UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON,D.C. 20549 ---------------------- FORM 10-K/A Amendment No. 1 ----------------------Annual Report Pursuant To Section 13 Or 15(d) Of The Securities Exchange Act Of 1934
Transition Report Pursuant To Section 13 Or 15(d) Of The Securities Exchange Act Of 1934
For the fiscal year ended December 31, 2006 Commission file number 1-14795 AMERICAN SAFETY INSURANCE HOLDINGS, 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 (Address of principal executive offices) HM HX (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 if the registrant is a well known seasoned issuer as defined in Rule 405 of the Securities Act. Yes ___ No _X_ Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes____ No X Indicate by check mark whether the 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 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/A or any amendment to this Form 10-K/A. __ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. Large Accelerated Filer ___Accelerated Filer X Non-accelerated Filer ____ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ___ No X The aggregate market value of registrant's voting common stock held by non-affiliates on June 30, 2006 was $112,097,997. For the purposes of this calculation, shares of common stock of the Registrant held by directors, executive officers and persons who hold more than 5% of the outstanding shares have been excluded. The number of shares of registrant's common stock outstanding on March 9, 2007 was 10,556,449. Documents Incorporated by Reference: Part III of this Form 10-K/A incorporates by reference certain information from Registrant's Proxy Statement for the 2007 Annual General Meeting of the Shareholders (the "2007 Proxy Statement"). [The Remainder of this Page Intentionally Left Blank]
Explanatory Note
This Amendment No. 1 on Form 10-K/A (this “Amendment”) to our Annual Report on Form 10-K of American Safety Insurance Holdings, Ltd. (the “Registrant”) for the year ended December 31, 2006 filed on March 15, 2007 (the “Original Filing”) is being filed solely to change the date in the last line of each of the Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting included in Item 9A of the Original Filing and the Report of Independent Registered Public Accounting Firm included in Item 15 of the Original Filing from March 15, 2007 to March 13, 2007.
As required by Rule 12b-15 promulgated under the Securities and Exchange Act of 1934, as amended, we have included the complete text of Item 8, Item 9A, 9B and Item 15 with no other changes. Also as required by Rule 12 b-15, in connection with this Form 10-K/A the Registrant’s Chief Executive Officer and Chief Financial Officer are providing Rule 13a-14(a) certifications dated March 21, 2007 and written statements pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 dated March 21, 2007.
Except as described above, this Amendment does not modify or update disclosure in, or exhibits to, the Original Filing. Furthermore, this amendment does not change any previously reported financial results, nor does it reflect events occurring after the date of the Original Filing.
Item 8. Financial Statements and Supplementary Data
The Company’s consolidated financial statements required under this Item 8 are included as part of Item 15 of this Report.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Management’s Responsibility for Financial Statements
The financial statements presented in this Annual Report have been prepared with integrity and objectivity and are the responsibility of the management of American Safety Insurance Holdings, Ltd. These financial statements have been prepared in conformity with U.S. generally accepted accounting principles and properly reflect certain estimates and judgments based upon the best available information.
The financial statements of the Company have been audited by BDO Seidman LLP, an independent registered public accounting firm. Their accompanying report is based upon an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States). The Audit Committee of the Board of Directors, consisting solely of outside directors, meets a minimum of four times a year with the independent registered public accounting firm, the internal auditors and representatives of management to discuss auditing and financial reporting matters. In addition, a meeting is held prior to each quarterly earnings release. The Audit Committee retains the independent registered public accounting firm and regularly reviews the internal accounting controls, the activities of the independent registered public accounting firm and internal auditors and the financial condition of the Company. Both the Company’s independent registered pubic accounting firm and the internal auditors have access to the Audit Committee at any time.
Evaluation of Disclosure Controls and Procedures
As of December 31, 2006, an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a – 15(e) under the Securities Exchange Act of 1934) was carried out on behalf of American Safety Insurance Holdings, Ltd., and its subsidiaries by our management with the participation of our Chief Executive Officer and Chief Financial Officer. Based upon the evaluation, management concluded that these disclosure controls and procedures were effective as of December 31, 2006.Changes in Internal Controls
During the fourth quarter of the year ended December 31, 2006, no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) occurred that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
None.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) promulgated under the Securities Exchange Act of 1934, as amended. Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework inInternal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on our evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2006. Our management’s assessment of the effectiveness of our internal control over financial reporting as of December 31, 2006 has been audited by BDO Seidman LLP, an independent registered public accounting firm, as stated in its report which is included herein.
/s/ Stephen R. Crim /s/ William C. Tepe Stephen R. Crim William C. Tepe President and Chief Executive Officer Chief Financial Officer
Report of Independent Registered Public Accounting Firm on
Internal Control Over Financial Reporting
To the Board of Directors
American Safety Insurance Holdings, Ltd.
We have audited management’s assessment in the accompanying Report of Management on Internal Control over Financial Reporting included in Item 9A, that American Safety Insurance Holdings, Ltd. and subsidiaries (the “Company”) maintained effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO” criteria). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of the inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of the effectiveness to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, management’s assessment that the Company maintained effective internal control over financial reporting as of December 31, 2006 is fairly stated, in all material respects, based on the COSO criteria. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on the COSO criteria.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of American Safety Insurance Holdings, Ltd. and subsidiaries as of December 31, 2006 and 2005 and the related consolidated statements of income, changes in shareholders’ equity and cash flows and related schedules for each of the three years in the period ended December 31, 2006 and our report dated March 13, 2007 expressed an unqualified opinion thereon.
/s/ BDO Seidman, LLP
Atlanta, GA
March 13, 2007
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 21, 2007. AMERICAN SAFETY INSURANCE HOLDINGS, LTD. By: /s/ Stephen R. Crim Stephen R. Crim President
AMERICAN SAFETY INSURANCE HOLDINGS, LTD. AND SUBSIDIARIES
Consolidated Financial Statements
December 31, 2005 and 2006
With Independent Auditors’ Report Thereon
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors
American Safety Insurance Holdings, Ltd.
We have audited the accompanying consolidated balance sheets of American Safety Insurance Holdings, Ltd and subsidiaries as of December 31, 2005 and 2006 and the related consolidated statements of operations, shareholders’ equity, cash flows and comprehensive income for each of the three years in the period ended December 31, 2006. We have also audited Schedules II, III, and IV as of and for each of the three years in the period ended December 31, 2006. These consolidated financial statements and schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and schedules based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (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 also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial 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 Holdings, Ltd. and subsidiaries at December 31, 2005 and 2006, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2006, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related schedules present fairly, in all material respects, the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of American Safety Insurance Holdings, Ltd.‘s internal control over financial reporting as of December 31, 2006, based on criteria established inInternal Control Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 13, 2007 expressed an unqualified opinion thereon.
/s/ BDO Seidman, LLP Atlanta, Georgia March 13, 2007
AMERICAN SAFETY INSURANCE HOLDINGS, LTD. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2005 and 2006
2005 2006 Assets Investments: Fixed maturity securities available-for-sale, at fair value $364,856,826 $490,031,666 Common stock, at fair value 21,706,103 12,402,957 Preferred stock, at fair value 3,607,000 8,118,060 Short-term investments 25,326,648 40,605,672 Total investments 415,496,577 551,158,355 Cash and cash equivalents 23,289,927 11,293,296 Accrued investment income 4,037,573 4,299,678 Premiums receivable 17,315,778 21,747,908 Ceded unearned premium 28,870,656 35,897,446 Reinsurance recoverable 172,110,582 185,010,493 Deferred income taxes 11,933,791 10,115,869 Deferred policy acquisition costs 10,882,478 12,402,764 Property, plant and equipment, net 4,489,608 5,644,629 Other assets 6,572,007 9,560,230 Total assets $694,998,977 $847,130,668 ============ ============
Liabilities and Shareholders' Equity Liabilities: Unpaid losses and loss adjustment expenses $393,493,107 $439,673,496 Unearned premiums 97,982,908 115,197.804 Ceded premiums payable 16,505,732 25,462,908 Deferred revenues 1,501,741 1,192,705 Accounts payable and accrued expenses 13,066,758 11,810,962 Funds held 11,190,989 16,328,609 Loans payable 37,810,099 38,138,804 Minority interest 5,012,396 3,175,200 Total liabilities 576,563,730 650,980,488 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, 2005 6,753,731 shares, and at December 31, 2006 10,554,200 shares 67,537 105,542 Additional paid-in capital 49,460,019 104,514,200 Retained earnings 70,457,352 90,989,550 Accumulated other comprehensive (loss) income, net (1,549,661) 540,888 Total shareholders' equity 118,435,247 196,150,180 Total liabilities and shareholders' equity $694,998,977 $847,130,668 ============ =========== See accompanying notes to consolidated financial statements.
AMERICAN SAFETY INSURANCE HOLDINGS, LTD. AND SUBSIDIARIES Consolidated Statements of Operations Years ended December 31, 2004, 2005 and 2006 2004 2005 2006 Revenues: Direct premiums earned $223,052,339 $229,238,078 $222,257,131 Assumed premiums earned 4,000,601 (81,311) 135,000 Ceded premiums earned (90,752,226) (91,576,899) (75,636,276) Net premiums earned 136,300,714 137,579,868 146,755,855 Net investment income 9,772,722 14,315,891 21,766,562 Net realized gains (losses) 208,135 (54,101) 1,190,328 Real estate income 67,967,125 3,000,078 - Fee Income 210,172 1,196,505 1,684,889 Other income 317,784 76,286 42,476 Total revenues 214,776,652 156,114,527 171,440,110 Expenses: Losses and loss adjustment expenses incurred 93,503,285 84,406,158 92,329,283 Acquisition expenses 26,648,980 28,751,979 27,378,292 Payroll and related expenses 10,297,037 12,130,136 14,896,180 Real estate expenses 55,480,408 2,439,022 381,243 Interest expense 1,075,715 1,257,064 3,376,124 Other expenses 8,559,668 11,900,940 12,105,188 Minority interest 988,202 515,233 (1,872,690) Expenses recovered from rescission (229,568) (1,334,162) - Total expenses 196,323,727 140,066,370 148,593,620 Earnings before income taxes 18,452,925 16,048,157 22,846,490 Income taxes 3,695,950 1,391,747 2,314,292 Net earnings $ 14,756,975 $14,656,410 $20,532,198 ============ ========== =========== Net earnings per share: Basic $2.15 $2.18 $2.35 Diluted $2.01 $2.05 $2.26 Weighted average number of shares outstanding Basic 6,863,619 6,736,938 8,729,734 Diluted 7,342,879 7,163,892 9,095,423See accompanying notes to consolidated financial statements.
