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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Fiscal Year Ended December 31, 1998 Commission File Number 1-14795
AMERICAN SAFETY INSURANCE GROUP, LTD.
(Exact name of Registrant as specified in its charter)
Bermuda Not applicable
(State of incorporation (I.R.S. Employer
or organization) Identification No.)
44 Church Street
P.O. Box HM 2064
Hamilton, Bermuda 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. [X ]
The aggregate market value of Registrant's voting common stock held by
non-affiliates on February 5, 1999 was $41,433,164. 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 the Registrant.
The number of outstanding shares of Registrant's common stock on February 5,
1999 was 6,074,770.
Documents Incorporated by Reference: Part III of this Form 10-K incorporates by
reference certain information from the Registrant's Proxy Statement for the 1999
Annual General Meeting of the Shareholders (the "1999 Proxy Statement").
AMERICAN SAFETY INSURANCE GROUP, LTD.
Table of Contents
Page
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.................................... 29
Item 7. Management's Discussion and Analysis of Results of
Operations and Financial Condition.................... 31
Item 7A Quantitative and Qualitative Disclosures About
Market Risk........................................... 43
Item 8. Financial Statements and Supplementary Data................ 45
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure................... 45
PART III
Item 10. Directors and Executive Officers of the Registrant......... 46
Item 11. Executive Compensation..................................... 46
Item 12. Security Ownership of Certain Beneficial Owners
and Management....................................... 46
Item 13. Certain Relationships and Related Transactions............. 46
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K......................................... 47
PART I
Item 1. Business
General
American Safety Insurance Group, Ltd. (the "Company" or "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 for (i) environmental remediation risks; (ii)
employee leasing and staffing industry risks; and (iii) other specialty
risks. Unless the context indicates otherwise, all references to the
"Company" or "American Safety" refer to American Safety Insurance Group,
Ltd. and its subsidiaries.
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 and surety, as well as custom designed risk management
programs (including captive and rent-a-captive programs), for contractors,
consultants and other businesses and property owners who are involved with
environmental remediation, employee leasing and staffing, and other
specialty risks.
The Company insures and places risks through its U.S. insurance
subsidiary, American Safety Casualty Insurance Company ("American Safety
Casualty"), 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 and reinsurance companies. The
Company also reinsures and places, through its Bermuda reinsurance
subsidiary, American Safety Reinsurance, Ltd. ("American Safety Re"), and
substantial unaffiliated reinsurers, a portion of the risks underwritten
directly by its U.S. insurance subsidiary, its risk retention group
affiliate and other insurers. Substantially all of the reinsurance business
that the Company currently assumes is for primary insurance programs that
the Company has developed and underwritten. In January 1998, American
Safety formed its new Bermuda reinsurance subsidiary, American Safety Re,
and transferred a substantial portion of its reinsurance insurance business
on a going forward basis to the subsidiary.
The Company also provides specialized insurance program development,
underwriting, risk placement, reinsurance, program management, brokerage,
loss control, claims administration and marketing services through Synergy
Insurance Services, Inc. ("Synergy"), its principal U.S. program
development, underwriting, brokerage and administrative services
subsidiary. The Company selects its roles as program developer,
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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.
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 insurance coverages and services
in all 50 states and principally markets its insurance programs through
approximately 160 independent insurance agency and brokerage firms.
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"). A 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.
Alternative Insurance Market
The alternative insurance market has developed over the past 15 years
to serve insureds whose insurance needs have not been adequately met by the
standard insurance market. According to A.M. Best, from 1990 to 1995, a
period characterized by excess insurance capacity and declining premium
rates, the alternative insurance market grew from approximately 35% to 44%
of the total U.S. commercial property and casualty insurance market, and
the total annual premium volume of the alternative insurance market grew
from approximately $66 billion to $104 billion.
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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 the employee leasing and
staffing industry, as well as 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.
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.
Synergy Insurance Services. Synergy provides insurance program
development, underwriting, risk placement, reinsurance placement, program
management, brokerage, loss control, claims administration, marketing and
administrative services to the
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Company's U.S. insurance operations, its risk retention group affiliate, and
unaffiliated insurers and reinsurers.
Synergy 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, Synergy identifies the resources needed to evaluate
and develop the program. In evaluating and developing a new program,
Synergy 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, Synergy 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. Synergy determines which entities, both
affiliated and unaffiliated, are best able to provide such services in a
cost-effective manner and implements the program.
Synergy has been successful in developing many of the Company's
primary insurance and reinsurance programs. Synergy has also served since
1990 as the program manager for the Company's risk retention group
affiliate, providing it, within administrative guidelines, with program
management, underwriting, loss control, brokerage, marketing and financial
services.
Management and Administrative Services. In the development and
implementation of programs, Synergy provides a number of fee and
commission-based services. Synergy 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 carriers; (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 four other U.S.
subsidiaries engaged, under the direction of Synergy, in various
administrative and insurance
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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. and
Harbor Insurance Services, Inc. are surety bond agencies authorized to write
contract performance and payment bonds for unaffiliated insurance carriers.
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, including the Company's U.S.
insurance subsidiary, American Safety Casualty.
Primary Insurance Operations
The Company, through its U.S. insurance subsidiary and its risk
retention group affiliate, provides primary casualty insurance in the
alternative insurance market for (i) environmental remediation risks; (ii)
employee leasing and staffing industry risks; and (iii) other specialty
risks. The Company's specialty insurance programs include coverages for
general liability, pollution liability, professional liability, workers'
compensation and surety, as well as custom designed risk management
programs (including captive and rent-a-captive programs), for contractors,
consultants and other businesses and property owners who are involved with
environmental remediation, employee leasing and staffing, and other
specialty risks.
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, many of whom have been
with the Company for several years. 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
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as inspecting contractor insureds' environmental remediation project sites and
recordkeeping throughout the United States. The loss control professionals have
backgrounds in engineering or environmental fields.
The Company combines intensive loss control procedures with its
expertise in the underwriting process to currently insure, through its U.S.
insurance subsidiary and its risk retention group affiliate, nearly 1,000
insureds throughout the United States for a broad range of coverages for
asbestos and lead abatement, hazardous materials and hazardous waste
remediation, underground storage tank removal and replacement, and
"brownfields" remediation. The Company estimates that it has insured
through its insurance and reinsurance subsidiaries and its risk retention
group affiliate in excess of 300,000 environmental remediation projects
since 1986. The Environmental Business Journal's Annual Industry Overview
1997 estimated that the United States environmental industry, which
includes contractors, consultants, equipment manufacturers and other
service firms served by the Company, generated approximately $181 billion
of revenue in 1996.
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 errors and omissions
committed in 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 coverage for a broad range of environmental
risks, including:
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. For the past 13 years, 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.
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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 operations. Environmental insurance coverage
is offered for varied purposes such as financing 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 44 states and the District
of Columbia primarily providing contract performance and payment bonds to
environmental and 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, 1998, was
$899,000 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 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.
Employee Leasing and Staffing Industry. The Company, through its U.S.
brokerage and management services subsidiaries, places and writes workers'
compensation and general liability insurance for employee leasing companies
(also known as professional employer organizations) and staffing industry
companies through custom designed captive and rent-a-captive programs.
These insurance programs were originally developed to enable
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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.
Employee leasing companies generally focus on small to medium size
businesses and provide their clients with integrated human resource
administration and risk management services. Although the client maintains
control of the activities of the worksite employees, the employee leasing
company legally becomes the employer of record for its client's employees.
The employee leasing company assumes substantial employer responsibilities
and risks, including payment of payroll, filing and remitting of related
taxes, provision for workers' compensation insurance coverage, management
of workers' compensation claims, provision and administration of health and
other employee benefits and offering of various risk management services in
compliance with state and federal guidelines.
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.
General liability policies written for employee leasing and staffing
companies protect such companies from claims arising out of bodily injury
or property damage arising from their operations, which may include claims
brought against the employee leasing and staffing company as a result of
performance of activities by their employees, although such employees are
under the direction and control of the employee leasing and staffing
company's clients. Employee leasing and staffing companies generally
require their clients to independently maintain general liability coverage
to protect the client against such claims. Substantially all of the
premiums assumed by the Company from this line of business are attributable
to workers' compensation coverage provided.
Underwriting. Synergy's underwriting staff handles all insurance
underwriting functions, 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. Synergy uses management information
reports to measure risk selection and pricing in order to control
underwriting performance. The principal underwriting factors used by
Synergy 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.
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Claims. Claims arising under the policies and treaties issued or
reinsured by the Company are reviewed and managed by Synergy's internal
claims department. When Synergy receives notice of a loss, its claims
personnel open a claim file and establish a reserve with respect to the
loss. Synergy retains claims settlement authority, delegating only limited
settlement authority to certain third party administrators. Synergy
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 or risks 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 carriers 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.
For the year ended December 31, 1997, of the $7.5 million of gross
reinsurance premiums written by the Company, approximately $2.4 million was
assumed from its risk retention group affiliate, with the balance of
approximately $5.1 million assumed from unaffiliated insurers. For the year
ended December 31, 1998, of the $10.1 million of gross reinsurance premiums
written by the Company, approximately $3.4 million was assumed from its
risk retention group affiliate, with the balance of approximately $6.7
million assumed from unaffiliated reinsurers.
The Company's assumed reinsurance business for general liability,
pollution, and professional liability is written under excess of loss
treaties primarily with its risk retention group affiliate. In the layer of
the first $500,000 of loss per occurrence, the
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Company assumes 70% 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 30% of the risk after payment of
the aggregate amount. The Company also assumes workers' compensation reinsurance
from Legion Insurance Company ("Legion"). After a retention of the first 10% of
premium by Legion for payment of claims, the Company reinsures Legion for the
next $250,000 per occurrence, subject to a 75% aggregate stop-loss ratio
percentage.
The Company's U.S. insurance subsidiary cedes 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 subsidiary to write
insurance and reinsurance business. There is no material effect on the
Company's operating results or on the risk-based capital or other
regulatory ratios of the Company's U.S. insurance subsidiary.
Management's reinsurance underwriting strategy is to utilize the
underwriting expertise of Synergy, 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 U.S. insurance subsidiary and risk retention group
affiliate automatically cover primary insurance programs written by such
carriers. Authority to bind the Company is limited to Synergy's senior
management. The Company utilizes Synergy 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 subsidiaries and its
non-subsidiary affiliate, and also acts as an agency and broker for its
non-subsidiary affiliate, unaffiliated insurers and reinsurers for which
the Company receives brokerage commissions of 10-20% of gross premiums
written and produced. For the year ended December 31, 1998, the Company was
involved with the placement of approximately $26.5 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, 1997 and December 31, 1998:
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Year Ended Year Ended
December 31, 1997 December 31, 1998
Gross Ceded Net Gross Ceded Net
(Dollars in thousands)
The Company $ 11,561 $ 2,590 $ 8,971 $ 14,739 $ 5,087 $ 9,652
American Safety RRG (1) 7,071 4,648
Other Insurers and Reinsurers (2) 11,877 10,532
Less: Ceded from American Safety RRG
to the Company (3) (2,358) (3,372)
$ 28,151 $ 26,547
(1) Represents premiums written by American Safety RRG, the Company's non-
subsidiary affiliate.
(2) Represents premiums produced by the Company, as an agency and broker, for
unaffiliated insurers and reinsurers.
(3) Represents premiums ceded to the Company from American Safety RRG.
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, 1997 and December 31, 1998:
Year Ended Year Ended
Net Premiums Written December 31, 1997 December 31, 1998
(Dollars in thousands)
General Liability $ 1,959 21.8% $ 3,065 31.8%
Workers' Compensation 5,069 56.5 5,819 60.3
Surety 1,943 21.7 642 6.6
Auto - - 126 1.3
Total $ 8,971 100.0% $ 9,652 100.0%
The following table sets forth the Company's net premiums written by
specialty industry for the years ended December 31, 1997 and December 31,
1998:
Year Ended Year Ended
December 31, 1997 December 31, 1998
(Dollars in thousands)
Environmental $ 6,916 77.1% $ 7,622 79.0%
Employee Leasing 678 7.6 1,788 18.5
Other 1,377 15.3 242 2.5
Total $ 8,971 100.0% $ 9,652 100.0%
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 $2.6 million for
the year ended December 31, 1997, and $1.8 million for the year ended
December 31, 1998.
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 comparison of statutory combined
ratios suggests that the Company has experienced more favorable results
than the property and casualty insurance industry over the past three
years.
Combined Ratio (Statutory Basis)
Year Ended December 31,
1996 1997 1998
The Company(1)(2)....................... 75.2% 79.5% 72.5%
Property and casualty industry(3)....... 105.9 101.6 105.6
(1) Data have been derived from the consolidated financial statements of the
Company.
(2) Payments by American Safety Casualty to Synergy for management services are
included in the combined ratio.
(3) The statutory industry data was obtained from A.M. Best.
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 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.
The Company at times writes insurance program business with a higher
expense ratio resulting from significant commission expense (e.g. bail bond
program) and a higher loss ratio resulting from minimum reserves that are
established on other programs (e.g. workers' compensation). As a result,
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the Company's combined ratio may fluctuate over time due to the presence or
absence of such program business in any year and the initiation of new programs.
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 a 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.
