SECURITIES AND EXCHANGE COMMISSION WASHINGTON D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000 Commission File Number 1-14795 AMERICAN SAFETY INSURANCE GROUP, LTD. (Exact name of Registrant as specified in its charter) Bermuda Not Applicable (State or other jurisdiction (I.R.S. Employer of incorporation) Identification No.) 44 Church Street P.O. Box HM2064 Hamilton HM HX, Bermuda (Address, zip code of principal executive offices) (441) 296-8560 (Registrant's telephone number, including area code) Indicate by check mark whether Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No___ The aggregate number of shares outstanding of Registrant's common stock, $.01 par value, on October 2, 2000 was 5,323,286. AMERICAN SAFETY INSURANCE GROUP, LTD. FORM 10-Q TABLE OF CONTENTS ----------------- Page PART I - FINANCIAL INFORMATION Item 1. Financial Statements...........................................1 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.....................................15 Item 3. Quantitative and Qualitative Disclosures About Market Risks...24 PART II - OTHER INFORMATION Item 1. Legal Proceedings..............................................25 Item 2. Changes in Securities and Use of Proceeds......................25 Item 3. Defaults Upon Senior Securities................................25 Item 4. Submission of Matters to a Vote of Security Holders............25 Item 5. Other Information..............................................25 Item 6. Exhibits and Reports on Form 8-K...............................26 -2- PART I - FINANCIAL INFORMATION Item 1. Financial Statements American Safety Insurance Group, Ltd. and Subsidiaries Consolidated Balance Sheets December 31, September 30, 1999 2000 ------ ----- (unaudited) Assets Investments: Securities available for sale, at fair value: Fixed maturities $ 40,694,556 $ 42,986,758 Common stock 163,968 704,493 Investment in real estate 12,039,842 19,267,265 Short-term investments 6,749,791 7,411,218 ----------- ----------- Total investments 59,648,157 70,369,734 Cash 427,154 6,025,847 Restricted cash - 5,123,523 Accrued investment and interest income 2,783,663 3,782,115 Notes receivable: Related parties 1,700,000 - Other 11,255,264 9,955,088 Premiums receivable 12,239,544 25,386,776 Commissions receivable 5,948 36,100 Funds on deposit 353,407 408,951 Ceded unearned premium 4,591,075 18,805,126 Reinsurance recoverable 6,065,502 13,562,394 Due from affiliate 2,088,748 1,339,149 Income tax recoverable - 154,872 Deferred income taxes 733,227 2,116,012 Deferred acquisition costs 274,701 1,651,805 Property, plant and equipment 1,234,294 1,595,922 Prepaid Items 604,537 2,093,498 Goodwill 234,467 1,575,672 Other assets 113,846 1,648,831 ------------- ------------- Total assets $ 104,353,534 $165,631,415 ============= ============= Liabilities and Shareholders' Equity Liabilities: Unpaid loss and loss adjustment expenses $ 20,413,236 $ 33,664,871 Unearned premiums 9,496,342 34,058,289 Reinsurance on paid loss and loss adjustment expenses 1,419,536 - Reinsurance deposits on retroactive contract 48,375 - Ceded premiums payable 6,739,068 19,647,751 Due to affiliate: Ceded premiums payable 1,636,207 187,402 Reinsurance on paid loss and loss adjustment expenses 79,198 241,608 Escrow deposits - 5,211,023 Accounts payable and accrued expenses 1,893,470 8,661,978 Funds held 357,509 1,153,997 Loan payable - 4,020,535 Collateral held 1,208,976 777,083 Income tax payable 22,857 - ----------- ----------- Total liabilities 43,314,774 107,624,537 ----------- ----------- -1- December 31, September 30, Shareholders' equity: Preferred stock, $0.01 par value; authorized 5,000,000 shares; no shares issued and outstanding - - Common stock, $0.01 par value; authorized 15,000,000 shares; issued and outstanding at December 31, 1999, 6,077,750 shares, and at September 30, 2000, 6,281,386 shares 60,777 62,814 Additional paid-in capital 33,810,387 35,148,577 Retained earnings 30,625,739 28,838,715 Accumulated other comprehensive loss, net (1,288,804) (461,914) Treasury Stock, 300,000 shares at December 31, 1999 and 958,100 shares at September 30, 2000 (2,169,339) (5,581,314) ----------- ------------ Total shareholders' equity 61,038,760 58,006,878 ----------- ------------ Total liabilities and shareholders' equity $104,353,534 $165,631,415 ============= ============= See accompanying notes to consolidated financial statements (unaudited). -2- American Safety Insurance Group, Ltd. and Subsidiaries Consolidated Statements of Operations (Unaudited) Three Months Ended Nine Months Ended September 30, September 30, ------------------------------------ ------------------------------------ 1999 2000 1999 2000 ---- ---- ---- ---- Revenues: Direct premiums earned $ 2,212,188 $ 11,636,314 $ 5,325,894 $ 21,009,226 Assumed premiums earned: Affiliate 799,131 1,769,646 2,383,284 3,998,187 Nonaffiliates 2,279,402 4,113,826 6,066,682 9,785,408 ----------- ----------- ----------- ----------- Total assumed premiums earned 3,078,533 5,883,472 8,449,966 13,783,595 ----------- ----------- ----------- ---------- Ceded premiums earned: Affiliate 1,082,486 1,170,306 3,085,890 3,219,951 Nonaffiliates 682,013 6,769,616 1,108,583 10,633,895 ------------ ----------- ----------- ---------- Total ceded premiums earned 1,764,499 7,939,922 4,194,473 13,853,846 ----------- ----------- ----------- ---------- Net premiums earned 3,526,222 9,579,864 9,581,387 20,938,975 ----------- ----------- ----------- ---------- Net investment income 746,194 667,623 2,159,959 2,001,630 Interest on notes receivable 512,289 377,679 2,019,851 1,252,648 Brokerage commission income 276,800 859,449 771,034 1,812,087 Management fees from affiliate 339,320 350,392 1,064,908 1,068,738 Net realized gains (losses) 120,207 ( 9,352) 218,064 (215,063) Other income 245,007 69,543 706,056 767,949 ----------- ------------- ---------- ------------ Total revenues 5,766,039 11,895,198 16,521,259 27,626,964 ----------- ------------ ---------- ------------ Expenses: Loss and loss adjustment expenses incurred 2,147,664 4,980,766 5,567,194 11,801,592 Acquisition expenses 193,644 1,961,952 865,060 4,744,783 Payroll and related expenses 1,153,340 1,921,571 3,496,027 5,503,629 Other expenses 724,355 2,253,160 2,039,358 5,059,535 Expense due to rescission - - - 3,541,848 ------------ ---------- ---------- ----------- Total expenses 4,219,003 11,117,449 11,967,639 30,651,387 ------------ ---------- ---------- ---------- Earnings (loss) before income taxes 1,547,036 777,749 4,553,620 (3,024,423) Income taxes 187,773 123,923 33,782 (1,237,399) ------------ ------------ ---------- ----------- Net earnings (loss) $1,359,263 $653,826 $4,519,838 $(1,787,024) ------------ ------------ ---------- ------------ Net earnings (loss) per share: Basic $ 0.23 $ 0.12 $ 0.75 $ (0.32) ========= ========== ========== =========== Diluted $ 0.23 $ 0.12 $ 0.74 $ (0.32) ========= ========== ========== =========== Common shares used in computing earnings per share: Basic 6,009,208 5,377,597 6,050,059 5,609,170 ========= ========= ========= =========== Diluted 6,027,667 5,377,597 6,077,700 5,610,944 ========= ========= ========= =========== See accompanying notes to consolidated financial statements (unaudited). -3- American Safety Insurance Group, Ltd. and Subsidiaries Consolidated Statements of Cash Flow (Unaudited) Nine months ended September 30, ------------------------------- 1999 2000 ---- ---- Cash flow from operating activities: Net earnings (loss) $ 4,519,838 $(1,787,024) Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: Realized (gains) losses on sale of investments (218,064) 215,063 Amortization (deferral) of acquisition costs 1,195,038 (1,377,104) Change in: Accrued investment and interest income (917,477) (998,452) Premiums receivable (4,765,230) (13,147,232) Commissions receivable (236,444) (30,152) Reinsurance recoverable and ceded unearned premiums (2,487,200) (23,130,479) Funds held by reinsured (318,401) 740,944 Due from affiliate 366,471 749,599 Income taxes 116,346 (177,729) Deferred income taxes (224,320) (1,382,785) Unpaid losses and loss adjustment expenses 3,610,764 13,251,635 Unearned premiums 2,674,281 24,561,947 Liability for deductible fees held (488,039) (48,375) Ceded premiums payable 2,590,235 12,908,683 Due to affiliate 103,948 (1,286,395) Accounts payable and accrued expenses (1,343,746) 6,768,508 Collateral held 949,068 (431,893) Prepaid items - (1,331,461) Other, net (526,928) 223,593 ------------- ----------- Net cash provided by operating activities 4,600,140 14,290,891 ------------ ----------- Cash flow from investing activities: Purchases of fixed maturities (5,765,209) (7,762,871) Purchases of equity investments (1,321,179) (5,766,571) Proceeds from maturity and redemption of fixed maturities 8,083,197 650,024 Proceeds from sale of fixed maturities 2,103,289 10,897,958 Proceeds of sale of equity investments 3,065,525 5,134,381 Purchase of Trafalgar Insurance Company - (7,050,877) Increase in short-term investments (6,301,212) (731,427) Proceeds from notes receivable - related parties 280,000 1,530,000 Advances in notes receivable - other (4,287,138) 1,300,176 Increase in investment in real estate (887,328) (7,227,423) Purchase of fixed assets, net (891,649) (361,628) ------------ ------------- Net cash used in investing activities (5,921,704) (9,388,258) ----------- ------------- Cash flow from financing activities: Proceeds from sale of common stock 1,276 - Purchase of treasury stock (1,101,144) (3,411,975) Proceeds from escrow deposits - 5,211,023 Proceeds from loan payable - 4,020,535 ------------ ------------ Net cash used in financing activities (1,099,868) 5,819,583 ----------- ------------ Net increase (decrease) in cash (2,421,432) 10,722,216 Net cash and restricted cash at beginning of period 4,737,132 427,154 ----------- ------------- Net cash and restricted cash at end of period $2,315,700 $11,149,370 =========== ============= Noncash items operating activities: Change in accrued interest income 980,120 - Recoverable due to rescission in other assets - (1,323,000) Change in prepaid items - (170,000) Investing activities: Decrease in notes receivable-other 9,162,777 - Purchase of real estate (10,142,897) - Financing activities: Issuance of common stock - 1,323,000 Notes receivable related parties - 170,000 ----------------- ----------- Net noncash adjustments - - ================= =========== See accompanying notes to consolidated financial statements (unaudited). -4- American Safety Insurance Group, Ltd. and Subsidiaries Consolidated Statements of Comprehensive Earnings (Unaudited) Three months ended Nine months ended September 30, September 30, ----------------------------------- -------------------------------- 1999 2000 1999 2000 ----------------- ----------------- ----------------- -------------- Net earnings (loss) $1,359,263 $ 653,826 $4,519,838 $(1,787,024) Other comprehensive earnings before income taxes: Unrealized gains (losses) on securities available for sale (564,704) 529,033 (1,687,589) 970,752 Reclassification adjustment for realized gains (loss) included in net earnings 120,207 (9,352) 126,018 (215,063) ----------- ----------- ------------- -------------- Total other comprehensive earnings (loss) before taxes (444,497) 519,681 (1,561,571) 755,689 Income tax (benefit) expense related to items of comprehensive income (22,649) 104,245 (134,325) (71,201) ------------ ------------ -------------- -------------- Other comprehensive earnings (loss) net of income taxes (421,848) 415,436 (1,427,246) 826,890 ------------- ---------- -------------- ------------- Total comprehensive earnings (loss) $ 937,415 $1,069,262 $3,092,592 $(960,134) ============= ========== ============== ============= See accompanying notes to consolidated financial statements (unaudited). -5- American Safety Insurance Group, Ltd. and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) Note 1 - Basis of Presentation The accompanying unaudited interim consolidated financial statements of American Safety Insurance Group, Ltd. ("American Safety") and its subsidiaries (collectively, the "Company") are prepared in accordance with generally accepted accounting principles of the United States and, in the opinion of management, reflect all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of the interim periods presented. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates, based on the best information available, in recording transactions resulting from business operations. The balance sheet amounts that involve a greater extent of accounting estimates and actuarial determinations subject to future changes are the Company's liabilities for unpaid losses and loss adjustment expenses. As additional information becomes available (or actual amounts are determinable), the recorded estimates may be revised and reflected in operating results. While management believes that the liability for unpaid losses and loss adjustment expenses is adequate to cover the ultimate liability, such estimates may be more or less than the amounts actually paid when claims are settled. The results of operations for the nine months ended September 30, 2000 may not be indicative of the results that may be expected for the full year ending December 31, 2000. These unaudited interim consolidated financial statements and notes should be read in conjunction with the financial statements and notes included in the audited consolidated financial statements of the Company for the year ended December 31, 1999. The unaudited interim consolidated financial statements include the accounts of American Safety and each of its subsidiaries. All significant intercompany balances have been eliminated. Note 2 - Accounting Pronouncements In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133, as amended, is effective for years beginning after June 15, 2000. The standard requires that all derivatives be recorded as an asset or liability, at estimated fair value, regardless of the purpose or intent for holding the derivative. If a derivative is not utilized as a hedge, all gains or losses from the change in the derivative's estimated fair value are recognized in earnings. The gains or losses from the change in estimated fair value of certain derivatives utilized as hedges are recognized in earnings or other comprehensive income depending on the type of hedge relationship. The Company expects that adoption of SFAS No. 133, as amended by statement 138, will have an immaterial impact on the Company's consolidated financial position and results of operations. -6- In September 2000, the FASB issued SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities-a replacement of FASB Statement No. 125. SFAS No. 140 revises the standards of accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures not previously required under SFAS No. 125. This statement is effective for all transfers and servicing of financial assets and liabilities occurring after March 31, 2001. For recognition and reclassification of collateral and for disclosures relating to securitization transactions and collateral, it is effective for fiscal years ended after December 15, 2000. The Company is currently assessing the impact of SFAS No. 140, but does not believe that the statement will have a material impact on the Company's consolidated financial position and results of operation. