UNITED STATES
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 JUNE
30, 2006 “OR”
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
______ TO ______.
Commission File Number 1-14795
AMERICAN SAFETY INSURANCE HOLDINGS, LTD.
(Exact name of Registrant as specified in its charter)
Bermuda Not Applicable
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
44 Church Street
P.O. Box HM2064
Hamilton HM HX, Bermuda
(Address, zip code of principal executive offices)
(441) 296-8560
(Registrant´s telephone number, including area code)
______________
Indicate by check mark whether registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or 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. X__ Yes _____ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See
definition of "accelerated filer" and "large accelerated filer" in Rule 12b-2 of the Exchange Act. (check one)
Large accelerated filer ______ Accelerated filer ____ Non-accelerated filer __X_
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ____Yes _X_ No
The aggregate number of shares outstanding of Registrant´s common stock, $0.01 par value, on August 4, 2006 was 10,529,366.
AMERICAN SAFETY INSURANCE HOLDINGS, LTD.
FORM 10-Q
TABLE OF CONTENTS
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements 1
Item 2. Management´s Discussion and Analysis of Financial Condition and Results of Operations 17
Item 3. Quantitative and Qualitative Disclosures About Market Risks 31
Item 4. Controls and Procedures 31
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 32
Item 1A. Risk Factors 33
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 50
Item 3. Defaults Upon Senior Securities 50
Item 4. Submission of Matters to a Vote of Security Holders 50
Item 5. Other Information 51
Item 6. Exhibits 51
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
American Safety Insurance Holdings, Ltd. and Subsidiaries
Consolidated Balance Sheets
December 31, June 30,
2005 2006
(Unaudited)
Assets
Investments:
Fixed maturity securities available for sale $ 364,856,826 $ 421,939,126
Common stock, at fair value 21,706,103 23,934,245
Preferred stock, at fair value 3,607,000 7,700,280
Short-term investments 25,326,648 25,343,493
Total investments 415,496,577 478,917,144
Cash and cash equivalents 23,289,927 27,439,627
Accrued investment income 4,037,573 4,595,878
Premiums receivable 17,315,778 24,500,966
Ceded unearned premium 29,880,672 30,669,187
Reinsurance recoverable 173,490,056 170,535,478
Deferred income taxes 11,933,791 14,647,510
Deferred policy acquisition costs 10,628,874 11,146,162
Property, plant and equipment 4,489,608 4,922,591
Other assets 6,572,007 6,460,384
Total assets $ 697,134,863 $ 773,834,927
============== ==============
See accompanying notes to consolidated financial statements (unaudited).
December 31, June 30,
2005 2006
(Unaudited)
Liabilities and Shareholders´ Equity
Liabilities:
Unpaid losses and loss adjustment expenses $ 394,872,581 $ 412,150,889
Unearned premiums 100,241,061 105,997,102
Ceded premiums payable 16,505,732 19,809,367
Accounts payable and accrued expenses 13,066,758 11,357,324
Loan payable 37,810,099 37,819,468
Funds held 11,190,989 13,968,209
Minority Interest 5,012,396 4,232,455
Total liabilities 578,699,616 605,334,814
Shareholders´ equity:
Preferred stock, $0.01 par value; authorized 5,000,000
shares; no shares issued and outstanding - -
Common stock, $0.01 par value; authorized 15,000,000
shares; issued and outstanding at December 31, 2005,
6,753,731 and June 30, 2006, 10,045,966 shares 67,537 100,460
Additional paid-in capital 49,460,019 97,092,034
Retained earnings 70,457,352 79,185,485
Accumulated other comprehensive income, net (1,549,661) (7,877,866)
Total shareholders ´ equity 118,435,247 168,500,113
Total liabilities and shareholders ´ equity $ 697,134,863 $773,834,927
============= ============
See accompanying notes to consolidated financial statements (unaudited).
American Safety Insurance Holdings, Ltd. and Subsidiaries
Consolidated Statements of Earnings
(unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
2005 2006 2005 2006
Revenues:
Direct premiums earned $ 59,076,332 $ 54,038,204 $ 114,321,732 $ 110,634,016
Assumed premiums earned - - 6,662 -
Ceded premiums earned (24,541,747) (17,962,376) (45,173,198) (39,739,307)
Net premiums earned 34,534,585 36,075,828 69,155,196 70,894,709
Net investment income 3,427,475 4,794,702 6,583,856 9,269,713
Net realized gains (losses) (96,697) (3,169) (44,465) 359,815
Real estate income 691,078 - 3,000,078 -
Other income 33,807 23,193 35,746 87,263
Total revenues 38,590,248 40,890,554 78,730,421 80,611,500
========== ========== ========== ==========
Expenses:
Losses and loss adjustment expenses 21,507,779 21,387,969 42,288,823 43,311,993
Acquisition expenses 6,883,652 6,431,653 14,010,031 13,407,790
Payroll and related expenses 3,181,498 3,991,686 6,148,484 7,534,153
Real estate expenses 423,933 102,461 2,688,462 169,501
Other expenses 2,948,367 2,951,627 5,197,875 5,615,116
Interest expense 262,961 837,623 529,640 1,740,669
Minority interest (48,616) (39,174) 539,282 (511,630)
Total expenses 35,159,574 35,663,845 71,402,597 71,267,592
Earnings before income taxes 3,430,674 5,226,709 7,327,824 9,343,908
Income taxes 291,920 599,575 542,727 615,775
Net earnings $ 3,138,754 $ 4,627,134 $ 6,785,097 $ 8,728,133
=========== ============ ============ =============
Net earnings per share:
Basic $0.47 $0.65 $ 1.00 $ 1.26
Diluted $0.44 $0.62 $0.94 $ 1.19
outstanding:
Basic 6,718,269 7,106,393 6,754,670 6,935,489
========= ========= ========= =========
Diluted 7,118,651 7,498,006 7,197,091 7,328,958
========= ========= ========= =========
See accompanying notes to consolidated financial statements (unaudited).
