklahoma licensed insurance company, which has authority to operate as an excess
and surplus lines insurance company in 34 states and the District of Columbia.
Trafalgar Insurance Company's stock was acquired from Houston Casualty Company
for a purchase price of $16.3 million cash, and Trafalgar had, at closing, cash of $9.3
million and investments of $5.7 million creating $1.3 million of goodwill. The net
cash outlay for this acquisition was $7.0 million. Prior to closing, Trafalgar entered
into a bulk assumption reinsurance agreement with Houston Casualty, under which
Houston Casualty assumed all of Trafalgar's prior and existing insurance business.
Trafalgar has been renamed American Safety Indemnity Company.
On January 6, 2000, the Company acquired (i) the stock of L&W Holdings, Inc. and
its wholly-owned subsidiary, RCA Syndicate #1, Ltd., an Illinois licensed insurance
carrier operating on the INEX (formerly the Illinois Insurance Exchange), (ii) the
stock of Principal Management, Inc., an insurance program development and
management company headquartered in Okemos, Michigan, and in a related
transaction, the Company also acquired (iii) the stock of Pegasus Insurance, a
Cayman Islands licensed insurance carrier. The transactions were structured as stock
acquisitions, with the purchase price paid by the Company consisting of $3,500,000
plus 200,000 American Safety common shares and earnout provisions for up to an
additional 254,000 American Safety common shares over a five-year period. Of the
purchase price, $1,000,000 of cash and 109,086 shares of stock are held in escrow
to secure the obligations of the sellers. The Company also obtained a security interest
in a real estate condominium in the Cayman Islands with an estimated value of
$600,000 to secure the obligations of the sellers. On April 21, 2000, the Company
filed a lawsuit to rescind these acquisitions based upon the sellers' misrepresentations
as to the business affairs and financial condition of the acquired companies, and
recognized an expense, net of recoverables, of $3.5 million for such rescission. The
sellers' misrepresentations as to the business affairs and financial condition of the
acquired companies, and the under-reserving for claims, relate only to the operations
of the acquired companies. The lawsuit is in the preliminary stages of pre-trial discovery.
(16) Litigation
The Company is a defendant in various litigation matters considered to be in the
normal course of business. While the outcome of these matters cannot be estimated
with certainty, it is the opinion of management (after consultation with legal counsel)
that the resolution of such litigation will not have a material adverse effect on the
Company's financial statements.
(17) Shareholder Matters
The Company filed a registration statement on Form S-1 with the Securities and
Exchange Commission for an initial public offering of 3,105,000 common shares
(including the underwriters' over-allotment option). Such registration became
effective February 12, 1998. Proceeds to the Company pursuant to the initial public
offering described above aggregated approximately $31.8 million.
Exhibit 21.1
The Company's subsidiaries are:
American Safety Reinsurance, Ltd. a Bermuda company
American Safety Holdings Corp., a Georgia corporation
American Safety Casualty Insurance Company, a Delaware corporation
American Safety Indemnity Company, an Oklahoma corporation
American Safety Insurance Services, Inc., a Georgia corporation
American Safety Financial Corp., a Georgia corporation
American Safety Purchasing Group, Inc., a Georgia corporation
American Safety ReSources, Inc., a Georgia corporation
Environmental Claims Services, Inc., a Georgia corporation
Sureco Bond Services, Inc., a Georgia corporation
Ponce Lighthouse Properties, Inc., a Florida corporation
Harbour Village Real Estate Group, Inc., a Florida corporation
Rivermar Contracting Company, a Florida corporation
AMERICAN SAFETY INSURANCE GROUP, LTD.
QUARTERLY INFORMATION
(UNAUDITED)
The following table presents the quarterly results of consolidated operations for 2000
and 1999 (dollars in thousands, except per share amounts):
Mar. 31 June 30 Sept. 30 Dec. 31
1999
Operating revenues $ 7,720 $ 5,727 $ 5,646 $ 6,114
Income before taxes 1,673 1,333 1,547 1,449
Net earnings 1,719 1,441 1,359 1,401
Comprehensive income 1,158 997 937 845
Net earnings per share
Basic $ 0.28 $ 0.24 $ 0.23 $ 0.24
Diluted 0.28 0.24 0.23 0.24
Common stock price ranges
High $ 10.38 $ 10.00 $ 8.56 $ 7.94
Low 7.81 6.63 7.13 6.00
2000 Mar. 31 June 30 Sept. 30 Dec. 31
Operating revenues $ 7,720 $ 8,217 $11,904 $ 8,749
Income (loss) before taxes (3,019) (783) 778 504
Net earnings (loss) (1,949) (492) 654 424
Comprehensive income
(loss) (1,572) (458) 1,069 1,314
Net earnings (loss) per share
Basic $ (0.33) $(0.09) $ 0.12 $ 0.08
Diluted (0.33) (0.09) 0.12 0.08
Common stock price ranges
High $ 7.38 $ 5.94 $ 4.63 $ 6.94
Low 5.50 3.75 3.75 3.25
AMERICAN SAFETY INSURANCE GROUP, LTD.