Year Ended December 31
1996 1997 1998
(In thousands, except ratio data)
Reinsurance :
Gross Premiums Written $ 4,936 $ 7,501 $ 10,136
Net Premiums Written 4,417 7,072 8,996
Net Premiums Earned 4,142 6,645 8,608
Loss & Loss Adjustment Expense Ratio 48.9% 61.2% 57.3%
Primary:
Gross Premiums Written $ 1,192 $ 4,060 $ 4,603
Net Premiums Written 200 1,899 656
Net Premiums Earned 130 1,702 581
Loss & Loss Adjustment Expense Ratio 24.6% 1.5% 41.5%
Combined:
Gross Premiums Written $ 6,128 $ 11,561 $ 14,739
Net Premiums Written 4,617 8,971 9,652
Net Premiums Earned 4,272 8,347 9,189
Loss & Loss Adjustment Expense Ratio 48.1% 49.0% 56.3%
Expense Ratio 29.3% 32.8% 16.9%
Combined 77.4% 81.8% 73.2%
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
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.
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.
-12-
The Company's primary reinsurers are Underwriters Reinsurance Company and Signet
Star Reinsurance 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 $350,000. For
surety business written by American Safety Casualty, the Company maintains a 50%
quota share reinsurance treaty and an excess of loss treaty on a per principal
basis, thereby limiting the Company's maximum exposure on a per principal basis
to $500,000. For workers' compensation reinsurance business assumed by the
Company, the Company's maximum exposure is $250,000 per loss, and aggregate stop
loss reinsurance is maintained for losses above a 75% loss ratio. Reinsurance
treaties maintained by the Company for its protection generally have no loss
ratio restrictions or aggregate limits of liability.
The Company purchases reinsurance separately for its primary insurance
business lines and its reinsurance business. Gross reinsurance premiums
ceded in 1997 were $2.6 million, which constitutes 22.4% of the gross
premiums written, and in 1998 were $5.1 million, which constitutes 34.5% of
the gross premiums written. The amount of reinsurance obtained by the
Company varies with the line of business insured or reinsured.
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, 1998.
Premiums Ceded
for Year Ended A.M. Best
Reinsurers December 31, 1998 Rating(1)
(In thousands)
Underwriters Reinsurance Company............ $689 A+
Signet Star Reinsurance Company............. 329 A
Midwest Employers Casualty Company.......... 53 A-
Zurich American Insurance Group............. 33 A+
Swiss Re America............................ 12 A
(1) A.M. Best rating currently assigned.
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
-13-
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.
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 43% of the Company's net reserves relate to liability
associated with its asbestos abatement and other environmental general
liability insurance programs. Another 55% of net reserves are attributable
to the workers' compensation insurance program. The 2% 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 incurred;
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.
-14-
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 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:
Year Ended December 31,
(Dollars in thousands)
1996 1997 1998
Gross losses and loss adjustment expense reserves at
beginning of year $8,294 $ 8,914 $11,572
Reinsurance recoverable at beginning of year 6 45 779
Net losses and loss adjustment expense reserves at
beginning of year.................................... 8,288 8,869 10,793
Add:
Incurred losses related to:
Current accident years............................... 2,862 3,112 4,383
Prior accident years................................. (806) 981 794
Total incurred losses........................... 2,056 4,093 5,177
Less:
Claims payments related to:
Current accident years............................... 544 342 103
Prior accident years................................. 931 1,827 3,007
Total claims paid............................... 1,475 2,169 3,110
Net losses and loss adjustment expense reserves at end
of year 8,869 10,793 12,860
Reinsurance recoverable at end of year..................... 45 779 1,841
Gross losses and loss adjustment expense reserves at
end of year.......................................... $8,914 $ 11,572 $ 14,701
The following table shows the development of the reserves for unpaid
losses and loss adjustment expenses from 1988 through 1998 for the
Company's primary insurance and reinsurance subsidiaries on a GAAP basis.
The 1988 year includes information for all years prior (1986 and 1987
only). The top line of the table shows the liabilities at the balance sheet
date for each of the indicated years. This 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 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" depicted in the table, for any
particular calendar year, represents the aggregate change in the initial
estimates over all subsequent calendar years.
-15-
Year Ended December 31
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
(In thousands)
Reserves for unpaid
losses and loss
adjustment expense ............... $1,724 $ 2,397 $ 4,359 $4,552 $4,135 $4,798 $6,048 $8,288 $ 8,869 $ 10,793 $12,860
Reserves re-
estimated at
December31:
1 year later ..................... 1,351 2,910 2,786 3,264 4,266 4,653 5,854 7,482 9,850 11,587
2 years later .................... 1,408 1,968 2,327 3,057 4,100 4,584 5,381 7,518 9,926 --
3 years later .................... 1,053 1,533 2,169 2,956 4,148 3,920 4,823 7,398 -- --
4 years later .................... 974 1,391 2,119 2,933 3,644 3,063 4,373 -- -- --
5 years later .................... 776 1,329 1,967 2,607 2,987 2,740 -- -- -- --
6 years later .................... 744 1,130 1,948 1,953 2,765 -- -- -- -- --
7 years later .................... 494 1,187 1,438 1,693 -- -- -- -- -- --
8 years later .................... 669 806 1,310 -- -- -- -- -- -- --
9 years later .................... 413 715 -- -- -- -- -- -- -- --
10 years later .................... 356 -- -- -- -- -- -- -- -- --
Cumulative
redundancy
(deficiency) ...................... 1,368 1,682 3,049 2,859 1,370 2,058 1,675 890 (1,057) (794)
Cumulative amount of
liability paid
through December 31:
1 year later ..................... 1 54 319 99 524 152 501 931 1,827 3,007
2 years later .................... 38 88 378 308 651 382 997 2,056 3,506 --
3 years later .................... 38 175 554 380 872 621 1,552 2,906 -- --
4 years later .................... 38 203 611 531 1,095 776 1,899 -- -- --
5 years later .................... 39 244 693 697 1,235 1,064 -- -- -- --
6 years later .................... 65 299 757 701 1,511 -- -- -- -- --
7 years later .................... 67 325 757 699 -- -- -- -- -- --
8 years later .................... 93 324 755 -- -- -- -- -- -- --
9 years later .................... 92 321 -- -- -- -- -- -- -- --
10 years later .................... 89 -- -- -- -- -- -- -- -- --
Net reserve December 31, 8,869 10,793 12,860
Reinsurance
Recoverable 45 779 1,841
Gross Reserve 8,914 11,572 14,701
Investments
The Company entered into an Investment Services Agreement with
Travelers Asset Management International Corp. ("Travelers") in November
1998 whereby Travelers 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.
At December 31, 1998, the Company's total assets of $86.1 million
consisted of the following: cash, investments and notes receivable, 83.6%;
premiums receivable and
-16-
agent's balances, 7.2%; and other assets, 9.2%. At December 31, 1998, the
Company held investment grade fixed income debt securities valued at $45.3
million and secured notes receivable valued at $16.2 million. Of the secured
notes receivable, $280,000 represented shareholder loans from the Company, at
market rates, secured by personal guarantees and Common Shares in the Company,
with the balance of $15.9 million representing 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, 1998 totaled
approximately $55.0 million, and were classified as follows:
Percent of
Type of Investment Book Value Portfolio
(In thousands)
Cash and short-term investments ............. $ 7,024 12.8%
United States government securities ......... 13,365 24.3
Mortgage-backed securities .................. 5,009 9.1
Corporate bonds ............................. 13,820 25.1
Foreign investments ......................... 5,868 10.7
Municipal bonds ............................. 6,465 11.7
Equity securities ........................... 3,440 6.3
Total .............................. $54,991 100.0%
The statement and market values of the bond portfolio, classified by
rating, as of December 31, 1998 were as follows:
S&P's/Moody's Rating(1) Market Amount Reflected Percent of
Value on Balance Sheet Total
(Dollars in thousands)
AAA/Aaa (including United States Treasuries
of $13,647)................................ $29,245 $29,245 64.6%
AA/Aa ...................................... 9,807 9,807 21.6
A/A ........................................ 4,544 4,544 10.0
BBB/Baa .................................... 1,712 1,712 3.8
Total ................................. $45,308 $45,308 100.0%
(1) Ratings are assigned by Standard & Poor's ("S&P") or, if no S&P rating is
available, by Moody's Investors Service Inc. ("Moody's").
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
-17-
quality. As of December 31, 1998, 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, 1998 was 7.9 years. The composition of the Company's bond
portfolio, classified by maturity, as of December 31, 1998 was as follows:
Book Market
Maturity Value Value
(In thousands)
Due in one year or less............. $ 2,910 $ 2,922
Due from one to five years.......... 17,999 18,107
Due from five to ten years.......... 14,987 15,643
Due after ten years................. 3,623 3,723
Mortgage-backed securities.......... 5,009 4,913
Total.......................... $44,528 $45,308
(1) Based on stated maturity dates with no prepayment assumptions.
The Company's investment grade fixed maturity securities included
mortgage backed bonds of $5 million, which are subject to risks associated
with the variable prepayments of the underlying mortgage loans. Prepayments
cause those securities to have different actual maturities than expected at
the time of purchase. Securities backed by mortgages that have an amortized
cost greater than par and are prepaid faster than expected will incur a
reduction in yield, or a loss, while other securities that have an
amortized cost less than par and are prepaid faster than expected will
generate an increase in yield or a gain. The degree to which a security is
susceptible to either gains or losses is influenced by the difference
between its amortized cost and par, the relative sensitivity of the
underlying mortgages backing the assets to prepayments and a change in the
interest rate environment and the repayment priority of the securities in
the overall securitization structure.
As of January 1, 1994, the Company adopted FASB Statement 115 and
classified all of its securities as "available for sale." Under this
classification, the fixed maturities classified as "available for sale" are
carried at fair value and changes in fair values net of applicable income
taxes are charged or credited directly to shareholders' equity. The Company
has continued to classify all of its fixed income securities as "available
for sale."
-18-
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 carrier to
market 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
Synergy, the Company's principal U.S. program development, underwriting and
administrative services subsidiary, on a fee-for-service basis. 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 state filings. Presently, five of the directors of
American Safety RRG (Messrs. Treadway, Brueggen, Mauldin, Mueller and
Walsh) 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 44.1% of the premium and assumes 70% of the risk in the layer of
the first $500,000 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 $500,000 in
excess of $500,000 per occurrence, and 100% of the risk in the layer of $5
million in excess of $1 million, to unaffiliated reinsurers. In the event
that the unaffiliated reinsurers fail to pay claims covered by their
reinsurance treaties, American Safety RRG would be obligated to pay such
claims without the benefit of reinsurance recoveries within the specified
layers. 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
-19-
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 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 registration 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, Synergy has managed the nationwide operations
of American Safety RRG from its offices in Atlanta, Georgia pursuant to a
program management agreement. The program management agreement has a term
of three years from January 1, 1997 through December 31, 1999, provided
that the term continues for successive one year periods thereafter unless
the management agreement is terminated on or before 90 days prior to the
end of the initial term or any renewal 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.
Synergy 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 contracts on behalf of
American Safety RRG subject to program administration rules and procedures
of American Safety RRG. The program management agreement between American
Safety RRG and Synergy provides for payment
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of a monthly program management fee of $45,000 and a managing general agency
commission of 10-15% of premium, depending on the amount of premium paid by the
insured. Synergy is also compensated for direct production of business, and is
reimbursed for marketing expenses actually incurred, and for loss control
expenses actually incurred plus a 20% fee. The Company's recognized revenues
from American Safety RRG for the years ended December 31, 1997 and December 31,
1998 are as follows:
Year Ended Year Ended
December 31, 1997 December 31, 1998
(Dollars in thousands)
Assumed premiums earned from
American Safety RRG...................... $ 1,855 $ 2,835
Ceded premiums to American Safety RRG...... 1,250 2,317
Net premiums earned........................ 605 518
Management fees............................ 601 714
Brokerage commission income................ 908 634
Loss control fees.......................... 58 73
In the table above assumed premiums earned represent the assumption of
a portion of liability risks by the Company from American Safety RRG, and
ceded 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 16.1% ($2.2 million) of its revenues
in 1997 and 11.6% ($1.9 million) of its revenues in 1998 from American
Safety RRG for administrative and management fees, producing agent
commissions, a loss control fee, 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
-21-
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 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 insurance 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").
In deciding whether to grant registration, the Minister has discretion to
act as he thinks fit in the public interest. The Minister is required by
the Bermuda Act to determine whether an applicant for registration is a fit
and proper body to be engaged in insurance business and, in particular,
whether it has, or has available to it, adequate knowledge and expertise.
In connection with registration, the Minister may impose conditions
relating to the writing of certain types of insurance business.
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 has ever failed to meet the minimum solvency margin
or the minimum liquidity ratios.
-22-
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 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 U.S.
insurance subsidiary's operations are subject to state regulation where it
is domiciled and where it writes insurance.
American Safety Casualty, the Company's U.S. property and casualty
insurer domiciled in Delaware, was acquired by the Company in 1993.
American Safety Casualty is currently licensed as a property and casualty
insurer in 45 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 carrier. 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. As reported in its 1998 Annual Statement, the statutory capital
and surplus of American Safety Casualty was approximately $8,904,000. The
maximum amount of dividends which can be paid, without prior written
approval of the Delaware Insurance Department, is limited to the greater of
10% of surplus as regard to policyholders or net income, excluding realized
gains, of the preceding year. Accordingly, American Safety Casualty could
pay dividends of approximately $890,400 in 1999 to the Company.