American Safety Insurance Holdings, Ltd. and Subsidiaries
Consolidated Statements of Cash Flow
(unaudited)
Six Months Ended
June 30,
2005 2006
Cash flow from operating activities:
Net earnings $6,785,097 $ 8,728,133
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Realized losses (gains) on investments 44,465 (359,815)
Depreciation expense 469,877 817,410
Stock based compensation expense - 299,241
Amortization of deferred acquisition costs, net 408,406 (517,288)
Amortization of premiums on investments 1,121,351 913,471
Deferred income taxes (454,458) (834,022)
Change in:
Accrued investment income (424,275) (558,305)
Premiums receivable (464,619) (7,185,188)
Reinsurance recoverable and ceded unearned premiums (19,416,618) 2,166,063
Funds held 1,230,834 2,777,220
Unpaid losses and loss adjustment expenses 32,912,804 17,278,308
Unearned premiums 6,074,856 5,756,041
Ceded premiums payable 999,178 3,303,635
Accounts payable and accrued expenses (699,066) (1,409,434)
Other, net 2,319,056 (309,567)
Net cash provided by operating activities 30,906,888 30,865,903
Cash flow from investing activities:
Purchases of fixed maturities (62,292,659) (102,547,990)
Purchases of common stock (6,854,709) (3,827,278)
Purchases of preferred stock - (4,405,720)
Proceeds from sale of fixed maturities 27,364,190 36,540,178
Proceeds from sale of equity investments 908,376 1,703,829
Decrease (increase) in short-term investments 9,404,848 (16,845)
Decrease of investment in real estate 2,005,440 -
Purchase of fixed assets, net (712,132) (1,250,393)
Net cash used in investing activities (30,176,646) (73,804,219)
See accompanying notes to consolidated financial statements (unaudited).
American Safety Insurance Holdings, Ltd. and Subsidiaries
Consolidated Statements of Cash Flow (Continued)
(unaudited)
Six Months Ended
June 30,
2005 2006
Cash flow from financing activities:
Proceeds from issuance of common stock 772,210 47,088,016
Stock repurchase payments (2,945,714) -
Repayment of loan payable (191,397) -
Repayment of escrow deposits (144,500) -
Withdrawals of restricted cash 144,500 -
Net cash used in financing activities (2,364,901) 47,088,016
Net increase (decrease) in cash and cash equivalents (1,634,659) 4,149,700
Cash and cash equivalents at beginning of period 24,843,736 23,289,927
Cash and cash equivalents at end of period $23,209,077 $27,439,627
=========== ===========
Supplemental disclosure of cash flow:
Income taxes paid $ 287,259 $ 1,541,845
========== =============
Interest paid $ 489,305 $ 1,733,565
========== =============
See accompanying notes to consolidated financial statements (unaudited).
American Safety Insurance Holdings, Ltd. and Subsidiaries
Consolidated Statements of Comprehensive Income
(unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
2005 2006 2005 2006
Net earnings $ 3,138,754 $ 4,627,134 $ 6,785,097 $ 8,728,133
Other comprehensive income before income taxes:
Unrealized gains (losses)on securities available
for sale, net of minority interest of $288,541 and
$(167,259)for the three months ended June 30, 2005
and 2006, respectively, and $75,870 and $(406,535)
for the six months ended June 30, 2005 and 2006,
respectively. 5,068,766 (4,071,054) 408,680 (7,813,250)
Unrealized gains (losses) on hedging transactions (167,696) 31,686 113,089 104,383
Reclassification adjustment for realized (gains) and
losses included in net earnings 96,697 3,169 44,465 (359,815)
Total other comprehensive income (loss) before taxes 4,997,767 (4,036,199) 566,234 (8,068,682)
Income tax expense (benefit) related to items of
other comprehensive income, net of minority interest
of $109,733 and $(57,869) for the three months ended
June 30, 2005 and 2006 respectively, and $108,370
and $(139,221)for the six months ended June 30,
2005 and 2006, respectively. 1,134,646 (864,677) 202,888 (1,740,477)
Other comprehensive income (loss) net of income taxes 3,863,131 (3,171,522) 363,346 (6,328,205)
Total comprehensive income $ 7,001,875 $1,455,612 $7,148,443 $ 2,399,928
=========== ========== ========== ===========
See accompanying notes to consolidated financial statements (unaudited).
