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, 2001
Commission File Number 1-14795
AMERICAN SAFETY INSURANCE GROUP, LTD.
(Exact name of Registrant as specified in its charter)
Bermuda Not Applicable
(State or other (I.R.S. Employer
jurisdiction Identification
of incorporation) No.)
44 Church Street
P.O. Box HM2064
Hamilton HM HX, Bermuda
(Address, zip code of principal executive offices)
(441) 296-8560
(Registrant's telephone number, including area code)
--------------
Indicate by check mark whether Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No___
The aggregate number of shares outstanding of Registrant's common stock, $.01 par value, on November 7, 2001 was 4,745,927.
AMERICAN SAFETY INSURANCE GROUP, LTD.
FORM 10-Q
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements......................................................1
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................16
Item 3. Quantitative and Qualitative Disclosures About Market Risks..............25
PART II - OTHER INFORMATION
Item 1. Legal Proceedings........................................................26
Item 2. Changes in Securities and Use of Proceeds................................26
Item 3. Defaults Upon Senior Securities..........................................26
Item 4. Submission of Matters to a Vote of Security Holders......................26
Item 5. Other Information........................................................26
Item 6. Exhibits and Reports on Form 8-K.........................................27
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
American Safety Insurance Group, Ltd. and Subsidiaries
Consolidated Balance Sheets
December 31, September 30,
2000 2001
(unaudited)
Assets
Investments:
Securities available for sale, at fair value:
$45,985,656 $58,928,240
Fixed maturities
Common stock 162,322 638,647
Investment in real estate 23,946,305 44,958,893
Short-term investments 15,312,377 22,247,069
Total investments 85,406,660 126,772,849
Cash 3,784,102 2,263,124
Restricted cash 6,117,682 10,568,471
Accrued investment and interest income 1,543,675 2,163,804
Notes receivable 8,878,018 8,074,116
Premiums receivable 33,344,382 35,272,587
Commissions receivable - -
Funds on deposit 298,000 1,126,579
Ceded unearned premium 22,190,095 31,935,797
Reinsurance recoverable 27,929,794 46,072,101
Due from affiliate 985,320 896,200
Income tax recoverable 160,333 -
Deferred income taxes 7,383,191 8,559,133
Deferred acquisition costs 3,039,144 3,989,967
Property, plant and equipment 935,743 2,017,784
Prepaid items 1,755,191 2,018,547
Goodwill 1,553,863 1,488,438
Other assets 1,992,923 2,294,186
Total assets $207,298,116 $285,513,683
============ ============
Liabilities and Shareholders' Equity
Liabilities:
Unpaid losses and loss adjustment expenses $50,508,627 $80,674,922
Unearned premiums 41,953,354 66,910,470
Reinsurance on paid loss and loss adjustment
expenses 928,865 61,063
Ceded premiums payable 24,311,656 17,534,834
Due to affiliate:
Ceded premiums payable 567,786 346,675
Reinsurance on paid loss and loss
adjustment expenses 229,790 716,507
Escrow deposits 6,200,182 13,617,605
Accounts payable and accrued expenses 6,384,429 9,784,368
Funds held 4,861,472 1,448,173
Loan payable 11,435,221 29,407,062
Collateral held 1,544,839 1,699,971
Income tax payable - 1,929,170
Deferred revenue - 256,916
Unearned loan fees 568,750 325,000
Total liabilities 149,494,971 224,712,736
-1-
December 31, September 30,
2000 2001
Shareholders' equity:
Preferred stock, $0.01 par value; authorized
5,000,000 shares; noshares issued and outstanding - -
Common stock, $0.01 par value; authorized 15,000,000
shares;issued and outstanding at December 31, 2000,
6,281,386shares,and at September 30, 2001, 6,287,266
shares 62,814 62,873
Additional paid-in capital 35,148,577 35,206,612
Retained earnings 29,262,582 33,088,780
Accumulated other comprehensive income, net 428,085 1,542,157
Treasury Stock, 1,267,200 shares at December 31, 2000 and
1,541,339 shares at September 30, 2001 (7,098,913) (9,099,475)
Total shareholders' equity 57,803,145 60,800,947
Total liabilities and shareholders's equity $207,298,116 $285,513,683
============ ============
See accompanying notes to consolidated financial statements (unaudited).