AMERICAN SAFETY INSURANCE HOLDINGS, LTD. AND SUBSIDIARIES Consolidated Statements of Shareholders' Equity Years ended December 31, 2004, 2005 and 2006 2004 2005 2006 Common stock - number of shares: Balance at beginning of period 6,910,766 6,781,721 6,753,731 Issuance of common shares 87,855 173,583 3,800,469 Repurchase of common shares (219,900) (201,573) - Balance at end of period 6,781,721 6,753,731 10,554,200 ========= ========= ========== Common stock: Balance at beginning of period $69,108 $67,817 $67,537 Issuance of common shares 879 1,735 38,005 Repurchase of common shares (2,170) (2,015) - Balance at end of period $67,817 $67,537 $105,542 Additional paid-in capital: Balance at beginning of period $52,744,720 $51,067,506 $49,460,019 Issuance of common shares 805,825 1,336,211 54,439,295 Repurchase of common shares (2,483,039) (2,943,698) - Share based compensation - - 614,886 Balance at end of period $51,067,506 $49,460,019 $104,514,200 Retained earnings: Balance at beginning of period $41,043,967 $55,800,942 $70,457,352 Net earnings 14,756,975 14,656,410 20,532,198 Balance at end of period $55,800,942 $70,457,352 $90,989,550 Accumulated other comprehensive income: Balance at beginning of period $1,485,328 $1,843,418 $(1,549,661) Unrealized gain (loss) during the period (net of deferred tax benefit (expense) of $(65,933), $783,353, and $197,928, respectively) 358,090 (3,393,079) 2,090,549 Balance at end of period $1,843,418 $(1,549,661) $540,888 Total shareholders' equity $108,779,683 $118,435,247 $196,150,180 =========== =========== =========== See accompanying notes to consolidated financial statements
AMERICAN SAFETY INSURANCE HOLDINGS, LTD. AND SUBSIDIARIES Consolidated Statements of Cash Flows Years ended December 31, 2004, 2005 and 2006 2004 2005 2006 Cash flow from operating activities: Net earnings $ 14,756,975 $14,656,410 $20,532,198 Adjustments to reconcile net earnings to net cash provided by operating activities: Realized (gains) losses on sale of investments (208,135) 54,101 (1,190,328) Depreciation expense 1,174,770 1,116,386 2,113,540 Stock Based Compensation Expense - - 614,886 Amortization of deferred acquisition costs, net 401,307 855,639 (1,520,016) Reinsurance recoverable allowance - 1,318,000 - Amortization of investment premium 2,450,153 2,326,835 1,534,636 Deferred income taxes 1,889,988 (1,509,401) 478,015 Change in operating assets and liabilities: Accrued investment income (536,772) (729,110) (262,105) Premiums receivable 6,850,698 3,778,032 (4,432,130) Reinsurance recoverable (18,537,761) (34,975,997) (12,899,911) Ceded unearned premiums 1,654,444 (3,965,139) (7,026,790) Funds held 3,383,326 2,856,195 5,137,620 Unpaid losses and loss adjustment expenses 91,519,976 72,454,712 46,180,389 Unearned premiums (6,140,184) 4,901,286 17,214,896 Ceded premiums payable (5,870,903) 4,653,704 8,957,176 Accounts payable and accrued expenses 1,109,634 (2,303,685) (1,015,796) Deferred revenue (1,817,775) 1,155,229 (309,036) Other, net (2,243,973) 4,246,580 (3,436,605) Net cash provided by operating activities 89,835,768 70,358,811 70,670,639 Cash flow from investing activities: Purchase of fixed maturities (107,194,605) (150,861,495) (388,133,860) Purchase of common stock (12,854,116) (7,106,043) (4,043,980) Purchase of preferred stocks - (3,500,900) (4,405,720) Proceeds from sales of fixed maturities 27,752,791 3,584,528 230,496,120 Proceeds from matured securities 4,420,000 60,635,000 34,000,000 Proceeds from sales of equity securities 1,380,010 1,195,954 13,772,938 Decrease (increase) in short-term investments (20,217,314) 571,483 (15,279,024) Decrease in notes receivable 1,435,000 - - Decrease of investment in real estate 35,850,109 2,005,440 - Purchases of fixed assets (980,480) (1,705,521) (3,268,561) Net cash used in investing activities (70,408,605) (95,181,554) (136,862,087)
2004 2005 2006 Cash flow from financing activities: Proceeds from sale of common stock 638,495 1,218,455 54,194,817 Stock repurchase payments (2,485,209) (2,945,714) - Proceeds from (repayment of) loan payable (17,421,859) 24,996,193 - Proceeds from redemption of escrow deposits (9,091,347) (144,500) - Withdrawals from restricted cash, net 1,623,114 144,500 - Net cash (used in) provided by financing activities (26,736,806) 23,268,934 54,194,817 Net decrease in cash (7,309,643) (1,553,809) (11,996,631) Cash and cash equivalents at beginning of period 32,153,379 24,843,736 23,289,927 Cash and cash equivalents at end of period $24,843,736 $23,289,927 $11,293,296 =========== =========== =========== Supplemental disclosure of cash flow: Income taxes paid $ 3,525,270 $287,617 $2,697,684 ========== ======== ========= Interest paid $ 1,121,713 $983,195 $3,211,736 ========== ======== ========= See accompanying notes to consolidated financial statements.
AMERICAN SAFETY INSURANCE HOLDINGS, LTD. AND SUBSIDIARIES Consolidated Statements of Comprehensive Income Years ended December 31, 2004, 2005 and 2006 2004 2005 2006 Net earnings $14,756,975 $14,656,410 $20,532,198 Other comprehensive income (loss): Unrealized gains (losses) on securities available-for sale, net of minority interest of $(108,334), $(259,129) and $11,815 for 2004, 2005 and 2006, respectively 463,260 (4,541,890) 3,616,606 Unrealized gains (losses) on hedging transactions 81,912 311,359 (103,200) Reclassification adjustment for realized (gains) losses included in net earnings, net of minority interest of $(86,986), $(0) and $(25,530) for 2004, 2005 and 2006 respectively. (121,149) 54,101 (1,215,858) Total other comprehensive income (loss) before income taxes 424,023 (4,176,430) 2,297,548 Income tax expense (benefit) related to items of other comprehensive income, net of minority interest of $0 for 2004, $(5,534) for 2005 and $9,071 for 2006 respectively. 65,933 (783,351) 206,999 Other comprehensive income (loss) 358,090 (3,393,079) 2,090,549 Total comprehensive income $15,115,065 $11,263,331 $22,622,747 ========== =========== ========== See accompanying notes to consolidated financial statements.
AMERICAN SAFETY INSURANCE HOLDINGS, LTD. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2005 and 2006
(1) Summary of Significant Accounting Policies
(a)Basis of Presentation
The accompanying consolidated financial statements of American Safety Insurance Holdings, Ltd. (“American Safety”) and its subsidiaries and American Safety Risk Retention Group Inc. (“American Safety RRG”), a non-subsidiary risk retention group affiliate (collectively, the “Company”) are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of financial statements in conformity with GAAP 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/or actuarial determinations subject to future changes are the Company’s invested assets, deferred income taxes, and the 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 these estimates are adequate, such estimates may change in the future. |
(b)Description of Common Stock — Voting and Ownership Rights
The authorized share capital of the Company is 20 million shares, consisting of 15 million common shares, par value $.01 per share (“Common Shares”), and 5 million preferred shares, par value $.01 per share (“Preferred Shares”). The Common Shares are validly issued, fully paid, and non-assessable. There are no provisions of Bermuda law or the Company’s Bye-Laws which impose any limitations on the rights of shareholders to hold or vote Common Shares by reason of such shareholders not being residents of Bermuda. Holders of Common Shares are entitled to receive dividends ratably when and as declared by the Board of Directors out of funds legally available therefore. |
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 non cumulative 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 Holdings, Ltd., a Bermuda company, American Safety Reinsurance, Ltd. (“American Safety Re”), American Safety Assurance Ltd., (“ASA”) two 100%-owned licensed Bermuda insurance companies, American Safety Holdings Corp. (“American Safety Holdings”), a 100%-owned insurance holding company and American Safety Risk Retention Group, Inc. (“American Safety RRG”), a non-subsidiary risk retention group affiliate. American Safety Holdings in turn wholly owns American Safety Casualty Insurance Company (“American Safety Casualty”), a property and casualty insurance company, American Safety Insurance Services, Inc. (“ASI Services”), an underwriting and administrative subsidiary, Ponce Lighthouse Properties, Inc. (“CityPonce”), the development company of the Harbour Village project, and Rivermar Contracting Company (“Rivermar”), the general contractor of the Harbour Village project. American Safety Casualty owns 88% of American Safety Indemnity Company, a property and casualty excess and surplus lines insurance company. The remaining 12% is owed by American Safety Holdings. ASI Services wholly owns the following subsidiaries: Sureco Bond Services, Inc. (“Sureco”), a bonding agency; Environmental Claims Services, Inc. (“ECSI”), a claims service firm; American Safety Financial Corp., a financial services subsidiary; and American Safety Purchasing Group, Inc., which acts as a purchasing group for the placement of certain business with American Safety Casualty. |
In accordance with FASB Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities (VIEs) and FASB Interpretation No. 46 Revised (FIN 46R), the accompanying financial statements consolidate American Safety RRG, based on its status as VIE and the Company’s status as the primary beneficiary of the VIE. A minority interest has been established for the equity holders of American Safety RRG. The accompanying financial statements also de-consolidate American Safety Capital Trust, American Safety Capital Trust II and American Safety Capital Trust III (“American Safety Capital”, “American Safety Capital II” and “American Safety Capital III”, respectively) based on their status as variable interest special purpose entities of the Company’s status as not being the primary beneficiary. American Safety Capital, American Safety Capital II and American Safety Capital III are accounted for under the equity method. |
All significant intercompany balances have been eliminated, as appropriate, in consolidation. |
(d)Business Environment
The following is a description of certain risks facing the Company and its subsidiaries:
Legal/Regulatory Risk is the risk that changes in the legal or regulatory environment in which an insurer operates will create additional expenses not anticipated by the insurer in pricing its products and beyond those recorded in the financial statements. That is, regulatory initiatives designed to reduce insurer profits or otherwise affecting the industry in which the insurer operates, new legal theories or insurance company insolvencies through guaranty fund assessments, may create costs for the insurer beyond those recorded in the financial statements. The Company attempts to mitigate this risk by actively writing insurance business in several states, thereby spreading this risk over a large geographic area. |
The Potential Risk of country-regionUnited 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 country-regionUnited States trade or business or is carrying on an insurance business in the country-regionUnited 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’s, American Safety Re’s and American Safety Assurance’s sole business is reinsuring contracts via treaty reinsurance agreements, which are all signed outside of the United States, American Safety does not consider itself to be engaged in a trade or business in the United States and, accordingly, does not expect to be subject to United States income taxes. This position is consistent with the position taken by various other entities that have similar operational structures as American Safety. |
However, because the Internal Revenue Code of 1986, as amended, the Treasury Regulations and court decisions do not definitively identify activities that constitute being engaged in a United States trade or business, and because of the factual nature of the determination, there can be no assurance that the Internal Revenue Service will not contend that American Safety or its Bermuda insurance subsidiary are engaged in a United States trade or business. In general, if American Safety or its Bermuda insurance subsidiaries are considered to be engaged in a United States trade or business, it would be subject to (i) United States Federal income tax on its taxable income that is effectively connected with a United States trade or business at graduated rates and (ii) the 30 percent branch profits tax on its effectively connected earnings and profits deemed repatriated from the United States. Certain subsidiaries of American Safety are, however, subject to U.S. Federal and state income tax, as they are domiciled and conduct business in the United States. |