The insurance laws of Delaware place restrictions on a change of
control of American Safety as result of its ownership of American 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 Casualty, as a licensed carrier, is subject to state
regulation of rates and policy forms in the various states in which direct
premiums are written for its general liability and workers' compensation
lines of business. Under such regulations, a licensed carrier may be
required to file and obtain prior approval of its policy form and the rates
that are charged to insureds. While American Safety Casualty is licensed to
write workers' compensation insurance in a number of states, it presently
does not produce direct premiums from such line of business, and is
therefore not subject to such regulations with respect to this line of
business. If American Safety Casualty, in the future, directly writes
workers' compensation insurance, it would become subject to such
regulations. American Safety Casualty, as a licensed carrier, is also
required to participate in state insolvency funds, or shared markets, which
are designed to protect insureds of insurance carriers which become
-23-
unable to pay claims due to an insurer's insolvency. Assessments made against
insurers participating in such funds are based on direct premiums written by
participating insurers, as a percentage of total direct written premiums of all
participating insurers.
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, 1998, the Company employed 55 persons, none of whom
was represented by a labor union. Synergy 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.
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Item 2. Properties
The Company's Bermuda offices are located at 44 Church Street,
Hamilton, Bermuda, and the telephone number is (441) 296-8560. The 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.
Item 3. Legal Proceedings
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.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of the Company's security holders
during fourth quarter of the fiscal year ended December 31, 1998.
Management of the Company
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.
Name Age Position
Lloyd A. Fox.......... 53 President and Director
Stephen R. Crim....... 35 Executive Vice President
Joseph D. Scollo, Jr.. 35 Senior Vice President - Operations
Fred J. Pinckney...... 51 General Counsel and Secretary
Steven B. Mathis...... 31 Chief Financial Officer
J. Jeffrey Hood....... 35 Vice President-Claims and Loss Control
Kenneth A. Schneider.. 38 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
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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. Mr. Fox is a
frequent speaker at insurance seminars and environmental training courses
throughout the United States.
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 departments
of Aetna Casualty and Surety and The Hartford Insurance Co. between 1986
and 1990. Mr. Crim has 12 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 8 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.
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 9 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 Vice President-Claims and Loss Control of Synergy
and of American Safety Casualty and has been responsible for loss control
and safety matters since joining the Company in 1990. Previously, Mr. Hood
had served as a loss control and safety
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coordinator and claims administrator for national technical and insurance
organizations 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 Synergy.
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 16 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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PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
The Company's common shares commenced trading on the National
Association of Security Dealers, Inc.'s National Market under the symbol
"AMSFF" on February 13, 1998 as a result of the Company's completion of its
initial public offering. The following table sets forth the high and low
prices per share of the Company's common shares for the periods indicated.
Fiscal Year Ended December 31, 1998 High Low
First Quarter $ 13.50 $ 11.00
Second Quarter 14.75 11.12
Third Quarter 12.38 8.75
Fourth Quarter 10.00 6.75
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. The closing price of the Company's common
shares on February 5, 1999, as reported on the New York Stock Exchange,
Inc. was $9.94 per share. As of February 5, 1999, there were approximately
2,300 holders of the Company's common shares.
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 policies are for its primary insurance and reinsurance
subsidiaries to retain their capital for growth.
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Item 6. Selected Financial Data
The following table sets forth selected consolidated financial data
with respect to the Company for the periods indicated. The balance sheet
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.
Year Ended December 31,
1994 1995 1996 1997 1998
(In thousands, except per share and ratio data)
Income Statement Data:
Revenues:
Direct and assumed premiums
earned........................ $ 3,509 $ 6,109 $ 5,316 $ 10,590 $ 13,183
Ceded premiums earned............ (89) (362) (1,044) (2,243) (3,994)
Net premiums earned......... 3,420 5,747 4,272 8,347 9,189
Net investment income............ 663 1,346 1,207 1,647 2,847
Interest on notes receivable..... - 7 885 798 2,409
Brokerage commission
income......................... 1,706 2,145 1,881 1,999 1,114
Management fees from
affiliate...................... 464 475 479 601 714
Net realized gains (losses)...... (118) 200 177 84 443
Other income..................... - - 5 14 24
Total revenues.............. 6,135 9,920 8,906 13,490 16,740
Expenses:
Losses and loss adjustment
expenses incurred............. 1,424 2,905 2,056 4,093 5,177
Acquisition expenses............. 517 1,086 646 2,336 1,010
Other expenses................... 2,247 2,029 3,110 3,494 4,798
Total Expenses.............. 4,188 6,020 5,812 9,923 10,985
Earnings before
income taxes............. 1,947 3,900 3,094 3,567 5,755
Income Taxes......................... 329 720 177 356 (199)
Net earnings......................... $ 1,618 $ 3,180 $ 2,917 $ 3,211 $ 5,954
Net diluted earnings
per share........................ $ 0.54 $ 1.07 $ 0.98 $ 1.08 $ 1.04
Common shares and common
share equivalents used in
computing net diluted earnings
per shares....................... 2,983 2,964 2,964 2,964 5,738
GAAP Ratios:
Loss and loss adjustment expense
ratio............................ 41.6% 50.5% 48.1% 49.0% 56.3%
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Expense Ratio........................ 30.7 23.4 29.3 32.8 16.9
Combined ratio....................... 72.3% 73.9% 77.4% 81.8% 73.2%
Net premiums written to
Equity ............... 0.3x 0.4x 0.3x 0.4x 0.2x
Statutory Ratios:
Loss and loss adjustment
expense ratio ..................... 41.6% 50.5% 48.1% 49.0% 56.3%
Expense ratio........................ 27.9 21.9 27.1 30.5 16.2
Combined ratio....................... 69.5% 72.4% 75.2% 79.5% 72.5%
Balance Sheet Data (at end of
period)
Total investments.................... $ 17,393 $ 20,648 $ 17,964 $ 29,341 $ 51,048
Total assets......................... 20,344 27,143 31,299 47,668 86,147
Unpaid loss and loss
adjustment expenses................ 6,048 8,294 8,914 11,572 14,700
Total liabilities.................... 8,406 10,529 13,267 25,827 26,878
Total shareholders' equity........... 11,938 16,614 18,032 21,841 59,269
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Item 7. Management's Discussion and Analysis of Results of Operations and
Financial Condition
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.
Overview
American Safety is a specialty insurance holding company which,
through its subsidiaries, develops, underwrites, manages and markets
primary casualty insurance and reinsurance programs in the alternative
insurance market for (i) environmental remediation risks; (ii) employee
leasing and staffing industry risks; and (iii) other specialty risks.
The Company's specialty insurance programs include coverages for
general liability, pollution liability, professional liability, workers'
compensation and surety, as well as custom designed risk management
programs (including captive and rent-a-captive programs), for contractors,
consultants and other businesses and property owners who are involved with
environmental remediation, employee leasing and staffing, and other
specialty risks. Through its U.S. brokerage and management services
subsidiaries, the Company also provides specialized insurance program
development, underwriting, risk placement, reinsurance, program management,
brokerage, loss control, claims administration and marketing services.
The Company insures and places risks through its U.S. insurance
subsidiary, as well as its non-subsidiary risk retention group affiliate
and substantial unaffiliated insurance and reinsurance companies. The
Company also reinsures and places, through its Bermuda reinsurance
subsidiary and substantial unaffiliated reinsurers, a portion of the risks
underwritten directly by its U.S. insurance subsidiary, its risk retention
group affiliate and other insurers. Substantially all of the reinsurance
business that the Company currently assumes is for primary insurance
programs that the Company has developed and underwritten.
The Company is able to select its roles as program developer, primary
underwriter, reinsurer, program manager and broker based on its assessment
of each risk profile. After determining its roles, the Company utilizes its
insurance and reinsurance subsidiaries, its insurance brokerage and
management services subsidiaries, and a risk retention group affiliate to
generate risk premium revenues, program management fees, insurance and
reinsurance commissions and investment income, as appropriate.
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The Company's general, pollution, professional liability, and surety
(other than bail bonds) lines of business are written primarily for
environmental remediation contractors, consultants and property owners
involved with environmental risks. Environmental remediation contractors
are involved in the removal or abatement of hazardous materials and
conditions such as asbestos, lead, underground storage tanks and other
environmental risks. Environmental consultants and similar professional
firms engage in the detection and analysis of hazardous materials and the
design and monitoring of remediation projects. The general, pollution, and
professional liability policies written and reinsured by the Company are
issued for specific environmental remediation risks, have limited (rather
than absolute) pollution exclusions and contain aggregate limits of
liability. The Company's workers' compensation line of business is written
primarily for environmental industry businesses and the employee leasing
and staffing industry. The workers' compensation coverage for contractors
involved in environmental remediation includes coverage for risks which may
include occupational diseases from exposure to hazardous substances. Surety
bonds issued by the Company guarantee the performance of environmental and
other contractors on environmental remediation and construction projects,
and the payment of sums due to laborers, materialmen and suppliers.
The Company's revenues are comprised of risk premium revenues, program
management fees, insurance and reinsurance brokerage commissions,
investment income, interest on secured notes receivable, net realized gains
from the sale of investment securities, and other income. The Company's
primary revenue source has been reinsurance assumed from its U.S. insurance
subsidiary, its risk retention group affiliate and other insurers, for
which the Company has developed specialty insurance programs. The Company
and its risk retention group affiliate write only casualty coverages and
therefore do not participate in reinsuring first party property coverages.
The Company's development and structuring of programs are focused
primarily on the generation of revenues and earnings, whether attributable
to underwriting profits, fees, commissions, or a combination of these
items. For example, a profitable program may be structured to result in
break-even underwriting results in the Company's insurance subsidiaries,
while at the same time creating revenues and earnings in the Company's
program management or insurance brokerage subsidiaries.
The Company's financial position and results of operations are subject
to change based on various factors, including competitive conditions in the
insurance industry, unpredictable developments in loss trends, changes in
loss reserves, market acceptance of new coverages and enhancements, and
changes in levels of general business activity and economic conditions.
During this decade, the Company has operated in a soft market cycle which
is characterized by excess insurance capacity and declining insurance
premium rates.
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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 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.
Year 2000
The Year 2000 issue is the result of computer programs being written
using two digits rather than four digits to define the applicable year. If
not corrected, computer applications could fail or create erroneous results
by or at the Year 2000. The Company, together with consulting outside
vendors, has reviewed its information technology systems (i.e.,
underwriting, insureds, claims and accounting) and believes that the
systems will process date information accurately and without interruption
when required to process dates in the year 1999 and beyond.
In the context of Year 2000 issues, the Company has identified the
following general categories of business partners as material to the
Company's ability to conduct its operations: software, hardware and
telecommunication providers, banks and investment managers, insurance
brokers, agents and producers, reinsurers and reinsurance intermediaries
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and utilities. The Company has been in contact with its material business
partners to determine their state of readiness with regard to Year 2000
compliance and the potential impact on the Company. Based on the information
available to the Company, the Company has not currently identified a material
business partner that will not be compliant with respect to Year 2000 issues.
However, there can be no assurance that such material business partners will be
Year 2000 compliant, and such noncompliance could have a material affect on the
Company's financial condition and results of operations.
The Company has conducted a review of its underwriting guidelines and
policies, and has determined that the insurance policies issued by the
Company did not insure Year 2000 claims. However, changing social and legal
trends may create unintended coverage for claims by reinterpreting
insurance contracts and exclusions. It is impossible to predict what, if
any, exposure insurance companies may ultimately have for Year 2000 claims
whether coverage for the issue was specifically excluded or included.
The Company anticipates that its information technology systems will
be Year 2000 compliant on or before June 30, 1999. The Company's
contingency plan for any Year 2000 noncompliance of its information
technology systems involves the manual entering and outputting of business
records. The Company believes it has sufficient employees and other staff
available to maintain its current level of customer service. To date, the
Company has spent less than $100,000 on hardware and software relating to
Year 2000 compliance and the Company does not anticipate any significant
additional expenditures with respect to the Year 2000 issue.
-34-
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. Investors are cautioned that all
forward-looking statements necessarily involve risks and uncertainties that
are subject to change based on various factors, including, without
limitation, the competitive conditions in the insurance industry, the
unpredictable developments in loss trends, the adequacy and changes in loss
reserves, the market acceptance of new coverages and enhancements, and the
changes in 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.