American Safety Insurance Holdings, Ltd. and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2006
(unaudited)
Note 1 - Basis of Presentation
The accompanying consolidated financial statements of American Safety Insurance Holdings, Ltd. ("American Safety") and its
subsidiaries and American Safety Risk Retention Group, Inc. ("American Safety RRG"), a non-subsidiary risk retention group affiliate
(collectively, the "Company"), are prepared in accordance with accounting principles generally accepted in the United States of
America ("GAAP"). The preparation of financial statements in conformity with GAAP requires management to make estimates, based on
the best information available, in recording transactions resulting from business operations. The balance sheet amounts that involve
a greater extent of accounting estimates and/or actuarial determinations subject to future changes are the Company´s invested assets,
deferred income taxes, and the liabilities for unpaid losses and loss adjustment expenses. As additional information becomes
available (or actual amounts are determinable), the recorded estimates may be revised and reflected in operating results. While
management believes that these estimates are adequate, such estimates may change in the future.
The results of operations for the six months ended June 30, 2006 may not be indicative of the results that may be expected
for the fiscal year ending December 31, 2006. 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 in the Company´s Form
10-K of the Company for the fiscal year ended December 31, 2005.
The unaudited interim consolidated financial statements include the accounts of American Safety, each of its subsidiaries
and American Safety RRG. All significant intercompany balances have been eliminated. In 2005, the Company changed its segment
presentation. See Note 5 for additional information. Prior years have been reclassified to conform to current year presentation.
Note 2 - Accounting Pronouncements
During the last two years, the Financial Accounting Standard Board (FASB) has issued a number of accounting pronouncements
with various effective dates.
In November 2005, the FASB issued Staff Position Number FAS 115-1, The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments ("FSP 115-1"). FSP 115-1 addresses the determination as to when an investment is considered
impaired, whether that impairment is other than temporary, and the measurement of an impairment loss. It also includes accounting
considerations subsequent to the recognition of another-than-temporary impairment and requires certain disclosures about unrealized
losses that have not been recognized as other-than-temporary impairments. The guidance in FSP 115-1 amends FASB Statement No. 115,
Accounting for Certain Investments in Debt and Equity Securities, and was effective January 1, 2006. The adoption of this
pronouncement did not have a material impact on the Company´s financial statement.
In April 2006, the FASB issued a Staff Position Number FIN 46(R)-6, Determining the Variability to be Considered in Applying
FASB Interpretation No. 46(R) (“FSP 46R-6”). FSP 46R-6 responds to the need for guidance on the relevant risks and rewards that must
be identified and evaluated in order to apply FIN 46(R) and is effective for fiscal periods beginning after June 15, 2006. This
pronouncement will have no impact on the Company as it already consolidates its non-subsidiary affiliate American Safety RRG.
In July 2006, the FASB issued a Staff Position Number FIN 48 (FIN 48), Accounting for Uncertainty in Income Taxes. FIN 48
clarifies the accounting for uncertainty in income taxes recognized in an enterprise´s financial statements in accordance with FASB
statement number 109, Accounting for Income Taxes. This interpretation prescribes a recognition threshold and measurement
attributable for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.
This interpretation is effective for fiscal years beginning after December 15, 2006. The Company is currently reviewing this
pronouncement to determine impact if any it will have on its financial statements.
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 will
create additional expenses not anticipated by the Company in pricing its products and beyond those recorded in the financial
statements. That is, regulatory initiatives designed to reduce insurer profits or otherwise affecting the industry in which the
insurer operates, new legal theories or insurance company insolvencies through guaranty fund assessments may create costs for the
insurer beyond those recorded in the financial statements. The Company attempts to mitigate this risk by writing insurance business
in several states, thereby spreading this risk over a large geographic area.
The Potential Risk of United States Taxation of Bermuda Operations. Under current Bermuda law, American Safety is not
required to pay any taxes in Bermuda on either income or capital gains. American Safety has received an undertaking from the
Minister of Finance in Bermuda that will exempt American Safety from taxation until the year 2016 in the event of any such taxes
being imposed. Whether a foreign corporation is engaged in a United States trade or business or is carrying on an insurance business
in the United States that would subject it to United States taxation 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. Management believes that American Safety and its Bermuda subsidiaries have been
operated and in the future will continue to be operated in a manner that will not cause any of them to be treated as being engaged in
a U.S. trade or business.
However, because the Internal Revenue Code of 1986, as amended, 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 and/or its Bermuda
subsidiaries are engaged in a United States trade or business. In general, if American Safety or its Bermuda subsidiaries were
engaged in a United States trade or business, each could be subject to (i) United States Federal income tax on income effectively
connected with that trade or business and (ii) United States branch profits tax. Certain subsidiaries of American Safety are,
however, subject to United States federal and state income tax as they are domiciled and conduct business in the United States.
Credit Risk is the risk that issuers of securities owned by the insurer 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 and by maintaining sound reinsurance, credit and collection
policies.
Interest Rate Risk is the risk that interest rates may change and cause a decrease in the value of an insurer´s
investments.