Credit Risk is the risk that issuers of securities owned by the insurer or secured notes receivable will default or that other parties, including reinsurers that have obligations to the insurer, will not pay or perform. The Company attempts to mitigate this risk by adhering to a conservative investment strategy, by obtaining sufficient collateral for secured note obligations and by maintaining sound reinsurance, credit and collection policies. |
Interest Rate Risk is the risk that interest rates will change and cause a decrease in the value of an insurer’s investments. The Company attempts to mitigate this risk by attempting to match the maturities of its assets with the expected payouts of its liabilities. |
(e)Investments
Fixed maturity securities for which the Company has the positive intent and ability to hold to maturity are classified as “held to maturity” and are reported at amortized cost. Fixed maturity and equity securities that are bought and held principally for the purpose of selling them in the near term are classified as “trading” and are reported at fair value, with unrealized gains and losses included in earnings. Fixed maturity and equity securities not classified as either held to maturity or trading are classified as “available for sale” and are reported at fair value, with unrealized gains and losses (net of deferred taxes) charged or credited as a component of accumulated other comprehensive income. |
While it is the Company’s intent to hold fixed maturity securities until the foreseeable future or until maturity, it may sell such securities in response to, among other things, market conditions, liquidity needs, or interest rate fluctuations. At December 31, 2005 and 2006, the Company considered all of its fixed maturity securities as “available for sale” |
The Company notes that it has the ability and intent to hold securities with unrealized losses until they mature or recover in value. However, all investment securities are characterized as “available for sale”, and the Company may, from time to time, sell securities in response to market conditions or interest rate fluctuations in accordance with its investment guidelines or to fund the cash needs of individual operating subsidiaries. When a decision is made to sell a security that has an unrealized loss, the loss is recognized at the time of the decision. |
Investment income is recorded as earned on the accrual basis and includes amortization of premiums and accretion of discounts using the interest method. Realized gains or losses on disposal of investments are determined on a specific identification basis and are included in revenues. Investments in real estate are carried at the lower of cost or fair value plus capitalized development costs. Premiums and discounts arising from the purchase of mortgage-backed securities are treated as yield adjustments over their estimated lives. The Company’s portfolio managers routinely monitor and evaluate the difference between the cost and fair value of our investments. Additionally, credit analysis and/or credit rating issues related to specific investments may trigger more intensive monitoring to determine if a decline in market value is other than temporary. For investments with a market value below cost, the process includes evaluating the length of time and the extent to which cost exceeds market value, the prospects and financial condition of the issuer, and evaluation for a potential recovery in market value, among other factors. This process is not exact andfurther requires consideration of risks such as credit risk, which to a certain extent can be controlled, and interest rate risk, which cannot be controlled. Therefore, if an investment’s cost exceeds its market value solely due to changes in interest rates, impairment may not be appropriate. If, after monitoring and analysis, the Company believes that a decline in fair value is other than temporary, the Company adjusts the amortized cost of the security and reports a realized loss in the consolidated statements of earnings. |
(f)Recognition of Premium Income
General liability premiums are primarily 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 when the final audit is complete after the policy has expired. General liability, surety, commercial auto, other commercial lines and workers’ compensation premiums are recorded ratably over the policy period with unearned premium calculated on a pro rata basis over the lives of the underlying coverages. |
(g)Deferred Policy Acquisition Costs
The costs of acquiring business, primarily commissions and premium tax expenses, are deferred (to the extent they are recoverable from future premium income) and amortized to earnings in relation to the amount of premiums earned. If necessary, investment income is considered in the determination of the recoverability of deferred policy acquisition costs. Deferred revenue results when reinsurance ceding commissions received exceed the related deferred acquisition costs for direct and assumed business. |
An analysis of deferred policy acquisition costs follows:
Years ended December 31, 2004 2005 2006 Balance, beginning of period $ 12,006,478 $ 11,738,117 $ 10,882,478 Acquisition costs deferred, net 26,380,619 27,725,425 28,982,877 Costs amortized during the period (26,648,980) (28,581,064) (27,462,591) Balance, end of period $11,738,117 $ 10,882,478 $12,402,764 ========== ========== ==========
(h)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 these lines, management has established loss and loss adjustment expense reserves based on actuarial methods that determine ultimate losses and loss adjustment expenses utilizing a combination of both industry and the Company’s reporting and settlement patterns, as appropriate. One primary set of actuarial methods utilized, 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. |
(i) 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. When the Company does not believe that, on the basis of available information, it is more likely than not deferred tax assets will be recovered it recognizes a valuation allowance against its deferred tax assets. |
(j) Reinsurance
Reinsurance contracts do not relieve the Company from its obligation to policyholders. Failure of reinsurers to honor their obligations could result in losses to the Company. The Company evaluates the financial condition of its reinsurers and monitors concentration of credit risk to minimize its exposure to significant losses from reinsurer insolvencies. Reinsurance recoverables on unpaid losses and prepaid reinsurance represent amounts recoverable from reinsurers for unpaid losses and unearned ceded reinsurance premiums, respectively. |
(k)Goodwill and Intangibles
The Company adopted SFAS 142 on January 1, 2002. Under SFAS 142, goodwill and indefinite-lived intangible assets are no longer amortized but are reviewed annually (or more frequently if impairment indicators arise) for impairment. Prior to adoption, the Company amortized goodwill over a 20 year period. Separable intangible assets that are not deemed to have an indefinite life will continue to be amortized over their useful lives (but with no maximum life). |
At December 31, 2005 and 2006, the Company had $1,467,000 of goodwill.
In accordance with the disclosure requirements of SFAS 142 goodwill and intangibles there was no amortization recorded in net income for the years ended December 31, 2004, 2005 and 2006 respectively. |
(l)Net Earnings Per Share
Basic earnings per share and diluted earnings per share are computed by dividing net earnings by the weighted average number of shares outstanding for the period (basic EPS) plus dilutive shares attributable to stock options (diluted EPS). |
Earnings per share are as follows:
2004 2005 2006 Weighted average shares outstanding 6,863,619 6,736,938 8,729,734 Shares attributable to stock options 479,260 426,954 365,689 Weighted average common and common equivalents 7,342,879 7,163,892 9,095,423 ========= ========= ========== Earnings per share: Basic $2.15 $ 2.18 $ 2.35 Diluted $ 2.01 $ 2.05 $ 2.26
(m)Employee Stock Options
The Company’s stock option plan grants stock options to employees. The majority of the options outstanding under the plan generally vest evenly over a three year period and have a term of 10 years. The Company uses the Black-Scholes option pricing model to value stock options. This plan is described further in Note 13. |
The Company applied the recognition and measurement principles of SFAS No. 123R, Share Based Payments under modified prospective application method, commencing in the first quarter of 2006. Compensation expense relating to stock options of $614,886 is reflected in earnings for the twelve months ended December 31, 2006. |
(n)Accounting Pronouncements
During the last two years, the Financial Accounting Standard Board (FASB) has issued a number of accounting pronouncements with various effective dates. |
In November 2005, the FASB issued Staff Position Number FAS 115-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments (“FSP 115-1”). FSP 115-1 addresses the determination as to when an investment is considered impaired, whether that impairment is other than temporary, and the measurement of an impairment loss. It also includes accounting considerations subsequent to the recognition of other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. The guidance in FSP 115-1 amends FASB Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities, and was effective January 1, 2006. The adoption of this pronouncement did not have a material impact on the Company’s financial statements. |
In April 2006, the FASB issued a Staff Position Number FIN 46(R)-6, Determining the Variability to be Considered in Applying FASB Interpretation No. 46(R) (“FSP 46R-6”). |
FSP 46R-6 responds to the need for guidance on the relevant risks and rewards that must be identified and evaluated in order to apply FIN 46(R) and is effective for fiscal periods beginning after June 15, 2006. This pronouncement will have no impact on the Company as it already consolidates its non-subsidiary affiliate American Safety RRG. |
In July 2006, the FASB issued a Staff Position Number FIN 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB statement number 109, Accounting for Income Taxes. This interpretation prescribes a recognition threshold and measurement attributable for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This interpretation is effective for fiscal years beginning after December 15, 2006. The Company has reviewed the pronouncement and, based on its analysis to date does not expect it to have a material impact on its operating results. |
In September 2006, the FASB issued Statement Number 157, Fair Value Measurements. Prior to this statement, there were different definitions of “fair value” in GAAP. Moreover, that guidance was dispersed among the many accounting pronouncements that require fair value measurements. This statement creates a single set of guidelines for measuring fair value. This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. At the present time it is expected that this statement will not have a material impact on the Company’s financial statements. |
In September 2006, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 108 (SAB 108). Due to diversity in practice among registrants, SAB 108 expresses staff views regarding the process by which misstatements in financial statements are evaluated for purposes of determining whether financial statement restatement is necessary. SAB 108 is effective for fiscal years ending after November 15, 2006, and early application is encouraged. The Company does not believe SAB 108 will have a material impact on the Company’s financial statements. |
In February 2007, the FASB issued Statement of Financial Accounting Standards Number 159, The Fair Value Option For Financial Assets and Liabilities. This statement allows companies to carry the vast majority of financial assets and liabilities at fair value, with changes in fair value recorded into earnings. This statement is effective for fiscal years beginning after November 15, 2007. The Company expects that this statement will not have a material impact on the Company’s financial statements. |
(o)Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, money market instruments and other debt instruments with a maturity of 90 days or less when purchased. |