-35-
Results of Operations
The following table sets forth the Company's consolidated revenues:
Percent Increase
Year Ended December 31 (Decrease)
1996 to 1997 to
1996 1997 1998 1997 1998
(In thousands)
Net Premiums earned:
Reinsurance:
Workers' Compensation $ 2,620 $ 5,144 $ 6,135 96.3% 19.3%
General Liability from affiliate 1,522 1,463 2,381 (3.9) 62.7
Auto Liability - - 96 0.0 100.0
Total reinsurance 4,142 6,607 8,612 59.5 30.3
Primary Insurance:
Surety 130 1,740 577 1,238.5 (66.8)
Total primary reinsurance 130 1,740 577 1,238.5 (66.8)
Total net premiums earned 4,272 8,347 9,189 95.4 10.1
Net Investment Income 1,207 1,647 2,847 36.5 72.9
Interest on notes receivable 885 798 2,409 (9.8) 201.9
Commission and fee income:
Brokerage commission income 1,881 1,999 1,114 6.3 (44.3)
Management fees from affiliates 479 601 714 25.5 18.8
Total commission and fee income 2,360 2,600 1,828 10.2 (29.7)
Net realized gains (losses) 177 84 443 (52.5) 427.4
Other income 5 14 24 180.0 71.4
Total Revenues $ 8,906 $ 13,490 $ 16,740 51.5% 24.1%
The following table sets forth the components of the Company's
statutory combined ratio for the period indicated:
1996 1997 1998
Insurance Operations
Loss & Loss Adjustment Expense Ratio 48.1% 49.0% 56.3%
Expense Ratio 29.3 32.8 16.9
Combined Ratio 77.4% 81.8% 73.2%
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Year Ended December 31, 1998 to Year ended December 31, 1997
Net Premiums Earned. Net premiums earned increased 10.1% from $8.3
million in 1997 to $9.2 million in 1998. The principal factors accounting
for the result were an increase of workers' compensation reinsurance
premiums by 19.3% or $991,000 and an increase of general liability
reinsurance premiums by 62.7% or $918,000. Those increases were partially
offset due to a decrease of surety premiums by 66.8% or $1,163,000, which
can be attributed to reduced bail bond premium production from a
discontinued program during 1997 which produced $1.4 million in net earned
premium in such year.
Net Investment Income. Net investment income increased 72.9% from $1.6
million in 1997 to $2.8 million in 1998 as a result of the investment of
additional cash flows from insurance operations and from investment of the
Company's initial public offering proceeds during 1998. The average annual
pre-tax yield on investments was 7.0% in 1997 and 7.1% in 1998. The average
annual after-tax yield on investments was 6.3% in 1997 and 6.7% in 1998.
Interest from Notes Receivable. Interest from notes receivable
increased 201.9% from $798,000 in 1997 to $2,409,000 in 1998 as a result of
an increase of $10.9 million in outstanding secured notes receivable. These
notes bear interest rates ranging from 9% to 25% and are payable on various
dates.
Brokerage Commission Income. Income from insurance brokerage
operations decreased 44.3% from $2.0 million in 1997 to $1.1 million in
1998 as a result of additional premiums being written by the Company's U.S.
insurance subsidiary in which acquisition expenses and brokerage income are
eliminated due to consolidation.
Management Fees. Management fees increased 18.8% from $601,000 in 1997
to $714,000 in 1998 as a result of increased service levels provided by the
Company to its risk retention group affiliate.
Net Realized Gains. Net realized gains from the sale of investments
increased from $84,000 in 1997 to $443,000 in 1998, primarily from the sale
of fixed maturities due to favorable market conditions.
Losses and Loss Adjustment Expenses. Loss and loss adjustment expenses
increased 26.5% from $4.1 million in 1997 to $5.2 million in 1998 primarily
due to a 10.1% increase in net earned premiums combined with an increase in
the projected losses for workers' compensation and a decrease in the
projected losses for general liability. The Company has recorded loss and
loss adjustment expenses for workers' compensation to the aggregate
stop-loss attachment point of its reinsurance.
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Acquisition Expenses. Policy acquisition expenses decreased 56.8% from
$2.3 million in 1997 to $1 million in 1998 as a result of increased
premiums written by the Company's U.S. insurance subsidiary and produced by
the Company's U.S. brokerage subsidiary where acquisition expenses and
brokerage income are eliminated due to consolidation.
Other Expenses. Other expenses increased 37.3% from $3.5 million in
1997 to $4.8 million in 1998 which is primarily due to salary and employee
benefit increases resulting from additional staffing for new and existing
programs.
Income Taxes. Federal and state income taxes decreased from $355,531
in 1997 to a benefit of $199,244 in 1998 due to additional premiums being
ceded to the Company's Bermuda reinsurance subsidiary and investment income
earned in Bermuda.
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Year Ended December 31, 1997 compared to Year Ended December 31, 1996.
Net Premiums Earned. Net premiums earned increased 95.4% from $4.3
million in 1996 to $8.3 million in 1997. The principal factor accounting
for the increase was the Company's assumption in 1997 of workers'
compensation reinsurance business from an unaffiliated insurance carrier,
which increased net premiums earned from workers' compensation reinsurance
by 96.3% from $2.6 million in the 1996 to $5.1 million in 1997. The
magnitude of this increase was also affected by workers' compensation
premium refunds of $782,000 in 1996 on business that had been recorded in
the prior year. In workers' compensation insurance, annual premium payments
are generally determined on the basis of the insured company's payroll. At
the start of a policy year, the level of payroll is unknown and must be
estimated. The insured then pays workers' compensation premiums based on
this estimate of future payroll. At policy expiration, an audit is
performed to determine the insured's actual payroll for the policy period.
Then, the actual payroll is compared to the original estimate, and either
an additional workers' compensation premium is billed or a return premium
is refunded. The workers' compensation premium refunds of $782,000, which
reduced the Company's 1996 revenues, were a result of changes in the
Company's estimate of the ultimate premium, based upon audits of the
insured's 1994 and 1995 payroll estimates.
General liability reinsurance premiums remained substantially the same
from $1.5 million in 1996 to $1.5 million in 1997. In the Company's primary
insurance business, net premiums earned from the Company's U.S. insurance
subsidiary's surety program increased from $130,000 in 1996 to $1.7 million
in 1997, primarily due to the initiation of a bail bond program in 1997
which produced $1.4 million in net premiums earned in such year. The
Company has discontinued its participation in the prior bail bond program
due to inadequate premium production.
Net Investment Income. Net investment income increased 36.5% from $1.2
million in 1996 to $1.6 million in 1997 as a result of the investment of
additional cash flows from insurance operations. The average annual pre-tax
yield on investments was 6.2% in 1996 and 7% in 1997. The average annual
after-tax yield on investments was 5.6% in 1996 and 6.3% in 1997.
Interest from Notes Receivable. Interest from notes receivable
decreased 9.8% from $885,000 in 1996 to $798,000 in 1997. This decrease
resulted primarily from a decrease in the outstanding notes receivable.
Brokerage Commission Income. Income from insurance brokerage
operations increased 6.3% from $1.9 million in 1996 to $2 million in 1997
as a result of increased
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commissions derived from insurance business produced through the Company's risk
retention group affiliate and unaffiliated insurance companies.
Management Fees. Management fees increased 25.5% from $479,000 in 1996
to $601,000 in 1997 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 $177,000 in 1996 to $84,000 in 1997.
Losses and Loss Adjustment Expenses. Losses and loss adjustment
expenses increased 99.1% from $2.1 million in 1996 to $4.1 million in 1997
due to the 95.4% increase in net premiums earned and a corresponding
increase in reserves primarily due to the increase in the workers'
compensation line of business.
Acquisition Expenses. Policy acquisition expenses increased from
$646,000 in 1996 to $2.3 million in 1997. This increase resulted from the
initiation of the bail bond program which was structured to have an expense
ratio of approximately 96%.
Other Expenses. Other expenses increased 12.4% from $3.1 million in
1996 to $3.5 million in 1997 due to salary and employee benefit increases
resulting from additional staffing for new and existing programs.
Income Taxes. Federal and state income taxes increased from $177,000
in 1996 to $356,000 in 1997 due to increased taxable income in the
Company's U.S. insurance subsidiary.
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Liquidity and Capital Resources
The Company historically has met its cash requirements and financed
its growth principally through cash flows generated from operations. The
Company's primary sources of cash flow are proceeds from the sale or
maturity of invested assets, premiums earned, investment income, commission
income and management fees. The Company's short-term cash requirements are
primarily for claims payments, reinsurance premiums, commissions, salaries,
employee benefits and other operating expenses, and the purchase of
investment securities, which have historically been satisfied from
operating cash flows. Due to the uncertainty regarding settlement of unpaid
claims, the long-term liquidity requirements of the Company may vary, and
the Company has attempted to structure its investment portfolio to take
into account the historical payout patterns. Management believes that the
Company's current cash flows are sufficient for its short-term needs and
the Company's invested assets are sufficient for its long-term needs. The
Company also purchases reinsurance to mitigate the effect of large claims
and to help stabilize demands on its liquidity.
On a consolidated basis, net cash provided from operations was $3.6
million for 1996, $9.4 million for 1997 and $2.7 million for 1998. The
positive cash flows for said periods were primarily attributable to
net premiums written, net earnings, and increases in reserves for unpaid
losses. Because workers' compensation and general liability claims may be
paid over an extended period of time, the Company has established
relatively large loss reserves for such lines of business. The assets
supporting the Company's reserves continue to earn investment income until
claim payments are made.
Total assets increased from $31.3 million at December 31, 1996 to
$47.7 million at December 31, 1997, and to $86.1 million at December 31,
1998, primarily due to increases in cash, invested assets, and notes
receivable. Cash, invested assets and notes receivable increased from $27.3
million at December 31, 1996 to $37.4 million at December 31, 1997, and to
$72 million at December 31, 1998 as a result of increases in net premiums
written, investment income, and the proceeds from the Company's initial
public offering.
American Safety is an insurance holding company whose principal assets
are its investment portfolio and its investment in the capital stock of its
subsidiaries. As an insurance holding company, American Safety's ability to
pay dividends to its shareholders will depend, to a significant degree, on
the ability of the Company's subsidiaries to pay dividends to American
Safety. The jurisdictions in which American Safety and its insurance and
reinsurance subsidiaries are domiciled place limitations on the amount of
dividends or other distributions payable by insurance companies in order to
protect the solvency of insurers.
-41-
In January 1997, the Securities and Exchange Commission approved rule
amendments regarding disclosures concerning derivative financial
instruments, other financial instruments and derivative commodity
instruments (the "Release"). The Release requires inclusion in the
footnotes to the financial statements of extensive detail about the
accounting policies followed by a company in connection with its accounting
for derivative financial instruments and derivative commodity instruments.
As of December 31, 1998, the Company had no investments in derivative
instruments.
Income Taxes
American Safety is incorporated under the laws of Bermuda and, under
current Bermuda law, is not obligated to pay any taxes in Bermuda based
upon income or capital gains. American Safety has received an undertaking
from the Minister of Finance in Bermuda pursuant to the provisions of The
Exempted Undertakings Tax Protection Act 1966, which exempts American
Safety and its shareholders, other than shareholders ordinarily resident in
Bermuda, from any Bermuda taxes computed on profits, income or any capital
asset, gain or appreciation, or any tax in the nature of estate, duty or
inheritance until March 28, 2016. The Company, exclusive of its United
States 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.
-42-
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Market risk is the risk of economic losses due to adverse changes in
the estimated fair value of a financial instrument as the result of changes
in equity prices, interest rates, foreign exchange rates and commodity
prices. 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, 1998. The estimated fair value of the Company's investment
portfolio at December 31, 1998 was $51.0 million, 93% of which was invested
in fixed maturities and short-term investments, and 7% of which was
invested in equity securities.
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, 1998. The selected hypothetical changes do not
indicate what could be the potential best or worst case scenarios (dollars
in thousands):
Estimated Fair Hypothetical
Estimated Value after Percentage Increase
Fair Value at Hypothetical Hypothetical (Decrease) in
December 31, 1998 Price Change Change in Prices Shareholders' Equity
- ------------------------------------------------------------------------------------------------------------------------------
Equity Securities $3,453 20% increase $ 4,144 1.0%
20% decrease 2,762 (1.0)
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.
-43-
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.
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,
1998. The selected hypothetical changes do not indicate what would be the
potential best or worst case scenarios (dollars in thousands):
Hypothetical
Estimated Fair Percentage
Fixed Maturity Carrying 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
1998 Rate
- -----------------------------------------------------------------------------------------------------------------
U.S. Treasury Securities and $13,647 200bp decrease $14,858 2.0%
obligations of U.S. 100bp decrease 14,235 1.0
government agencies 100bp increase 13,092 -0.9
200bp increase 12,567 -1.8
- -----------------------------------------------------------------------------------------------------------------
Obligations of states, $6,749 200bp decrease $7,646 1.5%
municipalities and political 100bp decrease 7,180 0.7
subdivisions 100bp increase 6,349 -0.7
200bp increase 5,979 -1.3
- -----------------------------------------------------------------------------------------------------------------
Collateralized Mortgage $4,913 200bp decrease $5,048 0.2%
Obligations 100bp decrease 4,988 0.1
100bp increase 4,829 -0.1
200bp increase 4,733 0.3
- -----------------------------------------------------------------------------------------------------------------
Corporate Bonds (including $22,286 200bp decrease $24,038 3.0%
short-term investments 100bp decrease 23,102 1.4
100bp increase 21,550 -1.2
200bp increase 20,872 -2.4
- -----------------------------------------------------------------------------------------------------------------
-44-
- ------------------------------------------------------------------------------------------------------------------
Notes receivable $16,220 200bp decrease $16,544 0.5%
100bp decrease 16,382 0.3
100bp increase 16,058 -0.3
200bp increase 15,896 -0.5
- ------------------------------------------------------------------------------------------------------------------
Item 8. Financial Statements and Supplementary Data
The Company's consolidated financial statements required under this
Item 8 are included as part of Item 14 of this Report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
-45-
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required by this Item 10 regarding directors and
executive officers of the Company will be set forth in the Company's 1999
Proxy Statement which will be filed with the Securities and Exchange
Commission pursuant to applicable regulations, and is hereby incorporated
by this reference.