-2-
American Safety Insurance Group, Ltd. and Subsidiaries
Consolidated Statements of Earnings
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2000 2001 2000 2001
Revenues:
Direct premiums earned $ 10,200,794 $ 28,494,114 $ 18,135,059 $79,657,272
Assumed premiums earned:
Affiliate 1,769,646 2,633,927 3,998,187 7,737,630
Nonaffiliates 3,757,288 3,468,186 8,757,345 11,106,525
Total assumed premiums earned 5,526,934 6,102,113 12,755,532 18,844,155
Ceded premiums earned:
Affiliate 1,170,306 1,925,225 3,219,951 4,842,878
Nonaffiliates 6,769,616 18,331,867 10,633,895 48,913,399
Total ceded premiums earned 7,939,922 20,257,092 13,853,846 53,756,277
Net premiums earned 7,787,806 14,339,135 17,036,745 44,745,150
Net investment income 667,623 946,765 2,001,630 2,709,385
Interest on notes receivable 377,679 207,622 1,252,648 766,937
Brokerage commission income 1,215,987 716,003 2,840,150 1,715,027
Management fees from affiliate 350,392 363,354 1,068,738 1,094,662
Net realized gains (losses) (9,352) 186,005 (215,063) 601,354
Sales - Real Estate - 3,180,705 - 3,180,705
Other income 69,543 128,814 767,949 978,399
Total revenues 10,459,678 20,068,403 24,752,797 55,791,619
Expenses:
Losses and loss adjustment expenses incurred 4,980,766 9,636,161 11,801,592 28,501,533
Acquisition expenses 1,221,384 2,561,742 3,087,669 8,801,854
Payroll and related expenses 1,921,571 2,073,232 5,503,629 6,255,317
Costs - Real Estate 181,714 3,096,454 367,157 3,578,941
Other expenses 1,376,494 1,455,311 3,475,325 4,301,627
Expense due to rescission - - 3,541,848 -
Total expenses 9,681,929 18,822,900 27,777,220 51,439,272
777,749 1,245,503 (3,024,423) 4,352,347
Earnings (loss) before income taxes 123,923 266,750 (1,237,399) 526,150
Income taxes (benefit)
$ 653,826 $978,753 $(1,787,024) $3,826,197
========== ======== ============ ==========
Net earnings (loss)
Net earnings (loss) per share:
Basic $ 0.12 $ 0.20 $ (0.32) $ 0.79
Diluted $ 0.12 $ 0.20 $ (0.32) $ 0.77
Common shares used in computing earnings per share:
Basic 5,377,597 4,788,648 5,609,170 4,823,066
========= ========= ========= =========
Diluted 5,377,597 4,996,787 5,610,944 4,949,942
========= ========= ========= =========
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,
2000 2001
Cash flow from operating activities:
Net earnings (loss) $(1,787,024) $3,826,197
Adjustments to reconcile net earnings (loss) to net cash provided
by operating activities:
Realized (gains)/losses on sale of investments 215,063 (601,354)
Amortization of deferred acquisition costs (1,377,104) (950,823)
Change in:
Accrued investment and interest income (998,452) (620,129)
Premiums receivable (13,147,232) (1,928,205)
Commissions receivable (30,152) -
Reinsurance recoverable and ceded unearned premiums (23,130,479) (28,755,811)
Unearned loan fees - (243,750)
Funds held by reinsured 740,944 (3,413,299)
Due from affiliate 749,599 89,120
Funds on Deposit - (828,579)
Income taxes (1,560,514) 913,561
Unpaid losses and loss adjustment expenses 13,251,635 30,166,295
Unearned premiums 24,561,947 24,957,116
Liability for deductible fees held (48,375) -
Ceded premiums payable 12,908,683 (6,776,822)
Due to affiliate (1,286,395) 265,606
Accounts payable and accrued expenses 6,768,508 3,399,939
Collateral held (431,893) 155,132
Prepaid items (1,331,461) (263,356)
Deferred Revenue - 256,916
Other, net 223,593 169,995
Net cash provided by operating activities 14,290,891 19,817,749
Cash flow from investing activities:
Purchases of fixed maturities (7,762,871 (40,573,756)
Purchases of Equity Investments (5,766,571) (2,905,977)
Proceeds from maturity and redemption of fixed maturities 650,024 1,039,717
Proceeds from sale of fixed maturities 10,897,958 27,959,232
Proceeds from sale of equity investments 5,134,381 2,429,563
Purchase of Trafalgar Insurance Company (7,050,877) -
Investment in Real Estate (7,227,423) (21,012,588)
Increase in short-term investments (731,427) (6,934,692)
Proceeds from notes receivable - related parties 1,530,000 -
Advances in notes receivable - other 1,300,176 803,902
Purchase of fixed assets, net (361,628) (1,082,041)
Net cash used in investing activities (9,388,258) (40,276,640)
Cash flow from financing activities:
Purchase of treasury stock (3,411,975) (2,000,562)
Proceeds from loan payable 4,020,535 17,971,841
Proceeds from escrow deposits 5,211,023 7,417,423
Net cash provided by financing activities 5,819,583 23,388,702
Net increase in cash 10,722,216 2,929,811
Cash at beginning of period 427,154 9,901,784
Cash at end of period $11,149,370 $12,831,595
=========== ===========
NONCASH ITEMS
Operating activities:
Recoverable due to rescission in other assets (1,323,000) -
Change in prepaid items (170,000) -
Financing activities: - -
Issuance of common stock 1,323,000 -
Notes receivable related parties 170,000 -
Net noncash adjustments - -
============ ============
Supplemental disclosure of cash flow information:
Interest expenses paid - 13,014
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,
2000 2001 2000 2001
Net earnings (loss) $ 653,826 $ 978,753 $ (1,787,024) $ 3,826,197
Other comprehensive earnings (loss)
before income taxes:
Unrealized gains on securities available
for sale 510,329 1,884,379 540,626 2,103,042
Reclassification adjustment for realized
(gains) losses included in net earnings
9,352 (186,005) 215,063 (601,354)
Total other comprehensive earnings
before taxes 519,681 1,698,374 755,689 1,501,688
Income tax expense (benefit) related to
items of other comprehensive income 104,245 469,118 (71,266) 387,612
Other comprehensive earnings net of
income taxes 415,436 1,229,256 826,955 1,114,076
Total comprehensive earnings (loss) $ 1,069,262 $ 2,208,009 $ (960,069) $ 4,940,273
=========== =========== =========== ===========
See accompanying notes to consolidated financial statements (unaudited).
-5-
American Safety Insurance Group, Ltd. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
Note 1 - Basis of Presentation
The accompanying unaudited interim consolidated financial statements of American Safety Insurance Group, Ltd. ("American Safety") and its subsidiaries (collectively, the "Company") are prepared in accordance with accounting principles generally accepted in the United States of America and, in the opinion of management, reflect all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of the interim period presented. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates, based on the best information available, in recording transactions resulting from business operations. The balance sheet amounts that involve a greater extent of accounting estimates and actuarial determinations subject to future changes are the Company's liabilities for unpaid losses and loss adjustment expenses. As additional information becomes available (or actual amounts are determinable), the recorded estimates may be revised and reflected in operating results. While management believes that the liability for unpaid losses and loss adjustment expenses is adequate to cover the ultimate liability, such estimates may be more or less than the amounts actually paid when claims are settled.
The results of operations for the nine months ended September 30, 2001 may not be indicative of the results that may be expected for the full year ending December 31, 2001. These unaudited interim consolidated financial statements and notes should be read in conjunction with the financial statements and notes included in the audited consolidated financial statements of American Safety and its subsidiaries for the year ended December 31, 2000.