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin (SAB) No. 101 -- Revenue Recognition in Financial Statements. SAB 101, as amended, is effective for fiscal years ended after December 15, 2000. The bulletin further defines when revenues are recognizable and provides a series of questions and answers related to specific revenue recognition topics. The Company does not expect the adoption of SAB 101 to have a material impact on the Company's consolidated financial position and results of operation. Note 3 - Nature of Operations The following is a description of certain risks facing the Company: (a) Legal/Regulatory Risk is the risk that changes in the legal or regulatory environment in which an insurer operates which will create additional expenses not anticipated by the insurer in pricing its products and beyond those recorded in the financial statements. Regulatory initiatives designed to reduce insurer profits or otherwise affecting the industry in which the Company operates, new legal theories or insurance company insolvencies through guaranty fund assessments, may create costs for the Company beyond those recorded in the financial statements. The Company attempts to mitigate this risk by writing insurance business in several states, thereby spreading this risk over a large geographic area. (b) Potential Risk of United States Taxation of Bermuda Operations. Under current Bermuda law, American Safety is not required to pay any taxes in Bermuda on either income or capital gains. American Safety has received an undertaking from the Minister of Finance in Bermuda that will exempt American Safety from taxation until the year 2016 in the event of any such taxes being imposed. The Company, exclusive of its United States subsidiaries, does not consider itself to be engaged in a trade or business in the United States and accordingly does not expect to be subject to direct United States income taxation. The Company's U.S. subsidiaries are subject to taxation in the United States. Whether a foreign corporation is engaged in a United States trade or business or is carrying on an insurance business in the United States depends upon the level of activities conducted in the -7- United States. If the activities of a foreign company are "continuous, regular, and considerable,"; the foreign company will be deemed to be engaged in a United States trade or business. Due to the fact that American Safety will continue to maintain an office in Bermuda and American Safety and its Bermuda subsidiary's business is reinsuring contracts via treaty reinsurance agreements, which are all signed outside of the United States, American Safety does not consider itself to be engaged in a trade or business in the United States and, accordingly, does not expect to be subject to United States income taxes. This position is consistent with the position taken by various other entities that have a similar operational structure as American Safety. However, because the Internal Revenue Code of 1986, as amended, the Treasury Regulations and court decisions do not definitively identify activities that constitute being engaged in a United States trade or business, and because of the factual nature of the determination, there can be no assurance that the Internal Revenue Service will not contend that American Safety or its Bermuda subsidiary are engaged in a United States trade or business. In general, if American Safety or its Bermuda subsidiary are considered to be engaged in a United States trade or business, it would be subject to (i) United States Federal income tax on its taxable income that is effectively connected with a United States trade or business at graduated rates and (ii) the 30 percent branch profits tax on its effectively connected earnings and profits deemed repatriated from the United States. (c) Credit Risk is the risk that issuers of securities owned by the Company or secured notes receivable will default or that other parties, including reinsurers that have obligations to the insurer, will not pay or perform. The Company attempts to mitigate this risk by adhering to a conservative investment strategy, by obtaining sufficient collateral for secured note obligations and by maintaining sound reinsurance, credit and collection policies. (d) Interest Rate Risk is the risk that interest rates will change and cause a decrease in the value of an insurer's investments. The Company attempts to mitigate this risk by attempting to match the maturities of its assets with the expected payouts of its liabilities. Note 4 - Investments The amortized cost and estimated fair values of investments at December 31, 1999 and September 30, 2000 are as follows: Gross Gross Amount at Amortized unrealized unrealized Estimated which shown in Cost gains losses fair value the balance sheet -------------- ------------ ----------- ---------- ------------------ December 31, 1999: Securities available for sale: Fixed maturities: U.S. Treasury securities and obligations of U.S. Government corporations and agencies $17,475,473 $ - $624,997 $16,850,476 $16,850,476 Obligations of states and political subdivision 6,526,137 38,835 104,972 6,460,000 6,460,000 Corporate securities 14,623,165 2,427 519,015 14,106,577 14,106,577 Mortgage-backed securities 3,433,949 209 156,655 3,277,503 3,277,503 ------------ --------- ---------- ----------- ----------- -8- Total fixed maturities 42,058,724 41,471 1,405,639 40,694,556 40,694,556 Equity investments - common stocks 169,448 - 5,480 163,968 163,968 ----------- --------- ---------- ----------- ------------ Total $42,228,172 $ 41,471 $1,411,119 $40,858,524 $40,858,524 =========== ========= ========== =========== =========== September 30, 2000: Securities available for sale: Fixed maturities: U.S. Treasury securities and obligations of U.S. Government corporations and agencies $24,677,991 $ 94,727 $ 347,026 $24,425,692 $24,425,692 Obligations of states and political subdivisions 9,618,550 65,489 57,628 9,626,411 9,626,411 Corporate securities 8,817,218 4,239 366,573 8,454,884 8,454,884 Mortgage-backed securities 486,958 588 7,775 479,771 479,771 ----------- --------- ----------- ----------- ---------- Total fixed maturities 43,600,717 165,043 779,002 42,986,758 42,986,758 Equity investments - common stocks 707,493 - - 707,493 707,493 ----------- --------- ---------- ----------- ----------- Total $44,308,210 $ 165,043 $779,002 $43,694,251 $43,694,251 =========== ========= ========== =========== =========== Note 5 - Segment Information (a) Factors used to identify the Company's reportable segments: The Company's United States and Bermuda operating segments were identified by management as separate operating segments based upon the regulatory environments of each of these countries. Significant differences exist under United States and Bermuda law concerning the regulation of insurance entities including differences in: types of permissible investments, minimum capital requirements, solvency monitoring, pricing, corporate taxation, etc. (b) Products and services from each reportable segment: The Company's United States and Bermuda operating segments, develop, underwrite, manage and market primary casualty insurance and reinsurance programs in the alternative insurance market for environmental remediation risks, employee leasing and staffing industry risks, and other specialty risks. The Company has expertise in developing specialty insurance coverages and custom designed risk management programs not generally available in the standard insurance market. The Company is also involved in the development of the Harbour Village Golf and Yacht Club in Ponce Inlet, Florida, as discussed in Note 7, and this item is reflected in the segment United States-Real Estate. -9- The United States operating segment's specialty insurance programs provide insurance and reinsurance for general, pollution and professional liability exposures, for workers' compensation and surety, as well as custom designed risk management programs for contractors, consultants and other business and property owners who are involved with environmental remediation, employee leasing and staffing, and other specialty risks. Through its United States brokerage and management services subsidiaries, the Company provides specialized insurance program development, underwriting, risk and reinsurance placement, program management, brokerage, loss control, claims administration and marketing services. The Company also insures and places risks through its United States insurance subsidiary, as well as its non-subsidiary risk retention group affiliate and other unaffiliated insurance and reinsurance companies. Through its Bermuda operating