Item 11. Executive Compensation
The information required by this Item 11 regarding executive
compensation will be set forth in the Company's 1999 Proxy Statement which
will be filed with the Securities and Exchange Commission pursuant to
applicable regulations, and is hereby incorporated by this reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
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 1999 Proxy Statement which will be filed with the
Securities and Exchange Commission pursuant to applicable regulations, and
is hereby incorporated by this reference.
Item 13. Certain Relationships and Related Transactions
The information required by this Item 13 regarding certain
relationships and related transactions of the Company will be set forth in
the Company's 1999 Proxy Statement which will be filed with the Securities
and Exchange Commission pursuant to applicable regulations, and is hereby
incorporated by this reference.
-46-
PART IV
Item 14. Exhibits, Financial Statements Schedules, and Reports on Form 8-K
(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, 1998 and 1997
-Consolidated Statements of Earnings for the Years Ended December 31,
1998, 1997 and 1996
-Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 1998, 1997 and 1996
-Consolidated Statements of Cash Flows for the Years Ended December 31,
1998, 1997 and 1996
-Consolidated Statements of Comprehensive Earnings for the Years Ended
December 31, 1998, 1997 and 1996
-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 52
(Parent only)
-Schedule III - Supplemental Information 56
-Schedule IV - Reinsurance 57
-47-
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 Synergy 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. (formerly known as Environmental Management Services, Inc.)
and American Safety Risk Retention Group, Inc.
21.1* Subsidiaries of the Company
27 Financial Data Schedule
*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 Amendment
No. 1 to 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, 1998.
-48-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this Report to be signed on its behalf by
the undersigned, thereunto duly authorized on March 30, 1999.
AMERICAN SAFETY INSURANCE GROUP, LTD.
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, 1999.
Signature Title
__________________________________ President and Director
Lloyd A. Fox (Principal Executive Officer)
__________________________________ Chief Financial Officer
Steven B. Mathis (Principal Financial Officer and
Principal Accounting Officer)
__________________________________ Chairman of the Board of Directors
Frederick C. Treadway
__________________________________ Director
David V. Brueggan
__________________________________ Director
Cody W. Birdwell
__________________________________ Director
William O. Mauldin, Jr.
__________________________________ Director
Thomas W. Mueller
__________________________________ Director
Timothy E. Walsh
-49-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this Report to be signed on its behalf by
the undersigned, thereunto duly authorized on March 30, 1999.
AMERICAN SAFETY INSURANCE GROUP, LTD.
By: /s/ Lloyd A. Fox
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, 1999.
Signature Title
/s/ Lloyd A. Fox
____________________ President and Director
Lloyd A. Fox (Principal Executive Officer)
/s/ Steven B. Mathis
____________________ Chief Financial Officer
Steven B. Mathis (Principal Financial Officer and
Principal Accounting Officer)
/s/ Frederick C. Treadway
_________________________ Chairman of the Board of Directors
Frederick C. Treadway
/s/ David V. Brueggan
_________________________ Director
David V. Brueggan
/s/ Cody W. Birdwell
_________________________ Director
Cody W. Birdwell
/s/ William O. Mauldin, Jr.
___________________________Director
William O. Mauldin, Jr.
/s/ Thomas W. Mueller
__________________________ Director
Thomas W. Mueller
/s/ Timothy E. Walsh
__________________________ Director
Timothy E. Walsh
-50-
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 listed 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, 1997 and 1998, and the
results of their operations and their cash flow for each of the years in the
three-year period ended December 31, 1998, 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.
Atlanta, Georgia
March 2, 1999
/S/ KPMG, LLP
(Continued)
AMERICAN SAFETY INSURANCE GROUP, LTD. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1997 and 1998
Assets 1997 1998
------ ---- ----
Investments:
Securities available for sale, at fair value:
Fixed maturities $ 26,462,275 $ 45,308,326
Common stock 1,054,549 3,453,123
Short-term investments 1,823,830 2,286,320
----------- -----------
Total investments 29,340,654 51,047,769
Cash 2,768,831 4,737,132
Accrued investment and interest income 781,798 2,441,857
Notes receivable:
Related parties 580,000 280,000
Other 4,697,804 15,939,894
Premiums receivable 6,809,436 5,838,567
Commissions receivable 18,630 22,569
Ceded unearned premium 649,175 1,742,021
Reinsurance recoverable 778,975 1,840,884
Due from affiliate 288,951 668,074
Income tax recoverable 152,802 277,292
Deferred income taxes 209,795 362,951
Goodwill 270,010 252,239
Other assets 321,339 696,223
----------- -----------
Total assets $ 47,668,200 $ 86,147,472
========== ==========
Liabilities and Shareholders' Equity
Liabilities:
Unpaid losses and loss adjustment expenses 11,571,539 14,700,473
Unearned premiums 2,331,579 3,894,568
Liability for deductible fees held 3,539,032 244,998
Reinsurance on paid loss and loss adjustment expenses 256,085 380,858
Reinsurance deposits on retroactive contract 537,500 332,430
Ceded premiums payable 5,990,907 4,382,922
Due to affiliate:
Ceded premiums payable 217,062 201,778
Reinsurance on paid loss and loss adjustment expenses 41,085 52,151
Accounts payable and accrued expenses 1,342,515 2,688,001
----------- -----------
Total liabilities 25,827,304 26,878,179
---------- ----------
Shareholders' equity:
Preferred stock, $0.01 par value; authorized 5,000,000 shares;
no shares issued and outstanding - -
Common stock, $0.01 par value; authorized 15,000,000 shares; issued and
outstanding at December 31, 1997, 2,925,230 shares, and at
December 31, 1998, 6,074,770 shares 29,252 60,747
Additional paid-in capital 2,751,789 33,809,141
Retained earnings 18,751,222 24,705,471
Accumulated other comprehensive income 308,633 693,934
----------- -----------
Total shareholders' equity 21,840,896 59,269,293
---------- ----------
Total liabilities and shareholders' equity $ 47,668,200 $ 86,147,472
========== ==========
See accompanying notes to consolidated financial statements.
AMERICAN SAFETY INSURANCE GROUP, LTD. AND SUBSIDIARIES
Consolidated Statements of Earnings
Years ended December 31, 1996, 1997, and 1998
1996 1997 1998
---- ---- ----
Revenues:
Direct premiums earned $ 810,921 $ 3,514,559 $ 3,532,154
Assumed premiums earned:
Affiliate 1,982,290 1,855,739 2,834,855
Nonaffiliates 2,523,198 5,219,394 6,815,696
--------- ---------- ---------
Total assumed premiums earned 4,505,488 7,075,133 9,650,551
--------- ---------- ---------
Ceded premiums earned:
Affiliate 541,129 1,250,974 2,317,414
Nonaffiliates 502,858 991,611 1,676,677
--------- ---------- ----------
Total ceded premiums earned 1,043,987 2,242,585 3,994,091
--------- ---------- ----------
Net premiums earned 4,272,422 8,347,107 9,188,614
--------- ---------- ---------
Net investment income 1,206,193 1,646,926 2,847,359
Interest on notes receivable 885,436 798,139 2,408,908
Brokerage commission income 1,880,732 1,998,923 1,113,843
Management fees from affiliate 478,963 601,319 713,528
Net realized gains 177,321 83,548 443,230
Other income 4,800 13,874 24,367
--------- ---------- ----------
Total revenues 8,905,867 13,489,836 16,739,849
--------- ---------- ----------
Expenses:
Losses and loss adjustment expenses incurred 2,055,558 4,092,728 5,177,033
Acquisition expenses 645,980 2,335,883 1,009,906
Payroll and related expenses 1,918,279 2,371,051 3,500,676
Other expenses 1,191,806 1,123,629 1,297,229
--------- ---------- ----------
Total expenses 5,811,623 9,923,291 10,984,844
--------- ---------- ----------
Earnings before income taxes 3,094,244 3,566,545 5,755,005
Income taxes 176,509 355,531 (199,244)
--------- ---------- ---------
Net earnings $ 2,917,735 $ 3,211,014 $ 5,954,249
========= ========== =========
Net earnings per share comprehensive earnings:
Basic $ 0.98 $ 1.08 $ 1.05
---- ---- ----
Diluted $ 0.98 $ 1.08 $ 1.04
---- ---- ----
Average number of shares outstanding:
Basic 2,963,931 2,963,931 5,661,700
--------- --------- ---------
Diluted 2,963,931 2,963,931 5,738,039
--------- --------- ---------
See accompanying notes to consolidated financial statements.
AMERICAN SAFETY INSURANCE GROUP, LTD. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
Years ended December 31, 1996, 1997, and 1998
1996 1997 1998
---- ---- ----
Common stock - number of shares:
Balance at beginning of period 2,872,830 2,872,830 2,925,230
Shares redeemed and canceled - - -
Shares issued in connection with purchase of minority
interest - - -
Issuance of common shares - 52,400 3,149,540
----------- ----------- ----------
Balance at end of period 2,872,830 2,925,230 6,074,770
=========== =========== ==========
Common stock:
Balance at beginning of period $ 28,728 $ 28,728 $ 29,252
Shares redeemed and canceled - - -
Shares issued in connection with purchase of minority
interest - - -
Issuance of common shares - 524 31,495
---------- ---------- ---------
Balance at end of period 28,728 29,252 60,747
---------- ---------- ----------
Additional paid-in capital:
Balance at beginning of period 2,455,034 2,455,034 2,751,789
Shares redeemed and canceled - - -
Shares issued in connection with purchase of minority
interest - - -
Issuance of common shares - 296,755 31,057,352
---------- ---------- ----------
Balance at end of period 2,455,034 2,751,789 33,809,141
---------- ---------- ----------
Retained earnings:
Balance at beginning of period 13,394,948 15,540,208 18,751,222
Net earnings 2,917,735 3,211,014 5,954,249
Dividends declared and paid (772,475) -
----------- ----------- ----------
-
Balance at end of period 15,540,208 18,751,222 24,705,471
---------- ---------- ----------
Accumulated other comprehensive income:
Balance at beginning of period 735,322 8,137 308,633
Unrealized gain (loss) during the period (net of
deferred tax benefit (expense) of $26,759,
$(76,157), and $(6,236), respectively) (727,185) 300,496 385,301
----------- ----------- -----------
Balance at end of period 8,137 308,633 693,934
----------- ----------- -----------
Total shareholders' equity $ 18,032,107 $ 21,840,896 $ 59,269,293
========== ========== ==========
See accompanying notes to consolidated financial statements.
AMERICAN SAFETY INSURANCE GROUP, LTD. AND SUBSIDIARIES
Consolidated Statements of Cash Flow
Years ended December 31, 1996, 1997, and 1998
1996 1997 1998
---- ---- ----
Cash flow from operating activities:
Net earnings $ 2,917,735 $ 3,211,014 $ 5,954,249
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Realized losses (gains) on sale of investments (177,321) (83,548) (443,230)
Amortization of deferred acquisition costs 371,572 650,698 265,586
Change in:
Accrued investment and interest income (765,254) 248,239 (1,660,059)
Premiums receivable (584,465) (5,567,376) 612,725
Commissions receivable 8,630 45,586 (3,939)
Reinsurance recoverable and ceded unearned premiums (318,672) (1,077,334) (2,154,755)
Due from affiliate (90,279) 67,893 (20,979)
Income taxes (318,545) (44,529) (277,646)
Unpaid losses and loss adjustment expenses 620,805 2,657,079 3,128,934
Unearned premiums 611,395 967,120 1,562,989
Liability for deductible fees held - 4,076,532 (3,499,104)
Ceded premiums payable 533,457 4,811,440 (1,535,283)
Due to affiliate (78,335) 259,192 (76,920)
Accounts payable and accrued expenses 1,185,781 (369,528) 1,285,281
Other, net (318,356) (450,496) (404,211)
------------ ------------ ----------
Net cash provided by operating activities $ 3,598,148 $ 9,401,982 $ 2,733,638
------------ ------------ ---------
Cash flow from investing activities:
Purchases of fixed maturities $(20,967,644) $(19,577,784) $(82,199,114)
Purchase of common stocks (968,383) (2,078,706) (3,526,905)
Proceeds from maturity and redemption of fixed maturities 2,817,810 1,040,956 22,543,671
Proceeds from sale of fixed maturities 20,622,008 9,290,969 41,620,120
Proceeds from sale of common stock 584,563 1,749,354 1,129,500
Proceeds from sale of preferred stock 132,319 - -
Decrease (increase) in short-term investments (122,417) (1,351,413) (462,490)
(Increase) in notes receivable - other (756,841) 215,061 (11,242,090)
Decrease (Increase) in notes receivable - related parties (3,924,670) 566,841 300,000
Purchase of fixed assets, net (167,971) (57,665) (16,876)
----------- ----------- ------------
Net cash used in investing activities $ (2,751,226) $(10,202,387) $(31,854,184)
---------- ----------- ------------
Cash flow from financing activities:
Proceeds from sale of common stock - 297,279 31,088,847
Dividends paid (772,475) - -
---------- ------------ -----------
Net cash used in financing activities $ (772,475) $ 297,279 $ 31,088,847
---------- ------------ -----------
Net increase (decrease) in cash 74,447 (503,126) 1,968,301
Cash at beginning of period 3,197,510 3,271,957 2,768,831
----------- --------- ---------
Cash at end of period $ 3,271,957 $ 2,768,831 $ 4,737,132
=========== =========== ==========
Supplemental disclosure of cash flow information:
Income taxes paid $ 293,000 $ 490,000 $ 80,000
=========== =========== ==========
Interest paid $ - $ 54,010 $ -
=========== =========== ==========
See accompanying notes to consolidated financial statements.
