SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
----------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002
Commission File Number 1-14795
AMERICAN SAFETY INSURANCE GROUP, LTD.
(Exact name of Registrant as specified in its charter)
Bermuda Not Applicable
(State or other (I.R.S. Employer
jurisdiction Identification
of incorporation) No.)
44 Church Street
P.O. Box HM2064
Hamilton HM HX, Bermuda
(Address, zip code of principal executive offices)
(441) 296-8560
(Registrant's telephone number, including area code)
--------------
Indicate by check mark whether Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No___
The aggregate number of shares outstanding of Registrant’s common stock, $.01 par value, on October 2, 2002 was 4,747,884.
AMERICAN SAFETY INSURANCE GROUP, LTD.
FORM 10-Q
TABLE OF CONTENTS
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements........................................................................1
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.............................................................26
Item 3. Quantitative and Qualitative Disclosures About Market Risks.................................36
Item 4. Controls and Procedures.....................................................................36
PART II - OTHER INFORMATION
Item 1. Legal Proceedings...........................................................................37
Item 2. Changes in Securities and Use of Proceeds...................................................37
Item 3. Defaults Upon Senior Securities.............................................................37
Item 4. Submission of Matters to a Vote of Security Holders........................................37
Item 5. Other Information...........................................................................37
Item 6. Exhibits and Reports on Form 8-K............................................................37
-2-
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
American Safety Insurance Group, Ltd. and Subsidiaries
Consolidated Balance Sheets
December 31, September 30,
2001 2002
(unaudited)
Assets
Investments:
Securities available for sale, at fair value:
Fixed maturities $61,836,101 $96,680,470
Investment in real estate 37,662,600 34,424,322
Short-term investments 21,742,272 6,015,135
Total investments 121,240,973 137,119,927
Cash 1,302,842 14,769,092
Restricted cash 9,010,489 9,497,648
Accrued investment income 2,424,551 2,321,260
Notes receivable - other 8,081,899 8,015,967
Premiums receivable 25,783,225 21,491,357
Ceded unearned premium 19,161,319 25,205,256
Reinsurance recoverable 87,173,021 104,706,972
Funds on deposit 312,717 598,662
Due from affiliate 1,108,520 346,621
Income tax recoverable 1,614,940 1,277,119
Deferred income taxes 7,415,033 5,754,812
Deferred acquisition costs 5,781,810 8,224,964
Property, plant and equipment 2,046,332 2,184,509
Prepaid items 1,480,078 1,575,493
Goodwill and other intangible assets 1,466,629 1,466,629
Other assets 1,857,239 1,612,823
Total assets $297,261,617 $346,169,111
============ ============
Liabilities and Shareholders' Equity
Liabilities:
Unpaid losses and loss adjustment expenses 121,423,039 145,120,685
Unearned premiums 53,205,500 72,248,722
Reinsurance on paid losses and loss adjustment expenses 2,081,845 791,785
Ceded premiums payable 14,224,460 8,115,668
Due to affiliate:
Reinsurance on paid losses and loss adjustment expenses - 118,141
Escrow deposits 11,718,824 12,962,845
Accounts payable and accrued expenses 13,459,422 11,284,438
Funds held 1,433,648 10,114,097
Loan payable 16,403,135 13,891,973
Collateral held 821,302 1,170,484
Deferred Revenue 2,185,104 3,424,162
Unearned loan fees 325,000 325,000
Total liabilities $237,281,279 $279,568,000
============ ============
-1-
December 31, September 30,
2001 2002
(unaudited)
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, 2001,
6,287,266 shares, and at September 30, 2002, 6,349,023
shares 62,873 63,490
Additional paid-in capital 35,206,614 35,574,493
Retained earnings 33,416,851 36,648,008
Accumulated other comprehensive income net 834,974 3,967,835
Treasury stock, 1,589,239 shares at December 31, 2001,
and 1,601,139 shares at September 30, 2002 (9,540,974) (9,652,715)
Total shareholders' equity 59,980,338 66,601,111
Total liabilities and shareholders' equity $297,261,617 $346,169,111
============ ============
See accompanying notes to consolidated financial statements (unaudited).
-2-
American Safety Insurance Group, Ltd. and Subsidiaries
Consolidated Statements of Earnings
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2001 2002 2001 2002
Revenues:
Direct premiums earned $ 28,494,114 $ 29,903,241 $79,657,272 $87,702,115
Assumed premiums earned:
Affiliate 2,633,927 2,211,894 7,737,630 8,753,370
Nonaffiliates 3,468,186 3,415,756 11,106,525 6,299,363
Total assumed premiums earned 6,102,113 5,627,650 18,844,155 15,052,733
Ceded premiums earned:
Affiliate 1,925,225 869,927 4,842,878 2,397,364
Nonaffiliates 18,331,867 15,876,784 48,913,399 51,512,868
Total ceded premiums earned 20,257,092 16,746,711 53,756,277 53,910,232
Net premiums earned 14,339,135 18,784,180 44,745,150 48,844,616
Net investment income 946,765 973,320 2,709,385 2,848,195
Interest on notes receivable 207,622 - 766,937 -
Brokerage commission income 716,003 34,044 1,715,027 136,684
Management fees from affiliate 363,354 246,563 1,094,662 739,744
Net realized gains (losses) 186,005 (56,183) 601,354 (521,885)
Sales - real estate 3,180,705 10,723,526 3,180,705 44,659,187
Other income 128,814 30,504 978,399 119,014
Total revenues 20,068,403 30,735,954 55,791,619 96,825,555
Expenses:
Losses and loss adjustment expenses incurred 9,636,161 10,648,265 28,501,533 28,178,777
Acquisition expenses 2,561,742 4,072,469 8,801,854 10,369,914
Payroll and related expenses 2,073,232 2,300,400 6,255,317 6,604,500
Real estate expenses 3,096,454 9,626,848 3,578,941 38,781,328
Other expenses 1,455,311 1,723,424 4,301,627 4,418,676
Expense due to rescission - 1,152,876 - 1,506,468
Total expenses 18,822,900 29,524,282 51,439,272 89,859,663
Earnings before income taxes 1,245,503 1,211,672 4,352,347 6,965,892
Income taxes 266,750 178,143 526,150 2,033,436
Net earnings $978,753 $1,033,529 $3,826,197 $4,932,456
Net earnings per share:
Basic $ 0.20 $ 0.22 $ 0.79 $ 1.04
Diluted $ 0.20 $ 0.21 $ 0.77 $ 1.01
Common shares used in computing earnings per
share:
Basic 4,788,648 4,746,695 4,823,066 4,731,822
========= ========= ========= =========
Diluted 4,996,787 4,864,450 4,949,942 4,876,659
========= ========= ========= =========
See accompanying notes to consolidated financial statements (unaudited).
-3-
American Safety Insurance Group, Ltd. and Subsidiaries
Consolidated Statements of Cash Flow
(Unaudited)
Nine Months Ended
September 30,
2001 2002
Cash flow from operating activities:
Net earnings $3,826,197 $4,932,456
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Realized (gains)/losses on sale of investments (601,354) 521,885
Amortization of deferred acquisition costs (950,823) (2,443,154)
Change in:
Accrued investment income (620,129) 103,291
Premiums receivable (1,928,205) 4,291,868
Reinsurance recoverable and ceded unearned premiums (28,755,811) (24,867,948)
Unearned loan fees (243,750) -
Funds held by reinsured (3,413,299) 8,680,449
Due from affiliate 89,120 761,899
Funds on deposit (828,579) (285,945)
Income taxes 913,561 1,998,042
Unpaid losses and loss adjustment expenses 30,166,295 23,697,646
Unearned premiums 24,957,116 19,043,222
Ceded premiums payable (6,776,822) (6,108,792)
Due to affiliate 265,606 118,141
Accounts payable and accrued expenses 3,399,939 (2,174,984)
Collateral held 155,132 349,182
Prepaid items (263,356) (95,415)
Deferred revenue 256,916 1,239,058
Other, net 169,995 (982,563)
Net cash provided by operating activities 19,817,749 28,778,338
Cash flow from investing activities:
Purchases of fixed maturities (40,573,756) (68,102,237)
Purchases of equity investments (2,905,977) -
Proceeds from maturity and redemption of fixed maturities 1,039,717 401,507
Proceeds from sale of fixed maturities 27,959,232 36,590,769
Proceeds from sale of equity investments 2,429,563 103,550
Decrease (increase) in investment in real estate (21,012,588) 3,238,278
Decrease (increase) in short-term investments (6,934,692) 15,727,137
Advances in notes receivable - other 803,902 65,932
Purchase of fixed assets, net (1,082,041) (138,177)
Net cash (used in) investing activities (40,276,640) (12,113,241)
Cash flow from financing activities:
Purchase of treasury stock (2,000,562) (111,741)
Proceeds from issuance of common stock - 368,496
Proceeds from (repayment of) loan payable 17,971,841 (2,511,162)
Proceeds from escrow deposits 7,417,423 1,244,021
(Deposits) withdrawals from restricted cash (4,450,789) (487,159)
Dividends paid - (1,701,302)
Net cash provided by financing activities 18,937,913 (3,198,847)
Net increase (decrease) in cash (1,520,979) 13,466,250
Cash at beginning of period 3,784,102 1,302,842
Cash at end of period $2,263,124 $14,769,092
Supplemental disclosure of cash flow information:
Interest expenses paid 13,014 342,684
See accompanying notes to consolidated financial statements (unaudited).