segment, the Company places and reinsures a portion of the risks underwritten directly by its United States segment, its risk retention group affiliate and other insurers. (c) Information about segment profit or loss and assets: Nine Months Ended September 30, 1999 2000 ---- ---- United States - Insurance Net Premiums Earned - All Other 7,663,886 19,080,500 Net Premiums Earned - Intersegment (2,870,232) (5,935,873) Net investment income and interest on notes receivable 558,043 1,339,556 Other revenues 2,895,906 3,469,266 --------- ----------- Total Revenues 8,247,603 17,953,449 Depreciation and amortization expense 71,097 132,283 Equity in net earnings of subsidiaries 436,628 - Income taxes 33,782 (1,108,947) Segment loss 146,094 (2,089,586) Significant noncash items other than depreciation and amortization - - Property, plant and equipment 228,762 547,964 Total investments 19,231,658 41,001,732 Total assets 42,690,975 119,650,975 Total policy and contract liabilities 18,797,327 60,037,244 Total liabilities 33,292,874 92,490,080 -10- Nine Months Ended September 30, 1999 2000 ---- ---- United States - Real Estate Net Premiums Earned - All Other - - Net Premiums Earned - Intersegment - - Net investment income and interest on Notes - - Other revenues - 150 --------- -------- Total revenues - 150 Depreciation and amortization - 31,109 Equity in net earnings of subsidiaries - - Income taxes - (128,452) Segment loss - (238,555) Significant noncash items - - Property, plant and equipment - 222,189 Total investments - - Total assets - 21,034,807 Total policy and contract liabilities - - Total liabilities - 11,608,676 Bermuda Net Premiums Earned - All Other 1,917,501 1,858,475 Net Premiums Earned - Intersegment 2,870,232 5,935,873 Net investment income and interest on notes receivable 3,621,767 1,914,722 Other revenues 249,941 632,955 ---------- ----------- Total revenues 8,659,441 10,342,025 Depreciation and amortization expense - 15,094 Equity in net earnings (loss) of subsidiaries 1,718,391 (1,193,346) Income Taxes - - Segment profit 4,373,744 541,117 Significant noncash items other than depreciation and amortization - - Property, plant and equipment 865,587 825,769 Total investments 39,667,590 56,694,084 Total assets 92,384,858 86,960,497 Total policy and contract liabilities 12,283,120 16,615,861 Total liabilities 14,510,049 18,947,298 -11- Nine Months Ended September 30, 1999 2000 ---- ---- Intersegment Eliminations Net Premiums Earned - All Other - - Net Premiums Earned - Intersegment - - Net investment income and interest on notes - - receivable Other revenues (385,785) (668,660) --------- --------- Total revenues (385,785) (668,660) Depreciation and amortization expense - - Equity in net earnings of subsidiaries (2,155,019) 1,193,346 Income taxes - - Segment profit (loss) - - Significant noncash items other than depreciation and amortization - - Property, plant and equipment - - Total investments (9,397,445) (46,593,347) Total assets (38,122,652) (62,014,864) Total policy and contract liabilities (6,200,361) (8,929,945) Total liabilities (12,111,759) (15,421,517) Total Net Premiums Earned - All Other 9,581,387 20,938,975 Net Premiums Earned - Intersegment - - Net investment income and interest on notes receivable 4,179,810 3,254,278 Other revenues 2,257,958 3,433,711 ----------- ----------- Total revenues 16,521,259 27,626,964 Depreciation and amortization expense 71,097 178,486 Equity in net earnings of subsidiaries - - Income taxes 33,782 (1,237,399) Segment profit (loss) 4,519,838 (1,787,024) Significant noncash items other than depreciation and amortization - - Property, plant and equipment 1,094,349 1,595,922 Total investments 49,501,803 51,102,469 Total assets 96,953,181 165,631,415 Total policy and contract liabilities 24,880,086 67,723,160 Total liabilities 35,691,164 107,624,537 -12- Note 6 - Shareholder Matters During the quarter ended September 30, 2000, the Company repurchased 58,100 common shares at a total price of $228,050 in open market transactions pursuant to its share repurchase program. Note 7 - Investment in Real Estate The Company's investment in the development of the Harbour Village Golf and Yacht Club ("Harbour Village") project is comprised of 173 acres of property in Ponce Inlet, Florida which was acquired through foreclosure on April 13, 1999. At the date of foreclosure, the Company evaluated the carrying value of its investment in real estate by comparing the fair value of the foreclosed collateral to the book value of the underlying loan and accrued interest. As the book value of the loan and accrued interest was less than the fair value of the collateral, no loss was recognized on foreclosure and the book balance of the loan and accrued interest became the basis of the real estate. The Company announced on March 10, 2000, its plans to complete development of the Harbour Village project through its subsidiary, Ponce Lighthouse Properties, Inc. Note 8 - Acquisitions On March 24, 2000, the Company purchased Trafalgar Insurance Company, an Oklahoma licensed insurance company, which has authority to operate as an excess and surplus lines insurance company in 34 states and the District of Columbia. Trafalgar Insurance Company's stock was acquired from Houston Casualty Company for a purchase price of $16.3 million cash, and Trafalgar had, at closing, cash of $9.3 million and investments of $5.7 million creating $1.3 million of goodwill. The net cash outlay for this acquisition was $7.0 million. Prior to closing, Trafalgar entered into a bulk assumption reinsurance agreement with Houston Casualty, under which Houston Casualty assumed all of Trafalgar's prior and existing insurance business. Trafalgar has been renamed American Safety Indemnity Company. On January 6, 2000, the Company acquired (i) the stock of L&W Holdings, Inc. and its wholly-owned subsidiary, RCA Syndicate #1, Ltd., an Illinois licensed insurance carrier operating on the INEX (formerly the Illinois Insurance Exchange), (ii) the stock of Principal Management, Inc., an insurance program development and management company headquartered in Okemos, Michigan, and in a related transaction, the Company also acquired (iii) the stock of Pegasus Insurance, a Cayman Islands licensed insurance carrier. The transactions were structured as stock acquisitions, with the purchase price paid by the Company consisting of $3,500,000 plus 200,000 American Safety common shares and earnout provisions for up to an additional 254,000 American Safety common shares over a five-year period. Of the purchase price, $1,000,000 of cash and 109,086 shares of stock are held in escrow to secure the obligations of the sellers. The Company also obtained a security interest in a real estate condominium in the Cayman Islands with an estimated -13- value of $600,000 to secure the obligations of the sellers. On April 21, 2000, the Company filed a lawsuit to rescind these acquisitions based upon the sellers' misrepresentations as to the business affairs and financial condition of the acquired companies, and recognized an expense, net of recoverables, of $3.5 million for such rescission. Note 9 - Income Taxes Total income tax (benefit) for the nine months ended September 30, 1999 and 2000 were allocated as follows: Nine Months Ended June 30, 1999 2000 ---- ---- Tax benefit attributable to: Income (loss) from continuing operations $33,782 $(1,237,399) Unrealized losses on securities available for sale (62,241) (71,266) -------- ------------ Total $(28,459) $ (1,308,665) ======== ============ U.S. Federal and state income tax expense (benefit) from continuing operations consists of the following components: Current Deferred Total ------- -------- ----- September 30, 1999 (128,297) 162,079 33,782 September 30, 2000 74,120 (1,311,519) (1,237,399) The state income tax components aggregated $134,017 and $(34,314) for the nine months ended September 30, 1999 and 2000, respectively. Income tax expense (benefit) for the period ended September 30, 1999 and 2000 differed from