AMERICAN SAFETY INSURANCE GROUP, LTD. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Earnings
Years ended December 31, 1996, 1997 and 1998
1996 1997 1998
---- ---- ----
Net Earnings $ 2,917,735 $ 3,211,014 $ 5,924,249
Other comprehensive earnings (loss) before income taxes:
Unrealized gains (losses) on securities available for sale (730,640) 470,427 31,854
Reclassification Adjustment for realized gains included in net earnings (23,304) (93,773) 359,682
---------- ----------- -------
Total other comprehensive earnings (loss) before taxes (753,944) 376,654 391,536
Income tax expense (benefit) related to items of comprehensive income (26,759) 76,157 6,236
---------- ----------- ----------
Other comprehensive earnings (loss) net of income taxes (727,185) 300,497 385,300
---------- ----------- ---------
Total comprehensive earnings $ 2,190,550 $ 3,511,511 $ 6,309,549
========== =========== ==========
See accompanying notes to consolidated financial statements.
AMERICAN SAFETY INSURANCE GROUP, LTD AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1996, 1997 and 1998
(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, as described below (collectively, the "Company") are
prepared in accordance with generally accepted accounting
principles in the United States. 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 nonasssessable. 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 corporation,
American Safety Reinsurance, Ltd. ("American Safety Re" - formed
January 1998 to serve as the successor for the reinsurance business
of American Safety), a 100%-owned licensed Bermuda insurance
company, and American Safety Casualty Insurance Company ("American
Safety Casualty"), a 100%-owned property and casualty insurance
company. American Safety Casualty in turn wholly owns Synergy
Insurance Services, Inc. ("Synergy"), an insurance management and
brokerage company. Synergy wholly owns the following subsidiaries:
Sureco Bond Services, Inc. ("Sureco"), a bonding agency;
Environmental Claims Services, Inc. ("ECSI"), a claims consulting
firm; Harbor Insurance Services, Inc., a bonding agency; 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) Nature of Operations
The following is a description of certain risks facing property and
casualty insurers:
Legal/Regulatory Risk is the risk that changes in the legal or
regulatory environment in which an insurer operates will create
additional expenses not anticipated by the insurer in pricing
its products and beyond those recorded in the financial
statements. 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 mitigates this risk because it is
licensed and actively writes 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 the same operational
structure as American Safety.
However, because the Internal Revenue Code of 1986, as amended,
the Treasury Regulations and court decisions do not definitively
identify activities that constitute being engaged in a United
States trade or business, and because of the factual nature of
the determination, there can be no assurance that the Internal
Revenue Service will not contend that American Safety or its
Bermuda subsidiary are engaged in a United States trade or
business. In general, if American Safety or its Bermuda
subsidiary are considered to be engaged in a United States trade
or business, it would be subject to (i) United States Federal
income tax on its taxable income that is effectively connected
with a United States trade or business at graduated rates and
(ii) the 30 percent branch profits tax on its effectively
connected earnings and profits deemed repatriated from the
United States. However, certain subsidiaries of American Safety
are subject to U.S. Federal and state income tax.
Credit Risk is the risk that issuers of securities owned by the
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. During the 1998 year, the Company made a
loan to an unaffiliated borrower, which amounts to 8.9% of the
Company's total assets. Consistent with the Company's policy on
notes receivable, this note is secured by real estate and the
personal guaranties of the principals of the borrower.
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
Under Statement of Financial Accounting Standards ("SFAS") No. 115,
fixed maturity securities for which a 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,
1997 and 1998, 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
relating to investments acquired at other than par value. Realized
gains or losses on disposal of investments are determined on a
specific identification basis and are included in revenues.
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 is recognized on an effective yield basis over the life of
the loan giving consideration to loan fees and expenses under the
provisions of SFAS No. 91. The allowance for possible loan losses
has been determined giving consideration to the provisions of SFAS
No. 114. At December 31, 1996, 1997, and 1998, no allowance was
deemed necessary by Company management. Additionally, no loan
losses were recognized for the periods then ended.
(g) Recognition of Premium Income
General liability premiums are primarily assumed from American
Safety Risk Retention Group, Inc. ("American Safety RRG"), a
nonsubsidiary 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 and workers' compensation
premiums are recorded ratably over the policy period with unearned
premium calculated on a daily pro rata basis. Surety premiums are
recorded ratably over a twelve-month period with unearned premium
calculated using a half-month convention.
(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 Synergy are recognized as the
related insurance premiums are written. For Synergy-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
Synergy provides for payment of a monthly program management fee, a
managing general agency commission, producing agent commissions,
reimbursement for marketing expenses actually incurred, and
reimbursement for loss control expenses actually incurred plus a
20% fee. 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.
An analysis of deferred policy acquisition costs follows:
Years ended December 31,
1996 1997 1998
Balance, beginning of period $ 91,340 $ 121,671 $ 92,870
Acquisition costs deferred 401,903 621,897 112,511
Amortized during the period (371,572) (650,698) (265,586)
------- ------- ---------
Balance, end of period $ 121,671 $ 92,870 $ (60,205)
======= ====== ========
The deferred acquisition costs liability is caused by the Company's
direct writing of General Liability Premium of which 100% of the
premium is ceded. The benefit to the Company is the result of
higher ceding commissions than acquisition expenses. At December
31, 1997 and 1998, deferred acquisition costs are included in
"other assets" and "accounts payable", respectively, in the
accompanying balance sheet.
(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
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) Liability for Deductible Fees Held
Deductible fees held represent deposits held by the Company in its
capacity as administrator for self-insured programs. Such deposits
will be extinguished by the payment of claims on behalf of the
self-insured or by refund of excess deposits to the self-insured.
(m) 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.
(n) 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.
(o) Goodwill
On April 2, 1993, American Safety Casualty exchanged 8% of its
common shares for 100% of the common stock of Synergy. The goodwill
created in this transaction is being amortized ratably over 20
years. Accumulated amortization was $88,170 at December 31, 1997
and $105,941 at December 31, 1998.
(p) Net Earnings Per Share
Basic EPS and diluted EPS are computed by dividing net earnings by
the weighted average number of shares outstanding for the period
(basic EPS) plus shares subject to stock options and other common
stock equivalents (diluted EPS).
As shown on the accompanying consolidated statement of earnings,
basic EPS and diluted EPS for the years ended December 31, 1996 and
1997 do not differ from one another as all options were issued
within a one-year period of the offering and, in accordance with
Staff Accounting Bulletin Topic 4D, the options shares have been
treated as being outstanding for all reported periods using the
treasury stock method.
Diluted EPS as presented above and as reflected on the accompanying
Consolidated Statements of Earnings did not differ as a result of
the application of SFAS No. 128 for any period presented. The
earnings per share calculation is as follows:
1996 1997 1998
---- ---- ----
Weighted average shares outstanding 2,963,931 2,963,931 5,661,700
Shares attributable to stock options 0 0 76,339
Weighted average common and common equivalents
2,963,931 2,963,931 5,738,039
Earnings per share:
Basic $ .98 $ 1.08 $ 1.05
Diluted $ .98 $ 1.08 $ 1.04
(q) Accounting Pronouncements
In March 1998, the American Institute of Certified Public
Accountants issued Statement of Position (SOP) 98-1, Accounting for
the Costs of Computer Software Developed or Obtained for Internal
Use. SOP 98-1 is effective for years beginning after December 15,
1998. The SOP specifies the types of costs that should be
capitalized and those that should be expensed as incurred in
connection with an internal-use software project. Capitalized costs
begin amortizing when the software is ready for its intended use,
regardless of when it is placed in service. Companies are required
to evaluate capitalized costs for impairment using estimated future
cash flows to determine if the asset is impaired. The Company
expects that adoption of SOP 98-1 will have an immaterial impact on
the Company's consolidated financial position and results of
operations.
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS
No. 133 is effective for years beginning after June 15, 1999. The
standard requires that all derivatives be recorded as an asset or
liability, at estimated fair value, regardless of the purpose or
intent for holding the derivative. If a derivative is not utilized
as a hedge, all gains or losses from the change in the derivative's
estimated fair value are recognized in earnings. The gains or
losses from the change in estimated fair value of certain
derivatives utilized as hedges are recognized in earnings or other
comprehensive income depending on the type of hedge relationship.
Due to the Company's limited use of derivatives, the Company
expects that adoption of SFAS No. 133 will have an immaterial
impact on the Company's consolidated financial position and results
of operations.
In December 1997, the AICPA issued SOP 97-3, "Accounting by Insurance
and Other Enterprises for Insurance-Related Assessments." This SOP
suggests methods to determine when an entity should recognize a
liability for guaranty fund and other insurance-related assessments,
how to measure that liability, and when an asset may be recognized for
the recovery of such assessments through premium tax offsets or policy
surcharges. This SOP is effective for 1999, and the effect of initial
adoption is to be reported as a cumulative catch-up adjustment.
Restatement of previously issued financial statements is not allowed.
Implementation of this statement is not expected to have a material
impact on the Company's financial position.
(r) Reclassifications
Certain items in the prior periods' financial statements have been
reclassified to conform with the 1998 presentation.
(2) Investments
Net investment income is summarized as follows:
Years ended December 31,
1996 1997 1998
Fixed maturities $ 1,113,876 $ 1,458,262 $ 2,571,518
Equity securities 31,128 38,936 34,301
Short-term investments and cash 124,285 218,072 360,542
--------- ---------- ----------
1,269,289 1,715,270 2,966,361
Less investment expenses 63,096 68,344 119,002
----------- ----------- ----------
Net investment income $ 1,206,193 $ 1,646,926 $ 2,847,359
========= ========= =========
Realized and unrealized investment gains and losses were as follows:
Years ended December 31,
1996 1997 1998
Realized gains:
Fixed maturities $ 340,811 $ 88,438 $ 457,066
Equity securities 20,454 - -
--------- -------- ---------
Total gains 361,265 88,438 457,066
--------- -------- ---------
Realized losses:
Fixed maturities (153,215) (4,890) (13,836)
Equity securities (30,729) - -
---------- -------- --------
Total losses (183,944) (4,890) (13,836)
--------- --------- --------
Net realized gains (losses) $ 177,321 $ 83,548 $ 443,230
========= ======== ========
Changes in unrealized gains (losses):
Fixed maturities $ (779,918) $ 367,598 $ 387,179
Equity securities 25,974 9,056 4,357
--------- -------- ---------
Net unrealized gains (losses) $ (753,944) $ 376,654 $ 391,536
========= ======== ========
At December 31, 1997 and 1998, 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, 1997 and 1998 are as follows:
Amount
Gross Gross at which
Amortized unrealized unrealized Estimated shown in the
cost gains losses fair value balance sheet
December 31, 1997:
Securities available for sale:
Fixed maturities:
U.S. Treasury securities and
obligations
of U.S. Government corporations $ 11,725,010 $ 128,883 $ 2,376 $ 11,851,517 $ 11,851,517
and agencies
Obligations of states and political
subdivisions 4,782,325 220,175 - 5,002,500 5,002,500
Corporate securities 6,545,888 51,986 13,508 6,584,366 6,584,366
Mortgage-backed securities 3,016,040 30,693 22,841 3,023,892 3,023,892
---------- --------- ------ --------- ----------
Total fixed maturities 26,069,263 431,737 38,725 26,462,275 26,462,275
Equity investments - common stocks 1,045,493 12,688 3,632 1,054,549 1,054,549
---------- --------- ------ --------- ----------
Total $ 27,114,756 $ 444,425 $ 42,357 $ 27,516,824 $ 27,516,824
========== ======= ====== ========== ==========
December 31, 1998:
Securities available for sale:
Fixed maturities:
U.S. Treasury securities and
obligations
of U.S. Government corporations $13,365,480 $ 332,997 $ 50,997 $ 13,647,480 $ 13,647,480
and agencies
Obligations of states and political
subdivisions 6,465,377 284,486 1,179 6,748,684 6,748,684
Corporate securities 19,688,443 364,650 53,841 19,999,252 19,999,252
Mortgage-backed securities 5,008,835 7,820 103,745 4,912,910 4,912,910
---------- -------- ------- ---------- ----------
Total fixed maturities 44,528,135 989,953 209,762 45,308,326 45,308,326
Equity investments - common stocks 3,439,710 23,962 10,549 3,453,123 3,453,123
---------- ------ ------ --------- ---------
Total $47,967,845 $1,013,915 $220,311 $ 48,761,449 $ 48,761,449
========== ========= ======== ========== ==========
The amortized cost and estimated fair values of fixed maturities at
December 31, 1998, 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 $ 2,910,058 $ 2,922,006
Due after one year through five years 17,999,568 18,107,670
Due after five years through ten years 14,986,835 15,642,869
Due after ten years 3,622,839 3,722,871
Mortgage-backed securities 5,008,835 4,912,910
------------- -------------
Total $44,528,135 $45,308,326
Bonds with an amortized cost of $4,198,368 and $4,272,797 were on deposit
with insurance regulatory authorities at December 31, 1997 and 1998 in
accordance with statutory requirements.
