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 MARCH 31, 1998
Commission File Number 333-42749
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
Hamilton HM HX, Bermuda
(Address, zip code of principal executive offices)
(441) 295-5688
(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 May 14, 1998 was 6,030,230.
AMERICAN SAFETY INSURANCE GROUP, LTD.
FORM 10-Q
TABLE OF CONTENTS
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Page
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements............................................. 3
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................ 9
Item 3. Quantitative and Qualitative Disclosures About
Market Risks................................................... 15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings................................................ 16
Item 2. Changes in Securities and Use of Proceeds........................ 16
Item 3. Defaults Upon Senior Securities.................................. 16
Item 4. Submission of Matters to a Vote of Security Holders.............. 16
Item 5. Other Information................................................ 16
Item 6. Exhibits and Reports on Form 8-K................................. 16
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
American Safety Insurance Group, Ltd. and Subsidiaries
Consolidated Balance Sheets
December 31, March 31,
Assets 1997 1998
------ ----------- ------------
(unaudited)
Investments:
Securities available for sale, at fair value:
Fixed maturities $26,462,275 $57,433,410
Common stock 1,054,549 838,357
Short-term investments 1,823,830 2,039,221
----------- -----------
Total investments 29,340,654 60,310,988
Cash 2,768,831 4,059,426
Accrued investment and interest income 781,798 1,457,664
Notes receivable:
Related parties 580,000 580,000
Other 4,697,804 4,675,734
Premiums receivable 6,809,436 6,217,509
Commissions receivable 18,630 47,211
Ceded unearned premium 649,175 660,178
Reinsurance recoverable 778,975 820,138
Due from affiliate 288,951 240,513
Income tax recoverable 152,802 71,420
Deferred income taxes 209,795 243,620
Goodwill 270,010 265,567
Other assets 321,339 349,536
----------- -----------
Total assets $47,668,200 $79,999,504
=========== ===========
Liabilities and Shareholders' Equity
------------------------------------
Liabilities:
Unpaid losses and loss adjustment expenses $11,571,539 $12,390,410
Unearned premiums 2,331,579 3,213,573
Liability for deductible fees held 3,539,032 3,117,464
Reinsurance on paid loss and loss
adjustment expenses 256,085 45,388
Reinsurance deposits on retroactive
contract 537,500 455,472
Ceded premiums payable 5,990,907 4,883,015
Due to affiliate:
Ceded premiums payable 217,062 111,523
Reinsurance on paid loss and loss
adjustment expenses 41,085 4,667
Income tax payable - -
Accounts payable and accrued expenses 1,342,515 2,137,110
----------- -----------
Total liabilities 25,827,304 26,358,622
----------- -----------
Shareholders' equity:
Preferred stock, $0.01 par value; authorized
5,000,000 shares; no shares issued and
outstanding - -
Common stock, $0.01 par value; authorized
15,000,000 shares; issued and outstanding at
December 31, 1997, 2,925,230 shares, and at
March 31, 1998, 6,030,230 shares 29,252 60,302
Additional paid-in capital 2,751,789 33,558,256
Retained earnings 18,751,222 19,774,954
Other comprehensive income 308,633 247,370
----------- -----------
Total shareholders' equity 21,840,896 53,640,882
----------- -----------
Total liabilities and
shareholders' equity $47,668,200 $79,999,504
=========== ===========
See accompanying notes to consolidated financial statements (unaudited).