(p)Derivatives
The Company has limited activity with derivative financial instruments. They are not used for trading purposes, nor does the Company engage in leveraged derivative transactions. At December 31, 2006, the Company’s outstanding derivative contracts were interest swaps related to certain of its trust preferred obligations. See Note 8. The Company recognizes unrealized gain or loss on these interest rate swaps as interest rates change. The net after tax derivative loss included in accumulated other comprehensive income at December 31, 2006 will be reclassified into interest expense in conjunction with the recognition of interest payments on trust preferred debt through October 2010, with $186,000 of after tax net los expected to be recognized in interest expense within the next year. |
(q) Reclassifications
Certain items in the prior periods’ financial statements have been reclassified to conform to the 2006 presentation. In 2006 the Company changed its segment presentation. See Note 10 for additional information. |
(2) Investments
Net investment income is summarized as follows: Years ended December 31, 2004 2005 2006 Fixed maturities $ 9,695,664 $ 13,567,965 $ 19,018,642 Common stock securities 195,009 367,697 415,635 Preferred stock securities - 23,149 332,322 Short-term investments and cash 298,305 914,171 2,595,463 10,188,978 14,872,982 22,362,062 Less investment expenses 416,256 557,091 595,500 Net investment income $9,772,722 $14,315,891 $21,766,562 ========= ========== ========== Realized and unrealized gains and losses were as follows: Years ended December 31, 2004 2005 2006 Realized gains: Fixed maturities $ 182,336 $ 91,077 $ 1,175,769 Common stock securities 118,952 154,906 2,789,933 Total gains 301,288 245,983 3,965,702 Realized losses: Fixed maturities (66,977) (250,383) (2,223,096) Common stock securities (26,176) (49,701) (552,278) Total losses (93,153) (300,084) (2,775,374) Net realized gains (losses) $ 208,135 $ (54,101) $ 1,190,328 ======= ========= =========== Changes in unrealized gains (losses): Fixed maturities $ (758,834) $(5,496,515) $ 1,886,180 Common stock securities 905,625 643,499 421,389 Preferred stock securities - 106,100 105,340 Net change in unrealized gains (losses) $ 146,791 $(4,746,916) $ 2,412,909 ======== =========== ===========
At December 31, 2005 and 2006, 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, 2005 and 2006 are as follows: |
Gross Gross Amortized unrealized unrealized Estimated Cost gains losses fair value ================= ================ ================= ================= December 31, 2005 Fixed maturities: U.S. Treasury securities and obligations of U.S. Government corporations and agencies $ 86,740,033 $ 547,669 $1,311,628 $85,976,073 States of the U.S and political subdivisions of the states 64,740,408 386,303 498,465 64,628,246 Corporate securities 84,763,525 618,765 1,598,413 83,783,877 Mortgage-backed securities 132,992,335 56,265 2,579,971 130,468,629 Total fixed maturities $369,236,301 $ 1,609,002 $ 5,988,477 $ 364,856,826 =========== ========= ========= =========== Common stock $ 19,983,174 $ 2,721,304 $ 998,374 21,706,103 =========== ========= ========= =========== Preferred Stock $ 3,500,900 $ 106,100 $ - $ 3,607,000 =========== ========== ========= =========== December 31, 2006 Fixed maturities: U.S. Treasury securities and obligations of U.S Government corporations and agencies $ 123,390,583 $ 386,236 $ 1,378,807 $ 122,380,012 States of the U.S. and political subdivisions of the states 7,584,447 42,338 238,041 7,388,744 Corporate securities 131,469,859 814,574 812,477 131,471,956 Mortgage-backed securities 230,080,072 731,214 2,020,332 228,790,954 Total fixed maturities $ 492,524,961 $ 1,956,362 $ 4,449,657 $ 490,031,666 =========== ========== ========== =========== Common stock $ 10,258,638 $ 2,491,431 $ 347,112 12,402,957 ============ ========== ========== =========== Preferred stock $ 7,906,620 $ 221,830 $ 10,390 $ 8,118,060 ============ ========== ========== ===========
The amortized cost and estimated fair values of fixed maturities at December 31, 2006 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 $ 27,439,286 $ 27,425,880 Due after one year through five years 148,763,529 148,254,566 Due after five years through ten years 75,799,419 74,842,208 Due after ten years 10,442,655 10,718,058 Mortgage-backed securities 230,080,072 228,790,954 Total $492,524,961 $490,031,666 =========== ===========
Fixed income securities with an amortized cost of $34,405,204 and $26,694,924 were on deposit with insurance regulatory authorities at December 31, 2005 and 2006 in accordance with statutory requirements. |
The fair value of the investments in debt securities can fluctuate greatly as a result of changes in interest rates. The Company believes that the declines in fair value noted below primarily resulted from changes in interest rates rather then credit issues. (See Critical Accounting Polices under Part II, Item 7 for more information on investments) |
Therefore, the Company has no concern regarding the ultimate collectibility of the security value, and accordingly, has not recorded any impairment write-down. The tables below show the securities the Company is holding which have been held at a loss for less than 12 months and greater than 12 months at December 31, 2005 and December 31, 2006 respectively. |
December 31, 2005 Less than 12 months 12 months or longer Total Unrealized Unrealized Fair Value Unrealized Fair Value Losses Fair Value Losses Losses ----------------------------------------------------------------------------------------- US Treasury Securities & other government corporations and agencies $39,303,992 $(546,902) $25,829,191 $(764,727) $65,133,183 $(1,311,628) States of the US and political subdivisions of the states 27,795,435 (329,164) 5,921,758 (169,302) 33,717,193 (498,465) Corporate securities 30,765,595 (614,456) 34,496,894 (983,957) 65,262,490 (1,598,413) Mortgage-backed securities 85,185,338 (1,360,455) 34,261,657 (1,219,516) 119,446,995 (2,579,971) Subtotal, fixed maturities 183,050,361 (2,850,976) 100,509,500 (3,137,501) 283,559,861 (5,988,477) Common stock 4,590,179 (502,397) 1,994,090 (495,977) 6,584,269 (998,374) Total temporarily impaired securities $187,640,540 $(3,353,372) $102,503,590 $(3,633,479) $290,144,130 $(6,986,851) =========== =========== =========== =========== =========== ===========
December 31, 2006 Less than 12 months 12 months or longer Total Unrealized Unrealized Fair Value Unrealized Fair Value Losses Fair Value Losses Losses ----------------------------------------------------------------------------------------- US Treasury Securities & other government corporations and agencies $53,077,690 $(218,138) $36,967,250 $(1,160,669) $90,044,939 $(1,378,807) States of the US and political states - - 6,409,615 (238,041) 6,409,615 (238,041) subdivisions of the Corporate securities 59,749,175 (412,465) 20,291,277 (400,012) 80,040,453 (812,477) Mortgage-backed securities 95,741,114 (466,246) 67,439,424 (1,554,086) 163,180,538 (2,020,332) Subtotal, fixed maturities 208,567,979 (1,096,849) 131,107,566 (3,352,808) 339,675,545 (4,449,657) Common stock 913,738 (103,126) 1,091,057 (243,986) 2,004,795 (347,112) Preferred Stock 1,467,260 (10,390) - - 1,467,260 (10,390) Total temporarily impaired securities $210,948,977 $(1,210,365) $132,198,623 $(3,596,794) $343,147,600 $(4,807,159) =========== ========== =========== =========== =========== ===========
(3)Investment in Real Estate
The Company’s investment in real estate is known as Harbour Village Golf and Yacht Club (“Harbour Village”) comprised of 173 acres of property in Ponce Inlet, StateFlorida that was acquired in foreclosure during April 1999. At the date of foreclosure the Company evaluated the carrying value of its investment in real estate by comparing the fair value of the foreclosed collateral to the book value of the underlying loan and accrued interest. As the book value of the loan and accrued interest was less than the fair value of the collateral, no loss was recognized on foreclosure and the book balance of the loan and accrued interest became the basis of the real estate. |
The Harbour Village project is substantially complete as all units are sold and closed. The Company does not expect to engage in any further real estate activities. No additional revenue from Harbour Village is expected. There will be some ongoing expenses for the project associated with legal, insurance and other matters. |
(4) Financial Instruments
The carrying amounts for short-term investments, cash, premiums receivable, commissions receivable, accrued investment income, ceded premiums payable, funds held, collateral held and accounts payable and accrued expenses approximate their fair values due to the short-term nature of these instruments and obligations. |
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. |
(5) Reinsurance
Excess and Surplus Lines
Environmental
The Company has excess of loss reinsurance treaties with various reinsurers for the Company’s general liability line of business. These treaties provide varying levels of reinsurance protection depending on the date the underlying insurance policy was written. |
Construction
The Company previously had excess of loss treaties with various reinsurers for the Company’s construction line of business. These treaties provide varying levels of reinsurance protection depending on the date the underlying insurance policy was written. |
Effective July 1, 2005, the Company discontinued purchasing excess of loss reinsurance on our construction line. The Company made this decision after performing a loss cost and dynamic financial analysis and concluding that our reinsurance purchases were uneconomical. The Company believes that based upon reinsurance market pricing at the time of the decision, retaining this exposure and not ceding a large percentage of premiums to the reinsurance market will enhance our balance sheet. |
Surety
For our surety business, we entered into a quota share reinsurance treaty during the second quarter of 2004 which provides reinsurance for a single bond limit not to exceed $3.0 million, subject to a maximum for any one principal of $6.0 million. We retained a 50% participation in this treaty with the balance reinsured by unaffiliated reinsurers. Effective June 1, 2006 this treaty was non- renewed. |
Alternative Risk Transfer
Specialty Programs
The Company’s program business division buys various forms of reinsurance on both a quota share basis as well as an excess of loss basis. These treaties cover the majority of risks written by the Company in this division. In addition, we require our program managers to share in the underwriting risks on many of our programs. Where appropriate, collateral is obtained from the reinsurers and program managers to secure their obligations. |
Runoff
Workers’ Compensation
The Company has excess of loss treaties with various reinsurers. These treaties provide varying levels of reinsurance protection depending on the date the underlying insurance policy was written. |
The approximate effects of reinsurance on the financial statement accounts listed below are as follows: |
Years ended December 31, 2004 2005 2006 -------------------------------------- (In thousands) Written premiums: Direct $220,452 $ 234,139 $ 239,472 Assumed (158) (81) 135 Ceded (88,630) (95,543) (82,339) Net $ 131,664 $ 138,515 $ 157,268 ======= ======= ======= Earned premiums: Direct $ 223,052 $229,238 $222,257 Assumed 4,000 (81) 135 Ceded (90,751) (91,577) (75,636) Net $ 136,301 $ 137,580 $ 146,756 ======== ======== ======== Losses and loss adjustment expenses incurred Direct $ 153,167 $ 159,668 $ 159,920 Assumed 4,379 2,031 - Ceded (64,043) (77,293) (67,591) Net $ 93,503 $ 84,406 $ 92,329 ======= ======= ======== Unpaid loss and loss adjustment expenses: Direct $ 306,600 $ 377,952 $ 425,342 Assumed 14,438 15,541 14,331 Ceded (136,998) (159,515) (161,146) Net $ 184,040 $ 233,978 $ 278,527 ======== ======== =======
(6) Income Taxes
Total income tax expense for the years ended December 31, 2004, 2005 and 2006 was allocated as follows:
2004 2005 2006 Tax expense attributable to: income from continuing operations $ 3,695,950 $ 1,391,747 $ 2,314,292 Unrealized gain on hedging transactions 27,851 105,861 (35,087) Unrealized gain (losses) on securities available-for-sale 38,082 (894,746) 233,015 Total $3,761,883 $ 602,862 $ 2,512,220 ========= ========= ========= U.S. Federal and state income tax expense (benefit) from continuing operations consists of the following components: 2004 2005 2006 Current $ 2,300,361 $ 3,455,663 $ 694,298 Deferred 1,889,988 (1,509,401) 478,015 (Reversal) Establishment of valuation allowance (494,399) (554,515) 1,141,979 Total $3,695,950 $1,391,747 $2,314,292 ========= ========= =========