(3) Notes Receivable
As of December 31, 1998, the notes receivable from related parties
consists of one note with an outstanding principal balance of $280,000,
which is secured by common shares of the Company with a book value of
approximately $5,900,000. The note bears an interest rate of 9.25% and is
payable in 1999.
The other notes receivable consists of seven notes which are fully
secured by real and personal property and various corporate and personal
guarantees. These notes bear interest rates ranging from 9.00% to 25.0%
and are payable on various dates. In addition, these notes will yield
interest rates ranging from 9.00 to 26.5%.
During the 1998 year, the Company made a loan to an unaffiliated
borrower, which at December 31, 1998 amounts to 10.1% of the Company's
total assets. The note is secured by real estate and the personal
guaranties of the principals of the borrower with a payment due March 31,
1999 and the balance due May 15, 2000.
The Company recognized $885,436, $798,139 and $2,408,908 of interest
income on the notes receivable in 1996, 1997 and 1998, respectively.
As of December 31, 1998, there are no delinquent note payments and no
losses have been incurred on the Company's notes receivable for any
period presented herein.
(4) 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, 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.
During 1997, notes receivable are with affiliated individuals and
unaffiliated entities. Of the seven notes receivable at December 31,
1997, six have fair values which approximate market values. These notes
have maturity dates in 1998 or have minimal outstanding principal
balances at December 31, 1997. The carrying value and approximate fair
value of the remaining loan at December 31, 1997, assuming a fair market
interest rate of prime plus 1% (9-1/2%), are $1,840,117 and $1,824,000,
respectively.
During 1998, notes receivable are with affiliated individuals and
unaffiliated entities. Of the eight notes receivable at December 31,
1998, six have fair values which approximate market values. These
notes have maturity dates in 1999 and 2000 or have minimal outstanding
principal balances at December 31, 1998. The carrying value and
approximate fair value of these remaining loans at December 31, 1998,
assuming a fair market interest rate of prime plus 1% (9-1/2%), are
$12,979,257 and $14,324,000, respectively.
(5) Reinsurance
General Liability
Effective January 1, 1997, the Company entered into two Excess of Loss
Reinsurance treaties with Signet Star Reinsurance Company, Underwriters
Reinsurance Company, and Zurich-American Insurance Group (the
"Reinsurers") for the Company's general liability lines of business. The
treaties provide $500,000 excess $500,000 and $5 million excess $1
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--$5,000,000 X $1,000,000
Signet Star Reinsurance Company 50%
Underwriters Reinsurance Company 20
Zurich-American Insurance Group 30
----
100%
COVERAGE LAYER--$500,000 X $500,000
Signet Star Reinsurance Company 60%
Underwriters Reinsurance Company 40
----
100%
COVERAGE LAYER--$0--$500,000 (1)
American Safety 42%
American Safety Casualty 28
American Safety RRG 30
----
100%
(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. This business is produced by Synergy, 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 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 75% 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 depicts the income statement effects to the Company
from Legion Insurance Company:
Years ended December 31,
1996 1997 1998
(In thousands)
Premiums assumed $ 2,804 $ 5,171 $ 6,017
Premiums ceded 184 27 124
Net premiums - earned 2,620 5,144 5,893
Loss and LAE incurred 1,851 3,582 4,552
Commissions 587 970 1,312
Loss control - 3 -
The following table depicts the balance sheet effects to the Company from
Legion Insurance Company:
December 31,
1996 1997 1998
Assets (In thousands)
Premium receivable $ 459 $ 765 $ 1,485
Liabilities
Unpaid loss and LAE 2,983 4,922 7,066
Unearned premiums 878 803 732
Reinsurance payable on paid loss and LAE 80 333 636
Surety
For surety business written by the Company's insurance subsidiary,
American Safety Casualty, the Company has in place a 50% quota share
arrangement with Underwriters Reinsurance Company. American Safety
Casualty cedes 50% of all premiums collected less a 55% ceding commission
on the first $500,000 of reinsurance premium and 25% commission
thereafter, as well as ceding 50% of all losses to Underwriters Re. The
ceding commission percentage is based on the recovery of 50% of the
commissions, premium taxes and other expenses. The rate adjusts down
after fixed expenses are recovered. American Safety Casualty also has an
arrangement with American Safety Re to cede 25% of all premiums and all
losses to them. Effective November 1, 1997, the Company purchased excess
of loss reinsurance for 100% coverage above $1,000,000.
The approximate effect of reinsurance on the financial statement accounts
listed below is as follows:
Years ended December 31,
1996 1997 1998
(In thousands)
Written premiums:
Direct $ 1,192 $ 4,060 $ 4,603
Assumed 4,936 7,501 10,136
Ceded (1,511) (2,590) (5,087)
----- ------- -----
Net $ 4,617 $ 8,971 $ 9,652
===== ======= =====
Earned premiums:
Direct $ 811 $ 3,515 $ 3,532
Assumed 4,505 7,075 9,651
Ceded (1,044) (2,243) (3,994)
----- ------- -----
Net $ 4,272 $ 8,347 $ 9,189
===== ======= =====
Losses and loss adjustment expenses incurred:
Direct $ 227 $ 574 $ 928
Assumed 2,024 4,125 5,095
Ceded (195) (606) (846)
----- ------- -----
Net $ 2,056 $ 4,093 $ 5,177
===== ======= =====
Unpaid loss and loss adjustment expenses:
Direct $ 81 $ 872 $ 1,749
Assumed 8,833 10,700 12,952
Ceded (45) (779) (1,841)
----- ------- ------
Net $ 8,869 $10,793 $12,860
===== ====== ======
(6) Income Taxes
Total income tax (benefit) for the years ended December 31, 1996, 1997,
and 1998 were allocated at follows:
Years ended December 31,
1996 1997 1998
Tax (benefit) attributable to:
Income from continuing operations $ 176,509 $ 355,531 $ (199,244)
Unrealized gains (losses) on
securities available for sale (26,759) 76,157 6,236
------- ------- --------
Total $ 149,750 $ 431,688 $ (193,008)
======= ======= ========
U.S. Federal and state income tax expense from continuing operations consists of
the following components:
Current Deferred Total
December 31, 1996 $ 232,221 $(55,712) $ 176,509
December 31, 1997 462,164 (106,633) 355,531
December 31, 1998 (39,850) (159,394) (199,244)
The state income tax components aggregated $(6,595), $6,884 and $(74,698)
for the years ended December 31, 1996, 1997 and 1998, respectively.
Income tax expense for the years ended December 31, 1996, 1997 and 1998
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:
Years ended December 31,
1996 1997 1998
Expected income tax expense $ 1,052,043 $ 1,212,625 $ 1,956,701
Foreign earned income not subject to
direct taxation (798,094) (833,725) (2,034,446)
Tax-exempt interest (52,632) (57,945) (89,706)
Other, net (24,808) 34,576 (31,793)
---------- ---------- -----------
$ 176,509 $ 355,531 $ (199,244)
========= ========== ===========
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,
1997 1998
Deferred tax assets:
Loss reserve discounting $ 265,277 $ 370,607
Unearned premium reserves 53,486 65,989
Deferred revenue - 36,129
Other, net 254 -
------- -------
Gross deferred tax assets 319,017 472,725
------- -------
Deferred tax liabilities:
Deferred acquisition costs 15,788 -
Unrealized gains 93,434 99,670
Other - 10,104
------- -------
Gross deferred tax liabilities 109,222 109,774
------- -------
Net deferred tax asset $ 209,795 $ 362,951
======= =======
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.
(7) 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.
Although the NAIC has stated that the adoption date for the Codification
is January 1, 2001, the implementation date is dependent upon an
insurer's state of domicile.
The impact of the Codification to such financial statements has not been
determined.
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, 1996, 1997, and 1998 were $18,032,107,
$21,840,896, and $59,269,293 respectively, and the amounts required to be
maintained by the Company were $1,330,348, $1,618,885,and $1,928,938,
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. At
December 31, 1998, the Company was in compliance with this requirement.
As reported in American Safety Casualty's 1998 annual statement, the
statutory capital and surplus of American Safety Casualty approximated
$8,904,000. 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 1999 of approximately $890,400.
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 has calculated its RBC level and has determined
that its capital and surplus is significantly in excess of threshold
requirements.
(8) Related Party and Affiliate Transactions
As of December 31, 1998, the Company had one loan to shareholders
outstanding, which totaled $280,000. This loan bears an effective
interest rates of 9.25% and is payable in 1999. See note 3.
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 marketplace. Reinsurance premiums
ceded and earned aggregated $451,728, $429,976, and $368,000 for the
years ended December 31, 1996, 1997 and 1998, respectively. Additionally,
Intersure 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 12.
Synergy, 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. The Company pays base annual
rent of $214,407 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,
1996 1997 1998
(In thousands)
General liability premiums from affiliate $ 1,522 $ 1,580 $ 2,381
General liability premiums from consolidated subsidiary (532) (1,405) (2,338)
Assumed general liability premiums - other - - (503)
Ceded general liability premiums - other 451 430 977
----- ------ -------
Net premiums earned $ 1,441 $ 605 $ 517
===== ====== ======
Assumed premiums from American Safety RRG 1,982 1,856 2,835
Ceded premiums to American Safety RRG 541 1,251 2,318
------ ----- -----
Net premiums earned 1,441 605 517
Management fee 479 601 714
Loss control 49 58 73
Brokerage commission income 1,341 908 634
----- ------ ---
Total revenues $ 3,310 $ 2,172 $ 1,938
===== ====== =====
Loss and LAE incurred $ 166 $ 405 $ 346
===== ====== =====
For the years ended December 31, 1996, 1997, and 1998, Synergy and ECSI
received fees from American Safety RRG for risk management, claims
administration and other management services. Synergy also recognized
brokerage commission income from American Safety RRG.
The following table depicts the balance sheet effects to the Company from
American Safety RRG:
December 31,
Assets 1996 1997 1998
------ ---- ---- ----
Due from affiliate $ 356,844 $ 288,951 $ 668,074
Liabilities
Unpaid loss and LAE 5,737,373 5,886,030 5,491,731
Unearned premium 91,997 590,269 1,028,600
Ceded premiums payable - 217,062 201,778
Reinsurance payable on paid loss
and LAE - 41,085 82,853
(9) 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.
(b) 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 (i)
environmental remediation risks; (ii) employee leasing and staffing
industry risks; and (iii) other specialty risks. The Company has
demonstrated expertise in developing specialty insurance coverages
and custom designed risk management programs not generally
available in the standard insurance market.
The 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, employee leasing and
staffing, 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 subsidiary, 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:
December 31,
---------------------------------
1996 1997 1998
---- ---- ----
(In thousands)
United States
Net premiums earned - All Other $ 88 $ 2,456 $ 4,857
Net premiums earned - Intersegment 2,101 2,413 (416)
Net investment income and interest on notes receivable 587 737 817
Other revenues 2,471 2,720 2,079
Total revenues 5,247 8,326 7,337
Interest expense - - -
Depreciation and amortization expense 85 89 90
Equity in net earnings of subsidiaries - - -
Income taxes 177 356 (199)
Segment profit (loss) 570 759 (30)
Significant noncash items other than depreciation
and amortization - - -
Property, plant and equipment 187 169 186
Total investments 10,908 14,716 15,678
Total assets 16,666 25,621 29,304
Total policy and contract liabilities 4,865 7,577 12,541
Total liabilities 7,627 15,677 19,375
Bermuda
Net premiums earned - All Other 4,184 5,891 4,332
Net premiums earned - Intersegment (2,101) (2,413) 416
Net investment income and interest on notes receivable 1,505 1,708 4,439
Other revenues 203 84 437
Total revenues 3,791 5,270 9,624
Interest expense - 44 -
Depreciation and amortization expense - - -
Equity in net earnings of subsidiaries 570 759 2,116
Income taxes - - -
Segment profit 2,348 2,452 5,984
Significant noncash items other than depreciation
and amortization - - -
Property, plant and equipment - - -
Total investments 16,095 24,569 58,544
Total assets 26,224 36,313 87,309
Total policy and contract liabilities 7,967 13,729 11,193
Total liabilities 8,192 14,472 14,794
December 31,
1996 1997 1998
(In thousands)
Intersegment Eliminations
Net premiums earned - All Other $ - $ - $ -
Net premiums earned - Intersegment - - -
Net investment income and interest on notes receivable - - -
Other revenues (132) (106) (221)
Total revenues (132) (106) (221)
Interest expense - - -
Depreciation and amortization expense - - -
Equity in net earnings of subsidiaries (570) (759) (2,116)
Income taxes - - -
Segment profit (loss) - - -
Significant noncash items other than depreciation
and amortization - - -
Property, plant and equipment - - -
Total investments (9,039) (9,944) (23,174)
Total assets (11,591) (14,266) (30,465)
Total policy and contract liabilities (2,553) (3,326) (4,561)
Total liabilities (2,552) (4,322) (7,291)
Total
Net premiums earned - All Other 4,272 8,347 9,189
Net premiums earned - Intersegment - - -
Net investment income and interest on notes receivable 2,092 2,445 5,256
Other revenues 2,542 2,698 2,295
Total revenues 8,906 13,490 16,740
Interest expense - 44 -
Depreciation and amortization expense 85 89 90
Equity in net earnings of subsidiaries - - -
Income taxes 177 356 (199)
Total profit (loss) 2,918 3,211 5,954
Significant noncash items other than depreciation
and amortization - - -
Property, plant and equipment 187 169 186
Total investments 17,964 29,341 51,048
Total assets 31,299 47,668 86,148
Total policy and contract liabilities 10,279 17,980 19,173
Total liabilities 13,267 25,827 26,878
(10) Commitments and Contingencies
At December 31, 1997 and 1998, 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. Additionally, Legion Insurance Company
had $2,000,000 of aggregate outstanding letters of credit which had not
been drawn in favor of the Company at December 31, 1997 and 1998.