3
American Safety Insurance Group, Ltd. and Subsidiaries
Consolidated Statements of Earnings
(Unaudited)
Three Months Ended
March 31,
------------------------
1997 1998
---- ----
Revenues:
Direct premiums earned $ 383,765 $1,038,024
Assumed premiums earned:
Affiliate 564,188 541,359
Nonaffiliates 1,044,237 1,539,456
---------- ----------
Total assumed premiums earned 1,608,425 2,080,815
---------- ----------
Ceded premiums earned:
Affiliate 238,635 715,593
Nonaffiliates 170,203 310,416
---------- ----------
Total ceded premiums earned 408,838 1,026,009
---------- ----------
Net premiums earned 1,583,352 2,092,830
---------- ----------
Net investment income 333,475 626,649
Interest on notes receivable 277,584 268,215
Brokerage commission income 617,314 384,041
Management fees from affiliate 124,101 170,749
Net realized gains (losses) 5,649 37,146
Other income 5,492 6,700
---------- ----------
Total revenues 2,946,967 3,586,330
---------- ----------
Expenses:
Losses and loss adjustment expenses incurred 1,012,779 1,335,177
Acquisition expenses 156,857 213,379
Other expenses 721,701 959,804
---------- ----------
Total expenses 1,891,337 2,508,360
---------- ----------
Earnings before income taxes 1,055,630 1,077,970
Income taxes 193,335 54,237
---------- ----------
Net earnings $ 862,295 $1,023,733
========== ==========
Net earnings per share:
Basic $ 0.30 $ 0.23
========== ==========
Diluted $ 0.29 $ 0.23
========== ==========
Common shares used in computing earnings per share:
Basic 2,872,830 4,429,730
========== ==========
Diluted 2,963,931 4,510,455
========== ==========
See accompanying notes to consolidated financial statements (unaudited).
4
American Safety Insurance Group, Ltd. and Subsidiaries
Consolidated Statements of Cash Flow
(Unaudited)
Three months ended
March 31,
---------
1997 1998
---- ----
Cash flow from operating activities:
Net earnings $ 862,295 $ 1,023,733
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Realized losses (gains) on sale of investments (5,649) (37,146)
Amortization of deferred acquisition costs 162,675 158,426
Change in:
Accrued investment and interest income 11,951 (675,866)
Premiums receivable (1,312,460) 591,927
Commissions receivable 1,896 (28,581)
Reinsurance recoverable and ceded unearned premiums (495,000) (52,166)
Due from affiliate 143,312 48,438
Income taxes 147,680 47,557
Unpaid losses and loss adjustment expenses 1,129,344 818,871
Unearned premiums 536,682 881,994
Liability for deductible fees held 1,290,410 (503,596)
Ceded premiums payable 996,614 (1,107,892)
Due to affiliate 58,971 (141,957)
Accounts payable and accrued expenses (1,219,554) 794,595
Other, net (244,780) (402,860)
----------- ------------
Net cash provided by operating activities 2,064,387 1,415,477
----------- ------------
Cash flow from investing activities:
Purchases of fixed maturities (5,555,848) (39,454,936)
Proceeds from maturity and redemption of fixed maturities 850,990 3,390,813
Proceeds from sale of fixed maturities 423,208 4,998,332
Proceeds from sale of common stock 241,432 304,140
Decrease (increase) in short-term investments (1,086,098) (215,391)
Increase in notes receivable - other 2,580,930 22,070
(Increase) decrease in notes receivable - related parties 70,000 -
Purchase of fixed assets, net (13,206) (7,427)
----------- ------------
Net cash used in investing activities (2,488,592) (30,962,399)
----------- ------------
Cash flow from financing activities:
Proceeds from sale of common stock - 30,837,517
----------- ------------
Net cash used in financing activities - 30,837,517
----------- ------------
Net increase (decrease) in cash (424,205) 1,290,595
Cash at beginning of period 3,271,957 2,768,831
----------- ------------
Cash at end of period $ 2,847,752 $ 4,059,426
=========== ============
See accompanying notes to consolidated financial statements (unaudited).
5
American Safety Insurance Group, Ltd. and Subsidiaries
Consolidated Statements of Comprehensive Earnings
(Unaudited)
Three months ended
March 31,
------------------------
1997 1998
---- ----
Net earnings $ 862,295 $1,023,733
Other comprehensive earnings before income taxes:
Unrealized gains (losses) on securities available
for sale (376,003) (104,996)
Reclassification adjustment for realized gains
included in net earnings 5,649 37,146
--------- ----------
Total other comprehensive earnings before taxes (370,354) (67,850)
Income tax expense related to items of
comprehensive income (45,555) (6,587)
--------- ----------
Other comprehensive earnings net of income taxes (324,799) (61,263)
--------- ----------
Total comprehensive earnings $ 537,496 $ 962,470
========= ==========
See accompanying notes to consolidated financial statements (unaudited).