-4-
American Safety Insurance Group, Ltd. and Subsidiaries
Consolidated Statements of Comprehensive Earnings
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
2001 2002 2001 2002
Net earnings $ 978,753 $ 1,033,529 $ 3,826,197 $ 4,932,456
Other comprehensive earnings before
income taxes:
Unrealized gains on securities available for
sale 1,884,379 3,665,505 2,103,042 3,508,690
Reclassification adjustment for realized
gains (losses) included in net earnings 186,005 (56,183) 601,354 (521,885)
Total other comprehensive earnings before
taxes 1,698,374 3,721,688 1,501,688 4,030,575
Income tax expense related to items of
other comprehensive income 469,118 849,568 387,616 897,714
Other comprehensive earnings net of
income taxes 1,229,256 2,872,120 1,114,072 3,132,861
Total comprehensive earnings $ 2,208,009 $ 3,905,649 $ 4,940,269 $ 8,065,317
============= ============= ============= ==============
See accompanying notes to consolidated financial statements (unaudited).
-5-
American Safety Insurance Group, Ltd. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
Note 1 - Basis of Presentation
The accompanying unaudited interim consolidated financial statements of American Safety Insurance Group, Ltd. ("American Safety") and its subsidiaries (collectively, the "Company") are prepared in accordance with accounting principles generally accepted in the United States of America and, in the opinion of management, reflect all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of the interim period presented. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates, based on the best information available, in recording transactions resulting from business operations. The balance sheet amounts that involve a greater extent of accounting estimates and actuarial determinations subject to future changes are the Company's liabilities for unpaid losses and loss adjustment expenses. As additional information becomes available (or actual amounts are determinable), the recorded estimates may be revised and reflected in operating results. While management believes that the liability for unpaid losses and loss adjustment expenses is adequate to cover the ultimate liability, such estimates may be more or less than the amounts actually paid when claims are settled.
The results of operations for the three months or nine months ended September 30, 2002 may not be indicative of the results that may be expected for the full year ending December 31, 2002. These unaudited interim consolidated financial statements and notes should be read in conjunction with the financial statements and notes included in the audited consolidated financial statements of American Safety and its subsidiaries for the year ended December 31, 2001.
The unaudited interim consolidated financial statements include the accounts of American Safety and each of its subsidiaries. All significant intercompany balances have been eliminated. Certain items from prior periods have been reclassified to conform with the 2002 presentation.
Note 2 - Accounting Pronouncements
In July 2001, the FASB issued Statement of Financial Standards (SFAS) No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS 141 requires that the purchase method of accounting be used for all business combinations initiated after September 30, 2001, as well as all purchase method business combinations completed after September 30, 2001. SFAS 141 also specifies criteria intangible assets acquired in a purchase method business combination must meet to be recognized and reported apart from goodwill, noting that any purchase price allocable to an assembled workforce may not be accounted for separately. SFAS 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS 142. SFAS 142 also requires that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.
-6-
SFAS 141 requires upon adoption of SFAS 142, that the Company evaluate its existing intangible assets and goodwill that were acquired in a prior purchase business combination, and to make any necessary reclassifications in order to conform with the new criteria in SFAS 141 for recognition apart from goodwill. Upon adoption of SFAS 142, the Company is required to reassess the useful lives and residual values of all intangible assets acquired in purchase business combinations, and make any necessary amortization period adjustments by the end of the first interim period after adoption. In addition, to the extent an intangible asset is identified as having an indefinite useful life, the Company is required to test the intangible asset for impairment in accordance with the provisions of SFAS 142 within the first interim period. Any impairment loss is measured as of the date of adoption and recognized as the cumulative effect of a change in accounting principle in the first interim period. The Company adopted SFAS 142 effective January 1, 2002.
As of the date of adoption, the Company had unamortized goodwill in the amount of $1.5 million, which is subject to the transition provisions of Statement 141 and 142. Amortization expense related to goodwill was $87,234, $0 and $0 for the year ended December 31, 2001 and the three and nine month periods ended September 30, 2002, respectively. See Note 10 for additional information.
The FASB issued SFAS 143, "Accounting for Asset Retirement Obligations" in August 2001. This standard requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. The standard is effective for fiscal years beginning after June 15, 2002. The Company will adopt SFAS 143 effective January 1, 2003, and does not expect the adoption of this statement to have any material impact on its consolidated financial statements.
The FASB issued SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" in October 2001. The FASB's new rules on asset impairment supersede FASB Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" and provide a single accounting model for long-lived assets to be disposed of. The standard is effective for fiscal years beginning after December 15, 2001 and interim periods within those fiscal years, with early application encouraged. The Corporation adopted SFAS 144 effective January 1, 2002 with no material impact on its consolidated financial statements.
In June 2002, the FASB issued SFAS No. 146. This standard, which addresses accounting and reporting for costs associated with exit or disposal activities, will be effective January 1, 2003, and is not expected to have a material impact on the Company's financial position or results of operations.
-7-
Note 3 - Nature of Operations
The following is a description of certain risks facing the Company:
Legal/Regulatory Risk is the risk that changes in the legal or regulatory environment in which an insurer operates which will create additional expenses not anticipated by the insurer in pricing its products and beyond those recorded in the financial statements. Regulatory initiatives designed to reduce insurer profits or otherwise affecting the industry in which the Company operates, new legal theories or insurance company insolvencies through guaranty fund assessments, may create costs for the Company beyond those recorded in the financial statements. The Company attempts to mitigate this risk by writing insurance business in several states, thereby spreading this risk over a large geographic area.
Potential Risk of United States Taxation of Bermuda Operations. Under current Bermuda law, American Safety is not required to pay any taxes in Bermuda on either income or capital gains. American Safety has received an undertaking from the Minister of Finance in Bermuda that will exempt American Safety from taxation until the year 2016 in the event of any such taxes being imposed. The Company, exclusive of its United States subsidiaries, does not consider itself to be engaged in a trade or business in the United States and accordingly does not expect to be subject to direct United States income taxation. The Company's U.S. subsidiaries are subject to taxation in the United States.
Whether a foreign corporation is engaged in a United States trade or business or is carrying on an insurance business in the United States depends upon the level of activities conducted in the United States. If the activities of a foreign company are "continuous, regular, and considerable," the foreign company will be deemed to be engaged in a United States trade or business. Due to the fact that American Safety will continue to maintain an office in Bermuda and American Safety and its Bermuda insurance subsidiary's business is reinsuring contracts via treaty reinsurance agreements, which are all signed outside of the United States, American Safety does not consider itself to be engaged in a trade or business in the United States and, accordingly, does not expect to be subject to United States income taxes. This position is consistent with the position taken by various other entities that have the same operational structure as American Safety.
However, because the Internal Revenue Code of 1986, as amended, the Treasury Regulations and court decisions do not definitively identify activities that constitute being engaged in a United States trade or business, and because of the factual nature of the determination, there can be no assurance that the Internal Revenue Service will not contend that American Safety or its Bermuda 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.
-8-
Credit Risk is the risk that issuers of securities owned by the Company or secured notes receivable will default or that other parties, including reinsurers that have obligations to the insurer, will not pay or perform. The Company attempts to mitigate this risk by adhering to a conservative investment strategy, by obtaining sufficient collateral for secured note obligations and by maintaining sound reinsurance, credit and collection policies.
Interest Rate Risk is the risk that interest rates will change and cause a decrease in the value of an insurer's investments. The Company attempts to mitigate this risk by attempting to match the maturities of its assets with the expected payouts of its liabilities.