The Company´s fixed maturity holdings are invested predominantly in high quality corporate, government and municipal bonds
with relatively short durations. The fixed maturity portfolio is exposed to interest rate fluctuations; as interest rates rise,
their fair values decline and as interest rates fall, their fair values rise. The changes in the fair market value of the fixed
maturity portfolio are presented as a component of shareholders´ equity in accumulated other comprehensive income, net of taxes.
We work to manage the impact of interest rate fluctuations on our fixed maturity portfolio. The effective duration of the
fixed maturity portfolio is managed with consideration given to the estimated payout timing of our liabilities. We have investment
policies which limit the maximum duration and maturity of individual securities within the portfolio and set target levels for
average duration and maturity of the entire portfolio.
Note 4 - Investments
The amortized cost and estimated fair values of the Company´s investments at December 31, 2005 and June 30, 2006 are as
follows:
Gross Gross
Amortized unrealized unrealized Estimated
cost gains losses fair value
December 31, 2005:
Securities available for sale:
Fixed maturities:
U.S. Treasury securities and
obligations of U.S. Government
corporations and agencies $ 86,740,033 $547,669 $1,311,628 $ 85,976,074
States of the U.S. and political
subdivisions of the States 64,740,408 386,303 498,465 64,628,246
Corporate securiti=es 84,763,525 618,765 1,598,413 83,783,877
Mortgage-backed securities 132,992,335 56,265 2,579,971 130,468,629
Total fixed maturities: $369,236,301 $1,609,002 $5,988,477 $364,856,826
============ ========== ========== ============
Common stock $ 19,983,174 $2,721,304 $ 998,374 $ 21,706,103
============== ========== ========== ==============
Preferred stock $ 3,500,900 $ 106,100 $ - $ 3,607,000
============== ========== ========== ==============
June 30, 2006:
Securities available for sale:
Fixed maturities:
U.S. Treasury securities and
obligations of U.S. Government
corporations and agencies $ 90,149,772 $ 139,469 $ 2,618,397 $ 87,670,844
States of the U.S. and political
subdivisions of the 73,658,363 27,633 2,123,173 71,562,823
States
Corporate securities 94,243,484 175,899 2,435,967 91,983,416
Mortgage-backed securities 176,634,417 45,708 5,958,082 170,722,043
Total fixed maturities: $434,686,036 $ 388,709 $13,135,619 $421,939,126
============ =========== =========== ============
Common stock $ 22,111,041 $3,136,762 $ 1,313,558 $ 23,934,245
============== ========== ============ =============
Preferred stock $ 7,906,620 $ 8,920 $ 215,260 $ 7,700,280
=============== ============ ============= ============
Note 5 - Segment Information
The Company initially segregates its business into the following segments: Real Estate Operations, Insurance Operations, and
Other. The Insurance Operations segment is further classified into three additional lines: Excess and Surplus Lines (E&S),
Alternative Risk Transfer (ART), and Runoff. The E&S lines is then further classified into four reportable lines of business:
Environmental Specialty (Env.), Construction (Const.), Excess and Surety. ART is then further classified into two reportable lines
of business: Specialty Programs (Programs) and Fully-Funded (FF).
Real estate consists of the Harbour Village project in Ponce Inlet, Florida, which is substantially complete.
In our E&S line, Environmental Specialty writes insurance coverages for the environmental remediation industry. Construction
provides commercial casualty insurance coverages, generally in the area of construction and products liability. Excess provides
umbrella liability coverage over other carriers´ primary policies. Surety provides payment and performance bonds to the
environmental remediation industry.
In our ART line, Specialty Programs facilitates the offering of insurance to homogeneous niche groups of risks. Fully-funded
provides a mechanism for insureds to post collateral and self-insure their risks. The Company is paid a fee for arranging this type
of transaction.
The Other segment consists of amounts associated with realized gains and losses on investments.
The Company measures all segments using net earnings, total assets and total equity. The Reportable Insurance Operations
segments are measured by net premiums earned, incurred losses and loss adjustment expenses and acquisition expenses. Assets are
not allocated to the Reportable Insurance Operations segments.