6
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 in 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 period 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 three months ended March 31, 1998 may not be
indicative of the results that may be expected for the full year ending December
31, 1998. These unaudited interim consolidated financial statements and notes
should be read in conjunction with the financial statements and notes included
in the audited consolidated financial statements of American Safety and
subsidiaries for the year ended December 31, 1997.
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 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
(Statement 130). Statement 130 establishes standards for reporting and
displaying comprehensive income and its components in a full set of general
purpose financial statements. The Company adopted Statement 130 effective
January 1, 1998. The primary component of the differences between net income
and comprehensive income for the Company is unrealized gains on securities.
Total comprehensive income for the three months ended March 31, 1997 was
$537,496 as compared to $962,470 for the three months ended March 31, 1998.
Note 3 - Nature of Operations
The following is a description of certain risks facing casualty insurers:
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
7
by writing insurance business in several states, thereby spreading this risk
over a large geographic area.
Credit Risk is the risk that issuers of securities owned by the Company or
secured notes receivable will default or that other parties, including
reinsurers that have obligations to the insurer, will not pay or perform. The
Company attempts to mitigate this risk by adhering to a conservative investment
strategy, by obtaining sufficient collateral for secured note obligations and by
maintaining sound reinsurance, credit and collection policies.
Interest Rate Risk is the risk that interest rates will change and cause a
decrease in the value of an insurer's investments. The Company attempts to
mitigate this risk by attempting to match the maturities of its assets with the
expected payouts of its liabilities.
Note 4 - Investments
The amortized cost and estimated fair values of investments at December 31,
1997 and March 31, 1998 are as follows:
Amount
Gross Gross at which
Amortized unrealized unrealized Estimated shown in the
cost gains losses fair value balance sheet
--------- ---------- ---------- ---------- -------------
December 31, 1997:
Securities available for sale:
Fixed maturities:
U.S. Treasury securities and obligations
of U.S. Government corporations
and agencies $11,725,010 128,883 2,376 11,851,517 11,851,517
Obligations of states and political
subdivisions 4,782,325 220,175 -- 5,002,500 5,002,500
Corporate securities 6,545,888 51,986 13,508 6,584,366 6,584,366
Mortgage-backed securities 3,016,040 30,693 22,841 3,023,892 3,023,892
----------- ------- ------ ---------- ----------
Total fixed maturities 26,069,263 431,737 38,725 26,462,275 26,462,275
Equity investments - common stocks 1,045,493 12,688 3,632 1,054,549 1,054,549
----------- ------- ------ ---------- ----------
Total $27,114,756 444,425 42,357 27,516,824 27,516,824
=========== ======= ====== ========== ==========
March 31, 1998:
Securities available for sale:
Fixed maturities:
U.S. Treasury securities and obligations
of U.S. Government corporations
and agencies $31,834,943 36,646 -- 31,871,589 31,871,589
Obligations of states and political
subdivisions 4,775,623 199,249 -- 4,974,872 4,974,872
Corporate securities 10,104,474 47,176 29,633 10,122,017 10,122,017
Mortgage-backed securities 10,478,728 10,194 23,990 10,464,932 10,464,932
----------- ------- ------ ---------- ----------
Total fixed maturities 57,193,768 293,265 53,623 57,433,410 57,433,410
Equity investments - common stocks 752,704 85,653 -- 838,357 838,357
----------- ------- ------ ---------- ----------
Total $57,946,472 378,918 53,623 58,271,767 58,271,767
=========== ======= ====== ========== ==========
Note 5 - Shareholder Matters
On January 29, 1998, the Company effectuated a 1,310-for-one share split and
increased its authorized capital to 15,000,000 common shares and 5,000,000
preferred shares in contemplation of the Company's initial public offering which
became effective February 12, 1998. All share and per share amounts have been
retroactively adjusted to effect this split.
8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
American Safety is a specialty insurance holding company which, through its
subsidiaries, develops, underwrites, manages and markets primary casualty
insurance and reinsurance programs in the alternative insurance market for (i)
environmental remediation risks; (ii) employee leasing and staffing industry
risks; and (iii) other specialty risks. The Company has demonstrated expertise
in developing specialty insurance coverages and custom designed risk management
programs not generally available in the standard insurance market.