SCHEDULE II - CONDENSED BALANCE SHEETS
DECEMBER 31, 1999 AND 2000
Assets 1999 2000
------ ---- ----
Investment in subsidiary $25,535,858 $47,821,141
Other investments:
Fixed maturities 26,631,892 4,033,000
Common stock - -
Cash 510,419 152,642
Secured note receivable 9,543,377 4,494,987
Accrued investment income 2,285,599 317,739
----------- -----------
Total investments and cash 64,507,145 56,819,509
Premiums receivable 1,174,686 1,445,846
Due from affiliate 220,247 1,871,331
Ceded loss reserves 1,477,114 793,603
Property plant and equipment 841,701 -
Other assets 503,799 1,107,343
----------- -----------
Total Assets $68,724,692 $62,037,632
=========== ===========
Liability and Shareholders' Equity
Unpaid losses and loss adjustments expenses $ 5,463,793 $4,188,174
Ceded premiums payable 178,638 108,433
Assumed loss and LAE payable 793,296 (121,352)
Reinsurance deposits on retroactive contact 48,375 -
Due to related party: 1,170,000 47,179
Accounts payable and
Accrued expenses 31,830 12,053
----------- -----------
Total Liabilities 7,685,932 4,234,487
----------- -----------
Common stock 60,777 62,814
Additional paid in capital 33,810,387 35,148,577
Accumulated other comprehensive earnings (loss), net (1,288,804) 428,085
Retained earnings 30,625,739 29,262,582
Treasury stock (2,169,339) (7,098,913)
Total Shareholders' Equity 61,038,760 57,803,145
----------- -----------
Total Liabilities &
Shareholders' Equity $68,724,692 $62,037,632
============ ===========
See accompanying independent auditors' report.
AMERICAN SAFETY INSURANCE GROUP, LTD.
SCHEDULE II - CONDENSED INCOME STATEMENT
YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
1998 1999 2000
Revenues:
Direct and Assumed Premiums Earned $ 2,884,327 $ 563,543 $ 18,300
Ceded Premiums Earned (1,325,351) (23,487) 15,038
----------- --------- ---------
Net Premiums Earned 1,558,976 540,056 33,338
Investment Income 1,869,231 1,989,252 339,055
Interest on Notes Receivable 1,001,773 1,170,484 951,784
Realized Gains (losses) on Sale
of Investments 436,871 134,316 (131,212)
Other Income - 142,495 270,180
----------- --------- ---------
Total Revenues 4,866,851 3,976,603 1,463,145
----------- --------- ---------
Expenses:
Losses and LAE Incurred 396,305 141,869 50,234
Acquisition Expenses 288,903 37,959 (3,700)
Other Underwriting Expenses 343,466 589,888 491,492
Expenses Due to Rescission - - 1,567,305
----------- --------- ---------
Total Expenses 1,028,674 769,716 2,105,331
----------- --------- ---------
Earnings Before Equity In
Earnings of Subsidiary 3,838,177 3,206,887 (642,186)
Equity in Net Earnings of Subsidiary 2,116,072 2,713,381 (720,971)
----------- --------- ----------
Net Earnings $ 5,954,249 $ 5,920,268 $(1,363,157)
=========== =========== ============
See accompanying independent auditors' report.
AMERICAN SAFETY INSURANCE GROUP, LTD.
SCHEDULE II - CONDENSED STATEMENT OF CASH FLOW
YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
1998 1999 2000
Cash flow from operating activities:
Net earnings (loss) before equity in earnings of $ 3,838,177 $ 3,206,887 $ (642,186)
subsidiary
Adjustments to reconcile net earnings (loss) to net
cash provided (used) by operating activities:
Change in:
Accrued investment income (836,983) (854,318) 1,967,860
Premiums receivable/payable 1,500,040 (1,291,491) (341,365)
Due from/to affiliate 2,202,162 (1,145,360) (2,773,905)
Unpaid losses and loss adjustment expenses (1,331,079) (1,406,369) (592,108)
Unearned premiums (895,851) - -
Liability for deductible fees held (3,499,104) (529,053) (48,375)
Accounts payable and accrued expenses 65,385 (78,800) (19,777)
Loss and LAE payable (243,906) 793,296 (914,648)
Other, net (279,238) (174,430) 23,209
---------- ----------- -----------
Net cash provided (used) by operating 519,603 (1,479,638) (3,341,295)
---------- ----------- -----------
activities
Cash flow from investing activities:
Decrease (increase) in investments (20,987,278) 3,179,743 10,954,164
Investment in subsidiary (11,100,000) (500) (3,900,000)
Sales (purchases) of fixed assets, net - (841,701) 841,701
------------ ----------- -----------
Net cash provided (used) by investing activities (32,087,278) 2,337,542 7,895,865
------------ ----------- -----------
Cash flow from financing activities:
Proceeds from sale of common stock 31,088,847 1,276 17,227
Purchase of Treasury Stock - (2,169,339) (4,929,574)
------------ ----------- -----------
Net cash provided (used) by financing activities 31,088,847 (2,168,063) (4,912,347)
------------ ----------- -----------
Net decrease in cash (478,828) (1,310,159) (357,777)
Cash at beginning of year 2,299,406 1,820,578 510,419
------------ ----------- ----------
Cash at end of year $ 1,820,578 $ 510,419 $ 152,642
============ =========== =========
See accompanying independent auditors' report.