The following table presents key financial data by segment for the six months ended June 30, 2005 and June 30, 2006
(in thousands):
June 30, 2005 Real Insurance
Estate
E&S ART Runoff Other Total
-------------------------- --------- ------------------------------------ ------------------- --------- -------- --------
Env. Const. Excess Surety Specialty FF
Programs
-------------------------- --------- --------- --------- -------- ------- ----------- ------- --------- -------- --------
Gross premiums written $- $27,290 $47,046 $989 $935 $43,326 $810 $7 $ - $120,403
-------------------------- --------- --------- --------- -------- ------- ----------- ------- --------- -------- ---------
Net premiums written - 24,124 38,142 198 470 8,784 528 (35) - 72,211
-------------------------- --------- --------- --------- -------- ------- ----------- ------- --------- -------- ---------
Net premiums earned - 18,522 40,734 228 434 8,789 293 155 - 69,155
-------------------------- --------- --------- --------- -------- ------- ----------- ------- --------- -------- ---------
Losses & loss
adjustment
expenses - 10,187 24,720 137 452 5,369 10 1,414 - 42,289
-------------------------- --------- --------- --------- -------- ------- ----------- ------- --------- -------- ---------
Acquisition expenses - 4,637 9,369 (69) 68 363 (109) (249) - 14,010
-------------------------- --------- --------- --------- -------- ------- ----------- ------- --------- -------- ---------
Underwriting profit
(loss) $ - $ 3,698 $6,645 $160 $(86) $3,057 $392 $(1,010) $- $12,856
-------------------------- --------- --------- --------- -------- ------- ----------- ------- --------- -------- --------
Income tax expense
(benefit) $118 $445 $(20) $543
-------------------------- --------- ------------------------------------------------------------------ -------- -- ------
Net earnings $193 $6,654 $(62) $6,785
-------------------------- --------- ------------------------------------------------------------------ -------- --------
Assets $3,924 $619,632 $ - $623,556
-------------------------- --------- ------------------------------------------------------------------ -------- --------
Equity $2,740 $111,334 $(101) $113,973
-------------------------- --------- ------------------------------------------------------------------ -------- --------
June 30, 2006 Real Insurance
Estate E&S ART Runoff Other Total
-------------------------- --------- ------------------------------------ ------------------- --------- -------- --------
Env. Const. Excess Surety Specialty FF
Programs
-------------------------- --------- --------- --------- -------- ------- ----------- ------- --------- -------- --------
Gross premiums written $- $26,885 $47,578 $1,469 1,955 $36,640 $2,019 $- $ - $116,546
-------------------------- --------- --------- --------- -------- ------- ----------- ------- --------- -------- --------
Net premiums written - 19,808 44,048 382 1,083 9,705 1,317 - - 76,343
-------------------------- --------- --------- --------- -------- ------- ----------- ------- --------- -------- --------
Net premiums earned - 17,360 41,895 239 784 9,677 940 - - 70,895
-------------------------- --------- --------- --------- -------- ------- ----------- ------- --------- -------- --------
Losses & loss
adjustment
expenses - 10,174 27,023 143 276 5,581 145 (300) - 43,312
-------------------------- --------- --------- --------- -------- ------- ----------- ------- --------- -------- --------
Acquisition expenses - 5,012 8,164 (50) 152 143 (13) - - 13,408
-------------------------- --------- --------- --------- -------- ------- ----------- ------- --------- -------- --------
Underwriting profit $ - $ 2,174 $6,708 $146 $356 $3,683 $808 $300 $- $14,175
-------------------------- --------- --------- --------- -------- ------- ----------- ------- --------- -------- --------
Income tax expense
(benefit) $ (64) $606 $74 $616
-------------------------- --------- ------------------------------------------------------------------ -------- --------
Net earnings $(105) $8,547 $286 $8,728
-------------------------- --------- ------------------------------------------------------------------ -------- --------
Assets $1,886 $771,949 $ - $773,835
-------------------------- --------- ------------------------------------------------------------------ -------- --------
Equity $651 $167,952 $(103) $168,500
-------------------------- --------- ------------------------------------------------------------------ -------- --------
Additionally, the Company conducts business in the following geographic segments: United States and Bermuda. Significant
differences exist in the regulatory environment in each country. Those differences include laws regarding the types of investments,
capital requirements, solvency monitoring, pricing, corporate taxation, etc. The following table provides key financial data about
the geographic segments for the six months ended June 30, 2005 and June 30, 2006 (in thousands):
June 30, 2005 United States Bermuda Total
Income tax $ 543 $ - $543
Net earnings 2,381 4,404 6,785
Assets 474,185 149,371 623,556
Equity 58,902 55,071 113,973
June 30, 2006 United States Bermuda Total
Income tax 616 - 616
Net earnings 2,751 5,977 8,728
Assets 545,236 228,599 773,835
Equity 58,373 110,127 168,500
The following table presents key financial data by segment for the three months ended June 30, 2005 and June 30, 2006 (in
thousands):
June 30, 2005 Real Insurance
Estate
-------------------------- ---------- ----------------------------------- ------------------- --------- -------- ---------
E&S ART Runoff Other Total
--------------------------- ---------- -------- --------- -------- ------- ----------- ------- --------- -------- -------
Env. Const. Excess Surety Specialty FF
Programs
-------------------------- ---------- -------- --------- -------- ------- ----------- ------- --------- -------- --------
Gross premiums written $- $13,696 $20,335 $647 $438 $20,583 $493 $- $ - $56,192
-------------------------- --------- --------- --------- -------- ------- ----------- ------- --------- -------- --------
Net premiums written - 13,157 16,026 129 220 5,514 395 - - 35,441
-------------------------- --------- --------- --------- -------- ------- ----------- ------- --------- -------- --------