The Company's specialty insurance programs include coverages for general
liability, pollution liability, professional liability, workers' compensation
and surety, as well as custom designed risk management programs (including
captive and rent-a-captive programs), for contractors, consultants and other
businesses and property owners who are involved with environmental remediation,
employee leasing and staffing, and other specialty risks. Through its U.S.
brokerage and management services subsidiaries, the Company also provides
specialized insurance program development, underwriting, risk placement,
reinsurance, program management, brokerage, loss control, claims administration
and marketing services.
The Company insures and places risks through its U.S. insurance subsidiary,
American Safety Casualty Insurance Company, as well as its non-subsidiary risk
retention group affiliate, American Safety Risk Retention Group, Inc., and
substantial unaffiliated insurance and reinsurance companies. The Company also
reinsures and places, through its Bermuda reinsurance subsidiary, American
Safety Reinsurance, Ltd., and substantial unaffiliated reinsurers, a portion of
the risk underwritten directly by its U.S. insurance subsidiary, American Safety
Casualty Insurance Company, its risk retention group affiliate and other
insurers. Substantially all of the reinsurance business that the Company
currently assumes is for primary insurance programs that the Company has
developed and underwritten. In January 1998, the Company formed American Safety
Reinsurance, Ltd., a Bermuda reinsurance subsidiary, and transferred a
substantial portion of its reinsurance business on a going forward basis to the
subsidiary.
The Company is able to select its roles as program developer, primary
underwriter, reinsurer, program manager and broker based on its assessment of
each risk profile. After determining its roles, the Company utilizes its
insurance and reinsurance subsidiaries, its insurance brokerage and management
services subsidiaries, and its risk retention group affiliate to generate risk
premium revenues, program management fees, insurance and reinsurance commissions
and investment income.
A.M. Best Company ("A.M. Best"), an independent nationally recognized insurance
rating service and publisher, has assigned a rating of "A (Excellent)" on a
group basis to American Safety, as well as its U.S. insurance subsidiary and its
non-subsidiary risk
9
retention group affiliate. A.M. Best's ratings are an independent opinion of an
insurer's ability to meet its obligations to policyholders, which opinion is of
concern primarily to policyholders, insurance agents and brokers, and should not
be considered an investment recommendation.
The Company's financial position and results of operation are subject to change
based on various factors, including competitive conditions in the insurance
industry, unpredictable developments in loss trends, changes in loss reserves,
market acceptance of new coverages and enhancements, and changes in levels of
general business activity and economic conditions. 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
non-insurance subsidiaries.
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 had ended.
The Company maintains reserves to cover its estimated liability for losses and
loss adjustment expenses with respect to reported and unreported claims
incurred.
The Company has reviewed its internal business systems and believes that the
systems, primarily its computer system, will process date information accurately
and without interruption when required to process dates in the year 1999 and
beyond. The Company has not been required to expend significant resources to
address the year 2000 issue and does not anticipate any significant
expenditures.
Statements made in this Report that are not based on historical information are
deemed to be "forward-looking statements" under applicable federal securities
laws. Such forward-looking statements are based largely on current expectations
and assumptions of management and are subject to a number of risks and
uncertainties which could cause actual results to differ materially from those
contemplated, including, without limitation, competitive conditions in the
insurance industry, unpredictable developments in loss trends, changes in loss
reserves, market acceptance of new coverages and enhancements, and changes in
levels of general business activity and economic conditions.