The state income tax components aggregated $677,840, $307,485 and $(17,825) for the years ended December 31, 2004, 2005 and 2006, respectively. |
Income tax expense from continuing operations for the years ended December 31, 2004, 2005 and 2006 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: |
2004 2005 2006 Expected income tax $ 6,273,995 $ 5,456,373 $ 7,767,807 Foreign earned income not subject to direct taxation (3,132,853) (3,488,277) (5,793,898) (Reversal)Establishment of Valuation allowance (494,399) (554,515) 1,141,979 Tax exempt interest (275,681) (385,621) (639,064) State taxes and other 1,324,888 363,787 (162,532) Total income tax $ 3,695,950 $1,391,747 $2,314,292 ========== ========= =========
In 2004, given the historical loss position of American Safety RRG, it had established a 100% valuation allowance on its net deferred tax assets totaling $554,515. In 2005, American Safety RRG reduced income tax expense by reversing this valuation allowance as the realizability of the deferred tax assets changed due to American Safety RRG’s profitability. This reduction in income tax expense was offset by an increase in minority interest expense and had no overall effect on the earnings or shareholders’ equity of the Company. However in 2006, American Safety RRG’s profitability changed and the Company believes it will not realize the full benefit of the deferred tax assets, therefore a 100% valuation allowance of $1,141,979 was established at December 31, 2006. For 2005 and 2006, the reversal and establishment of the valuation allowance has been included in income tax expense with a corresponding offset in minority interest. |
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, 2005 2006 Deferred tax assets: Loss reserve discounting $ 9,288,244 $ 8,095,876 Unearned premium reserves 3,118,965 2,365,798 Warranty reserve 154,980 152,475 Unrealized loss on securities 500,823 434,144 NOL Carryforward - 817,709 Other 348,009 332,602 Gross deferred tax assets 13,411,021 12,198,604 Valuation allowance - (1,141,979) Gross deferred tax assets after valuation allowance 13,411,021 11,056,625 Deferred tax liabilities: Deferred acquisition costs 1,477,230 809,507 Unrealized gain on securities - 131,249 Gross deferred tax liabilities 1,477,230 940,756 Net deferred tax assets $11,933,791 $10,115,869 ========== ==========
(7)Insurance Accounting
The consolidated financial statements have been prepared in conformity with GAAP which vary in certain respects, for the Company, American Safety Casualty, American Safety Indemnity and American Safety RRG, from statutory accounting practices prescribed or permitted by regulatory authorities. Statutory accounting practices include state laws, regulations, and general administrative rules, as well as a variety of publications of the National Association of Insurance Commissioners (the “NAIC”). The NAIC membership adopted the Codification of Statutory Accounting Principles Project (the “Codification”) as the NAIC-supported basis of accounting. The Codification was approved with a provision allowing for commissioner discretion in determining appropriate statutory accounting for insurers. Accordingly, such discretion will continue to allow prescribed or permitted accounting practices that may differ from state to state. |
The maximum amount of dividends the Company’s insurance subsidiaries can pay out without prior written approval from the subsidiaries’ domicile state insurance commissioners, is limited to the greater of 10% of surplus as regards to policyholders or net income, excluding realized capital gains of the preceding year. Dividends are also limited to the amount of unassigned surplus. |
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, American Safety Indemnity and American Safety RRG have calculated their RBC level and have determined that their capital and surplus is in excess of threshold requirements. |
The Bermuda Insurance Act of 1978 and related regulations (the “Act”) requires American Safety Re to meet a minimum solvency margin. American Safety Re’s statutory capital and surplus as of December 31, 2004, 2005 and 2006 was $30,292,863, $38,586,734 and $76,447,031, respectively, and the amounts required to be maintained by the Company were $9,576,055, 12,868,524 and $21,633,238, respectively. American Safety Assurance, Ltd (ASA) capital and surplus as of December 31, 2005 and 2006 was $623,425 and $659,750 respectively. ASA is required to maintain a minimum of $120,000 in capital. 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 remaining retained earnings available for distribution. |
(8)Loans Payable
Trust Preferred Offerings
In 2003 American Safety Capital and American Safety Capital II, both non-consolidated, wholly-owned subsidiaries of the Company, issued $8 million and $5 million, respectively, of variable rate 30-year trust preferred securities. The proceeds are being used by the Company to support the growth of its insurance business. The securities require interest payments on a quarterly basis calculated at a floating rate of LIBOR + 4.2% and LIBOR + 3.95% for American Safety Capital and American Safety Capital II, respectively. The securities can be redeemed at the Company’s option commencing five years from the date of original issuance. |
In 2005, the American Safety Capital Trust III, a non-consolidated wholly-owned subsidiary of the Company, issued a 30-year trust preferred obligation in the amount of $25 million. This obligation bears a fixed interest rate of 8.31% for the first five years and LIBOR plus 3.4% thereafter. Interest is payable on a quarterly basis and the securities may be redeemed at the Company’s option commencing five years from the date of original issuance. |
The underlying debt obligations between the Company and American Safety Capital and American Safety Capital II expose the Company to variability in interest payments due to changes in interest rates. Management entered into an interest rate swap for these trust preferred offerings to manage that variability. Under each interest rate swap, the Company receives variable interest payments and makes fixed interest rate payments to the applicable capital trust entity, thereby creating fixed rate long-term debt. The overall effective fixed rate expense as a result of this hedge is 7.1% and 7.6% for American Safety Capital and American Safety Capital II, respectively, over the first five years of the obligation. |
Interest expense for the twelve months ended December 31, 2005 and December 31, 2006 includes no gains or losses from the interest rate swaps. Changes in fair value of the interest rate swaps designated as hedging instruments of the variability of cash flow associated with a floating rate, long-term debt obligation are reported in accumulated other comprehensive income. The gross unrealized gains on the interest rate swaps at December 31, 2005 and December 31, 2006 were $347,481 and $263,973 for American Safety Capital and $141,742 and $122,052 for American Safety Capital II, respectively. The interest rate swaps are 100% effective at December 31, 2006. |
(9)Related Party and Affiliate Transactions
ASI Services, American Safety’s underwriting and administrative services subsidiary leased office from an entity which was owned by certain directors, officers and shareholders of the Company. The lease commenced on March 1, 2001 with an original term through August 31, 2007. This lease was terminated in 2006. The Company paid rent associated with the former space of $519,814 and $533,093 in 2006 and 2005, respectively. See Part I, Item 2, Properties for more information about the Company’s offices. |
(10)Segment Information
During 2006, we changed our segment reporting to coincide with our strategic direction. In our segment reporting for periods prior to the year ended December 31, 2006 we segregated our business into real estate operations, insurance operations and other (which included realized gains and losses on investments and rescission expenses). We continue to segregate our business into real estate operations, insurance operations and other, but the insurance operations segment is further classified into three additional segments: excess and surplus lines, alternative risk transfer and runoff. The excess and surplus lines segment is further classified into five business lines: environmental, construction, non construction, excess and surety. The alternative risk transfer segment is further classified into two business lines: specialty programs and fully-funded. Prior year amounts have been reclassified to conform to the current year presentation. Our real estate operations consist solely of our development of the Harbour Village property as described below under “Business – Harbour Village Development.” |
In our E&S line, Environmental Specialty writes insurance coverages for the environmental remediation industry. Construction provides commercial casualty insurance coverages, generally in the area of residential and commercial. Non-construction and excess provides general and products liability business for primary and excess products. Surety provides payment and performance bonds to the environmental remediation industry. |
In our ART line, Specialty Programs facilitates the offering of insurance to homogeneous niche groups of risks. Fully funded provides a mechanism for insureds to post collateral and self-insure all or a portion of their risks. We are paid a fee for arranging this type of transaction. |
The Other segment consists of amounts associated with realized gains and losses on investments and also for rescission expenses. |
The Company measures all segments using net income, total assets and total equity. The Reportable Insurance Operations segments are measured by net premiums earned, incurred losses and loss adjustment expenses and acquisition expenses. Assets are not allocated to the Reportable Insurance Operations segments. The following table presents key financial data by segment for years ended December 31, 2004, December 31, 2005 and December 31, 2006 (in thousands): |
- -------------------------- --------- ------------------------------------------------------------------------------- ------- -------- Real December 31, 2004 Estate Insurance Other Total - -------------------------- --------- -------------------------------------------------- ------------------ --------- ------- -------- E&S ART Runoff - -------------------------- --------- -------------------------------------------------- ------------------ --------- ------- -------- Env. Const. Non-Const. Excess Surety Specialty FF Programs - -------------------------- --------- --------- -------- ---------- ---------- --------- ---------- ------- --------- ------- -------- Gross premiums written - 44,157 94,747 - 2,158 1,725 76,264 1,243 - 220,294 - -------------------------- --------- --------- -------- ---------- ---------- --------- ---------- ------- --------- ------- -------- Net premiums written - 35,024 77,462 - 432 1,174 17,273 299 - 131,664 - -------------------------- --------- --------- -------- ---------- ---------- --------- ---------- ------- --------- ------- -------- Fee income written - - - - - - - 257 - - 257 - -------------------------- --------- --------- -------- ---------- ---------- --------- ---------- ------- --------- ------- -------- Net premiums earned - 32,152 79,559 - 222 1,138 16,516 6,714 - 136,301 - -------------------------- --------- --------- -------- ---------- ---------- --------- ---------- ------- --------- ------- -------- Fee income earned - - - - - - - 210 - - 210 - -------------------------- --------- --------- -------- ---------- ---------- --------- ---------- ------- --------- ------- -------- Losses &loss adjustment expenses 15,094 55,998 - 133 477 10,929 - 10,872 - 93,503 - -------------------------- --------- --------- -------- ---------- ---------- --------- ---------- ------- --------- ------- -------- Acquisition expenses - 7,729 17,716 - 51 249 324 - 579 - 26,648 - -------------------------- --------- --------- -------- ---------- ---------- --------- ---------- ------- --------- ------- -------- Underwriting profit (loss) - 9,329 5,845 - 38 412 5,263 210 (4,737) - 16,360 - --------------------------- --------- ------------------------------------------------------------------------------- ------- ------- Income tax expense 4,670 1,368) 394 3,696 (benefit) - -------------------------- --------- ------------------------------------------------------------------------------- ------- -------- Net earnings (loss) 7,816 4,263 2,678 14,757 - -------------------------- --------- ------------------------------------------------------------------------------- ------- -------- Assets 8,729 574,192 283 583,204 - -------------------------- --------- ------------------------------------------------------------------------------- ------- -------- Equity 5,547 103,319 (86) 108,780 - -------------------------- --------- ------------------------------------------------------------------------------- ----------------