Note 4 - Investments
The amortized cost and estimated fair values of investments at December 31, 2001 and September 30, 2002 are as follows:
Gross Gross
Amortized unrealized unrealized Estimated
cost gains losses fair value
December 31, 2001:
Securities available for sale:
Fixed maturities:
U.S. Treasury securities and obligations of
U.S. Government corporations and
agencies $28,618,104 $1,091,312 $101,892 $29,607,524
Corporate securities 24,157,207 380,283 146,968 24,390,522
Mortgage-backed securities 7,914,282 3,956 80,183 7,838,055
Total fixed maturities $60,689,593 $1,475,551 $ 329,043 $61,836,101
=========== ========== ========== ===========
September 30, 2002:
Securities available for sale:
Fixed maturities:
U.S. Treasury securities and obligations of
U.S. Government corporations and
agencies $47,893,422 $2,804,131 $ 0 $50,697,553
Corporate securities 35,060,359 2,453,841 336,859 37,177,341
Foreign Securities 599,411 68,664 0 668,075
Mortgage-backed securities 7,877,760 264,514 4,773 8,137,501
Total fixed maturities $91,430,952 $5,591,150(a) $341,632 $96,680,470
=========== ========== ========== ===========
(a)Unrealized gains include 72,434, which relate to funds held
Note 5 - Segment Information
(a) Factors used to identify the Company's reportable segments:
| The Company’s United States and Bermuda operating segments were identified by management as separate operating segments based upon the regulatory environments of each of these countries. Significant differences exist under United States and Bermuda law concerning the regulation of insurance entities including differences in: types of permissible investments, minimum capital requirements, solvency monitoring, pricing, corporate taxation, etc. |
-9-
(b) Products and services from each reportable segment:
| The Company’s United States and Bermuda operating segments, develop, underwrite, manage and market primary casualty insurance and reinsurance programs in the alternative insurance market for environmental remediation risks, contracting 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 also involved in the development of the Harbour Village Golf and Yacht Club project in Ponce Inlet, Florida, as discussed in Note 7 and this item is reflected in the segment United States-Real Estate. |
| The United States operating segment’s specialty insurance programs provide insurance and reinsurance for general, pollution and professional liability exposures, for workers’ compensation and surety, as well as custom designed risk management programs for contractors, consultants and other business and property owners who are involved with environmental remediation, 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 its United States insurance subsidiaries, as well as its non-subsidiary risk retention group affiliate and other unaffiliated insurance and reinsurance companies. |
| Through its Bermuda operating segment, the Company places and reinsures a portion of the risks underwritten directly by its United States segment, its risk retention group affiliate and other insurers. |
(c) Information about segment profit or loss and assets:
Nine Months Ended
September 30,
2001 2002
United States - Insurance
Net premiums earned - All other $43,281,201 $48,371,226
Net premiums earned - Intersegment (6,977,694) (17,233,023)
Net investment income and interest on notes receivable 2,127,759 2,207,522
Real estate income - -
Other revenues 4,117,682 718,091
Total revenues 42,548,948 34,063,816
-10-
Nine Months Ended
September 30,
2001 2002
Interest expense 131,370 151,941
Depreciation and amortization expense 214,687 174,973
Equity in net earnings of subsidiaries - -
Income tax expense (benefit) 660,364 (274,529)
Segment profit (loss) 1,299,554 (658,922)
Significant noncash items other than depreciation and
amortization - -
Property, plant and equipment 849,621 915,472
Total investments 65,996,404 76,289,560
Total assets 201,731,059 276,492,610
Total policy and contract liabilities 141,003,699 211,084,015
Total liabilities 172,920,822 243,418,736
United States - Real Estate
Net premiums earned - All other - -
Net premiums earned - Intersegment - -
Net investment income and interest on notes receivable - -
Real estate income 3,180,705 44,659,187
Other revenues 3,491 1,447
Total revenues 3,184,196 44,660,634
Interest expense - -
Depreciation and amortization expense 4,524 107,002
Equity in net earnings of subsidiaries - -
Income taxes expense (benefit) (134,214) 2,307,965
Segment profit/(loss) (260,531) 3,571,341
Significant noncash items other than depreciation and
amortization - -
Property, plant and equipment 323,996 444,870
Total investments 44,958,893 34,424,322
Total assets 57,822,811 49,434,399
Total policy and contract liabilities - -
Total liabilities 47,182,538 34,577,993
Bermuda
Net premiums earned - All other 1,463,949 473,390
Net premiums earned - Intersegment 6,977,694 17,233,023
Net investment income and interest on notes receivable 1,348,563 640,673
Real estate income - -
Other revenues 414,170 (133,481)
Total revenues 10,204,376 18,213,605
Interest expense - -
Depreciation and amortization expense 5,833 15,000
Equity in net earnings of subsidiaries 1,039,023 2,912,419
Income taxes - -
Segment profit 2,787,174 2,020,037
Significant noncash items other than depreciation and
amortization - -
Property, plant and equipment 844,167 824,167
Total investments 67,677,226 87,870,817
-11-
Nine Months Ended
September 30,
2001 2002
Total assets 91,981,519 116,842,119
Total policy and contract liabilities 16,436,234 34,362,939
Total liabilities 18,671,408 36,706,516
Intersegment Eliminations
Net premiums earned - All other - -
Net premiums earned - Intersegment - -
Net investment income and interest on notes receivable - -
Real estate income - -
Other revenues (145,901) (112,500)
Total revenues (145,901) (112,500)
Interest expense (112,500) (112,500)
Depreciation and amortization expense - -
Equity in net earnings (loss) of subsidiaries (1,039,023) (2,912,419)
Income taxes - -
Segment profit (loss) - -
Significant noncash items other than depreciation and
amortization - -
Property, plant and equipment - -
Total investments (51,859,674) (61,464,772)
Total assets (66,021,706) (96,600,017)
Total policy and contract liabilities (9,854,541) (28,077,547)
Total liabilities (14,062,032) (35,135,245)
Total
Net premiums earned - All other 44,745,150 48,844,616
Net premiums earned - Intersegment - -
Net investment income and interest on notes receivable 3,476,322 2,848,195
Real estate income 3,180,705 44,659,187
Other revenues 4,389,442 473,557
Total revenues 55,791,619 96,825,555
Interest expense 18,870 39,441
Depreciation and amortization expense 225,044 296,975
Equity in net earnings of subsidiaries - -
Income taxes expense 526,150 2,033,436
Segment profit 3,826,197 4,932,456
Significant noncash items other than depreciation and
amortization - -
Property, plant and equipment 2,017,784 2,184,509
Total investments 126,772,849 137,119,927
Total assets 285,513,683 346,169,111
Total policy and contract liabilities 147,585,392 217,369,407
Total liabilities 224,712,736 279,568,000
-12-
Note 6 - Shareholder Matters
During the nine months ended September 30, 2002, the Company repurchased 11,900 shares of its stock at a total price of $111,741 in open market transactions pursuant to its share repurchase program.
Note 7 - Investment in Real Estate
The Company's investment in the development of the Harbour Village Golf and Yacht Club ("Harbour Village") project is comprised of 173 acres of property in Ponce Inlet, Florida (the "Property") that was acquired through foreclosure on April 13, 1999. At the date of foreclosure, the Company evaluated the carrying value of its investment in real estate by comparing the fair value of the foreclosed collateral to the book value of the underlying loan and accrued interest. As the book value of the loan and accrued interest was less than the fair value of the collateral, no loss was recognized on foreclosure and the basis of real estate was recorded in accordance with EITF Abstract 98-11, which included the recognition of $5.8 million in a deferred tax asset.
As of December 31, 2001 and September 30, 2002, the investment in real estate for the Harbour Village project is as follows (in thousands):
December 31, 2001 September 30, 2002
Land $4,360 $2,308
Capitalized overhead, interest and
taxes 3,925 2,647
Work in process 28,328 29,469
Total $36,613 $34,424
======= =======
During the quarter ended September 30, 2002, the Company closed 32 condominium units and 14 boat slips at Harbour Village. The Company has determined to recognize revenue when title to each individual unit or boat slip passes to the purchaser. When title passes, the Company uses a percentage of completion method, based on actual costs to total estimated costs (including allocated common costs) to recognize revenue. The difference between total sales price and the revenue recognized is set up as deferred revenue and will be recognized as the additional costs of each building are incurred.
-13-
Note 8 - Income Taxes
Total income tax expense for the nine months ended September 30, 2001 and 2002 were allocated as follows:
Nine Months Ended
September 30,
2001 2002
Tax expense attributable to:
Income from continuing operations $ 526,150 $2,033,436
Unrealized gains on
securities available for sale 387,612 897,714
Total $913,762 $2,931,150
======== ==========
U.S. Federal and state income tax expense (benefit) from continuing operations consists of the following components:
Current Deferred Total
September 30, 2001 2,089,704 (1,563,554) 526,150
September 30, 2002 271,259 1,762,177 2,033,436
The state income tax components aggregated $(2,090) and $520,985 for the periods ended September 30, 2001 and 2002, respectively.
Income tax expense (benefit) for the periods ended September 30, 2001 and 2002 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:
September 30,
2001 2002
Expected income tax expense $1,479,798 $2,368,403
Foreign earned income not subject to U.S.
taxation (947,639) (686,813)
Tax-exempt interest (15,654) -
State taxes and other 9,645 351,846
$526,150 $2,033,436
======== ==========
-14-
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, September 30
2001 2002
Deferred tax assets:
Loss reserve discounting 2,336,868 3,085,480
Unearned premium reserves 2,128,862 2,281,688
Difference between tax and GAAP basis of Harbour
Village Project 5,118,563 3,280,699
Gross deferred tax assets $9,584,293 $8,647,867
Deferred tax liabilities:
Deferred acquisition costs 1,855,958 1,682,353
Unrealized gain on securities 311,530 1,209,249
Other 1,772 1,453
Gross Deferred tax liabilities 2,169,260 2,893,055
Net deferred tax asset $7,415,033 $5,754,812
========== ==========
Note 9 - Notes Receivable
The Company ceases the accrual of interest on loans when any payment is past due. 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. Cash receipts on impaired notes receivable are applied to reduce the principal amount of such notes until the principal has been recovered and are recognized as interest income, thereafter.
The recorded investment in notes receivable, which meet the definition of impaired loans at December 31, 2001 and September 30, 2002 were $8,081,899 and $8,015,967, respectively. 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. The weighted average recorded investment in impaired notes receivable as of December 31, 2001 and September 30, 2002 were $2,494,294 and $8,048,933 respectively. Interest income recognized on impaired notes receivable during the nine months ended September 30, 2001 and September 30, 2002 were $0 and $0, respectively.
-15-
Note 10 - Goodwill and Intangibles
The Company adopted SFAS 142 on January 1, 2002. Under SFAS 142, goodwill and indefinite-lived intangible assets are no longer amortized but are reviewed annually (or more frequently if impairment indicators arise) for impairment. Separable intangible assets that are not deemed to have an indefinite life will continue to be amortized over their useful lives (but with no maximum life).