10
Results of Operations
The following table sets forth the Company's consolidated revenues:
Percent
Increase
(Decrease)
--------------------------------
Three Months Ended March 31,
--------------------------------
1997 1998 1997
to 1998
--------------------------------
(Dollars in thousands)
Net Premiums earned:
Reinsurance:
Workers' compensation................ $1,045 $1,464 40.1%
General liability from affiliate..... 451 441 (2.2)
------ ------
Total reinsurance............. 1,496 1,905 27.3
Primary insurance:
Surety............................... 87 188 116.1
------ ------
Total primary insurance....... 87 188 116.1
------ ------
Total net premiums earned 1,583 2,093 32.2
------ ------
Net investment income................... 333 627 88.3
Interest on notes receivable............ 278 268 (3.6)
Commission and fee income:
Brokerage commission income............. 617 384 (37.8)
Management fees from affiliate.......... 124 171 37.9
------ ------
Total commission and fee income...... 741 555 (25.1)
------ ------
Net realized gains (losses)............. 6 37 516.7
Other income............................ 6 6 --
------ ------
Total Revenues...... $2,947 $3,586 21.7%
====== ======
11
The following table sets forth the components of the Company's GAAP combined
ratio for the periods indicated:
Three months ended
March 31,
---------------------
1997 1998
---- ----
Insurance operations:
Loss and loss adjustment expense ratio........... 63.4% 63.8%
Expense ratio.................................... 16.3 10.4
---- ----
Combined ratio................................ 79.7% 74.2%
==== ====
Quarter Ended March 31, 1998 Compared to Quarter Ended March 31, 1997
Net Premiums Earned. Net premiums earned increased 32.2% from $1.6 million
in the quarter ended March 31, 1997 to $2.1 million in the quarter ended March
31, 1998. The principal factor accounting for the increase was the Company's
assumption in 1998 of workers' compensation reinsurance business from an
unaffiliated insurance carrier, which increased net premiums earned from
workers' compensation reinsurance by 40.1% from $1.0 million in the quarter
ended March 31, 1997 period to $1.46 million in the quarter ended March 31,
1998. This increase was a result of additional premiums from new insureds in
this line of business.
General liability reinsurance premiums remained substantially the same,
from $441,000 in the quarter ended March 31, 1997 to $451,000 in the quarter
ended March 31, 1998. In the Company's primary insurance business, net premiums
earned from the Company's U.S. insurance subsidiary's surety program increased
from $87,000 in the quarter ended March 31, 1997 to $188,000 in the quarter
ended March 31, 1998 as a result of new accounts written.
Net Investment Income. Net investment income increased 88.3% from $333,000
in the quarter ended March 31, 1997 to $627,000 in the quarter ended March 31,
1998 as a result of the investment of additional cash flows from insurance
operations and from investment of the Company's initial public offering
proceeds. The average annual pre-tax yield on investments was 6.6% in the
quarter ended March 31, 1997 and 5.6% in the quarter ended March 31, 1998. The
average annual after-tax yield on investments was 5.8% in the quarter ended
March 31, 1997 and 5.1% in the quarter ended March 31, 1998.
Interest from Notes Receivable. Interest from notes receivable decreased
3.61% from $278,000 in the quarter ended March 31, 1997 to $268,000 in the
quarter ended March 31, 1998.
Brokerage Commission Income. Income from insurance brokerage operations
decreased 37.8% from $617,000 in the quarter ended March 31, 1997 to $384,000 in
the
12
quarter ended March 31, 1998 because the Company initiated a substantial
rent-a-captive program in January 1997 for an 18 month term.
Management Fees. Management fees increased 37.9% from $124,000 in the
quarter ended March 31, 1997 to $171,000 in the quarter ended March 31, 1998 as
a result of increased service levels provided by the Company to its risk
retention group affiliate.
Net Realized Gains. Net realized gains from the sale of investments
increased from $6,000 in the quarter ended March 31, 1997 to $37,000 in the
quarter ended March 31, 1998.
Losses and Loss Adjustment Expenses. Losses and loss adjustment expenses
increased 31.8% from $1.0 million in the quarter ended March 31, 1997 to $1.3
million in the quarter ended March 31, 1998 due to the 32.2% increase in net
premiums earned and a corresponding increase in reserves primarily due to the
increase in the workers' compensation line of business.
Acquisition Expenses. Policy acquisition expenses increased 36.0% from
$157,000 in the quarter ended March 31, 1997 to $213,000 in the quarter ended
March 31, 1998 as a result of increased premiums.
Other Expenses. Other expenses increased 33.0% from $722,000 in the
quarter ended March 31, 1997 to $960,000 in the quarter ended March 31, 1998 due
to salary and benefit increases and increased staffing required to handle new
and existing programs.
Income Taxes. Federal and state income taxes decreased from $193,000 in
the quarter ended March 31, 1997 to $54,000 in the quarter ended March 31, 1998
due to decreased taxable income in the Company's U.S. insurance subsidiary.