- -------------------------- --------- ------------------------------------------------------------------------------- ------- --------- December 31, 2005 Real Insurance Other Total Estate - -------------------------- --------- -------------------------------------------------- ------------------ --------- ------- --------- E&S ART Runoff - -------------------------- --------- --------- -------- ---------- ---------- --------- ---------- ------- --------- ------- --------- Env. Const. Non-Const. Excess Surety Specialty FF Programs - -------------------------- --------- --------- -------- ---------- ---------- --------- ---------- ------- --------- ------- --------- Gross premiums written - 51,014 93,315 - 2,091 2,581 85,138 - (81) - 234,058 - -------------------------- --------- --------- -------- ---------- ---------- --------- ---------- ------- --------- ------- --------- Net premiums written - 41,477 77,639 - 387 1,345 19,712 - (2,045) - 138,515 - -------------------------- --------- --------- -------- ---------- ---------- --------- ---------- ------- --------- ------- --------- Fee income written - - - - - - - 1,722 - - 1722 - -------------------------- --------- --------- -------- ---------- ---------- --------- ---------- ------- --------- ------- --------- Net premiums earned - 38,081 81,451 - 457 1,148 18,297 - (1,854) - 137,580 - -------------------------- --------- --------- -------- ---------- ---------- --------- ---------- ------- --------- ------- --------- Fee income earned - - - - - - 1,196 1,196 - -------------------------- --------- --------- -------- ---------- ---------- --------- ---------- ------- --------- ------- --------- Losses & loss - 19,253 51,651 10,298 - 1,519 - 84,406 adjustment expenses - 274 1,411 - -------------------------- --------- --------- -------- ---------- ---------- --------- ---------- ------- --------- ------- --------- Acquisition expenses - 9,848 17,888 - (143) 342 1,112 - (295) - 28,752 - -------------------------- --------- --------- -------- ---------- ---------- --------- ---------- ------- --------- ------- --------- Underwriting profit - 326 - 8,980 11,912 (605) 6,887 1,196 (3,078) - 25,618 - ------------------------- --------- ------------------------------------------------------------------------------- ------- --------- Income tax expense 437 $1,392 (benefit) 351 604 - -------------------------- --------- ------------------------------------------------------------------------------- ------- --------- Net earnings (loss) 209 13,618 829 14,656 - -------------------------- --------- ------------------------------------------------------------------------------- ------- --------- Assets 3,031 691,968 - 694,999 - -------------------------- --------- ------------------------------------------------------------------------------- ------- --------- Equity 756 117,679 - 118,435 - -------------------------- --------- ------------------------------------------------------------------------------- ------- --------- - -------------------------------------------------------------------------------------------------------------------------------------- December 31, 2006 Real Insurance Other Total Estate - -------------------------- --------- -------------------------------------------------- ------------------ --------- ------- --------- E&S ART Runoff - -------------------------- --------- --------- -------- ---------- ---------- --------- ---------- ------- --------- ------- --------- Env. Const. Non-Const. Excess Surety Specialty FF Programs - -------------------------- --------- --------- -------- ---------- ---------- --------- ---------- ------- --------- ------- --------- Gross premiums written - 51,805 96,918 2,344 3,946 4,004 80,590 - - - 239,607 - -------------------------- --------- --------- -------- ---------- ---------- --------- ---------- ------- --------- ------- --------- Net premiums written - 37,746 92,530 1,524 670 3,042 21,756 - - - 157,268 - -------------------------- --------- --------- -------- ---------- ---------- --------- ---------- ------- --------- ------- --------- Fee income written - - - - - - - 2,124 - - 2,124 - -------------------------- --------- --------- -------- ---------- ---------- --------- ---------- ------- --------- ------- --------- Net premiums earned - 35,138 88,612 653 532 2,566 19,255 - - - 146,756 - -------------------------- --------- --------- -------- ---------- ---------- --------- ---------- ------- --------- ------- --------- Fee income earned - - - - - - - 1,685 - - 1,685 - -------------------------- --------- --------- -------- ---------- ---------- --------- ---------- ------- --------- ------- --------- Losses &loss adjustment expenses - 20,221 58,824 456 319 674 12,135 - (300) - 92,329 - -------------------------- -------- --------- -------- ---------- ---------- --------- ---------- ------- --------- ------- ---------- Acquisition expenses - 10,390 16,555 122 (130) 569 (128) - - - 27,378 - -------------------------- --------- --------- -------- ---------- ---------- --------- ---------- ------- --------- ------- --------- Underwriting profit - 4,527 13,233 75 343 1,323 7,248 1,685 300 - 28,734 - -------------------------- --------- ------------------------------------------------------------------------------- ------- --------- Income tax expense (benefit) 124 1,922 268 2,314 - -------------------------- --------- ------------------------------------------------------------------------------- ------- --------- Net earnings (loss) (506) 20,117 921 20,532 - -------------------------- --------- ------------------------------------------------------------------------------- ------- --------- Assets 918 846,213 - 847,131 - -------------------------- --------- ------------------------------------------------------------------------------- ------- --------- Equity 250 196,001 (101) 196,150 - -------------------------- --------- ------------------------------------------------------------------------------- ------- ---------
Additionally, the Company conducts business in the following geographic segments: country-regionUnited States and Bermuda. Significant differences exist in the regulatory environment in each country. Those differences include laws regarding the measurable information about the insurance geographic segments for the years ended December 31, 2004, December 31, 2005 and December 31, 2006 (in thousands): |
December 31, 2004 United States Bermuda Total Income tax 3,696 - 3,696 Net earnings 5,543 9,214 14,757 Assets 448,366 134,838 583,204 Equity 56,126 52,654 108,780 December 31, 2005 United States Bermuda Total Income tax 1,392 - 1,392 Net earnings 4,396 10,260 14,656 Assets 527,632 167,367 694,999 Equity 59,002 59,433 118,435 December 31, 2006 United States Bermuda Total Income tax 2,314 - 2,314 Net earnings 3,491 17,041 20,532 Assets 509,552 337,579 847,131 Equity 66,896 129,254 196,150
(11)Commitments and Contingencies
At December 31, 2005 and 2006, the Company had aggregate outstanding irrevocable letters of credit which had not been drawn amounting to $2,000,000 in favor of the Vermont Department of Banking, Insurance, Securities and Health Care Administration. Investments in the amount of $2,000,000 have been pledged as collateral to the issuing bank. |
The Company entered into a lease for approximately 47,000 rentable square feet for its headquarters. The term of the lease is eighty-six months, commencing on February 1, 2007 and extending through March 31, 2014. |
The yearly minimum base rent for all operating leases is payable according to the following schedule: |
2007 $ 877,505
2008 $1,108,316
2009 $ 979,815
2010 $ 988,065
2011 $ 248,983
Thereafter $ 3,185,548
(12)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, 2004 2005 2006 (In thousands) Unpaid loss and loss adjustment expenses, January 1 $ 230,104 $ 321,038 $ 393,493 Reinsurance recoverable on unpaid losses and loss adjustment expenses January 1 115,061 136,998 159,515 Net unpaid loss and loss adjustment expenses, January 1 115,043 184,040 233,978 Incurred related to: Current year 79,101 81,800 89,731 Prior years 14,402 2,606 2,598 Total incurred 93,503 84,406 92,329 Paid related to: Current year 2,567 2,501 5,959 Prior years 21,939 31,967 41,821 Total paid 24,506 34,468 47,780 Net unpaid loss and loss adjustment expenses, December 31 184,040 233,978 278,527 Reinsurance recoverable on unpaid loss and loss adjustment expenses, December 31 136,998 159,515 161,149 Unpaid loss and loss adjustment expenses, December 31 $ 321,038 $ 393,493 $439,673
The net prior year reserve development for 2004, 2005 and 2006 occurred in the following business lines: |
Year Ended December 31, 2004 2005 2006 (In thousands) Excess and Surplus Lines $ 94 $ (754) $ 56 Environmental 7,700 2,204 2,425 Construction 37 311 (224) Surety 7,831 1,761 2,257 Alternative Risk Transfer Programs 1,496 (266) 641 Runoff 5,075 1,111 (300) Total $ 14,402 $ 2,606 $ 2,598 ======= ======= =======
The 2006 prior year development in the construction line primarily relates to development in layers where the reinsurance provided by one of the participants in these layers was commuted in 2005. The development in the programs primarily relates to an increase in certain case reserves on polices written in 2004 and 2005. This development is partially offset by reductions in our surety and run-off lines. |
In 2005, the Company commuted two excess of loss reinsurance treaties with a former reinsurer. The negotiated commutation price was approximately $1 million less than the recoverable from the reinsurer which was recorded in the second quarter of 2005. Additionally, in the fourth quarter 2005, the accident year 2001 losses from commercial and residential contractors’ claims other than construction defect risk category developed adversely. The Company engaged an actuarial consulting firm in the fourth quarter of 2005 to provide construction defect claim count development patterns based on a group of companies writing construction contractors business since the early 1990s in California and other states. We implemented these claim count development patterns, which were based on a larger number of claims and a longer development history than we previously had used in estimating future construction defect claim counts. |
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 the 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 accounting practices and GAAP. |
(13) Stock Options
The Company’s stock option plan grants incentive stock options to employees. The options generally have a term of 10 years. The exercise price is equal to the fair market value at the date of grant. The majority of our options generally vest over three years. At December 31, 2006, 430,627 shares were available for future grants. |
The Company applied the recognition and measurement principles of SFAS No. 123R, Share Based Payments, commencing in the first quarter of 2006. Compensation expense relating to stock options of $614,886 is reflected in earnings for the twelve months ended December 31, 2006. The weighted average fair value of the options was $7.00 at December 31, 2006. |
The following table illustrates the effect on earnings and earnings per share, assuming we had applied the fair value recognition provisions of SFAS No. 123R, Accounting for Share Based Payments, for the twelve months ended December 31, 2004 and 2005. |
Year Ending December 31, 2004 2005 (In thousands, except per share amounts) Net earnings As reported $ 14,757 $ 14,656 Effect of stock options (199) (454) Pro forma net earnings $14,558 $14,202 ======= ====== Net earnings per share: Basic - as reported $2.15 $2.18 Basic - pro forma $2.12 $2.11 Diluted - as reported $2.01 $2.05 Diluted - pro forma $1.98 $1.99
The following table shows the stock option activity for the Company during 2004, 2005 and 2006.