the amount computed by applying the U.S. Federal income tax rate of 34% to earnings (loss) before Federal income taxes as a result of the following: -14- September 30, 1999 2000 ---- ---- Expected income tax expense (benefit) $1,548,231 $(1,028,304) Foreign earned income not subject to U.S. taxation (1,487,073) (183,980) Tax-exempt interest (73,039) (97,996) State taxes and other 45,663 72,881 ------------ ------------- $ 33,782 $(1,237,399) ============ ============= Deferred income taxes are based upon temporary differences between the financial statement and tax bases of assets and liabilities. The following deferred taxes are recorded: December 31, September 30, 1999 2000 ---- ---- Deferred tax assets: Loss reserve discounting $ 509,011 $ 832,855 Unearned premium reserves 185,459 765,036 Unrealized loss on securities 80,844 152,110 Net operating loss carry forward - 879,425 ---------- ---------- Gross deferred tax assets 775,314 2,629,426 ---------- ---------- Deferred tax liabilities: Deferred acquisition costs 42,087 513,414 ---------- ----------- Gross deferred tax liabilities 42,087 513,414 ---------- ----------- Net deferred tax asset $ 733,227 $2,116,012 ========== =========== A valuation allowance has not been established as the Company believes it is more likely than not that the deferred tax asset will be realized. The Company believes it will have sufficient future income to offset the net operating loss carry forward. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations General American Safety is a specialty insurance and financial services holding company which, through its subsidiaries, develops, underwrites, manages and markets primary casualty insurance and reinsurance programs in the alternative insurance market for environmental remediation risks, -15- employee leasing and staffing industry risks, and other specialty risks, as well as provides a broad range of financial services and products to middle market businesses. During the past ten years, the Company operated in a generally soft market cycle which is characterized by excess insurance capacity and declining insurance premium rates. The Company's reported combined ratio for its insurance operations may not provide an indication of the Company's overall profitability from insurance and reinsurance programs due to the exclusion of fee and commission income and expenses generated in related management and agency subsidiaries. Forward Looking Statements This Report contains certain forward-looking statements within the meaning of United States' securities laws which are intended to be covered by the safe harbors created thereby. Forward-looking statements involve risks and uncertainties which may cause actual results to differ, and are subject to change based on various factors, including the outcome of the Company's lawsuit for rescission of the acquisition of an insurance agency and two related insurance companies, competitive conditions in the insurance industry, unpredictable developments in loss trends, adequacy and changes in loss reserves, market acceptance of new coverages and enhancements, changes in insurance regulatory requirements and tax statutes, changes in levels of general business activity and economic conditions, and the Company's ability to integrate and operate acquired businesses and the risks associated with such businesses. With respect to the development of the Harbour Village Golf and Yacht Club project, such forward-looking statements involve risks and uncertainties which may cause actual results to differ, and are subject to change based on various real estate development industry factors, including competitive housing conditions in the local market area, risks inherent in new construction, changes in interest rates and the availability of mortgage financing for prospective purchasers of condominium units and boat slips, and changes in local and national levels of general business activity and economic conditions. For additional factors which could influence the results of the Company's operating and financial performance, see the Company's filings with the Securities and Exchange Commission. All statements, other than statements of historical facts, included or incorporated by reference in this Report that address activities, events or developments that the Company expects or anticipates will or may occur in the future constitute forward-looking statements. Although the Company believes that the assumptions underlying the forward-looking statements contained in this Report are reasonable, any of the assumptions could over time prove to be inaccurate and therefore, there can be no assurance that the forward-looking statements included in this Report will themselves prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included in this Report, the inclusion of such information should not be regarded as a representation by the Company or any other person that the objectives and plans of the Company will be achieved. [The remainder of this page is intentionally left blank] -16- Results of Operations The following table sets forth the Company's consolidated revenues: Three Nine Months Months Three Months Nine Months Ended Ended Ended September 30, Ended September 30, September September 30, 30, ---------------------------- --------------------------- ------------- -------------- 1999 to 1999 to 1999 2000 1999 2000 2000 2000 ------------- ------------- ------------- ------------- ------------- -------------- (Dollars in thousands) -------------------------------------------------------------------------------------- Net Premiums earned: Reinsurance: Workers' compensation $2,339 $3,598 $5,541 $9,229 53.8% 66.6% General liability and excess and surplus from affiliate 487 1,462 2,301 3,249 200.2 41.2 Auto Liability 6 - 28 - (100.0) (100.0) ------- --------- ------- ------ ----- ----- Total reinsurance 2,832 5,060 7,870 12,478 78.7 58.6 Primary insurance: Private Passenger Auto - 122 - 122 - - Prepaid Legal - - - 8 - - Excess and Surplus - 244 - 272 - - Commercial Line - 1,197 - 2,022 - - Workers' compensation - 91 - 253 - - Surety 694 2,866 1,711 5,784 313.0 238.0 ------- ----- ----- ------ ----- ----- Total primary insurance 694 4,520 1,711 8,461 551.3 394.5 ------ ----- ----- ------- ------ ----- Total net premiums earned 3,526 9,580 9,581 20,939 171.7 118.5 ------ ----- ----- ------ ------ ----- Net investment income 746 668 2,160 2,002 (10.5) (7.3) Interest on notes receivable 512 377 2,020 1,252 (26.3) (38.0) Commission and fee income: Brokerage commission income 277 859 771 1,812 210.1 135.0 Management fees from affiliate 339 350 1,065 1,069 3.2 0.4 ------ ------- ------- ------- ------ ------ Total commission and fee income 616 1,209 1,836 2,881 96.3 56.9 ------ ------- ------- ------ ------ ------ Net realized gains (losses) 120 (9) 218 (215) (107.5) (198.6) Other income 245 70 706 768 (71.4) 8.8 ------ ------- ------- ------- ------- ------- Total Revenues $5,765 $11,895 $16,521 $27,627 106.3% 67.2% ------ ------- ------ ------- ------ ------ The following table sets forth the components of the Company's GAAP combined ratio for the periods indicated: Three months ended Nine months ended September 30, September 30, ------------- ------------- 1998 1999 2000 1998 1999 2000 ---- ---- ---- ---- ---- ---- Insurance operations: Loss and loss adjustment expense ratio 63.9% 60.9% 52.0% 54.3% 59.6% 56.4% Expense ratio 4.1 15.0 32.1 33.7 9.2 32.7 ---- ---- ---- ---- ----- ---- Combined ratio 68.0 75.9% 84.1% 88.0% 68.8% 89.1% ---- ---- ---- ---- ---- ---- Quarter Ended September 30, 2000 Compared to Quarter Ended September 30, 1999 Net Premiums Earned. Net premiums earned increased 171% from $3.5 million in the quarter ended September 30, 1999 to $9.6 million in the quarter ended September 30, 2000. The principal factors contributing to the increase for the quarter ended September 30, 2000 as compared to the prior period were the Company's assumption of workers' compensation reinsurance business, which increased