The unaudited interim consolidated financial statements include the accounts of American Safety and each of its subsidiaries. All significant intercompany balances have been eliminated. Certain items from prior periods have been reclassified to conform with the 2001 presentation.
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 adoption of SFAS No. 133, as amended, did not have a material impact on the Company's consolidated financial position and results of operation.
-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 July 2001, the FASB issued Statement No. 141, Business Combinations, and Statement No. 142, Goodwill and Other Intangible Assets. Statement 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 as well as all purchase method business combinations completed after June 30, 2001. Statement 141 also specifies criteria intangible assets acquired in a purchase method business combination must meet to be recognized and reported apart from goodwill, noting that any purchase price allocable to an assembled workforce may not be accounted for separately. Statement 142 will require that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of Statement 142. Statement 142 will also require that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.
Statement 141 will require upon adoption of Statement 142, that the Company evaluate its existing intangible assets and goodwill that were acquired in a prior purchase business combination, and to make any necessary reclassifications in order to conform with the new criteria in Statement 141 for recognition apart from goodwill. Upon adoption of Statement 142, the Company will be required to reassess the useful lives and residual values of all intangible assets acquired in purchase business combinations, and make any necessary amortization period adjustments by the end of the first interim period after adoption. In addition, to the extent an intangible asset is identified as having an indefinite useful life, the Company will be required to test the intangible asset for impairment in accordance with the provisions of Statement 142 within the first interim period. Any impairment loss will be measured as of the date of adoption and recognized as the cumulative effect of a change in accounting principle in the first interim period.
As of the date of adoption, the Company expects to have unamortized goodwill in the amount of $1.5 million, which will be subject to the transition provisions of Statements 141 and 142. Amortization expense related to goodwill was $69,869 and $65,425 for the year ended December 31, 2000 and the nine months ended September 30, 2001, respectively.
-7-
Note 3 - Nature of Operations
The following is a description of certain risks facing the Company:
Legal/Regulatory Risk is the risk that changes in the legal or regulatory environment in which an insurer operates which will create additional expenses not anticipated by the insurer in pricing its products and beyond those recorded in the financial statements. Regulatory initiatives designed to reduce insurer profits or otherwise affecting the industry in which the Company operates, new legal theories or insurance company insolvencies through guaranty fund assessments, may create costs for the Company beyond those recorded in the financial statements. The Company attempts to mitigate this risk by writing insurance business in several states, thereby spreading this risk over a large geographic area.
Potential Risk of United States Taxation of Bermuda Operations. Under current Bermuda law, American Safety is not required to pay any taxes in Bermuda on either income or capital gains. American Safety has received an undertaking from the Minister of Finance in Bermuda that will exempt American Safety from taxation until the year 2016 in the event of any such taxes being imposed. The Company, exclusive of its United States subsidiaries, does not consider itself to be engaged in a trade or business in the United States and accordingly does not expect to be subject to direct United States income taxation. The Company's U.S. subsidiaries are subject to taxation in the United States.
Whether a foreign corporation is engaged in a United States trade or business or is carrying on an insurance business in the United States depends upon the level of activities conducted in the United States. If the activities of a foreign company are "continuous, regular, and considerable," the foreign company will be deemed to be engaged in a United States trade or business. Due to the fact that American Safety will continue to maintain an office in Bermuda and American Safety and its Bermuda insurance subsidiary's business is reinsuring contracts via treaty reinsurance agreements, which are all signed outside of the United States, American Safety does not consider itself to be engaged in a trade or business in the United States and, accordingly, does not expect to be subject to United States income taxes. This position is consistent with the position taken by various other entities that have the same operational structure as American Safety.
However, because the Internal Revenue Code of 1986, as amended, the Treasury Regulations and court decisions do not definitively identify activities that constitute being engaged in a United States trade or business, and because of the factual nature of the determination, there can be no assurance that the Internal Revenue Service will not contend that American Safety or its Bermuda insurance subsidiary are engaged in a United States trade or business. In general, if American Safety or its Bermuda insurance subsidiary are considered to be engaged in a United States trade or business, it would be subject to (i) United States Federal income tax on its taxable income that is effectively connected with a United States trade or business at graduated rates and (ii) the 30 percent branch profits tax on its effectively connected earnings and profits deemed repatriated from the United States.
-8-
Credit Risk is the risk that issuers of securities owned by the Company or secured notes receivable will default or that other parties, including reinsurers that have obligations to the insurer, will not pay or perform. The Company attempts to mitigate this risk by adhering to a conservative investment strategy, by obtaining sufficient collateral for secured note obligations and by maintaining sound reinsurance, credit and collection policies.
Interest Rate Risk is the risk that interest rates will change and cause a decrease in the value of an insurer's investments. The Company attempts to mitigate this risk by attempting to match the maturities of its assets with the expected payouts of its liabilities.
Note 4 - Investments
The amortized cost and estimated fair values of investments at December 31, 2000 and September 30, 2001 are as follows:
Gross Gross
Amortized unrealized unrealized Estimated
Cost gains losses fair value
December 31, 2000:
Securities available for sale:
Fixed maturities:
U.S. Treasury securities and obligations
of U.S. Government corporations and
agencies $ 30,952,452 $615,498 $112,524 $ 31,455,426
Obligations of states and political
subdivions 6,083,661 190,974 - 6,274,635
Corporate securities 6,799,319 17,688 153,243 6,663,764
Mortgage-backed securities 1,562,888 31,997 3,054 1,591,831
Total fixed maturities 45,398,320 856,157 268,821 45,985,656
Equity investments - common stocks 162,322 - - 162,322
Total $45,560,642 $856,157 $268,821 $46,147,978
=========== ======== ======== ===========
September 30, 2001:
Securities available for sale:
Fixed maturities:
U.S. Treasury securities and obligations of
U.S. Governmentcorporations and agencies 26,949,422 $ 1,514,174 $ - $ 28,463,596
Corporate securities 23,061,410 521,114 78,594 23,503,930
Mortgage-backed securities 6,828,384 142,848 10,518 6,960,714
Total fixed maturities 56,839,216 2,178,136 89,112 58,928,240
Equity investments - common stocks 638,647 - - 638,647
Total $57,477,863 $2,178,136 $ 89,112 $59,566,887
========== ============ =========== ===========
Note 5 - Segment Information
The Company’s United States and Bermuda operating segments were identified by management as separate operating segments based upon the regulatory environments of each of these countries. Significant differences exist under United States and Bermuda law concerning the regulation of insurance entities including differences in: types of permissible investments, minimum capital requirements, solvency monitoring, pricing, corporate taxation, etc.