Goodwill and Intangibles December 31, September 30,
(in Thousands) 2001 2002
Goodwill $1,467 -
Indefinite-lived Intangibles - $1,467
Other Amortizable Intangibles - -
Total Goodwill and Intangibles $1,467 $1,467
====== ======
In accordance with the disclosure requirements of SFAS 142 the following table shows the effect of the goodwill and intangibles amortization on the reported net income for the nine months ended September 30, 2001 and September 30, 2002 to show comparability between the periods presented.
Nine Months Ended
September 30
(In Thousands)
2001 2002
Reported Net Earnings $3,826 $4,932
Add back: Goodwill and Intangibles 66 -
Amortization
Adjusted Net Earnings $3,892 $4,932
====== ======
Earnings Per Share Diluted
Reported Net Earnings $0.79 $1.04
Add back: Goodwill and Intangibles 0.01 -
Amortization
Adjusted Net Earnings - Basic $0.80 $1.04
===== =====
Adjusted Net Earnings - Diluted $0.78 $1.01
===== =====
Note 11 - Commitments and Contingencies
One of the Company's former reinsurers, Berkley Insurance Company, has disputed its obligations under several reinsurance treaties entered into during the "soft reinsurance
-16-
market” that existed in 1998 and 1999. As of September 30, 2002, unreimbursed paid claims totaled $15.7 million and additional ceded case and incurred but not reported reserves totals approximately $19.5 million. A reserve for this dispute has not been established since the Company does not believe it is probable a loss will occur nor is any potential loss estimatable. If any of these factors change in the future, the Company will establish a reserve at that time, which could be material. On April 5, 2002, the Company demanded arbitration against the reinsurer to collect the amounts owed. The arbitration panel has been chosen, and the arbitration panel has scheduled a hearing in May 2003. The parties are presently engaged in the discovery phase of the proceedings. Berkley is a subsidiary of W.R. Berkley Corp. (NYSE: BER). The Company does not believe that this dispute will have a material adverse effect on the overall financial condition or liquidity of the Company.
Note 12 - Consolidating Information
The following represents consolidating information for the Company and its subsidiaries:
American Safety Insurance Group, Ltd.
Consolidating Condensed Information
American American
Safety Safety Total
Insurance Holdings Other Consolidating Consolidated
Group, Ltd. Corp. Subsidiaries Adjustments Amounts
Balance Sheet
December 31, 2001
Assets
Investment in subsidiary $ 51,376,103 $38,704,393 $ - $ (90,080,496) $ -
Fixed maturities 4,297,570 - 57,538,531 - 61,836,101
Common stock - - 100,000 (100,000) -
Investment in real estate - - 37,662,600 - 37,662,600
Cash 14,737 296,712 991,393 - 1,302,842
Restricted Cash - - 9,010,489 - 9,010,489
Short term investments 201,742 - 21,540,530 - 21,742,272
Secured notes receivable 2,500,000 - 8,081,899 (2,500,000) 8,081,899
Accrued investment income 456,181 - 2,318,370 (350,000) 2,424,551
Total investments and cash 58,846,333 39,001,105 137,243,812 (93,030,496) 142,060,754
Premium receivable 1,434,586 - 31,576,824 (7,228,185) 25,783,225
Due from affiliate 1,304,302 859,945 - (1,055,727) 1,108,520
Reinsurance recoverable 577,000 - 124,115,361 (18,336,804) 106,355,557
Income taxes recoverable - 1,208,703 406,237 - 1,614,940
Deferred income taxes - - 7,415,033 - 7,415,033
Other assets 1,056,421 1,267,704 11,260,800 (661,337) 12,923,588
Total Assets $ 63,218,642 $ 42,337,457 $ 312,018,067 $(120,312,549) $ 297,261,617
================ ================ ================= ================= =================
Liabilities and Shareholders' Equity
Unpaid losses and loss
adjustment expenses $ 1,964,279 $ - $ 129,136,148 $ (9,677,388) $ 121,423,039
Unearned premium - - 55,640,711 (2,435,211) 53,205,500
Ceded premiums payable 992,803 - 27,059,259 (13,827,602) 14,224,460
Assumed loss and lae payable - - 1,925,739 - 1,925,739
Deferred revenue - - 2,185,104 - 2,185,104
Due to affiliate - - 3,456,121 (3,456,121) -
-17-
American Safety Insurance Group, Ltd.
Consolidating Condensed Information
American American
Safety Safety Total
Insurance Holdings Other Consolidating Consolidated
Group, Ltd. Corp. Subsidiaries Adjustments Amounts
Loan payable - 1,006,000 15,397,135 - 16,403,135
Escrow deposits - - 11,718,824 - 11,718,824
Income taxes payable - - - - -
Accounts payable and accrued
expenses 181,222 1,031,000 15,718,987 (735,731) 16,195,478
Total Liabilities 3,138,304 2,037,000 262,238,028 (30,132,053) 237,281,279
Common stock 162,873 500 3,621,500 (3,722,000) 62,873
Additional paid in capital 35,206,612 38,818,852 34,023,383 (72,842,235) 35,206,612
Accumulated other
comprehensive earnings
(loss), net 834,974 604,736 598,894 (1,203,630) 834,974
Retained earnings 33,416,853 876,369 11,536,262 (12,412,631) 33,416,853
Treasury stock (9,540,974) - - - (9,540,974)
Total Shareholders' Equity 60,080,338 40,300,457 49,780,039 (90,180,496) 59,980,338
Total Liabilities and
Shareholders' Equity $63,218,642 $ 42,337,457 $ 312,018,067 $(120,312,549) $ 297,261,617
================ ================ ================= ================= =================
Balance Sheet
September 30, 2002
Assets
Investment in subsidiary $ 61,364,772 $ 47,451,497 $ - $(108,816,269) $ -
Fixed maturities 3,033,881 - 93,646,589 - 96,680,470
Common stock - - 100,000 (100,000) -
Investment in real estate - - 34,424,322 - 34,424,322
Cash 973,821 - 13,795,271 - 14,769,092
Restricted Cash - - 9,497,648 - 9,497,648
Short term investments - - 6,015,135 - 6,015,135
Secured notes receivable 2,500,000 - 8,015,967 (2,500,000) 8,015,967
Accrued investment income 497,202 - 2,286,558 (462,500) 2,321,260
Total investments and cash 68,369,676 47,451,497 167,781,490 (111,878,769) 171,723,894
Premium receivable 1,138,513 - 23,876,449 (3,523,605) 21,491,357
Due from affiliate (2,187,574) (180,283) 3,053,551 (339,073) 346,621
Reinsurance recoverable 868,500 - 158,912,873 (29,270,483) 130,510,890
Income taxes recoverable - 1,686,363 (409,244) - 1,277,119
Deferred income taxes - - 5,754,812 - 5,754,812
Other assets 820,777 1,416,026 12,817,615 10,000 15,064,418
Total Assets $ 69,009,892 $ 50,373,603 $ 371,787,546 $(145,001,930) $ 346,169,111
================ ================ ================= ================= =================
Liabilities and Shareholders'
Equity
Unpaid losses and loss
adjustment expenses $ 2,063,736 $ - $ 158,136,282 $ (15,079,333) $ 145,120,685
Unearned premium - - 85,246,936 (12,998,214) 72,248,722
Ceded premiums payable 38,348 - 12,973,443 (4,896,123) 8,115,668
Assumed loss and lae payable - - - - -
Deferred revenue - - 3,424,162 - 3,424,162
Due to affiliate - - 3,372,578 (2,462,652) 909,926
Loan payable - 1,006,000 12,885,973 - 13,891,973
Escrow deposits - - 12,962,845 - 12,962,845
Income taxes payable - - - - -
Accounts payable and accrued
expenses 206,697 1,437,323 21,899,338 (649,339) 22,894,019
Total Liabilities 2,308,781 2,443,323 310,901,557 (36,085,661) 279,568,000
-18-
American Safety Insurance Group, Ltd.
Consolidating Condensed Information
American American
Safety Safety Total
Insurance Holdings Other Consolidating Consolidated
Group, Ltd. Corp. Subsidiaries Adjustments Amounts
Common stock 163,490 500 3,621,500 (3,722,000) 63,490
Additional paid in capital 35,574,493 41,793,619 36,998,150 (78,791,769) 35,574,493
Accumulated other comprehen-
sive earnings (loss), net 3,967,835 2,347,365 3,679,479 (6,026,844) 3,967,835
Retained earnings 36,648,008 3,788,796 16,586,860 (20,375,656) 36,648,008
Treasury stock (9,652,715) - - - (9,652,715)
Total Shareholders' Equity 66,701,111 47,930,280 60,885,989 (108,916,269) 66,601,111
Total Liabilities and
Shareholders' Equity $ 69,009,892 $ 50,373,603 $ 371,787,546 $(145,001,930) $ 346,169,111
================ ================ ================= ================= =================
-19-
American Safety Insurance Group, Ltd.