by 54% from $2.3 million to $3.6 million, the Company's surety business, which increased by 313% from $694,000 to $2.9 million, the Company's assumption of general liability and excess and surplus reinsurance business, which increased by 200% from $487,000 to $1.5 million, and the Company's new commercial lines and primary excess and surplus lines of business, which generated net earned premiums of $1.2 million and $244,000, respectively, in the quarter ending September 30, 2000. Net Investment Income. Net investment income decreased 10.5% from $746,000 in the quarter ended September 30, 1999 to $668,000 in the quarter ended September 30, 2000 due to lower levels of invested assets. Average invested assets decreased to $48.2 million from $50.5 million when comparing third quarter 2000 with third quarter 1999. The main reason for this decrease relates to Treasury stock purchases made since September 30, 1999. The average pre-tax yield on investments was 5.9% in the quarter ended September 30, 1999 and 5.5% in the quarter ended September 30, 2000. The average after-tax yield on investments was 5.6% in the quarter ended September 30, 1999 and 4.4% in the quarter ended September 30, 2000. The reduction in the after tax yield is primarily due to the acquisition of American Safety Indemnity Company (formerly known as Trafalgar Insurance Company), which resulted in a substantial portion of the Company's bond portfolio being held by a United States subsidiary. Interest from Notes Receivable. Interest from notes receivable decreased 26% from $512,000 in the quarter ended September 30, 1999 to $378,000 in the quarter ended September 30, 2000, which primarily relates to the repayment of various loans, including the previously defaulted American Darico loan. The Company was successful in recovering all amounts that were due from the collateral securing repayment of the American Darico loan. As a result of the Company's refinancing of certain secured notes receivable from a borrower in the fourth quarter of fiscal year 2000, including the transfer of real estate to the Company as partial repayment of these notes receivable, there will be a reduction in interest on notes receivable on a going-forward basis. Brokerage Commission Income. Brokerage commission income increased 210% from $277,000 in the quarter ended September 30, 1999 to $859,000 in the quarter ended September 30, 2000 as a result of increased excess and surplus lines premium, with commissions recognized as revenue upon the inception of such policies written by the Company's non-subsidiary affiliate, American Safety Risk Retention Group, Inc. However, beginning in the third quarter of fiscal year 2000, policies are being written by the American Safety Indemnity Company, and such revenue will be recognized as premiums are earned over the life of the underlying policies. Management Fees. Management fees increased 3% from $339,000 in the quarter ended September 30, 1999 to $350,000 in the quarter ended September 30, 2000. These fees are derived -17- from services provided by the Company to its risk retention group affiliate, which services remained consistent as compared to the prior period. Net Realized Gains. Net realized gains decreased from $120,000 in the quarter ended September 30, 1999 to a loss of $9,000 for the quarter ended September 30, 2000 due to the sale of municipal bonds which were replaced with higher yield bonds. Other Income. Other income decreased from $245,000 in the quarter ended September 30, 1999 to $70,000 for the quarter ended September 30, 2000 as a result of lower fees generated by the Company's financial service subsidiary. Losses and Loss Adjustment Expenses. Losses and loss adjustment expenses increased 131% from $2.1 million in the quarter ended September 30, 1999 to $5.0 million in the quarter ended September 30, 2000. The increase in loss and loss adjustment expense was primarily due to increased premium volume over the prior period. Acquisition Expenses. Policy acquisition expenses increased from $194,000 in the quarter ended September 30, 1999 to $1.9 million in the quarter ended September 30, 2000 primarily as a result of increased premium production in all lines of business. Payroll and Other Expenses. Payroll and other expenses increased 122% from $1.9 million in the quarter ended September 30, 1999 to $4.2 million in the quarter ended September 30, 2000 as a result of increases in salary, benefits and operating expense primarily due to our newer underwriting units and license fees for expanding our capability to direct write additional lines of business, increased premium tax expense on new direct insurance business, non-capitalizable expenses related to the development of the Harbour Village project, and expenses associated with the Company's financial service subsidiary. Income Taxes. Federal and state income taxes decreased from $188,000 in the quarter ended September 30, 1999 to $124,000 in the quarter ended September 30, 2000 due to decreased taxable income in the Company's U.S. subsidiaries. The decrease in taxable income was primarily due to increased underwriting expenses. Nine Months Ended September 30, 2000 Compared to Nine Months Ended September 30, 1999 Net Premiums Earned. Net premiums earned increased 118% from $9.6 million in the nine months ended September 30, 1999 to $20.9 million in the nine months ended September 30, 2000. The principal factors contributing to the increase for the nine months ended September 30, 2000 as compared to the prior period were the Company's assumption of workers' compensation reinsurance business, which increased net premiums by 67% from $5.5 million to $9.2 million, the Company's surety business, which increased by 238% from $1.7 million to $5.8 million, the Company's assumption of general liability and excess and surplus reinsurance business, which increased by 41% -18- from $2.3 million to $3.2 million, and the Company's new commercial lines and primary excess and surplus lines business, which generated net earned premiums of $2.0 million and $272,000, respectively, in the nine months ended September 30, 2000. Net Investment Income. Net investment income decreased 7% from $2.16 million in the nine months ended September 30, 1999 to $2.0 million in the nine months ended September 30, 2000 due to a reduction in the investment portfolio, as a result of expenditures on acquisitions, real estate and treasury stock. The average annual pre-tax yield on investments was 5.7% in the nine months ended September 30, 1999 and 5.4% in the nine months ended September 30, 2000. The average annual after-tax yield on investments was 5.5% in the nine months ended September 30, 1999 and 4.4% in the nine months ended September 30, 2000. The reduction in the after tax yield is primarily due to the acquisition of American Safety Indemnity Company (formerly known as Trafalgar Insurance Company), which resulted in a substantial portion of the Company's bond portfolio being held by a United States subsidiary. Interest from Notes Receivable. Interest from notes receivable decreased 38% from $2.0 million in the nine months ended September 30, 1999 to $1.3 million in the nine months ended September 30, 2000, which primarily relates to the repayment of various loans, including the previously defaulted American Darico loan. The Company was successful in recovering all amounts that were due from the collateral securing repayment of the American Darico loan. As a result of the Company's refinancing of certain secured notes receivable from a borrower in the fourth quarter of fiscal year 2000, including the transfer of real estate to the Company as partial repayment of these notes receivable, there will be a reduction in interest on notes receivable on a going-forward basis. Brokerage Commission Income. Income from insurance brokerage operations increased 135% from $771,000 in the nine months ended September 30, 1999 to $1.8 million in the nine months ended September 30, 2000 as a result of increased excess