Weighted average Option Shares exercise price Outstanding at December 31, 2003 1,010,050 $ 7.57 2004 activity: Granted 136,500 13.68 Exercised (77,005) - Canceled (20,764) - Outstanding at December 31, 2004 1,048,781 $ 8.25 ========== ======= 2005 activity: Granted 31,000 16.26 Exercised (165,768) - Canceled (32,580) - Outstanding at December 31, 2005 881,433 $ 8.62 ======= ====== 2006 activity: Granted 80,000 17.04 Exercised (103,668) - Canceled (10,000) - Outstanding at December 31, 2006 847,765 $ 9.33 ======== =======
Of the 1,048,781 outstanding options at December 31, 2004, 633,615 were exercisable. Of the 881,433 outstanding options at December 31, 2005, 599,183 were exercisable. Of the 847,765 outstanding options at December 31, 2006, 570,766 were exercisable.
The following table summarizes information about stock options outstanding at December 31, 2006:
Range of Number Weighted Weighted Grant Number average remaining average exercise contractual exercise price outstanding life price Year exercisable $ 11.00 45,000 1.13 $11.00 1998 45,000 9.50 58,450 2.13 9.50 1999 58,450 6.00 43,200 4.11 6.00 2000 43,200 6.00 244,000 4.04 6.00 2001 244,000 8.85 53,416 5.17 8.85 2002 53,416 6.75 47,116 8.04 6.75 2003 47,116 8.57 170,000 8.46 8.57 2003 - 13.62 500 7.42 13.62 2004 334 13.77 10,000 7.58 13.77 2004 6,667 13.67 70,583 7.08 13.67 2004 70,583 15.99 1,000 8.08 15.99 2005 333 16.72 5,000 8.75 16.72 2005 1,667 16.18 25,000 8.90 16.18 2005 - 16.40 44,500 9.13 16.40 2006 - 16.00 4,000 9.13 16.00 2006 - 17.80 10,000 9.70 17.80 2006 - 18.50 6,000 9.75 18.50 2006 - 19.05 10,000 9.80 19.05 2006 - ---------------- ------------- $6.00-19.05 847,765 5.88 $ 9.33 570,766 ============== ================ =============== ============ =============
For the pro-forma information presented in Note 1(m), the fair value of each option granted during 2004, 2005 and 2006 was estimated on the date of grant using the Black-Scholes multiple option approach with the following assumptions: dividend yield of 0.0% in 2004, 2005 and 2006, respectively; expected volatility of 41.33%, 39.29% and 37.97% in 2004, 2005 and 2006, respectively; risk-free interest rate of 3.5% for 2004 through 2006 and expected life from the grant dates ranging from 0.50 years to 10.00 years. The weighted average fair value of the options during 2004, 2005 and 2006 were $7.86, $9.32 and $9.43 respectively. |
The Company expects to grant additional awards in future years. The Company granted options in 2004, 2005 and 2006 at an amount deemed to be fair market value at the date of grant. See Note 1(m) for more information. |
(14) Litigation
We, through our subsidiaries, are routinely party to pending or threatened litigation or arbitration disputes in the normal course of or related to our business. Based upon information presently available, in view of legal and other defenses available to our subsidiaries, management does not believe that any pending or threatened litigation or arbitration disputes will have any material adverse effect on our financial condition or operating results, except for the matters discussed below.
Warranty Reinsurance Litigation. We were named as a defendant in several cases, liquidation actions and reinsurance claims, collectively identified as the “National Warranty” issue. American Safety Reinsurance, Ltd. (“American Safety Re”) was an excess-of-loss reinsurer through a reinsurance treaty with National Warranty Risk Retention Group (“National Warranty”) that provided insurance coverage to automobile dealerships and other providers that were obligors on automobile warranty contracts they sold to consumers. National Warranty filed for liquidation in the Cayman Islands (the location of its legal creation). This liquidation had a cascading effect, including the subsequent filing of bankruptcy by various obligors of vehicle service contracts insured by National Warranty. As a result, there are potentially over one million vehicle service contracts that are not being honored by the obligors.
The iquidators of National Warranty made claims of $25.4 million pursuant to two reinsurance contracts issued by American Safety Re to National Warranty in 2002 and 2003. In addition, consumers of vehicle service contracts sued American Safety Re, and the trial court certified that case as a class action, although we appealed that determination. Lastly, claims have been made by sellers/obligors of the vehicle service contracts who were insured by National Warranty. There were five sellers/obligors cases against us and other professional services providers, including other reinsurers, relating to National Warranty, with claims in excess of $2.6 million. All of these claims were based on fraud and/or theories of contractual violations. We believe that American Safety Re had valid defenses to the claims including, among others, that it had commuted its obligations under reinsurance treaties, its liability is limited to the amount of coverage provided under the policies, which varies based on premium written by National Warranty and it loss ratios, and that most of the claimants cannot make claims directly under the reinsurance contracts.
On November 17, 2006, we entered into a settlement agreement pursuant to which all claims, other than claims by City Automotive and Oak Services as described below, against ASI parties were settled for $1.8 million, within the amount previously accrued, in exchange for a complete discharge and release. The settlement with the Joint Official Liquidators for National Warranty requires the approval of the Grand Cayman court. The approval is pending but has not yet been obtained.
City Automotive andOak Services. The plaintiffs in these two cases are dealers and marketers of the vehicle service contracts. We have entered into an arbitration agreement with the plaintiffs in exchange for a dismissal of all ASI parties from the pending litigation. Pursuant to this arbitration agreement, there is a floor and a ceiling to the award the arbitrators can award. The ceiling is reduced by a percentage amount equal the percentage that any recovery by City Automotive and Oak Services in their pending litigation against the remaining defendants or in the National Warranty liquidation bears to the plaintiffs’ total damages. The ultimate outcome of these matters cannot now be determined.
Griggs et al. v. American Safety Reinsurance, Ltd. et al., Case No. 2003-31509, Circuit Court, Seventh Judicial District, Volusia County, StateFlorida. Seven plaintiffs filed suit against us and three of our subsidiaries seeking to recover a $2.1 million loan made by the plaintiffs in 1986 to Ponce Marina, Inc., the former owner of the Harbour Village property. The plaintiffs claimed that we were responsible for the repayment of the loan, with interest. The plaintiffs propounded four theories of liability and the court granted judgment for us on three of the theories. However, the court entered judgment on August 10, 2005 against us for approximately $3.4 million, which includes interest, on the remaining theory. The court held that we, as a condition of our loan, required Ponce Marina, Inc. to demand that the plaintiffs enter into an agreement with Ponce Marina, Inc., to the detriment of their loans and to our benefit, and thus, we had entered into a quasi-contract with the plaintiffs to repay their loan with interest.
We filed an appeal in December 2005, and oral argument on our appeal was heard on December 5, 2006. The Court has not yet issued a decision on our appeal. Based on the merits of the case and likelihood of ultimate payment, we have not established an accrual for the decision. The ultimate outcome of this matter cannot now be determined.
Sizemore v. American Safety Insurance Services, Inc. et al., Case No 2005-31704, Circuit Court, Seventh Judicial District, Volusia County, Florida. American Safety Insurance Services, Inc., its parents and a number of its affiliates are defendants in a suit brought by an individual who contends that defendants are liable to him for a debt owed to him by Ponce Marina, Inc. in the amount of $400,000 plus interest and costs. The plaintiff also intends to seek class certification on behalf of himself and 21 other unnamed plaintiffs for the case on these claims in excess of $1.7 million plus interest and costs. On January 27, 2006, the trial court dismissed the case. The plaintiff was permitted to file an amended complaint on or before March 6, 2006. The plaintiff filed an amended complaint on March 7, 2006, alleging various theories of recovery, some of which were also alleged in theGriggs case. On May 4, 2006, the trial court dismissed the case and gave the plaintiff 20 days to file an amended complaint. The plaintiff filed a third amended complaint and our third Motion to Dismiss was heard on August 22, 2006, and on September 18, 2006, the plaintiff’s case was dismissed with prejudice. On October 17, 2006, the plaintiff filed an appeal of the dismissal. We continue to vigorously defend this case, as we believe that the case is without merit. Based on the merits of the case and the likelihood of ultimate payment, we have not established an accrual. The ultimate outcome of this matter cannot now be determined.