-9-
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 risks and other specialty risks. The Company has demonstrated expertise in developing specialty insurance coverages and custom designed risk management programs not generally available in the standard insurance market.
The Company is also involved in the development of the Harbour Village Golf and Yacht Club project in Ponce Inlet, Florida, as discussed in Note 7 and this item is reflected in the segment United States-Real Estate.
The United States operating segment’s specialty insurance programs provide insurance and reinsurance for general, pollution and professional liability exposures, for workers’ compensation and surety, as well as custom designed risk management programs for contractors, consultants and other business and property owners who are involved with environmental remediation, general construction and other specialty risks.
Through its United States brokerage and management services subsidiaries, the Company also provides specialized insurance program development, underwriting, risk and reinsurance placement, program management, brokerage, loss control, claims administration and marketing services. The Company also insures and places risks through its United States insurance 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.
Nine Months Ended
September 30,
2000 2001
United States - Insurance
Net premiums earned - All other $19,080,500 $43,281,201
Net premiums earned - Intersegment (5,935,873) (6,977,694)
Net investment income and interest on notes receivable 1,339,556 2,127,759
Sales - real estate - -
-10-
Nine Months Ended
September 30,
2000 2001
Other revenues 3,469,266 4,117,682
Total revenues 17,953,449 42,548,948
Interest expense - 131,370
Depreciation and amortization expense 132,283 214,687
Equity in net earnings of subsidiaries - -
Income taxes expense (benefit) (1,108,947) 660,364
Segment profit/(loss) (2,089,586) 1,299,554
Significant noncash items other than depreciation and
- - amortization
Property, plant and equipment 547,964 849,621
Total investments 41,001,732 65,996,404
Total assets 119,650,975 201,731,059
Total policy and contract liabilities 60,037,244 141,003,699
Total liabilities 92,490,080 172,920,822
United States - Real Estate
Net premiums earned - All other - -
Net premiums earned - Intersegment - -
Net investment income and interest on notes receivable - -
Sales - real estate 3,180,705
Other revenues 150 3,491
Total revenues 150 3,184,196
Interest expense - -
Depreciation and amortization expense 31,109 4,524
Equity in net earnings of subsidiaries - -
Income taxes expense (benefit) (128,452) (134,214)
Segment profit/(loss) (238,555) (260,531)
Significant noncash items other than depreciation and
amortization - -
Property, plant and equipment 222,189 323,996
Total investments - 44,958,893
Total assets 21,034,807 57,822,811
Total policy and contract liabilities - -
Total liabilities 11,608,676 47,182,538
Bermuda
Net premiums earned - All other 1,858,475 1,463,949
Net premiums earned - Intersegment 5,935,873 6,977,694
Net investment income and interest on notes receivable 1,914,722 1,348,563
Sales - real estate - -
Other revenues 632,955 414,170
Total revenues 10,342,025 10,204,376
Interest expense - -
Depreciation and amortization expense 15,094 5,833
Equity in net earnings (loss) of subsidiaries (2,328,141) 1,039,023
Income taxes - -
Segment profit 541,117 2,787,174
-11-
Nine Months Ended
September 30,
2000 2001
Significant noncash items other than depreciation and
amortization - -
Property, plant and equipment 825,769 844,167
Total investments 56,694,084 67,677,226
Total assets 86,960,497 91,981,519
Total policy and contract liabilities 16,615,861 16,436,234
Total liabilities 18,947,298 18,671,408
Intersegment Eliminations
Net premiums earned - All Other - -
Net premiums earned - Intersegment - -
Net investment income and interest on notes receivable - -
Sales - real estate - -
Other revenues (668,660) (145,901)
Total revenues (668,660) (145,901)
Interest expense - (112,500)
Depreciation and amortization expense - -
Equity in net earnings (loss) of subsidiaries 2,328,141 (1,039,023)
Income taxes - -
Segment profit (loss) - -
Significant noncash items other than depreciation and
amortization - -
Property, plant and equipment - -
Total investments (46,593,347) (51,859,674)
Total assets (62,014,864) (66,021,706)
Total policy and contract liabilities (8,929,945) (9,854,541)
Total liabilities (15,421,517) (14,062,032)
Total
Net premiums earned - All other 20,938,975 44,745,150
Net premiums earned - Intersegment - -
Net investment income and interest on notes receivable 3,254,278 3,476,322
Sales - real estate - 3,180,705
Other revenues 3,433,711 4,389,442
Total revenues 27,626,964 55,791,619
Interest expense - 18,870
Depreciation and amortization expense 178,486 225,044
Equity in net earnings of subsidiaries - -
Income taxes expense (benefit) (1,237,399) 526,150
Segment profit (loss) (1,787,024) 3,826,197
Significant noncash items other than depreciation and
amortization - -
Property, plant and equipment 1,595,922 2,017,784
Total investments 51,102,469 126,772,849
Total assets 165,631,415 285,513,683
Total policy and contract liabilities 67,723,160 147,585,392
Total liabilities 107,624,537 224,712,736
Note 6 - Shareholder Matters
During the quarter ended September 30, 2001, the Company repurchased 58,500 shares of its stock at a total price of $567,950 in open market transactions pursuant to its share repurchase program.