(11) 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,
1996 1997 1998
(In thousands)
Unpaid loss and loss adjustment expenses, January 1 $ 8,294 $ 8,914 $11,572
Reinsurance recoverable on unpaid losses and loss
adjustment expenses at end of period 6 45 779
----- ----- ------
Net unpaid loss and loss adjustment
expenses, January 1 8,288 8,869 10,793
----- ----- ------
Incurred related to:
Current year 2,862 3,112 4,383
Prior years (806) 981 794
----- ----- -----
Total incurred 2,056 4,093 5,177
----- ----- -----
Paid related to:
Current year 543 342 103
Prior years 932 1,827 3,007
----- ----- -----
Total paid 1,475 2,169 3,110
----- ----- -----
Net unpaid losses and loss adjustment
expenses at end of period 8,869 10,793 12,860
Reinsurance recoverable on unpaid losses and loss
adjustment expenses at end of period 45 779 1,841
----- ----- ------
Unpaid loss and loss adjustment end
expenses at of period $ 8,914 $11,572 $14,701
===== ====== ======
The negative development in 1997 and 1998 is attributable to the
Company's workers compensation line 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.
(12) Stock Options
The following table summarizes stock option activity:
Weighted
Option average
shares exercise price
1997 activity:
Granted 170,221 $ 6.66
Exercised - -
------- -----
Outstanding at December 31, 1997 170,221 $ 6.66
======= ====
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
======= ====
Of the 451,181 outstanding options at December 31, 1998, 125,681 were
exercisable. The remainder vest evenly over a three year period. All of
the 170,221 outstanding options at December 31, 1997 were exercisable.
The Company had no options outstanding prior to 1997.
The following table summarizes information about stock options
outstanding at December 31, 1998:
Options outstanding Options exercisable
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 3.18 $ 5.96 1997 51,090 $ 5.96
7.08 65,500 3.75 7.08 1997 65,500 7.08
11.00 9,091 1.25 11.00 1997 9,091 11.00
11.00 325,500 9.13 11.00 1998 -0- 11.00
5.96-11.00 451,181 7.52 9.86 125,681 6.91
========== ======= ==== =========== ======= ====
Had compensation cost for the Company's stock options granted in 1997
and 1998 been determined using the fair-value-based method as
described in SFAS No. 123, the Company's net earnings and earnings
per share would approximate the pro forma amounts indicated below:
December 31, 1997 December 31, 1998
----------------- -----------------
(In thousands, except
per share amounts)
Net earnings:
As reported $ 3,211 $ 5,954
Effect of stock options 217 133
------- -------
Pro forma net earnings $ 2,994 $ 5,821
===== =====
Net earnings per share:
As reported $ 1.08 $ 1.04
Effect of stock options 0.07 .02
---- -----
Pro forma net earnings per share $ 1.01 $ 1.02
==== ====
The fair value of each option granted during 1997 and 1998 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% (as the 1998 options were granted concurrently with
the Company's IPO); risk-free interest rate of 5.44%; and expected life
from the vesting dates ranging from 0.50 years to 9.13 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 1997 and 1998 at an
amount deemed to be fair market value at the date of grant.
(13) 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.
(14) 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 aggregate approximately $31.8 million.
AMERICAN SAFETY INSURANCE GROUP, LTD.
QUARTERLY INFORMATION
(UNAUDITED)
The following table presents the quarterly results of consolidated
operations for 1998 and 1997 (dollars in thousands, except per share
amounts):
1998 Mar. 31 June 30 Sept. 30 Dec. 31
Operating revenues $ 3,549 $ 3,945 $ 3,832 $ 4,970
Income before taxes 1,078 1,567 1,529 1,581
Net Income 1,024 1,581 1,598 1,751
Comprehensive income 962 1,654 2,446 1,248
Net income per share
Basic $ 0.23 $ 0.26 $ 0.26 $ 0.29
Diluted 0.23 0.26 0.26 0.29
Common stock price ranges
High $ 13.50 $ 14.75 $ 12.38 $ 10.00
Low 11.00 11.12 8.75 6.75
1997 Mar. 31 June 30 Sept. 30 Dec. 31
Operating revenues $ 2,941 $ 3,126 $ 4,272 $ 3,069
Income before taxes 1,056 802 747 962
Net income 862 704 656 989
Comprehensive income 537 970 887 1,117
Net income per share
Basic $ 0.29 $ 0.24 $ 0.22 $ 0.33
Diluted 0.29 0.24 0.22 0.33
Common stock price ranges
High NA NA NA NA
Low NA NA NA NA
-51-
AMERICAN SAFETY INSURANCE GROUP, LTD.
SCHEDULE II - CONDENSED BALANCE SHEETS
DECEMBER 31, 1996, 1997 and 1998
Assets 1997 1998
Investment in Subsidiary $ 9,943,892 $ 23,174,367
Other Investments:
Bonds 14,161,821 32,395,918
Common Stock 462,688 2,973,374
Cash 2,299,406 1,820,578
Shareholder Loan 580,000 280,000
Secured Note Receivable 4,423,178 5,335,125
Investment Income Due and Accrued 594,298 1,431,281
Total Investments 32,465,283 67,410,643
Premiums Receivable 1,633,482 844,956
Due from Affiliate 132,085 -
Ceded Unearned Premium 401,491 -
Ceded Loss Reserves 1,631,322 2,043,988
Other Assets 49,629 330,312
Total Assets $36,313,292 $ 70,629,899
Liability and Shareholders'
Equity
Unpaid Losses and Loss Adjustments
Expenses $ 8,355,449 $ 7,437,036
Unearned Premium 1,297,342 -
Ceded Premium Payable 428,885 1,140,399
Assumed Loss and LAE Payable - WC 243,906 -
Liability for Deductible Fees Held 4,076,532 577,428
Due to Related Party:
Paid Loss and LAE 25,036 -
Other - 2,095,113
Accounts Payable and
Accrued Expenses 45,245 110,630
Total Liabilities 14,472,395 11,360,606
Common Stock 29,252 60,747
Additional Paid in Capital 2,751,789 33,809,141
Unrealized Gain-Investments 308,633 693,934
Retained Earnings 18,751,223 24,705,471
Total Equity 21,840,897 59,269,293
Total Liabilities &
Shareholders' Equity $36,313,292 $70,629,899
-52-
AMERICAN SAFETY INSURANCE GROUP, LTD.
SCHEDULE II - CONDENSED INCOME STATEMENT
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
1996 1997 1998
Revenues:
Direct and Assumed Premiums Earned $ 4,120,549 $ 6,494,394 $ 2,884,327
Ceded Premiums Earned (2,037,942) (3,016,373) (1,325,351)
Net Premiums Earned 2,082,607 3,478,021 1,558,976
Investment Income 1,505,354 909,614 1,869,231
Interest on Notes Receivable - 798,139 1,001,773
Realized Gains on Sale of Investments 203,097 84,283 436,871
Total Revenues 3,791,058 5,270,057 4,866,851
Expenses:
Losses and LAE Incurred 683,253 1,832,184 396,305
Acquisition Expenses 358,256 626,745 288,903
Other Underwriting Expenses 402,216 358,995 343,466
Total Expenses 1,443,725 2,817,924 1,028,674
Earnings Before Income Taxes 2,347,333 2,452,133 3,838,177
Income Taxes - - -
Earnings Before Equity In
Earnings of Subsidiary 2,347,333 2,452,133 3,838,177
Equity in Net Earnings of Subsidiary 570,402 758,881 2,116,072
Net Earnings $ 2,917,735 $ 3,211,014 $ 5,954,249
-53-
AMERICAN SAFETY INSURANCE GROUP, LTD.
SCHEDULE II - CONDENSED STATEMENT OF CASH FLOW
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
1996 1997 1998
Cash flow from operating activities:
Net earnings before equity in earnings of subsidiary $ 2,347,333 $ 2,452,133 $ 3,838,177
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Change in:
Accrued investment and interest income (731,783) 301,154 (836,983)
Premiums receivable/Payable (232,149) (990,984) 1,500,040
Due from/to affiliate - (107,049) 2,202,162
Unpaid losses and loss adjustment expenses (165,998) 638,819 (1,331,079)
Unearned premiums 171,877 359,094 (895,851)
Liability for deductible fees held - 4,076,532 (3,499,104)
Accounts payable and accrued expenses (51,743) 5,061 65,385
Loss and LAE paybale - 243,906 (243,906)
Other assets (20,461) 22,182 (280,683)
Other, net (29,745) 35,237 1,445
Net cash provided by operating activities $ 1,287,331 $ 7,036,085 $ 519,603
Cash flow from investing activities:
Decrease (increase) in investments (66,134) (6,392,515) (20,987,278)
Investment in subsidiary - - (11,100,000)
Net cash provided by investing activities (66,134) (6,392,515) (32,087,278)
Cash flow from financing activities:
Proceeds from sale of common stock - 297,279 31,088,847
Dividends paid (772,475) - -
Net cash used by financing activities $ (772,475) $ 297,279 $ 31,088,847
Net increase (decrease) in cash 448,722 940,849 (478,828)
Cash at beginning of year 909,835 1,358,557 2,299,406
Cash at end of year $ 1,358,557 $ 2,299,406 $ 1,820,578
Supplemental disclosure of noncash
Financing activities - retirement of treasury stock 297,279 - -
-54-
AMERICAN SAFETY INSURANCE GROUP, LTD.
SCHEDULE II - CONDENSED COMPREHENSIVE INCOME
YEAR ENDED DECEMBER 31, 1996, 1997 AND 1998
1996 1997 1998
Net Earnings $ 2,917,735 $ 3,211,014 $ 5,924,249
Other comprehensive earnings (loss) before income taxes:
Unrealized gains (losses) on securities available for sale (730,640) 470,427 31,854
Reclassification adjustment for realized gains included in net earnings (23,304) (93,773) 359,682
Total other comprehensive earnings (loss) before taxes (753,944) 376,654 391,536
Income tax expense (benefit) related to items of comprehensive income (26,759) 76,157 6,236
Other comprehensive earnings (loss) net of income taxes (727,185) 300,497 385,300
Total comprehensive earnings $ 2,190,550 $ 3,511,511 $ 6,309,549
-55-
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
Costs Expenses C Premiums Premiums Income Year Years tion Costs Expenses Written
- ------------------------------------------------------------------------------------------------------------------------------------
United States
1996 .. 61 2,829 -- 828 2,189 586 1,279 93 186 624 2,350
1997... 46 4,847 -- 1,436 2,456 737 1,686 642 325 976 5,134
1998... (106) 7,311 -- 2,712 4,852 817 1,844 828 24 1,336 4,624
- ------------------------------------------------------------------------------------------------------------------------------------
Bermuda
1996... 61 6,085 -- 536 2,083 620 1,583 (899) 186 851 2,267
1997... 46 6,725 -- 896 5,891 910 1,426 339 326 1,193 3,837
1998... 46 7,389 -- 1,183 4,337 2,030 2,539 (34) 242 1,774 5,028
- ------------------------------------------------------------------------------------------------------------------------------------
Combined
1996... 122 8,914 -- 1,364 4,272 1,206 2,862 (806) 372 1,475 4,617
1997... 92 11,572 -- 2,332 8,347 1,647 3,112 981 651 2,169 8,971
1998... (60) 14,700 -- 3,895 9,189 2,847 4,383 794 266 3,110 9,652
- -----------------------------------------------------------------------------------------------------------------------------------
-56-
AMERICAN SAFETY INSURANCE GROUP, LTD. AND SUBSIDIARIES
SCHEDULE IV - REINSURANCE
Year Ended December 31, 1996, 1997 and 1998
Assumed
Property-Liability Ceded to from Percentage of
Insurance Premiums Gross Other Other Net Assumed to
Earned Amount Companies Companies Amount Net
- ---------------------------------------- ------ ------ ------ ------ -------
United States
December 31, 1996 ...................... $ 811 $ 592 $1,971 $2,190 90.0%
December 31, 1997 ...................... 3,515 1,813 754 2,456 30.7%
December 31, 1998 ...................... 3,532 3,626 4,982 4,888 101.9%
- ---------------------------------------- ------ ------ ------ ------ -------
Bermuda
December 31, 1996 ...................... -- $ 452 $2,534 $2,082 121.7%
December 31, 1997 ...................... -- 430 6,321 5,891 107.3%
December 31, 1998 ...................... -- 368 4,669 4,301 108.6%
- ---------------------------------------- ------ ------ ------ ------ -------
Combined Total
December 31, 1996 ...................... $ 811 $1,044 $4,505 $4,272 105.5%
December 31, 1997 ...................... 3,515 2,243 7,075 8,347 84.8%
December 31, 1998 ...................... 3,532 3,994 9,651 9,189 105.0%
- ---------------------------------------- ------ ------ ------ ------ -------
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