Net premiums earned - 9,777 19,742 116 215 4,480 204 - - 34,534
-------------------------- --------- --------- --------- -------- ------- ----------- ------- --------- -------- --------
Losses &loss
adjustment
expenses - 5,378 11,899 70 75 2,921 5 1,160 - 21,508
-------------------------- --------- --------- --------- -------- ------- ----------- ------- --------- -------- --------
Acquisition expenses - 2,244 4,790 (36) 21 152 (38) (249) - 6,884
-------------------------- --------- --------- --------- -------- ------- ----------- ------- --------- -------- --------
Underwriting profit $ -
(loss) $ 2,155 $3,035 $82 $119 $1,407 $237 $(911) $- $6,142
-------------------------- --------- ------------------------------------------------------------------ -------- --------
Income tax expense $102 $223 $(33) $292
(benefit)
-------------------------- --------- ------------------------------------------------------------------ -------- --------
Net earnings $165 $,049 $(75) $3,139
-------------------------- --------- ------------------------------------------------------------------ -------- -------
June 30, 2006 Real Insurance
Estate
-------------------------- ---------- ----------------------------------------------------------------- ----------------
E&S ART Runoff Other Total
-------------------------- ---------- -------- --------- -------- ------- ----------- ------- --------- -------- -------
Env. Const. Excess Surety Specialty FF
Programs
-------------------------- --------- --------- --------- -------- ------- ----------- ------- --------- -------- -------
Gross premiums written $- $14,244 $25,126 $858 $1,085 $20,295 $1,756 $- $ - $63,364
-------------------------- --------- --------- --------- -------- ------- ----------- ------- --------- -------- --------
Net premiums written - 11,737 23,863 214 643 5,922 1,129 - - 43,508
-------------------------- --------- --------- --------- -------- ------- ----------- ------- --------- -------- --------
Net premiums earned - 9,040 20,981 117 431 4,935 572 - - 36,076
-------------------------- --------- --------- --------- -------- ------- ----------- ------- --------- -------- --------
Losses & loss
adjustment
expenses - 4,479 13,538 70 151 3,005 145 - - 21,388
-------------------------- --------- --------- --------- -------- ------- ----------- ------- --------- -------- ------
Acquisition expenses - 2,371 3,990 (18) 64 (39) 64 - - 6,432
-------------------------- --------- --------- --------- -------- ------- ----------- ------- --------- -------- ------
Underwriting profit $ - $ 2,190 $3,453 $65 $216 $1,969 $363 $- $- $8,256
-------------------------- --------- ------------------------------------------------------------------ -------- ------
Income tax expense
(benefit) $(39) $647 $(8) $600
-------------------------- --------- ------------------------------------------------------------------ -------- ------
Net earnings $(63) $4,684 $6 $4,627
-------------------------- --------- ------------------------------------------------------------------ -------- ------
The following provides key measurable information about the geographic segments for the three months ended June 30, 2005 and June 30, 2006
(in thousands):
June 30, 2005 United States Bermuda Total
Income tax $292 $- $292
Net earnings 788 2,351 3,139
June 30, 2006 United States Bermuda Total
Income tax 600 - 600
Net earnings 1,705 2,922 4,627
Note 6 - Income Taxes
Total income tax expense for the periods ended June 30, 2005 and 2006 was allocated as follows:
Three Months Ended Six Months Ended
June 30, June 30,
2005 2006 2005 2006
Tax expense attributable to:
Income from continuing
operations $ 291,920 $ 599,575 $ 542,727 $ 615,775
Change in unrealized
gains/(losses) on hedging
transactions (57,018) 10,433 38,449 35,150
Change in unrealized
gains/(losses) on securities
available for sale 1,301,397 (932,979) 272,809 (1,914,848)
Total $ 1,536,299 $ (322,971) $ 853,985 $ (1,263,923)
=========== ========== ============ ================
United States federal and state income tax expense (benefit) from continuing operations consists of the following components:
Current Deferred Total
Three months ended:
June 30, 2005 $ 422,259 $ (130,339) $ 291,920
June 30, 2006 $ 1,572,959 $ (973,384) $ 599,575
Six months ended:
June 30, 2005 $ 997,185 $ (454,458) $ 542,727
June 30, 2006 $ 1,449,797 $ (834,022) $ 615,775
The state income tax expense (benefit) aggregated $58,476 and $(5,714) for the six months ended June 30, 2005 and 2006,
respectively, and $16,250 and $(20,882) for the three months ended June 30, 2005 and 2006, respectively, and is included in the
current provision.
Income tax expense for the periods ended June 30, 2005 and 2006 differed from the amounts computed by applying the United
States Federal income tax rate of 34% to earnings before Federal income taxes as a result of the following:
Three Months Ended Six Months Ended
June 30, June 30,
2005 2006 2005 2006
Expected income tax expense $ 1,166,429 $ 1,777,081 $ 2,491,460 $ 3,176,929
Foreign earned income not
subject to U.S. taxation (798,899) (993,431) (1,497,191) (2,032,193)
Valuation allowance - - (554,515) -
State taxes and other (75,610) (184,075) 102,973 (528,961)
$ 291,920 $ 599,575 $ 542,727 $ 615,775
============= =========== ============ ===========
Deferred income taxes are based upon temporary differences between the financial statement and tax bases of assets and
liabilities. The following deferred taxes are recorded:
December 31, June 30,
2005 2006
Deferred tax assets:
Loss reserve discounting $ 9,288,244 $ 10,183,841
Unearned premium reserves 3,118,965 3,286,882
Unrealized loss on securities 667,159 2,582,007
Other 502,989 652,579
Gross deferred tax assets 13,577,357 16,705,309
Deferred tax liabilities:
Deferred acquisition costs 1,477,230 1,856,313
Unrealized gains on hedging transactions 166,336 201,486
Gross deferred tax liabilities 1,643,566 2,057,799
Net deferred tax asset $11,933,791 $14,647,510
=========== ===========
Note 7- Stock Options
The Company´s stock option plan grants incentive stock options to employees. The majority of the options outstanding under
the plan generally vest evenly over a three year period and have a term of 10 years. The Company uses the Black- Scholes option
pricing model to value stock options.