Consolidating Condensed Information
American American
Safety Safety Total
Insurance Holdings Other Consolidating Consolidated
Group, Ltd. Corp. Subsidiaries Adjustments Amounts
Income Statement
September 30, 2001
Quarter to Date
Direct and assumed premiums
earned $ - $ - $ 36,437,052 $ (1,840,825) $ 34,596,227
Ceded premiums earned - - (22,097,917) 1,840,825 (20,257,092)
rned - - 14,339,135 - 14,339,135
Investment income 56,652 46 890,067 - 946,765
Interest on notes receivable 15,923 - 191,699 - 207,622
Brokerage commission income - - 2,079,985 (1,363,982) 716,003
Management fees from related
party - - 733,635 (370,281) 363,354
Realized gains (losses) on
investments - - 186,005 - 186,005
Real estate income - - 3,180,705 - 3,180,705
Other income 52,228 - 114,086 (37,500) 128,814
Total revenues 124,803 46 21,715,317 (1,771,763) 20,068,403
Losses and LAE incurred (250,000) - 9,886,161 - 9,636,161
Acquisition expenses - - 3,925,724 (1,363,982) 2,561,742
Real estate expenses - - 3,096,454 - 3,096,454
Payroll and related expenses 11,561 - 2,061,671 - 2,073,232
Other expenses 200,446 171,038 1,491,121 (407,781) 1,455,311
Expenses due to rescission - - - - -
Total expenses (37,993) 171,038 20,461,618 (1,771,763) 18,822,900
Earnings (loss) before equity in
earnings in subsidiary 162,796 (170,992) 1,253,699 - 1,245,503
Equity in net earnings (loss) of
subsidiary 815,957 665,339 - (1,481,296) -
Earnings (loss) before income
taxes 978,753 494,347 1,253,699 (1,481,296) 1,245,503
Income Taxes - (58,137) 324,887 - 266,750
Net earnings (loss) $ 978,753 $ 552,484 $ 928,812 $ (1,481,296) $ 978,753
-20-
American Safety Insurance Group, Ltd.
Consolidating Condensed Information
American American
Safety Safety Total
Insurance Holdings Other Consolidating Consolidated
Group, Ltd. Corp. Subsidiaries Adjustments Amounts
Income Statement
September 30, 2002
Quarter to Date
Direct and assumed premiums
earned $ - $ - $ 41,924,289 $ (6,393,398) $ 35,530,891
Ceded premiums earned - - (23,140,109) 6,393,398 (16,746,711)
Net premiums earned - - 18,784,180 - 18,784,180
Investment income 29,347 - 943,973 - 973,320
Interest on notes receivable - - - - -
Brokerage commission income - - 34,044 - 34,044
Management fees from related
party - - 246,563 - 246,563
Realized gains (losses) on
investments 3,086 - (59,269) - (56,183)
Real estate income - - 10,723,526 - 10,723,526
Other income 37,500 - 30,504 (37,500) 30,504
Total revenues 69,933 - 30,703,521 (37,500) 30,735,954
Losses and LAE incurred - - 10,648,265 - 10,648,265
Acquisition expenses - - 4,072,469 - 4,072,469
Real estate expenses - - 9,432,887 193,961 9,626,848
Payroll and related expenses 26,097 - 2,389,363 (115,060) 2,300,400
Other expenses 228,052 201,077 1,410,696 (116,401) 1,723,424
Expenses due to rescission - 1,152,876 - - 1,152,876
Total expenses 254,149 1,353,953 27,953,680 (37,500) 29,524,282
Earnings (loss) before equity in
earnings in subsidiary (184,216) (1,353,953) 2,749,841 - 1,211,672
Equity in net earnings (loss) of
subsidiary 1,217,745 1,088,607 - (2,306,352) -
Earnings (loss) before income
taxes 1,033,529 (265,346) 2,749,841 (2,306,352) 1,211,672
Income Taxes - (460,344) 638,487 - 178,143
Net earnings (loss) $ 1,033,529 $ 194,998 $ 2,111,354 $ (2,306,352) $ 1,033,529
-21-
American Safety Insurance Group, Ltd.
Consolidating Condensed Information
American American
Safety Safety Total
Insurance Holdings Other Consolidating Consolidated
Group, Ltd. Corp. Subsidiaries Adjustments Amounts
Income Statement
September 30, 2001
Year to Date
Direct and assumed premiums
earned $ - $ - 105,479,121 (6,977,694) 98,501,427
Ceded premiums earned - - (60,733,971) 6,977,694 (53,756,277)
Net premiums earned - - 44,745,150 - 44,745,150
Investment income 169,326 754 2,539,305 - 2,709,385
Interest on notes receivable 103,844 - 663,093 - 766,937
Brokerage commission income - - 4,677,957 (2,962,930) 1,715,027
Management fees from related
party - - 2,169,370 (1,074,708) 1,094,662
Realized gains on investments - - 601,354 - 601,354
Real estate income - - 3,180,705 - 3,180,705
Other income 173,675 - 917,224 (112,500) 978,399
Total revenues 446,845 754 59,494,158 (4,150,138) 55,791,619
Losses and LAE incurred (751,969) - 29,253,502 - 28,501,533
Acquisition expenses - - 11,764,784 (2,962,930) 8,801,854
Real estate expenses - - 3,578,941 - 3,578,941
Payroll and related expenses 11,561 - 6,243,756 - 6,255,317
Other expenses 472,553 612,783 4,403,499 (1,187,208) 4,301,627
Expenses due to rescission - - - - -
Total expenses (267,855) 612,783 55,244,482 (4,150,138) 51,439,272
Earnings (loss) before equity in
earnings in subsidiary 714,700 (612,029) 4,249,676 - 4,352,347
Equity in net earnings (loss) of
subsidiary 3,111,497 1,442,962 - (4,554,459) -
Earnings (loss) before income
taxes 3,826,197 830,933 4,249,676 (4,554,459) 4,352,347
Income Taxes - (208,090) 734,240 - 526,150
Net earnings (loss) $ 3,826,197 $ 1,039,023 $ 3,515,436 $ (4,554,459) $ 3,826,197
-22-
American Safety Insurance Group, Ltd.
Consolidating Condensed Information
American American
Safety Safety Total
Insurance Holdings Other Consolidating Consolidated
Group, Ltd. Corp. Subsidiaries Adjustments Amounts
Income Statement
September 30, 2002
Year to Date
Direct and assumed premiums
earned $ - $ - $ 119,987,871 $ (17,233,023) $ 102,754,848
Ceded premiums earned - - (71,143,255) 17,233,023 (53,910,232)
Net premiums earned - - 48,844,616 - 48,844,616
Investment income 122,188 4,263 2,721,744 - 2,848,195
Interest on notes receivable - - - - -
Brokerage commission income - - 136,684 - 136,684
Management fees from related
party - - 739,744 - 739,744
Realized gains (losses) on
investments 82,260 - (604,145) - (521,885)
Real estate income - - 44,659,187 - 44,659,187
Other income 113,020 - 118,494 (112,500) 119,014
Total revenues 317,468 4,263 96,616,324 (112,500) 96,825,555
Losses and LAE incurred - - 28,178,777 - 28,178,777
Acquisition expenses - - 10,369,914 - 10,369,914
Real estate expenses - - 38,207,711 573,617 38,781,328
Payroll and related expenses 50,701 - 6,898,979 (345,180) 6,604,500
Other expenses 575,268 183,069 4,001,276 (340,937) 4,418,676
Expenses due to rescission - 1,506,468 - 1,506,468
Total expenses 625,969 1,689,537 87,656,657 (112,500) 89,859,663
Earnings (loss) before equity in
earnings in subsidiary (308,501) (1,685,274) 8,959,667 - 6,965,892
Equity in net earnings (loss) of
subsidiary 5,240,957 4,029,699 - (9,270,656) -
Earnings (loss) before income
taxes 4,932,456 2,344,425 8,959,667 (9,270,656) 6,965,892
Income Taxes - (567,993) 2,601,429 2,033,436
Net earnings (loss) $ 4,932,456 $ 2,912,418 $ 6,358,238 $ (9,270,656) $ 4,932,456
-23-
American Safety Insurance Group, Ltd.
Consolidating Condensed Information
American American
Safety Safety Total
Insurance Holdings Other Consolidating Consolidated
Group, Ltd. Corp. Subsidiaries Adjustments Amounts
September 30, 2001
Cash Flow
Net cash provided (used) in
operating activities 298,737 (1,032,257) 20,451,269 100,000 19,817,749
Cash flow from investing activities:
Decrease (increase) in
investments 1,732,215 36,301 (40,963,115) - (39,194,599)
Investment in subsidiary - (10,000) - 10,000 -
Sales (purchases) of fixed
assets, net - - (1,082,041) - (1,082,041)
Net cash provided (used) by
investing activities 1,732,215 26,301 (42,045,156) 10,000 (40,276,640)
Cash flow from financing activities:
Proceeds from sale of common
stock 100,000 - - (100,000) -
Proceeds (repayment) of loans
payable - 1,006,000 16,965,841 - 17,971,841
Proceeds from escrow deposits - - 7,417,423 - 7,417,423
Restricted cash - - (4,450,789) - (4,450,789)
Receipt of funds from parent - - 10,000 (10,000) -
Dividends paid - - - - -
Purchase of treasury stock (2,000,562) - - - (2,000,562)
Net cash provided (used) by
financing activities (1,900,562) 1,006,000 19,942,475 (110,000) 18,937,913
Net increase (decrease) in cash 130,390 44 (1,651,412) - (1,520,978)
Cash at beginning of year 152,642 175,774 3,455,686 - 3,784,102
Cash at end of year 283,032 175,818 1,804,274 - 2,263,124
-24-
American Safety Insurance Group, Ltd.