and surplus lines premium, with commissions recognized as revenue upon the inception of such policies written by the Company's non-subsidiary affiliate, American Safety Risk Retention Group, Inc. However, beginning in the third quarter of fiscal year 2000, policies are being written by the American Safety Indemnity Company, and such revenue will be recognized as premium earned over the life of the underlying policies. Management Fees. Management fees increased from $1.06 million in the nine months ended September 30, 1999 to $1.07 million in the nine months ended September 30, 2000. These fees are derived from services provided by the Company to its risk retention group affiliate, which services remained consistent as compared to the prior period. Net Realized Gains. Net realized gains decreased 198% from a gain of $218,000 in the nine months ended September 30, 1999 to a loss of $215,000 in the nine months ended September 30, 2000. The decrease is related to bond portfolio sales for the purchase of American Safety Indemnity Company. -19- Other Income. Other income increased from $706,000 in the nine months ended September 30, 1999 to $768,000 for the nine months ended September 30, 2000. The increase principally relates to a commitment fee from the proposed sale of the Harbour Village project. Losses and Loss Adjustment Expenses. Losses and loss adjustment expenses increased 112% from $5.6 million in the nine months ended September 30, 1999 to $11.8 million in the nine months ended September 30, 2000. This increase in loss and loss adjustment expense was primarily due to increased premium volume over the prior period. Acquisition Expenses. Policy acquisition expenses increased 448% from $865,000 in the nine months ended September 30, 1999 to $4.7 million in the nine months ended September 30, 2000 as a result of increased premium production in all lines of business. Expense Due to Rescission. Expense due to rescission was $3.5 million and relates to the rescission of the acquisition of a group of companies. See Note 8 to the Financial Statements. Payroll and Other Expenses. Payroll and other expenses increased 90% from $5.5 million in the nine months ended September 30, 1999 to $10.6 million in the nine months ended September 30, 2000 as a result of increases in salary, benefits and operating expense primarily due to increased staffing for new and existing programs, increased premium tax expense on new direct insurance business, non-capitalizable expenses related to the development of the Harbour Village project, and expenses associated with the Company's financial service subsidiary. Income Taxes. Federal and state income taxes decreased from $34,000 in the nine months ended September 30, 1999 to a benefit of $1.2 million in the nine months ended September 30, 2000 due to decreased taxable income in the Company's U.S. subsidiaries. The decrease in taxable income was primarily due to expenses relating to rescission of the acquisition of a group of companies and increases in underwriting expenses. The Company has not set up a valuation allowance as it believes it will generate sufficient future taxable income to recover the net operating loss carryforward. Liquidity and Capital Resources The Company historically has met its insurance-related cash requirements and financed its insurance-related growth principally through cash flows generated from operations. The Company's primary sources of cash flow for its insurance operations are proceeds from the sale or maturity of invested assets, premiums earned, investment income, commission income and management fees. The Company's short-term cash requirements are primarily for claims payments, reinsurance premiums, commissions, salaries, employee benefits and other operating expenses, and the purchase of investment securities, which have historically been satisfied from operating cash flows. Due to the uncertainty regarding settlement of unpaid claims, the long-term liquidity requirements of the Company may vary, and the Company has attempted to structure its investment portfolio to take into account the historical payout patterns. Management believes that the Company's current cash flows are sufficient for its short-term needs and the Company's invested assets are sufficient for its -20- long-term needs. The Company also purchases reinsurance to mitigate the effect of large claims and to stabilize demands on its liquidity. The Company's primary source of cash flow for its Florida real estate development is an acquisition, development, and construction loan from a bank. Proceeds from this loan are used for development and construction of the Harbour Village project. The Company expects that net operating losses will occur in the fourth quarter of fiscal year 2000 as a result of general administrative expenses relating to the Company's investment in new operating units exceeding revenue production, non-capitalizable expenses incurred in the development and construction of the Harbour Village project, and lower brokerage income as a result of excess and surplus lines premium written by the Company as opposed to being written by the Company's non-subsidiary affiliate. During the quarter ended September 30, 2000, the Company repurchased 58,100 common shares in open market transactions pursuant to its share repurchase program. On a consolidated basis, net cash provided from operations was $4.6 million for the nine months ended September 30, 1999 and $14.3 million for the nine months ended September 30, 2000. The positive cash flows for both periods were primarily attributable to net premiums written, and increases in reserves for unpaid losses. Since workers' compensation and general liability claims may be paid over an extended period of time, the Company has established loss reserves for such lines of business. The assets supporting the Company's loss reserves continue to earn investment income until claims payments are made. Total assets increased from $104.4 million at December 31, 1999 to $165.6 million at September 30, 2000, primarily due to increases in premiums receivable, reinsurance recoverables, deferred income tax, real estate investments and goodwill from the purchase of Trafalgar Insurance Company. Cash, invested assets and notes receivable were $73.0 million at December 31, 1999 and $91.5 million at September 30, 2000. The increase in cash, invested assets and notes receivable was primarily due to receipt of escrow deposits, increases in investment in real estate and cash flow from insurance operations. Other assets increased from $114,000 at December 31, 1999 to $1.6 million at September 30, 2000 as a result of $1.3 million collateral held which lowered the expense due to the Company's rescission of the acquisition of a group of companies. American Safety is an insurance and financial services holding company whose principal assets are its investment portfolio and its investment in the capital stock of its subsidiaries. As an insurance holding company, American Safety's ability to pay dividends to its shareholders will depend, to a significant degree, on the ability of the Company's subsidiaries to pay dividends to American Safety. The jurisdictions in which American Safety and its insurance and reinsurance subsidiaries are domiciled place limitations on the amount of dividends or other distributions payable by insurance companies in order to protect the solvency of insurers. -21- In January 1997, the Securities and Exchange Commission approved rule amendments regarding disclosures concerning derivative financial instruments, other financial instruments and derivative commodity instruments (the "Release"). The Release requires inclusion in the footnotes to the financial statements of extensive detail about the accounting policies followed by a company in connection with its accounting for derivative financial instruments and derivative commodity instruments. As of September 30, 2000, the Company had no investments in derivative instruments. Harbour Village