AMERICAN SAFETY INSURANCE HOLDINGS, LTD. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) The following table presents the quarterly results of consolidated operations for 2005 and 2006 (dollars in thousands, except per share amounts): 2005 Mar. 31 June 30 Sept. 30 Dec. 31 Total revenues $ 40,207 $ 38,623 $ 35,029 $ 42,256 Income before taxes 3,897 3,431 4,430 4,290 Net earnings 3,646 3,139 3,347 4,524 Comprehensive income 147 7,002 344 3,770 Net earnings per share: Basic $ 0.54 $ 0.47 $ 0.50 $ 0.67 Diluted 0.50 0.44 0.47 0.63 Common stock price ranges: High $ 16.45 $ 15.75 $ 17.98 $ 18.00 Low 14.02 14.17 15.17 16.01 2006 Mar. 31 June 30 Sept. 30 Dec. 31 Total revenues $ 40,105 $ 40,376 $ 45,021 $ 45,938 Income before taxes 4,117 5,227 5,731 7,772 Net earnings 4,100 4,627 5,388 6,416 Comprehensive income 944 1,455 14,036 6,187 Net earnings per share: Basic $ 0.61 $ 0.65 $ 0.52 $ 0.61 Diluted 0.57 0.62 0.50 0.59 Common stock price ranges: High $ 16.97 $ 17.58 $ 18.40 $ 19.65 Low 14.27 15.30 15.80 17.40
AMERICAN SAFETY INSURANCE HOLDINGS, LTD. (PARENT ONLY) SCHEDULE II CONDENSED BALANCE SHEETS DECEMBER 31, 2005 AND 2006 2005 2006 Assets Investment in subsidiaries $ 104,160,885 $ 155,219,686 Other investments: Fixed maturities 4,753,607 27,596,656 Common stock 9,125,625 10,252,812 Short term investments 110,231 729,437 Secured note receivable from affiliate 2,500,000 2,500,000 Total other investments 16,489,463 196,298,591 Cash and cash equivalents 1,518 73,340 Accrued investment income 48,615 280,402 Other assets 21,570 273,175 Total assets $120,722,051 $196,925,508 Liability and shareholders' equity Due to related party $ 2,107,973 - Accounts payable and accrued expenses 78,831 675,328 Total liabilities 2,186,804 675,328 Preferred stock 100,000 100,000 Common stock 67,537 105,542 Additional paid in capital 49,460,019 104,514,210 Accumulated other comprehensive earnings (losses), net (1,549,661) 540,888 Retained earnings 70,457,352 90,989,540 Total shareholders' equity 118,435,247 196,150,180 Total liabilities and shareholders' equity $120,722,051 $196,925,508 =========== =========== See accompanying independent auditors' report.
AMERICAN SAFETY INSURANCE HOLDINGS, LTD. (PARENT ONLY) SCHEDULE II CONDENSED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006 2004 2005 2006 Revenues: Investment income $515,024 $314,437 $1,754,182 Realized gains (losses) on sales of investments 7,283 (20,140) 91,399 Total Revenues 522,304 294,297 1,845,581 Expenses: Other underwriting expenses 1,792,178 1,398,267 1,942,383 Total Expenses 1,792,178 1,398,267 1,942,383 Net loss before equity in net earnings of subsidiary (1,269,874) (1,103,970) (96,802) Equity in net earnings of subsidiary 16,026,849 15,760,380 20,629,000 Net earnings $14,756,975 $ 14,656,410 $ 20,532,198 ========== =========== ========== See accompanying independent auditors' report.
AMERICAN SAFETY INSURANCE HOLDINGS, LTD. (PARENT ONLY) SCHEDULE II - STATEMENTS OF CASH FLOW YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006 2004 2005 2006 Cash flow from operating activities: Net loss before equity in earnings of subsidiary $ (1,269,874) $ (1,103,970) $ (96,802) Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities: Change in operating assets and liabilities: Accrued investment income 104,179 35,522 231,787 Premiums receivable/payable - - - Due from/to affiliate (752,043) (214,583) (2,107,973) Unpaid losses and loss adjustment expenses - - - Accounts payable and accrued expenses (176,678) 70,375 842,029 Assumed loss and LAE payable - - - Other, net 797,694 135,766 399,944 Net cash used in operating activities (1,296,722) (1,076,890) (1,194,589) Cash flow from investing activities: Decrease (increase) in investments 7,428,345 2,456,282 (22,309,200) Investment in subsidiary (4,307,242) - (30,000,000) Decrease (increase) in short term investments 52,796 282,345 (619,206) Net cash provided by (used in) investing activities 3,173,899 2,738,627 (52,928,406) Cash flow from financing activities: Proceeds from sale of common stock 638,495 1,218,455 54,194,817 Stock repurchase payments (2,485,209) (2,945,714) - Net cash provided by (used in) financing activities (1,846,714) (1,727,259) 54,194,817 Net (decrease) increase in cash 30,463 (65,522) 71,822 Cash and cash equivalents, beginning of year 36,577 67,040 1,518 Cash and cash equivalents, end of year $ 67,040 $ 1,518 $ 73,340 ========= ====== ====== See accompanying independent auditors' report.
AMERICAN SAFETY INSURANCE HOLDINGS, LTD. (PARENT ONLY) SCHEDULE II -CONDENSED STATEMENTS OF COMPREHENSIVE INCOME YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006 2004 2005 2006 Net earnings $ 14,756,975 $ 14,656,410 $ 20,532,198 Other comprehensive income (loss): Unrealized gains (losses) on securities available-for sale, net of minority interest of $(108,334) $11,815 and $(259,129) for 2004, 2005 and 2006, respectively. 463,260 (4,541,890) 3,616,606 Unrealized gains (losses) on hedging transactions 81,912 311,359 (103,200) Reclassification adjustment for realized (gains) losses included in net earnings, net of minority interest of $(86,986), $0 and $25,530 for 2004, 2005 and 2006, respectively. (121,149) 54,101 (1,215,858) Total other comprehensive income (loss) before income taxes. 424,023 (4,176,430) 2,297,548 Income tax expense (benefit) related to items of other comprehensive income, net of minority interest of $0 for 2004, $(5,534) for 2005 and $9,071 for 2006 respectively. 65,933 (783,351) 206,999 Other comprehensive income (loss) 358,090 (3,393,079) 2,090,549 Total comprehensive income $ 15,115,065 $ 11,263,331 $ 22,622,747 ============ =========== =========== See accompanying independent auditors' report.
AMERICAN SAFETY INSURANCE HOLDINGS, LTD. SCHEDULE III - SUPPLEMENTAL INFORMATION CONCERNING PROPERTY-CASUALTY INSURANCE OPERATIONS (dollars in thousands) Column B Column C Column D Column E Column F Column G Column H Column I Column J Column K Reserves for Claims and Claim Amortization Unpaid Discount, Adjustment of Deferred Claims and if any, Expenses Deferred Policy Claim Deducted Net Net Net Incurred Related Policy Other Net Acquisition Adjustment in Unearned Earned Investment to Acquisition operating Premiums Costs Expenses Column C Premiums Premiums Income (1) Costs expenses Written (1) Current Prior Year Years 2004 E&S Environmental $4,107 $32,889 - $19,384 $32,152 - $15,000 $ 94 $ 5,714 - $35,024 Construction 7,400 107,282 - 41,895 79,559 - 48,298 7,700 19,283 - 77,462 Excess (63) 132 - 208 222 - 133 - 69 - 432 Surety 38 270 - 195 1,138 - 440 37 249 - 1,174 11,482 140,573 60,972 113,071 63,871 7,831 25,315 114,092 ART Programs 256 18,810 - 6,993 16,516 - 9,433 1,496 (2,910) - 17,273 Runoff - 24,657 - 211 6,714 - 5,797 5,075 4,244 - 299 Total $11,738 $184,040 $68,176 $136,301 $9,773 $79,101 $14,402 $26,649 $19,932 $131,664 ======= ======== ======== ========= ======= ======= ======== ======== ========= ======== 2005 E&S Environmental $4,569 $45,205 - $27,779 $38,081 - $20,007 $(754) $9,848 - $41,477 Construction 6,372 142,512 - 37,161 81,451 - 49,447 2,204 17,745 - 77,639 Excess 85 407 - 349 457 - 274 - - - 387 Surety 91 220 - 391 1,148 - 1,100 311 342 - 1,345 11,117 188,344 60,680 121,138 70,828 1,761 27,935 120,848 ART Programs (235) 21,412 - 8,432 18,297 - 10,375 (266) 941 - 19,712 Runoff - 24,222 - - (1,854) - 408 1,111 (295) - (2,045) Total $10,882 $233,978 $69,112 $137,580 $14,316 $81,800 $2,606 $28,581 $23,970 $138,515 ======= ======== ======== ========= ======== ======== ======== ======== ======== ======== 2006 E&S Environmental $5,117 $51,316 - $22,579 $35,235 - $20,165 $ 56 $10,398 - $ 37,746 Construction 7,544 179,282 - 41,288 88,612 - $56,398 2,425 16,555 - 92,530 Non-Construction (15) 424 - 871 653 456 - 122 1,524 Excess (181) 726 - 278 532 - 319 - (130) - 670 Surety 213 174 - 867 2,566 - 898 (224) 569 - 3,042 12,678 231,922 65,883 127,598 $78,236 $2,257 $27,514 $ 135,512 ART Programs (275) 27,269 - 13,417 19,255 - 11,495 641 (52) - 21,756 Runoff - 19,336 - - - - - (300) - - - Total $12,403 $278,527 $79,300 $146,853 $1,767 $89,731 $2,598 $27,462 $30,377 $157,298 ======= ======== ======== ======== ======= ======= ====== ======== ======== ======== (1) The Company does not allocate net investment income or other operating expenses to the various business segments. See accompanying independent auditors' report.
AMERICAN SAFETY INSURANCE HOLDINGS, LTD. SCHEDULE IV - REINSURANCE YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006 (Dollars in thousands) Assumed from Percentage of Ceded to Other Amount Property-Liability Gross Other Companies Net Assumed to Insurance Premiums Earned Amount Companies Amount Net -------------------------------- -------------- --------------- -------------- --------------- -------------- United States $ 223,052 $ 90,751 $ 4,000 $ 136,301 2.9 December 31, 2004 December 31, 2005 $ 229,238 $ 91,577 $ (81) $ 137,580 (0.1) December 31, 2006 $ 222,257 $ 75,636 $ 135 $ 146,756 0.1 Bermuda December 31, 2004 - - - - - December 31, 2005 - - - - - December 31, 2006 - - - - - Combined Total December 31, 2004 $ 223,052 $ 90,751 $ 4,000 $ 136,301 2.9 December 31, 2005 $ 229,238 $ 91,517 $ (81) $ 137,580 (0.1) December 31, 2006 $ 222,257 $ 75,636 $ 135 $ 146,756 0.1 See accompanying independent auditors' report.