The Company applied the recognition and measurement principles of SFAS No. 123R, Share Based Payment in the first quarter of
2006. Compensation expense of $299,241 is reflected in net earnings for the six months ended June 30, 2006 and $158,685 for the three
months ended June 30, 2006.
The following table illustrates the effect on earnings and earnings per share, assuming we had applied the fair value
recognition provisions of SFAS No. 123R Accounting for Share Based Payments for the three months and six months ended June 30, 2005.
Three Months Ending Six Months Ending
June 30, June 30,
2005 2005
(In thousands, except per share amounts)
Net earnings:
As reported $ 3,139 $ 6,785
Effect of stock options 26 (461)
Pro forma net earnings $ 3,165 $6,324
======= =======
Net earnings per share:
Basic - as reported $ 0.47 $ 1.00
Basic - pro forma $ 0.47 $ 0.94
Diluted - as reported $ 0.44 $ 0.94
Diluted - pro forma $ 0.44 $ 0.88
Note 8 - Subsequent Events
In July 2006, the underwriters of the Company´s recent public offering fully exercised their over-allotment option,
purchasing 480,000 additional shares of common stock at $15.50 per share, providing additional net proceeds to the Company of $7.0
million.
Item 2. Management´s Discussion and Analysis of Financial Condition and Results of Operations
We are a specialty insurance company that provides customized insurance products and solutions to small and medium-sized
businesses in industries that we believe are underserved by the standard insurance market. For twenty years, we have developed
specialized insurance coverages and alternative risk transfer products not generally available to our customers in the standard
insurance market because of the unique characteristics of the risks involved and the associated needs of the insureds. We specialize
in underwriting these products for insureds with environmental risks and construction risks as well as in developing programs for
other specialty classes of risks.
During 2005, we changed our segment reporting to coincide with our strategic direction. In our segment reporting for
periods prior to the year ended December 31, 2005, we segregated our business into real estate operations, insurance operations and
other (which included realized gains and losses on investments and rescission expenses). We continue to segregate our business into
real estate operations, insurance operations and other, but the insurance operations segment is further classified into three
additional segments: excess and surplus lines, alternative risk transfer and runoff. The excess and surplus lines segment is further
classified into four business lines: environmental, construction, excess and surety. The alternative risk transfer segment is
further classified into two business lines: specialty programs and fully-funded. Prior year amounts have been reclassified to conform
to the current year presentation. Our real estate operations consist solely of our development of the Harbour Village property. See
Note 5 to our consolidated financial statements for more information on our segment reporting.
The following information is presented on the basis of accounting principles generally accepted in the United States of
America (“GAAP”) and should be read in conjunction with our consolidated financial statements and the related notes included
elsewhere in this report. All amounts and percentages are rounded.
The Company reported a 47% increase in net earnings for the three months ended June 30, 2006 to $4.6 million, or $0.62 per
diluted share, compared to $3.1 million, or $0.44 per diluted share, for the same period of 2005.
Financial highlights in the quarter included:
o Gross premiums written increased 13% to $63.4 million.
o Net premiums written increased 23% to $43.5 million.
o Net premiums earned increased 5% to $36.1 million.
o Net investment income increased 40% to $4.8 million.
o The combined ratio improved to 95.2% from 98.9%.
o Book value decreased to $16.77 per outstanding share and $16.14 per diluted share.
Revenues for the quarter totaled $40.9 million compared to $38.6 million in 2005 due to increased premiums earned and investment
income. Net premiums earned increased $1.5 million or 5% to $36.1 million, primarily from increased retention levels in our
construction and specialty program lines of business. The second quarter combined ratio improved 3.7 percentage points to 95.2%, and
is comprised of a loss ratio of 59.3% and an expense ratio of 35.9%. Net investment income increased 40% to $4.8 million as average
invested assets increased 23% to $429 million and the tax equivalent yield increased 68 basis points to 4.9%. Annualized return on
average equity for the quarter increased to 15.8% as compared to 11.7% for the same period of 2005.
For the six months ended June 30, 2006, net earnings improved 29% to $8.7 million, or $1.19 per diluted share compared to $6.8
million, or $.94 per diluted share for 2005. Total revenues of $80.6 million increased 2% due to increased net premiums earned and
net investment income. Net premiums earned increased 3% to $70.9 million due to increased retention levels in construction and
specialty program business lines. The year to date combined ratio is 97.3% and is comprised of a loss ratio of 61.1% and an expense
ratio of 36.2%. Net investment income increased 41% to $9.3 million due to greater invested assets and increased yields. Annualized
return on average equity for the six months ended June 30, 2006 improved to 13.4% from 12.5% for the same period of 2005
.