Development. The Company announced in March 2000 its plans to complete development of the Harbour Village Golf and Yacht Club ("Harbour Village"), located in Ponce Inlet, Florida, consisting of 786 residential condominium units, a marina containing 142 boat slips, a par 3 golf course and beach club. The project acquired by the Company through foreclosure in April 1999, has been under development by its subsidiary, Ponce Lighthouse Properties, Inc. The number of residential condominium units planned for the project has been increased from 786 to 811. As of September 30, 2000, the Company's marketing efforts had generated nearly $60 million of pre-construction sales. It is anticipated that Harbour Village will be developed in three phases over the next three to five years, depending on future sales activities and economic conditions that may impact the marketing of the condominium units. In July 2000, the Company closed a $37 million acquisition, development and construction loan facility in order to commence construction of Phase I. During the third quarter of fiscal year 2000, the Company drew down approximately $4 million from this loan facility. The anticipated construction cost for the entire Harbour Village project is in excess of $160 million over a three to five year period. Phase I of the development consists of construction of all site work including a 142-boat slip marina, 372 residential units, and amenities. No assurance can be given, however, as to either future sales activities of the condominium units or the impact of local and national economic conditions on the Company's marketing efforts for the development of the Harbour Village project. Management believes that the bank credit facility, together with anticipated cash flows from marketing and sales operations, will meet the liquidity needs for the construction and development of Phase I of the Harbour Village project during the first 24 months of development. There can be no assurance, however, that the amounts available from the Company's sources of liquidity, exclusive of the bank credit facility for the project, will be sufficient or available to meet the Company's future capital needs for the project. Income Taxes American Safety is incorporated under the laws of Bermuda and, under current Bermuda law, is not obligated to pay any taxes in Bermuda based upon income or capital gains. American Safety has received an undertaking from the Minister of Finance in Bermuda pursuant to the provisions of The Exempted Undertakings Tax Protection Act 1966, which exempts American Safety and its shareholders, other than shareholders ordinarily resident in Bermuda, from any Bermuda taxes computed on profits, income or any capital asset, gain or appreciation, or any tax in the nature of estate, duty or inheritance until March 28, 2016. The Company, exclusive of its United States subsidiaries, does not consider itself to be engaged in a trade or business in the United States -22- and accordingly does not expect to be subject to direct United States income taxation. The Company's U.S. subsidiaries are subject to taxation in the United States. Inflation Property and casualty insurance premiums are established before the amounts of losses and loss adjustment expenses are known and therefore before the extent by which inflation may affect such expenses is known. Consequently, the Company attempts, in establishing its premiums, to anticipate the potential impact of inflation. However, for competitive and regulatory reasons, the Company may be limited in raising its premiums consistent with anticipated inflation, in which event the Company, rather than its insureds, would absorb inflation costs. Inflation also affects the rate of investment return on the Company's investment portfolio with a corresponding effect on the Company's investment income. Combined Ratio The combined ratio of an insurance company measures only the underwriting results of insurance operations and not the profitability of the overall company. The Company's reported combined ratio for its insurance operations may not provide an accurate indication of the Company's overall profitability from insurance and reinsurance programs due to the exclusion of fee and commission income and expenses generated in related management and agency subsidiaries. Depending on the Company's mix of business going-forward, the combined ratio may fluctuate from time to time and may not reflect the overall profitability of insurance programs to the Company. Reserves Certain of the Company's insurance policies and reinsurance assumed, including general and pollution liability policies covering environmental remediation risks, as well as workers' compensation policies, may be subject to claims brought years after an incident has occurred or the policy period has ended. The Company is required to maintain reserves to cover its estimated liability for losses and loss adjustment expenses with respect to reported and unreported claims incurred. The Company engages an independent internationally recognized actuarial consulting firm to provide reserve studies, opinions and rate studies. Reserves are estimates at a given time, which are established from actuarial and statistical projections by the Company of the ultimate settlement and administration costs of claims occurring on or prior to such time, including claims that have not yet been reported to the insurer. The establishment of appropriate loss reserves is an inherently uncertain process, and there can be no assurance that the ultimate payments will not materially exceed the Company's reserves. Item 3. Quantitative and Qualitative Disclosures About Market Risks. The Company's market risk has not changed materially since December 31, 1999. -23- PART II - OTHER INFORMATION Item 1. Legal Proceedings. See Item 6(b) of this Part II. Item 2. Changes in Securities and Use of Proceeds. Not applicable. Item 3. Defaults Upon Senior Securities. Not applicable. Item 4. Submission of Matters to a Vote of Security Holders. Not applicable. Item 5. Other Information. Not applicable. Item 6. Exhibits and Reports on Form 8-K. (a) The following exhibits are filed as part of this Report: Exhibit No. Description ----------- ----------- 11 Computation of Earnings Per Share 27 Financial Data Schedule (b) Reports on Form 8-K. None. -24- SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 14th day of November 2000. American Safety Insurance Group, Ltd. By: /s/ Lloyd A. Fox ---------------------------------------- Lloyd A. Fox President and Chief Executive Officer By: /s/ Steven B. Mathis --------------------------------------- Steven B. Mathis Chief Financial Officer (Principal Financial Officer) -25- Exhibit 11 American Safety Insurance Group, Ltd. and subsidiaries Computation of Earnings Per Share Three Months Ended Nine Months Ended -------------------- ------------------ September 30 September 30 September 30 September 30 1999 2000 1999 2000 ---- ---- ---- ---- Basic: Earnings Available to Common Shareholders.................... $1,359,263 $653,826 $4,519,838 $(1,787,024) ========== ======== ========== ============ Weighted Average Common Shares Outstanding..................... 6,009,208 5,377,597 6,050,059 5,609,170 Basic Earnings (Loss) Per Common Shares ......................... $ .23 $ .12 $ .75 $ (.32) ========== ========= ========= ============ Diluted: Earnings Available to Common Shareholders.................... $1,359,263 $653,826 $4,519,838 $(1,787,024) ========== ======== ========== =========== Weighted Average Common Shares Outstanding..................... 6,009,208 5,377,597 6,050,059 5,609,170 Weighted Average Common Shares Equivalents Associated with Options......................... 18,459 - 27,641 1,774 Total Weighted Average Common Shares.......................... 6,027,667 5,377,597 6,077,700 5,610,944 ========= ========= ========= ========= Diluted Earnings per Common Shares.......................... $ .23 $ .12 $ .74 $ ( .32) ========= ========= ========= ==========