AMERICAN SAFETY INSURANCE GROUP, LTD.
SCHEDULE II - CONDENSED COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
1998 1999 2000
Net earnings (loss) $ 5,954,249 $ 5,920,268 $(1,363,157)
Other comprehensive earnings (loss) before
income taxes: 31,854 (2,282,895) 2,474,841
Unrealized gains (losses) on securities
available for sale
Reclassification adjustment for realized
gains included in net earnings 359,682 119,643 (517,857)
---------- ----------- ----------
Total other comprehensive earnings (loss) 391,536 (2,163,252) 1,956,984
before taxes
Income tax expense (benefit) related to
items of comprehensive income 6,236 (180,514) 240,095
---------- ----------- ----------
Other comprehensive earnings (loss) net of
income taxes 385,300 (1,982,738) 1,716,889
---------- ----------- ----------
Total comprehensive earnings $ 6,339,549 $ 3,937,530 $ 353,732
=========== =========== ==========
See accompanying independent auditors' report.
AMERICAN SAFETY INSURANCE GROUP, LTD. AND SUBSIDIARIES
SCHEDULE III - SUPPLEMENTAL INFORMATION CONCERNING
PROPERTY-CASUALTY INSURANCE OPERATIONS
(in thousands)
Column B Column C Column D Column E Column F Column G Column H Column I Column J Column K
Reserves
for
Unpaid Amorti- Paid
Claims Discount, Claims and Claim zation of Claims
Deferred and Claim if any, Net Adjustment Expenses Deferred and Claim
Policy Adjust- Deducted Invest- Incurred Related to Policy Adjust-
Acquisition ment in Column Unearned Earned ment Current Prior Acquisi- ment Premiums s
Costs Expenses C Premiums Premiums Income Year Years tion Costs Expenses Written s
- --------------------------- ---------------- -------------- -------------- --------------- -------------- -------------- ------------------------------- -------------- -------------- --------------
United States
December 31, 1998 (106) 7,311 - 2,712 4,852 817 1,844 828 24 1,336 4,624
December 31, 1999 212 11,855 - 7,318 11,174 807 3,166 (511) 640 2,313 8,848
December 31, 2000 2,974 38,651 - 38,103 24,413 1,955 11,762 598 3,909 5,613 29,435
- --------------------------- ---------------- -------------- -------------- --------------- -------------- -------------- -------------- --------------- -------------- -------------- --------------
Bermuda
December 31, 1998 46 7,389 - 1,183 4,337 2,030 2,539 (34) 242 1,774 5,028
December 31, 1999 62 8,558 - 2,178 2,499 2,071 4,283 (42) 525 3,095 7,578
December 31, 2000 65 11,858 - 3,850 2,392 650 5,594 552 806 3,921 12,565
- --------------------------- ---------------- -------------- -------------- --------------- -------------- -------------- -------------- --------------- -------------- -------------- --------------
Combined Total
December 31, 1998 (60) 14,700 - 3,895 9,120 2,847 4,383 794 266 3,110 9,652
December 31, 1999 274 20,413 - 9,159 12,125 2,878 7,449 (553) 1,165 5,408 16,426
December 31, 2000 3,039 50,509 - 41,953 26,805 2,605 17,356 1,150 4,715 9,534 42,000
- --------------------------- ---------------- -------------- -------------- --------------- -------------- -------------- -------------- --------------- -------------- -------------- --------------
See accompanying independent auditors' report.
AMERICAN SAFETY INSURANCE GROUP, LTD. AND SUBSIDIARIES
SCHEDULE IV - REINSURANCE
Year Ended December 31, 1998, 1999 and 2000
Property-Liability Ceded to Percentage of
Insurance Premiums Gross Other Assumed from Net Amount
Earned Amount Companies Other Companies Amount Assumed to Net
- ---------------------------------- ------------------ ---------------------- ----------------------- -------------------- --------------------
United States
December 31, 1998 3,463 3,626 4,982 4,819 103.3%
December 31, 1999 6,625 5,934 8,935 9,626 92.8%
December 31, 2000 35,602 26,971 15,783 24,414 64.6%
- ---------------------------------- ------------------ ---------------------- ----------------------- -------------------- --------------------
Bermuda
December 31, 1998 - 368 4,669 4,301 108.6%
December 31, 1999 - 81 2,580 2,499 103.2%
December 31, 2000 - 303 2,694 2,391 112.7%
- ---------------------------------- ------------------ ---------------------- ----------------------- -------------------- --------------------
Combined Total
December 31, 1998 3,463 3,994 9,651 9,120 105.8%
December 31, 1999 6,625 6,015 11,515 12,125 95.0%
December 31, 2000 35,602 27,274 18,477 26,805 68.9%
- ---------------------------------- ------------------ ---------------------- ----------------------- -------------------- --------------------
See accompanying independent auditors' report.