Consolidating Condensed Information
American American
Safety Safety Total
Insurance Holdings Other Consolidating Consolidated
Group, Ltd. Corp. Subsidiaries Adjustments Amounts
September 30, 2002
Cash Flow
Net cash provided (used) in
operating activities 2,553,049 (297,064) 25,162,085 1,360,268 28,778,338
Cash flow from investing activities:
Decrease (increase) in
investments 1,465,431 - (13,440,495) - (11,975,064)
Investment in subsidiary (1,614,851) (2,974,415) - 4,589,266 -
Sales (purchases) of fixed
assets, net - - (138,177) - (138,177)
Net cash provided (used) by
investing activities (149,420) (2,974,415) (13,578,672) 4,589,266 (12,113,241)
Cash flow from financing activities:
Proceeds from sale of common
stock 368,498 - - - 368,498
Proceeds (repayment) of loans
payable - - (2,511,162) - (2,511,162)
Proceeds from escrow deposits - - 1,244,021 - 1,244,021
Restricted cash - - (487,159) - (487,159)
Receipt of funds from parent - 2,974,767 2,974,767 (5,949,534) -
Dividends paid (1,701,302) - - - (1,701,302)
Purchase of treasury stock (111,741) - - - (111,741)
Net cash provided (used) by
financing activities (1,444,545) 2,974,767 1,220,467 (5,949,534) (3,198,845)
Net increase (decrease) in cash 959,084 (296,712) 12,803,878 - 13,466,250
Cash at beginning of year 14,737 296,712 991,393 - 1,302,842
Cash at end of year 973,821 - 13,795,271 - 14,769,092
-25-
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations
General
American Safety is a specialty insurance 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, contracting and other specialty risks. The Company is also the owner/developer of the Harbour Village Golf & Yacht Club ("Harbour Village"), a residential condominium, marina, par 3 golf course and beach club project in Ponce Inlet, Florida.
The following table sets forth the Company's consolidated revenues:
Nine
Three Months Months
Ended Ended
Three Months Nine Months September September
Ended September 30, Ended September 30, 30, 30,
2001 to 2001 to
2001 2002 2001 2002 2002 2002
(Dollars in thousands)
Net Premiums earned:
Reinsurance:
Workers' compensation $2,659 $ - $ 8,300 $ - (100.0)% (100.0)%
General liability 1,963 4,793 7,232 11,488 144.2 58.8
Total reinsurance 4,622 4,793 15,532 11,488 3.7 (26.0)
Primary insurance:
Commercial Line 1,185 72 3,217 865 (93.9) (73.1)
Workers' compensation 1,882 1,593 4,009 5,955 (15.4) 48.5
Surety 1,023 298 5,492 950 (70.9) (82.7)
General liability 5,237 9,401 12,159 22,990 79.5 89.1
Program business 390 2,627 4,336 6,597 573.6 52.1
Total primary insurance 9,717 13,991 29,213 37,357 44.0 27.9
Total net premiums
earned 14,339 18,784 44,745 48,845 31.0 9.2
Net investment income 947 973 2,709 2,848 2.7 5.1
Interest on notes receivable 207 - 767 - (100.0) (100.0)
Commission and fee income:
Brokerage commission income
716 34 1,715 137 (95.3) (92.0)
Management fees from
affiliate 363 247 1,095 740 (32.0) (32.4)
Total commission and fee
income 1,079 281 2,810 877 (74.0) (68.8)
Net realized gains (losses) 186 (56) 601 (522) (130.1) (186.9)
Real estate income 3,181 10,724 3,181 44,659 237.1 1,303.9
Other income 129 30 979 119 (76.7) (87.8)
Total Revenues $20,068 $30,736 $55,792 $96,826 53.2% 73.5%
-26-
The following table sets forth the components of the Company's GAAP combined ratio for the periods indicated:
Three months ended Nine months ended
September 30, September 30,
2001 2002 2001 2002
Insurance operations:
Loss and loss adjustment expense
ratio 67.2% 56.7% 63.7% 57.7%
Expense ratio 22.9 26.9 25.2 26.9
Combined ratio 90.1% 83.6% 88.9% 84.6%
Quarter Ended September 30, 2002 Compared to Quarter Ended September 30, 2001
Net Premiums Earned. Net premiums earned increased 31% to $18.8 million in the quarter ended September 30, 2002 from $14.3 million in the quarter ended September 30, 2001. The principal factors accounting for the increase were a $4.2 million increase in primary general liability premiums, a $2.8 million increase in reinsurance general liability premiums, and a $2.2 million increase in program business premiums. Also, net premiums earned for workers' compensation commercial lines, and surety decreased 70.9% to $2 million from $6.7 million. These results were in line with the Company's strategy to focus on its more profitable lines of insurance business.
Net Investment Income. Net investment income increased to $973,000 in the quarter ended September 30, 2002 from $947,000 in the quarter ended September 30, 2001. The average pre-tax yield on investments was 4.9% in the quarter ended September 30, 2001 and 4.7% in the quarter ended September 30, 2002. The average after-tax yield on investments was 3.6% in the quarter ended September 30, 2001 and 3.5% in the quarter ended September 30, 2002.
Interest from Notes Receivable. Interest from notes receivable decreased 100% from $207,000 in the quarter ended September 30, 2001 to $0 in the quarter ended September 30, 2002 due to repayments on various loans. During 2001, the Company ceased accruing interest on two impaired loans with one borrower in accordance with its accounting policies. While the May 2002 appraised value of the collateral securing these loans is in excess of the balances owed, the borrower is seeking refinancing from third party sources and the Company intends to obtain a more current appraisal of the collateral. Average notes receivable decreased to $8 million in the quarter ended September 30, 2002 from $8.6 million in the quarter ended September 30, 2001.
Brokerage Commission Income and Management Fees. Income from insurance brokerage operations and management fees decreased 74% from $1.1 million in the three months ended September 30, 2001 to $281,000 in the three months ended September 30, 2002. This decrease is the result of a change in the manner fees are realized from our risk retention group affiliate. Previously, the risk retention group paid a fixed management fee plus a commission based on a percentage of the premiums produced by the Company. Effective January 1, 2002, the risk retention group pays fees based on its portion of costs allocated from the Company for its portion of premiums written. This change was implemented to coincide with the creation of an internal pooling agreement between the Company and its subsidiaries, including the risk retention group affiliate. The result of this change will initially lower the commission income and management fees paid to the Company by the risk retention group affiliate, but the net earned premiums retained by the Company will increase which are earned as revenue over the life of the underlying policies as opposed to earning the commissions and fees at the time such policies are written.
-27-
Net Realized Gains and Losses. Net realized gains and losses decreased from a gain of $186,000 in the quarter ended September 30, 2001 to a loss of $56,000 for the quarter ended September 30, 2002 due to the sale of bonds in the Company's investment portfolio.
Real Estate Income. Real estate sales at the Harbour Village project increased 237.1% to $10.7 million in the quarter ended September 30, 2002 from $3.2 million in the quarter ended September 30, 2001. These sales were realized from the closing of 32 residential condominium units and 14 boat slips in the quarter ended September 30, 2002, and from the closing of 12 residential condominium units and 6 boat slips in the quarter ended September 30, 2001. See Exhibit 99 included in this Report for further information regarding Harbour Village.
Other Income. Other income decreased 76.7% from $129,000 in the quarter ended September 30, 2001 to $30,000 for the quarter ended September 30, 2002 as a result of reduced fees earned by the Company's financial services subsidiary, American Safety Financial Corp. During 2001, the Company discontinued this line of business.
Losses and Loss Adjustment Expenses. Losses and loss adjustment expenses increased 10.5% from $9.6 million in the quarter ended September 30, 2001 to $10.6 million in the quarter ended September 30, 2002, and the loss ratio has decreased to 57% in the quarter ended September 30, 2002 from 67% in the quarter ended September 30, 2001. The loss ratio has decreased as a result of decreased earned premium in commercial lines, surety, and workers' compensation lines of business, which have higher loss ratios.
Acquisition Expenses. Policy acquisition expenses increased to $4.1 million for the three months ended September 30, 2002 from $2.6 million for the three months ended September 30, 2001, as a result of increased earned premiums. Premium tax expense has decreased to $541,000 from $794,000 due to lower volumes of direct premiums which are subject to premium taxes.
Payroll and Other Expenses. Payroll and other expenses increased 14% from $3.5 million in the quarter ended September 30, 2001 to $4 million in the quarter ended September 30, 2002 due to higher payroll and legal expenses during the quarter.
Real Estate Expenses. Real estate expenses associated with Harbour Village increased from $3.1 million in the quarter ended September 30, 2001 to $9.6 million in the quarter ended September 30, 2002. Of the $9.6 million of costs recognized during the quarter ended September 30, 2002, $8.6
-28-
million were previously capitalized variable costs related to the sale of condominium units and boat slips, and the remaining $1 million were fixed costs of the project, which includes advertising and other administration costs. Of the $3.1 million of costs recognized during the quarter ended September 30, 2001, $2.7 million was previously capitalized variable costs related to the sale of condominium units and boat slips and the remaining $400,000 were fixed costs of the project, which includes advertising and other administration costs. See Exhibit 99 included in this Report for further information regarding Harbour Village.