Note 7 - Investment in Real Estate
The Company's investment in the development of the Harbour Village Golf and Yacht Club ("Harbour Village") project is comprised of 173 acres of property in Ponce Inlet, Florida (the "Property") that was acquired through foreclosure on April 13, 1999. At the date of foreclosure, the Company evaluated the carrying value of its investment in real estate by comparing the fair value of the foreclosed collateral to the book value of the underlying loan and accrued interest. As the book value of the loan and accrued interest was less than the fair value of the collateral, no loss was recognized on foreclosure and the basis of real estate was recorded in accordance with EITF Abstract 98-11, which included the recognition of $5.8 million in a deferred tax asset.
As of December 31, 2000 and September 30, 2001, the investment in real estate for the Harbour Village project is as follows (in thousands):
Land $6,149 $6,149
Capitalized overhead, interest and
taxes 3,886 5,684
Work in process 8,961 31,552
Total $18,996 $43,385
======= =======
During the quarter ended September 30, 2001, the Company closed 12 condominium units and 6 boat slips at Harbour Village. The Company recognizes revenue when title to the individual units and boat slips passes to the purchaser. When title passes, the Company uses a percentage of completion method, based on actual costs to total estimated costs (including allocated common costs) to recognize revenue. The difference between total sales price and the revenue recognized is set up as deferred revenue and will be recognized as the additional costs of each building are incurred.
-12-
Note 8 - Income Taxes
Total income tax (benefit) for the nine months ended September 30, 2000 and 2001 were allocated as follows:
September 30,
2000 2001
Tax expense (benefit) attributable to:
Income from continuing operations (1,237,399) $526,150
Unrealized gains (losses) on
securities available for sale (71,266) 387,612
Total $ (1,308,665) $913,762
============ =======
U.S. Federal and state income tax expense (benefit) from continuing operations consists of the following components:
September 30, 2000 74,120 (1,311,519) (1,237,399) September 30, 2001 2,089,704 (1,563,554) 526,150
The state income tax components aggregated $(34,314) and $(2,090) for the periods ended September 30, 2000 and 2001, respectively.
Income tax expense (benefit) for the periods ended September 30, 2000 and 2001 differed from the amount computed by applying the U.S. Federal income tax rate of 34% to earnings before Federal income taxes as a result of the following:
-13-
2000 2001
Expected income tax expense (benefit) $(1,028,304) $1,479,798
Foreign earned income not subject to U.S.
taxation (183,980) (947,639)
Tax-exempt interest (97,996) (15,654)
State taxes and other 72,881 9,645
$(1,237,399) $526,150
=========== =======
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:
2000 2001
Deferred tax assets:
Loss reserve discounting $ 1,075,061 $ 2,440,090
Unearned premium reserves 1,209,162 2,244,173
Difference between tax and GAAP basis of Harbour
Village Project 5,839,919 5,764,541
Net operating loss carry forward 398,597 -
Gross deferred tax assets 8,522,739 10,448,804
Deferred tax liabilities:
Deferred acquisition costs 978,785 1,341,035
Unrealized gain on securities 159,251 546,863
Other 1,512 1,773
Gross Deferred tax liabilities 1,139,548 1,889,671
Net deferred tax asset $7,383,191 $8,559,133
========= =========
Note 9 - Notes Receivable
The Company ceases the accrual of interest on loans when any payment is past due. Additionally, the Company assesses loan impairment by comparing the carrying value of such loan, including accrued but unpaid interest at the valuation date to the fair market value of collateral held with respect to such loan. Any shortage of fair value over carrying value is first recognized by reversing interest income recognized for the year of impairment and then
-14-
recognizing any further loss against the allowance for loan losses. Cash receipts on impaired notes receivable are applied to reduce the principal amount of such notes until the principal has been recovered and are recognized as interest income, thereafter.
The recorded investment in notes receivable, which meet the definition of impaired loans at December 31, 2000 and September 30, 2001 were -0- and $8,074,116, respectively. The Company did not maintain an allowance for loan losses, as it believes that the value of collateral held is sufficient to preclude any losses. The weighted average recorded investment in impaired notes receivable as of December 31, 2000 and September 30, 2001 were $0 and $633,312, respectively. Interest income recognized on impaired notes receivable during the nine months ended September 30, 2000 and September 30, 2001 were $0 and $0, respectively.
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 risks and other specialty risks, and provides a broad range of financial services and products to middle market businesses. The Company is also the owner/developer of the Harbour Village Golf & Yacht Club, a residential condominium, marina, par 3 golf course and beach club project in Ponce Inlet, Florida.