Liquidity and Capital Resources
The Company historically has met its cash requirements and financed its
growth principally through cash flows generated from operations. The Company's
primary sources of cash flow are proceeds from the sale or maturity of invested
assets, premiums earned, investment income, commission income and management
fees. The Company's short-term cash requirements are primarily for claims
payments, reinsurance premiums, commissions, salaries, employee benefits and
other operating expenses, and the purchase of investment securities, which have
historically been satisfied from operating cash flows. Due to the uncertainty
regarding settlement of unpaid claims, the long-term liquidity requirements of
the Company may vary, and the Company has attempted to structure its investment
portfolio to take into account the historical payout patterns. Management
believes that the Company's current cash flows are sufficient for its short-term
needs and the Company's invested assets are sufficient for its long-term needs.
The Company also purchases reinsurance to mitigate the effect of large claims.
13
On a consolidated basis, net cash provided from operations was $2.1 million
for the quarter ended March 31, 1997 and $1.4 million for the quarter ended
March 31, 1998. The positive cash flows for both periods were primarily
attributable to net premiums written, net earnings, and increases in reserves
for unpaid losses. Because workers' compensation and general liability claims
may be paid over an extended period of time, the Company has established
relatively large loss reserves for such lines of business. The assets supporting
the Company's reserves continue to earn investment income until claims payments
are made.
Total assets increased from $47.7 million at December 31, 1997 to $80.0
million at March 31, 1997, primarily due to proceeds of the Company's initial
public offering in February 1998. Cash, invested assets and notes receivable
increased from $29.0 million at March 31, 1997 to $69.6 million at March 31,
1998.
American Safety is an insurance holding company whose principal assets are
its investment portfolio and its investment in the capital stock of its
subsidiaries. As an insurance holding company, American Safety's ability to pay
dividends to its shareholders will depend, to a significant degree on the
ability of the Company's subsidiaries to pay dividends to American Safety. The
jurisdictions in which the Company 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. Management believes it has significant liquidity in the near term to
accomplish its business objectives.
As of March 31, 1998, the Company had no investments in derivative
financial instruments.
Income Taxes
American Safety is incorporated under the laws of Bermuda and, under
current Bermuda law, is not obligated to pay any taxes in Bermuda based upon
income or capital gains. American Safety has received an undertaking from the
Minister of Finance in Bermuda pursuant to the provisions of The Exempted
Undertakings Tax Protection Act 1966, which exempts American Safety and its
shareholders, other than shareholders ordinarily resident in Bermuda, from any
Bermuda taxes computed on profits, income or any capital asset, gain or
appreciation, or any tax in the nature of estate, duty or inheritance until
March 28, 2016. The Company, exclusive of its United States subsidiaries, does
not 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
14
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.
Item 3. Quantitative and Qualitative Disclosures About Market Risks.
Not Applicable.
15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
Not applicable.
Item 2. Changes in Securities and Use of Proceeds.
Not applicable.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
The annual general meeting of shareholders of the Company was held on
January 29, 1998 in Hamilton, Bermuda. Proxies for the meeting were
solicited by Board of Directors pursuant to applicable Bermuda law.
The individuals nominated by the Board of Directors were duly elected
by the shareholders and there was no solicitation in opposition to the
individuals so nominated. The shareholders also duly approved and
adopted new Bye-Laws, an amendment to the Memorandum of Association
regarding authorized share capital, a share split in contemplation of
the Company's initial public offering, an Incentive Stock Option Plan,
a Director Stock Award Plan, and appointed auditors.
Item 5. Other Information.
The Company filed a Form 8-A pursuant to Section 12(g) of the
Securities Exchange Act of 1934 on February 11, 1998.
Item 6. Exhibits and Reports on Form 8-K.
(a) The following exhibits are filed as part of this Report:
Exhibit No. Description
----------- -----------
3.2 Bye-Laws
11 Computation of Earnings Per Share
27 Financial Data Schedule
16
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Company during the period
covered by this Report.
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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 May 1998.
American Safety Insurance Group, Ltd.
By: /s/ Lloyd A. Fox
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Lloyd A. Fox
President and Chief Executive Officer
By: /s/ Stephen F. Clarke
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Stephen F. Clarke
Chief Financial Officer
(Principal Financial Officer)
18