Rescission Expense. Expense due to rescission was $1.2 million for the quarter ended September 30, 2002. Of the $1.2 million of expense recognized, $153,000 was for legal fees, and $1 million was related to amounts held in escrow for the acquisition as a result of the Court's granting of defendents' summary judgment motions in part of the lawsuit. See Item 6(b) for more information.
Income Taxes. Federal and state income taxes increased to $178,000 in the quarter ended September 30, 2001 from $267,000 in the quarter ended September 30, 2002 due to lower levels of income in the Company's U.S. insurance and real estate subsidiaries.
Total Earnings. Net earnings after tax increased 5.6% to $1 million for the quarter ended September 30, 2002 from $979,000 for the quarter ended September 30, 2001. This increase in net earnings is from increases in insurance and real estate income. Operating earnings, which are earnings excluding amounts for realized capital gains and losses and rescission expenses, increased 133% to $1.8 million for quarter ended September 30, 2002 from $785,000 for the quarter ended September 30, 2001. This increase in operating earnings is the result of higher insurance and real estate income.
Nine Months Ended September 30, 2002 Compared to Nine Months Ended September 30, 2001
Net Premiums Earned. Net premiums earned increased 9.2% from $44.7 million in the nine months ended September 30, 2001 to $48.8 million in the nine months ended September 30, 2002. The principal factors accounting for the increase were an increase of $10.8 million in primary general liability premiums, an increase of $4.3 million in reinsurance general liability premiums and an increase of $2.3 million in program business premiums. Also, net premiums earned for workers' compensation, commercial lines, and surety decreased 63% to $7.8 million from $21 million. These results were in line with the Company's strategy to focus on its more profitable lines of insurance business.
Net Investment Income. Net investment income increased 5.1% from $2.7 million in the nine months ended September 30, 2001 to $2.8 million in the nine months ended September 30, 2002 due to higher levels of invested assets generated from positive cash flows from operations. The average pre-tax yield on investments was 5% in the nine months ended September 30, 2001 and 4.1% in the nine months ended September 30, 2002. The average after-tax yield on investments was 3.1% in the nine months ended September 30, 2001 and 3% in the nine months ended September 30, 2002.
-29-
Interest from Notes Receivable. Interest from notes receivable decreased 100% from $767,000 in the nine months ended September 30, 2001 to $0 in the nine months ended September 30, 2002 due to repayment of various loans. During 2001, the Company ceased accruing interest on two impaired loans with one borrower in accordance with its accounting policies. While the May 2002 appraised value of the collateral securing these loans is in excess of the balances owed, the borrower is seeking refinancing from third party sources and the Company intends to obtain a more current appraisal of the collateral. Average notes receivable decreased to $8 million from $8.5 million for the nine months.
Brokerage Commission Income and Management Fees. Income from insurance brokerage operations and management fees decreased 68.8% from $2.8 million in the nine months ended September 30, 2001 to $877,000 in the nine months ended September 30, 2002. This decrease is the result of a change in the manner fees are realized from our risk retention group affiliate. Previously, the risk retention group paid a fixed management fee plus a commission based on a percentage of the premiums produced by the Company. Effective January 1, 2002, the risk retention group pays fees based on its portion of costs allocated from the Company for its portion of premiums written. This change was implemented to coincide with the creation of an internal pooling agreement between the Company and its subsidiaries, including the risk retention group affiliate. The result of this change will initially lower the commission income and management fees paid to the Company by the risk retention group affiliate, but the net earned premiums retained by the Company will increase which are earned as revenue over the life of the underlying policies as opposed to earning the commissions and fees at the time such policies are written.
Net Realized Gains and Losses. Net realized gains and losses decreased from a gain of $601,000 in the nine months ended September 30, 2001 to a loss of $522,000 for the nine months ended September 30, 2002 due to the sale of bonds in the Company's investment portfolio, primarily 8% WorldCom Industrial Bonds due May 15, 2031.
Real Estate Income. Real estate sales at the Harbour Village project increased to $44.7 million in the nine months ended September 30, 2002 from $3.2 million in the nine months ended September 30, 2001. The sales in the nine months ended September 30, 2002 were realized from the closing of 147 residential condominium units and 59 boat slips. The sales in the nine months ended September 30, 2001 were realized from the closings of 12 residential condominium units and 6 boat slips. See Exhibit 99 included in this Report for further information regarding Harbour Village.
Other Income. Other income decreased from $979,000 in the nine months ended September 30, 2001 to $119,000 for the nine months ended September 30, 2002 as a result of lower fees earned by the Company's financial services subsidiary, American Safety Financial Corp. During 2001, the Company discontinued this line of business.
-30-
Losses and Loss Adjustment Expenses. Losses and loss adjustment expenses decreased 1.1% from $28.5 million in the nine months ended September 30, 2001 to $28.2 million in the nine months ended September 30, 2002, as a result of decreased net premiums earned in commercial lines, surety and workers' compensation lines of insurance business which caused the loss ratio to decrease to 58% from 64% for the period.
Acquisition Expenses. Policy acquisition expenses increased 17.8% from $8.8 million in the nine months ended September 30, 2001 to $10.4 million in the nine months ended September 30, 2002 as a result of increased net earned premiums in its general liability line of insurance business. Premium tax expense decreased to $2.2 million from $2.3 million due to lower volumes of direct premiums earned which are subject to premium taxes.
Payroll and Other Expenses. Payroll and other expenses increased 4.4% from $10.6 million in the nine months ended September 30, 2001 to $11 million in the nine months ended September 30, 2002, due to higher payroll and legal expenses during the period.
Real Estate Expenses. Real estate expenses associated with Harbour Village increased from $3.6 million in the nine months ended September 30, 2001 to $38.8 million in the nine months ended September 30, 2002. Of the $38.8 million of costs recognized during the nine months ended September 30, 2002, $36 million was previously capitalized variable costs related to the sale of condominium units and boat slips, and the remaining $2.8 million were fixed costs of the project, which includes advertising and other administration costs. Of the $3.6 million of costs recognized during the nine months ended September 30, 2001, $2.7 million were previously capitalized variable costs related to the sale of condominium units and boat slips, and the remaining $900,000 were fixed costs of the project, which includes advertising and other administration costs. See Exhibit 99 included in this Report for further information regarding Harbour Village.
Rescission Expense. Expense due to rescission was $1.5 million for the nine months ended September 30, 2002. Of the $1.5 million of expense recognized, $506,468 was for legal fees, and $1 million was related to amounts held in escrow for the acquisition as a result of the Court's granting of defendants' summary judgment motions in part of the lawsuit. See Item 6(b) for more information.
Income Taxes. Federal and state income taxes increased from $526,000 in the nine months ended September 30, 2001 to $2 million in the nine months ended September 30, 2002 due to higher levels of income in the Company's U.S. insurance and real estate subsidiaries.
Total Earnings. Net earnings after tax increased 28.9% to $4.9 million for the nine months ended September 30, 2002 from $3.8 million for the nine months ended September 30, 2001. This increase in net earnings is principally from real estate income. Operating earnings, which are earnings excluding amounts for realized capital gains and losses and rescission expenses, increased 90% to $6.4 million for nine months ended September 30, 2002 from $3.3 million for the nine months ended September 30, 2001. This increase in operating earnings is the result of higher real estate income.
-31-
Liquidity and Capital Resources
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 written, investment income, income from real estate development sales, commission income, management fees and reinsurance recoverables from reinsurers. The Company's short-term cash requirements are primarily for claims payments, reinsurance premiums, commissions, salaries, employee benefits, real estate development expenses, 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. The Company also purchases reinsurance to mitigate the effect of large claims and to help stabilize demands on its liquidity. Notwithstanding the Company's dispute with one of its former reinsurers, Berkley Insurance Company, as disclosed elsewhere in this Report, 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.
One of the Company's former reinsurers, Berkley Insurance Company, has disputed its obligations under several reinsurance treaties entered into during the "soft reinsurance market" that existed in 1998 and 1999. As of September 30, 2002, unreimbursed paid claims totaled $15.7 million and additional ceded case and incurred but not reported reserves totaled approximately $19.5 million. A reserve for this dispute has not been established since the Company does not believe it is probable a loss will occur nor is any potential loss estimatable. If any of these factors change in the future, the Company will establish a reserve at that time, which could be material. On April 5, 2002, the Company demanded arbitration against the reinsurer to collect the amounts owed. The arbitration panel has been chosen, and the hearing has been scheduled for May 2003. The parties are presently engaged in the discovery phase of the proceedings. Berkley is a subsidiary of W.R. Berkley Corp. (NYSE: BER). The Company does not believe that this dispute will have a material adverse effect on the overall financial condition or liquidity of the Company.
On a consolidated basis, net cash provided from operations was $19.8 million for the nine months ended September 30, 2001 and $28.8 million for the nine months ended September 30, 2002. The positive cash flows for said periods were primarily attributable to net premiums written, net earnings and sales of real estate. 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 claims payments are made.