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 materially, and are subject to change based on various industry factors, including the outcome of the Company's 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 reinsurance costs and availability, and changes in levels of general business activity and economic conditions. 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 materially, and are subject to change based on various real estate development industry factors, including competitive housing conditions in the local market area, risks inherent in real estate development and new construction, increases in construction costs, construction delays, weather, litigation, changes in interest rates and the availability of mortgage financing for prospective purchasers of condominium units and boat slips, and changes in local and national levels of general business activity and economic conditions. 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
-15-
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 following table sets forth the Company's consolidated revenues:
Months Months Months Months
Ended Ended Ended Ended
September September September September
30, 30, 30, 30,
2000 to 2000 to
2000 2001 2000 2001 2001 2001
(Dollars in thousands)
Net Premiums earned:
Reinsurance:
Workers' compensation $3,233 $2,659 $8,116 $8,300 (17.8)% 2.3%
General liability 1,779 1,963 3,589 7,232 10.3 101.5
Total reinsurance 5,012 4,622 11,705 15,532 (7.8) 32.7
Primary insurance:
Commercial Line 773 1,185 1,538 3,217 53.3 109.2
Workers' compensation - 1,882 - 4,009 - -
Surety 1,355 1,023 2,759 5,492 (24.5) 99.1
General Liability 244 5,237 272 12,159 2,046.3 4,370.2
Program Business 404 390 763 4,336 (3.5) 468.3
Total primary insurance 2,776 9,717 5,332 29,213 250.0 447.9
Total net premiums earned 7,788 14,339 17,037 44,745 84.1 162.6
Net investment income 668 947 2,002 2,709 41.8 35.3
Interest on notes receivable 378 207 1,253 767 (45.2) (38.8)
Commission and fee income:
Brokerage commission income 1,216 716 2,840 1,715 (41.1) (39.6)
Management fees from affiliate 350 363 1,068 1,095 3.7 2.5
Total commission and fee income 1,566 1,079 3,908 2,810 (31.1) (28.1)
Net realized gains (losses) (9) 186 (215) 601 2,167.0 379.5
Sales - Real Estate - 3,181 - 3,181 - -
Other income 69 129 768 979 87.0 27.5
Total Revenues $10,460 $20,068 $24,753 $55,792 91.9% 125.4%
-16-
The following table sets forth the components of the Company's GAAP combined ratio for the periods indicated:
September 30, September 30,
2000 2001 2000 2001
Insurance operations:
Loss and loss adjustment expense 64.0% 67.2% 69.3% 63.7% ratio
Expense ratio 21.1 22.9 23.3 25.2
Combined ratio 85.1% 90.1% 92.6% 88.9%
-17-
Quarter Ended September 30, 2001 Compared to Quarter Ended September 30, 2000
Net Premiums Earned. Net premiums earned increased 84.1% from $7.8 million in the quarter ended September 30, 2000 to $14.3 million in the quarter ended September 30, 2001. The principal factor accounting for the increase was a $5.0 million increase in primary general liability premiums. The Company expects written premium volume from its workers' compensation and commercial lines of business to decrease, as the Company focuses its underwriting efforts on other lines of insurance business which are anticipated to be more profitable.
Net Investment Income. Net investment income increased 41.8% from $668,000 in the quarter ended September 30, 2000 to $947,000 in the quarter ended September 30, 2001 due to higher levels of invested assets generated from positive cash flows from operations. The average pre-tax yield on investments was 5.5% in the quarter ended September 30, 2000 and 4.9% in the quarter ended September 30, 2001. The average after-tax yield on investments was 4.4% in the quarter ended September 30, 2000 and 3.6% in the quarter ended September 30, 2001.
Interest from Notes Receivable. Interest from notes receivable decreased 45.2% from $378,000 in the quarter ended September 30, 2000 to $207,000 in the quarter ended September 30, 2001 due to the repayment of various loans. Average notes receivable decreased to $8.6 million from $11.1 million for the quarter.
Brokerage Commission Income. Income from insurance brokerage operations decreased 41.1% from $1.2 million in the quarter ended September 30, 2000 to $716,000 in the quarter ended September 30, 2001 as a result of lower levels of premiums produced by the Company's risk retention group affiliate, American Safety Risk Retention Group, Inc.
Management Fees. Management fees increased 3.7% from $350,000 in the quarter ended September 30, 2000 to $363,000 in the quarter ended September 30, 2001. The 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 and Losses. Net realized gains and losses increased from a loss of $9,000 in the quarter ended September 30, 2000 to a gain of $186,000 for the quarter ended September 30, 2001 due to the sale of bonds in the Company's investment portfolio.
Sales - Real Estate. Real estate sales at the Harbour Village project were $3.2 million in the quarter ended September 30, 2001. These sales were realized from the closing of 12 residential condominium units in Building 100 and 6 boat slips. See Exhibit 99 included in this Report for further information regarding Harbour Village.
Other Income. Other income increased 87% from $69,000 in the quarter ended September 30, 2000 to $129,000 for the quarter ended September 30, 2001 as a result of fees generated by the
-18-
Company’s financial services subsidiary, American Safety Financial Corp. No assurance can be given as to the regularity or amount of fees being generated by the Company’s financial services subsidiary.
Losses and Loss Adjustment Expenses. Losses and loss adjustment expenses increased 93.5% from $5 million in the quarter ended September 30, 2000 to $9.6 million in the quarter ended September 30, 2001 due to an increase in net premiums earned and increases in surety and commercial lines reserves.
Acquisition Expenses. Policy acquisition expenses increased 109.7% from $1.2 million in the quarter ended September 30, 2000 to $2.6 million in the quarter ended September 30, 2001 as a result of increased premiums earned. Premium tax expense also increased to $794,000 from $695,000 due to higher volumes of direct premiums earned.
Payroll and Other Expenses. Payroll and other expenses increased 7% from $3.3 million in the quarter ended September 30, 2000 to $3.5 million in the quarter ended September 30, 2001 due to increases in payroll and related items.
Costs - Real Estate. Real estate expenses associated with Harbour Village increased from $182,000 in the quarter ended September 30, 2000 to $3.1 million in the quarter ended September 30, 2001 due to the continuing development of the project. Of the $3.1 million of costs recognized during the quarter, $2.7 million were previously capitalized variable costs related to the sale of condominium units and boat slips, which produces 14% to 15% gross margin on revenues. The remaining $400,000 were fixed costs of the project, which include advertising and other administrative costs. See Exhibit 99 included in this Report for further information regarding Harbour Village.
Income Taxes. Federal and state income taxes increased from $124,000 in the quarter ended September 30, 2000 to $267,000 in the quarter ended September 30, 2001 due to higher levels of income in the Company's U.S. subsidiaries operations.
Nine Months Ended September 30, 2001 Compared to Nine Months Ended September 30, 2000
Net Premiums Earned. Net premiums earned increased 162.6% from $17 million in the nine months ended September 30, 2000 to $44.7 million in the nine months ended September 30, 2001. The principal factors accounting for the increase were an 101.5% or $3.6 million increase in reinsurance general liability premiums, a 109.2% or $1.7 million increase in commercial lines premiums, a $4 million increase in primary workers' compensation premiums, a 99.1% or $2.7 million increase in surety premiums, a $11.9 million increase in primary general liability premiums and a $3.5 million increase in program business premiums. The Company expects written premium volume from its workers' compensation and commercial lines of business to decrease, as the Company focuses its underwriting efforts on other lines of insurance business which are anticipated to be more profitable.
Net Investment Income. Net investment income increased 35.3% from $2 million in the nine months ended September 30, 2000 to $2.7 million in the nine months ended September 30, 2001 due
-19-
to higher levels of invested assets generated from positive cash flows from operations. The average pre-tax yield on investments was 5.4% in the nine months ended September 30, 2000 and 5.0% in the nine months ended September 30, 2001. The average after-tax yield on investments was 4.4% in the nine months ended September 30, 2000 and 3.1% in the nine months ended September 30, 2001.
Interest from Notes Receivable. Interest from notes receivable decreased 38.8% from $1.3 million in the nine months ended September 30, 2000 to $767,000 in the nine months ended September 30, 2001 due to repayment of various loans. Average notes receivable decreased to $8.5 million in the nine months ended September 30, 2001 from $11.4 million in the nine months ended September 30, 2000.
Brokerage Commission Income. Income from insurance brokerage operations decreased 39.6% from $2.8 million in the nine months ended September 30, 2000 to $1.7 million in the nine months ended September 30, 2001 due to lower levels of premiums produced by the Company's risk retention group affiliate, American Safety Risk Retention Group, Inc.
Management Fees. Management fees have remained at $1.1 million in the nine months ended September 30, 2000 and the nine months ended September 30, 2001. 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 and Losses. Net realized gains and losses increased from a loss of $215,000 in the nine months ended September 30, 2000 to a gain of $601,000 for the nine months ended September 30, 2001 due to the sale of bonds in the Company's investment portfolio.
Sales - Real Estate. Real estate sales at the Harbour Village project were $3.2 million in the nine months ended September 30, 2001. These sales were realized from the closing of 12 residential condominium units in Building 100 and 6 boat slips. See Exhibit 99 included in this Report for further information regarding Harbour Village.
Other Income. Other income increased 27.5% from $768,000 in the nine months ended September 30, 2000 to $979,000 for the nine months ended September 30, 2001 as a result of fees generated by the Company's financial services subsidiary, American Safety Financial Corp. No assurance can be given as to the regularity or amount of such fees being generated by the Company's financial services subsidiary.
Losses and Loss Adjustment Expenses. Losses and loss adjustment expenses increased 141.5% from $11.8 million in the nine months ended September 30, 2000 to $28.5 million in the nine months ended September 30, 2001 due to an increase in net premiums earned and increases in surety and commercial lines reserves.
-20-
Acquisition Expenses. Policy acquisition expenses increased 185.1% from $3.1 million in the nine months ended September 30, 2000 to $8.8 million in the nine months ended September 30, 2001 as a result of increased premiums earned. Premium tax expense also increased to $2.3 million from $1.2 million due to higher volumes of direct premiums earned.
Payroll and Other Expenses. Payroll and other expenses increased 17.6% from $9 million in the nine months ended September 30, 2000 to $10.6 million in the nine months ended September 30, 2001 as a result of increased payroll and related expenses.
Costs - Real Estate. Real estate expenses associated with Harbour Village increased from $367,000 in the nine months ended September 30, 2000 to $3.6 million in the nine months ended September 30, 2001 due to the continuing development of the project. Of the $3.6 million of costs recognized during the year, $2.7 million were previously capitalized variable costs related to the sale of condominium units and boat slips, which produces a 14% to 15% gross margin on revenues. The remaining $900,000 were fixed costs of the project, which includes advertising and other administration costs. See Exhibit 99 included in this Report for further information regarding Harbour Village.
Income Taxes. Federal and state income taxes increased from a benefit of $1.2 million in the nine months ended September 30, 2000 to an expense of $526,000 in the nine months ended September 30, 2001 due to higher levels of income in the Company's U.S. subsidiaries' operations.
Liquidity and Capital Resources
The Company historically has met its cash requirements and financed its growth principally through cash flows generated from operations. During the past decade, the Company has operated in a soft market cycle which was characterized by excess insurance capacity and declining insurance premium rates; however, commencing in fiscal year 2000 the Company has operated in a hardening market with increased insurance premium rates for workers' compensation and excess and surplus lines. The Company's primary sources of cash flow are proceeds from the sale or maturity of invested assets, premiums 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 requirements 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 the short-term needs of its insurance business and the Company's invested assets are sufficient for the long-term needs of its insurance business. The Company also purchases reinsurance to mitigate the effect of large claims and to help stabilize demands on its liquidity.
On a consolidated basis, net cash provided from operations was $14.3 million for the nine months ended September 30, 2000 and $19.8 million for the nine months ended September 30, 2001. The positive cash flows for said periods were primarily attributable to net premiums written and net
-21-
earnings. Because workers’ compensation and general liability claims may be paid over an extended period of time, the Company has established loss reserves for such lines of business. The assets supporting the Company’s reserves continue to earn investment income until claims payments are made.
Total assets increased from $207.3 million at December 31, 2000 to $285.5 million at September 30, 2001 primarily due to increases in investments, reinsurance recoverables and real estate investments. Cash, invested assets and notes receivable increased from $104.2 million at December 31, 2000 to $147.7 million at September 30, 2001, as a result of increases in net premiums written, investment income and real estate investments. At September 30, 2001, the Company has repurchased 1,541,339 shares of its common stock at a total cost of $9.1 million since January 1999.
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. 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.