-32-
Total assets increased from $297.3 million at December 31, 2001 to $346.2 million at September 30, 2002 primarily due to increases in invested assets, cash and reinsurance recoverables. Cash, invested assets and notes receivable increased from $139.6 million at December 31, 2001 to $169.4 million at September 30, 2002, as a result of increases in fixed maturities and cash. At September 30, 2002, the Company has repurchased 1,601,139 shares of its common stock at a total cost of $9.7 million since January 1999.
American Safety is an insurance holding company whose principal assets are its investment portfolio and its investment in the capital stock of its subsidiaries. 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 generate earnings from which to pay dividends to American Safety. The jurisdictions in which American Safety and its insurance and reinsurance subsidiaries are domiciled place limitations on the amount of dividends or other distributions payable by insurance companies in order to protect the solvency of insurers.
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. From inception through September, 30, 2002, the Company's marketing efforts had generated over $177 million of pre-sales of condominium units and boat slips.
Management anticipates that Harbour Village will be developed in three Phases with projected completion in 2005, depending on future sales activities and economic conditions that may impact the marketing of the condominium units. Through September 30, 2002, we had outstanding borrowings of $12.9 million from an initial $37 million development and construction loan facility. The estimated completion cost for the remainder of the Harbour Village project is approximately $82.3 million. 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 our 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 the Harbour Village project during the next 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. See Exhibit 99 for further information regarding Harbour Village.
-33-
Income Taxes
American Safety is incorporated under the laws of Bermuda and, under current Bermuda law, is not obligated to pay any taxes in Bermuda based upon income or capital gains. American Safety has received an undertaking from the Minister of Finance in Bermuda pursuant to the provisions of The Exempted Undertakings Tax Protection Act 1966, which exempts American Safety and its shareholders, other than shareholders ordinarily resident in Bermuda, from any Bermuda taxes computed on profits, income or any capital asset, gain or appreciation, or any tax in the nature of estate, duty or inheritance until March 28, 2016. The Company, exclusive of its United States subsidiaries, does not consider itself to be engaged in a trade or business in the United States and accordingly does not expect to be subject to direct United States income taxation. The Company's U.S. subsidiaries are subject to taxation in the United States.
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 the Company's insurance and reinsurance programs.
-34-
Reserves
Certain of the Company's insurance policies and reinsurance assumed, including general and pollution liability policies covering environmental remediation, excess and surplus, and workers' compensation risks, 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, rate studies, and opinions. Reserves are estimates at a given time, which are established from actuarial and statistical projections by the Company of the ultimate settlement and administration costs of claims occurring on or prior to such time, including claims that have not yet been reported to the insurer. The establishment of appropriate loss reserves is an inherently uncertain process, and there can be no assurance that the ultimate payments will not materially exceed the Company's reserves.
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. The use of such statements include estimations of future insurance claims and losses, the Company's view of the potential outcome of the rescission litigation and the reinsurance recoverables arbitration, and the future profitability and value of the Harbour Village condominium real estate project in Florida, as reflected in the Company's consolidated financial statements and Exhibit 99 to this Report. In addition, 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.
Forward-looking statements involve risks and uncertainties which may cause actual results to differ materially, and are subject to change based on various insurance industry factors, including, without limitation, competitive conditions in the insurance industry, levels of new and renewal insurance business, unpredictable developments in loss trends, adequacy and changes in loss reserves, timing or collectibility of reinsurance receivables, market acceptance of new coverages and enhancements, changes in reinsurance costs and availability, potential adverse decisions in litigation and arbitration proceedings, 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 materially, 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 real estate development and new construction, increases in construction costs, construction delays, weather, zoning, litigation, 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.
-35-
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. The Company expressly disclaims any obligation to update any forward- looking statements except as required by law.
Item 3. Quantitative and Qualitative Disclosures About Market Risks.
The Company's market risk has not changed materially since December 31, 2001.
Item 4. Controls and Procedures
[The Remainder of this Page Intentionally Left Blank]
-36-
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable.
Item 2. Changes in Securities and Use of Proceeds.
Not applicable.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) The following exhibits are filed as part of this Report:
Exhibit No. Description
11 Computation of Earnings Per Share
99 Harbour Village Development Status
(b) Reports on Form 8-K.
| In April 2000, the Company filed a lawsuit in the United States District Court for the Northern District of Georgia to rescind the stock purchase of a Michigan insurance agency and two related insurance companies specializing in insurance program business based upon the sellers’ breach of the representations and warranties made in the definitive agreements concerning the business affairs and financial condition of the acquired companies. The defendants filed motions for summary judgment opposing the Company’s claim for rescission. The Company filed a Form 8-K, dated October 23, 2002, regarding the Court’s entering of an Order granting the defendants’ motions for summary judgment. However, the Court did not rule that the |
-37-
| representations and warranties of the defendants in the definitive agreements were correct. The Court also granted the Company’s motions for summary judgment on various counterclaims filed by the defendants. The Company has filed a Motion for Reconsideration with respect to the Court’s Order and is also considering other responses. |
-38-
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 14th day of November 2002.
American Safety Insurance Group, Ltd.
By: /s/ Lloyd A. Fox
Lloyd A. Fox
President and Chief Executive Officer
By: /s/ Steven B. Mathis
Steven B. Mathis
Chief Financial Officer
(Principal Financial Officer)
-39-
Certification Pursuant to § 302 of the Sarbanes-Oxley Act
of 2002
I, Lloyd A. Fox, certify that:
Date: November 14, 2002 /s/ Lloyd A. Fox
Lloyd A. Fox
Chief Executive Officer
American Safety Insurance Group, Ltd.
-40-
Certification Pursuant to § 302 of the Sarbanes-Oxley Act
of 2002
I, Steven B. Mathis, certify that:
Date: November 14, 2002 /s/ Steven B. Mathis
Steven B. Mathis
Chief Financial Officer
American Safety Insurance Group, Ltd.
-41-
Exhibit 11
American Safety Insurance Group, Ltd. and subsidiaries
Computation of Earnings Per Share
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
2001 2002 2001 2002
Basic:
Earnings available to common
shareholders........................ $ 978,753 $1,033,529 $3,826,197 $4,932,456
========== ========== ========== ==========
Weighted average common shares
outstanding......................... 4,788,648 4,746, 695 4,823,066 4,731,822
Basic earnings per common shares ... $ .20 $ .22 $ .79 $ 1.04
========== ========== ========== ==========
Diluted:
Earnings available to common
shareholders.......................... $ 978,753 $1,033,529 $3,826,197 $4,932,456
========== ========== ========== ==========
Weighted average common shares
outstanding............................ 4,788,648 4,746,695 4,823,066 4,731,822
Weighted average common shares
equivalents associated with options.... 208,139 117,755 126,876 144,837
Total weighted average common
shares................................. 4,996,787 4,864,450 4,949,942 4,876,659
========== ========== ========== ==========
Diluted earnings per common
shares.............................. $ .20 $ .21 $ .77 $ 1.01
========== ========== ========== ==========
-42-
Exhibit 99
Harbour Village Development Status
(000)s except references to Condo Units
(unaudited)
Phase 1 Phase 2 Phase 3
Townhouses The The
Marina Oak Links Links Fisherman's Total
Condos Hammock Riverwalk North South Harbour Condos Boat Slips Total
Planned Number of Condo Units and Boat Slips 248 18 28 188 188 70 740 142 882
Condo Units and Boat Slips under Contract .. 248 17 28 170 93 66 622 138 760
Value of Pre-sale Contracts (Note 1) ....... 62,892 7,902 10,771 42,587 26,133 14,935 165,220 12,567 177,787
Number of Buildings ........................ 8 4 6 4 4 1 27
Number of Buildings Complete by Task
Building Foundation ........................ 8 4 5 4 -- -- --
Vertical Building Completed ................ 8 4 5 -- -- -- --
Interior Finish Completed .................. 8 - 1 -- -- -- --
Certificate of Occupancy Received .......... 8 - 1 -- -- -- --
Outlook For 4th Quarter of 2002
Units Closed ............................... -- 8 21 -- 29 12 41
Revenue Recognized ......................... -- 3,572 7,579 -- 11,151 1,087 12,238
Other Revenue .............................. 150
Total Revenue .............................. 12,388
Gross Profit Recognized .................... -- (143) (228) -- (371) 424 53
Other Expense (Income) Items ............... 898
Pre-Tax Profit
(845)
3rd Quarter Actual
Units Closed ............................... 31 -- 1 -- -- 32 14 46
Revenue Recognized ......................... 8,803 -- 312 -- -- 9,115 1,454 10,569
Other Revenue .............................. 154
Total Revenue .............................. 10,723
Gross Profit Recognized .................... 1,566 -- -- -- -- 1,566 586 2,152
Other Expense (Income) Items ............... 1,055
Pre-Tax Profit ............................. 1,097
Note 1 - No assurance can be given that purchasers under binding pre-sale contracts with deposits will close each contemplated transaction .
Note 2 - Other includes net brokerage commissions, advertising, promotion, and other general and administrative costs. These items are not allocated to specific buildings.
The projected results contained above for unit closings, revenue, gross profit, fixed costs and pre-tax profit are forward looking statements. With respect to the Company’s development of the Harbour Village property, such forward looking statements involve risks and uncertainties which may cause actual results to differ materially, 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 real estate development and new construction, increases in construction costs, construction delays, weather, litigation, 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.
-42-