Harbour Village Development. The Company announced in March 2000 its plans to complete development of the Harbour Village Golf and Yacht Club ("Harbour Village"), located in Ponce Inlet, Florida, consisting of 786 residential condominium units, a marina containing 142 boat slips, a par 3 golf course and beach club. The Harbour Village property (comprising 173 acres) was acquired by the Company through foreclosure in April 1999, and has been under development by its subsidiary, Ponce Lighthouse Properties, Inc. and its general contracting subsidiary, Rivermar Contracting Company. The number of residential condominium units planned for the project has been increased from 786 to 809. As of October 31, 2001, the Company's marketing efforts had generated over $106 million of pre-sales of condominium units and boat slips.
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 of the project. Through September 30, 2001, the Company had borrowed $28 million from this loan facility. The estimated construction and development cost for the entire Harbour Village project is approximately $200 million over a three to five year period. Phase I of the development currently under construction consists of site work including a 142-boat slip marina, 294 residential units, and related 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. See Exhibit 99 included in this Report for further information regarding Harbour Village.
-22-
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 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.
-23-
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, 2000.
-23-
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
Not applicable.
Item 2. Changes in Securities and Use of Proceeds.
Not applicable.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
Lloyd A. Fox, President and Chief Executive Officer, has decided to leave American Safety at the expiration of his current employment contract on December 31, 2002 to pursue other business and personal interests. He will remain President and Chief Executive Officer of American Safety Insurance Group, Ltd. and American Safety Holdings Corp., the Company's U.S. holding company, until the expiration of his contract at the end of 2002.
Effective January 1, 2002, Stephen R. Crim, currently Executive Vice-President, will become President and Chief Executive Officer of American Safety's U.S. insurance and Bermuda reinsurance operations. Mr. Crim will succeed Mr. Fox as President and Chief Executive Officer of American Safety Insurance Group, Ltd. effective January 1, 2003. Mr. Crim has been responsible for all underwriting functions since joining American Safety Insurance Group's U.S. operations in 1990. He has served as Executive Vice-President of the Company and its U.S. insurance operations since 1997 and currently heads the U.S. Program Insurance Services Division. Mr. Crim has been closely involved in the Company's insurance operations for over 11 years.
Item 6. Exhibits and Reports on Form 8-K.
Exhibit No. Description
11 Computation of Earnings Per Share
99 Harbour Village Development Status
None.
-26-
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 2001.
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)
-27-
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,
2000 2001 2000 2001
Basic:
Earnings (loss) available to common
shareholders........................ $653,826 $978,753 $(1,787,024) $3,826,197
======== ======== ============ ==========
Weighted average common shares
outstanding......................... 5,377,597 4,788,648 5,609,170 4,823,066
Basic earnings (loss) per common shares $ .12 $ .20 $ (.32) $ .79
============= =============== ================ ===============
Diluted:
Earnings (loss) available to common $653,826 $978,753 $(1,787,024) $3,826,197
======== ======== ============ ==========
shareholders..........................
Weighted average common shares
outstanding............................ 5,377,597 4,788,648 5,609,170 4,823,066
Weighted average common shares
equivalents associated with options.... - 208,139 1,774 126,876
Total weighted average common
shares................................. 5,377,597 4,996,787 5,610,944 4,949,942
========= ========= ========= =========
Diluted earnings (loss) per common
shares $ .12 $ .20 $ (.32) $ .77
============ =============== =============== ===============
-28-
EXHIBIT 99
Harbour Village Development Status
$(000)s except references to Condo Units
and Boat Slips
Phase 1 Phase 2
Buildings Townhouses 8 Buildings Total
Oak Total Boat Condos and
100 200 300 400 500 600 700 800 Hammock Riverwalk Links Condos Slips Boat Slips
Status at 9/30/2001
Planned Number of Condo Units and Boat Slips 32 32 32 32 24 32 32 32 18 28 376 670 142 812
Condo Units and Boat Slips under Contract 32 32 32 32 19 28 27 31 14 25 67 339 132 471
Value of Pre-sale Contracts (Note 1) 7,574 7,312 7,607 8,213 5,560 7,494 7,614 7,759 6,434 9,229 16,365 91,161 12,012 103,173
Building Foundation Completed Yes Yes Yes Yes Yes Yes Yes Yes No No No
Vertical Building Completetd Yes Yes Yes Yes No No No Yes No No No
Interior Finish Completed Yes No No No No No No No No No No
Certificate of Occupancy Received Yes No No No No No No No No No No
Actual 9/20/2001 Quarter to Date
Units Closed at 9/30/2001 QTD 12 - - - - - - - - - - 12 6 18
Revenue Recognized at 9/30/2001 QTD 2,667 - - - - - - - - - - 2,667 513 3,180
Gross Profit Recognized at 9/30/2001 QTD 272 - - - - - - - - - - 272 213 485
Total Fixed Costs at 9/30/2001 QTD (Note 2) 399
Pre-Tax Profit at 9/30/2001 QTD 86
Projected 12/31/2001 Quarter to Date
Projected Unit Closings at 12/31/2001 QTD 20 32 21 15 88 40 128
Projected Revenue Recognized at 12/31/2001 QTD 4,344 6,727 4,593 3,542 19,206 2,560 21,766
Projected Gross Profit at 12/31/2001 QTD 443 686 468 361 1,959 1,063 3,022
Projected Total Fixed Costs at 12/31/2001 QTD 700
Projected Pre-Tax Profit at 12/31/2001 QTD 2,322
Note 1 - No assurance can be given that purchasers under binding pre-sale contracts with deposits will close each transaction.
Note 2 - Fixed costs include advertising, promotion, and other general and administrative costs. These costs are not allocated to specific buildings.
The projected results contained above for unit closings, revenue, gross profit, fixed costs and pre-tax profit are forward looking statements. With respect to the Company's development of the Harbour Village property, such forward looking statements involve risks and uncertainties which may cause actual results to differ materially, and are subject to change based on various real estate development industry factors, including competitive housing conditions in the local market area, risks inherent in real estate development and new construction, increases in construction costs, construction delays, weather, litigation, changes in interest rates and the availability of mortgage financing for prospective purchasers of condominium units and boat slips, and changes in local and national levels of general business activity and economic conditions.