With the completion of a common equity offering of 3.2 million shares during the quarter, and a fully exercised over-allotment option
of 480,000 shares in July, the Company successfully raised $53.3 million of additional capital, net of offering expenses. The
offering, including the over-allotment, increased the number of shares outstanding by 54% to 10,525,966 shares. As of June 30, 2006,
book value per outstanding share decreased to $16.77 from $17.54 at December 31, 2005 due to an increase in unrealized losses on
investments and the increase in common shares outstanding.
The following table sets forth the Companys consolidated revenues:
Three Months Six Months Three Months Six Months
Ended June 30, Ended June 30, Ended June 30, Ended June 30
2005 2006 2005 2006 2005 to 2006 2005 to 2006
--------------- ------------- ------------ --------------- ------------- -------------
(Dollars in thousands)
Net premiums written:
Excess and Surplus Lines
Environmental $ 13,157 $ 11,737 $ 24,124 $ 19,808 (10.8)% (17.9)%
Construction 16,026 23,863 38,142 44,048 48.9 15.5
Excess 129 214 198 382 65.9 92.3
Surety 220 643 470 1,083 192.1 130.4
Total 29,532 36,457 62,934 65,321 23.4 3.8
Alternative Risk Transfer
Specialty Programs 5,514 5,922 8,784 9,705 7.4 10.5
Fully-Funded 395 1,129 528 1,317 185.9 149.4
Total 5,909 7,051 9,312 11,022 19.3 18.4
Runoff - - (35) - - (100.0)
Total net premiums
written $ 35,441 $ 43,508 $ 72,211 $ 76,343 22.8% 5.7%
========= ======== ======== ======== ====== ====
Net premiums earned:
Excess and Surplus Lines
Environmental $ 9,777 $ 9,040 $ 18,522 $ 17,360 (7.5)% (6.3)%
Construction 19,742 20,981 40,734 41,895 5.9 2.9
Excess 116 117 228 239 0.9 4.8
Surety 215 431 434 784 100.4 80.6
Total 29,850 30,569 59,918 60,278 2.4 0.6
Alternative Risk Transfer
Specialty Programs 4,480 4,935 8,789 9,677 10.2 10.1
Fully-Funded 204 572 293 940 180.5 220.8
Total 4,684 5,507 9,082 10,617 17.6 16.9
Runoff - - 155 - - (100.0)
Total net premiums earned
$34,534 $36,076 $69,155 $70,895 4.5% 2.5%
Net investment income 3,427 4,795 6,584 9,270 39.9 40.8
Net realized gains (losses) (96) (3) (44) 360 96.9 918.2
Real estate income 691 - 3,000 - (100.0) (100.0)
Other income 34 23 36 87 (32.4) 141.7
Total Revenues $ 38,590 $ 40,891 $78,731 $ 80,612 6.0% 2.4%
======== ======== ======= ======== ===== ====
The following table sets forth the components of the Company´s insurance operations GAAP combined ratio for the periods
indicated:
Three months ended Six months ended
June 30, June 30,
2005 2006 2005 2006
Insurance operations:
Loss and loss adjustment expense ratio 62.3% 59.3% 61.2% 61.1%
Expense ratio 36.6 35.9 35.5 36.2
Combined ratio......................... 98.9% 95.2% 96.7% 97.3%
===== ===== ===== =====
Three Months ended June 30, 2006 Compared to Three Months ended June 30, 2005
Net Premiums Earned
Excess and Surplus Lines>
Environmental. Net premiums earned decreased 7.5% to $9.0 million in the second quarter of 2006 compared to the same
quarter of 2005. Net premiums earned and written decreased primarily due to the Company´s decision to exit the New York market.
Net premiums written decreased 10.8% to $11.7 million in the second quarter of 2006 compared to $13.2 million for the same quarter of
2005. Gross written premiums increased 4% to $14.0 million in the second quarter of 2006 compared to $13.7 million for the same
quarter of 2005. The increase in premiums was driven primarily by a 7% increase in Prostar online premiums, and a 5% increase in the
environmental impairment liability premiums. These increases were offset in part by a 4% decrease in the middle market business.
Construction. Net premiums earned increased 5.9% to $20.9 million in the second quarter of 2006 compared to $19.7 million
for the same quarter of 2005. Net premiums written increased 48.9% to $23.9 million in the second quarter of 2006 compared to $16.0
million for the same quarter of 2005. Gross premiums written increased 24% to $25.9 million in the second quarter of 2006 compared
to $20.9 million for the same quarter of 2005. Gross premiums written, net premiums earned and net premiums written all increased
primarily due to an increase in premium writings in non-western states as a result of the Company´s geographic diversification
efforts. The Company´s geographic expansion beyond the western U.S. increased gross premiums written to $2.5 million from $760,000.
Overall, the Company has continued to maintain restrictive policy terms and conditions in its construction line.
Excess. Net premiums earned increased to $117,000 in the second quarter of 2006 compared to $116,000 for the same quarter of
2005. Net premiums written increased to $214,000 in the second quarter of 2006 compared to $129,000 for the same quarter of 2005.
Gross premiums written increased to $860,000 in the second quarter of 2006 compared to $650,000 for the same quarter of 2005. The
increase in premiums was a result of the Company adding a senior underwriting manager and an underwriting team that will be
responsible for growing the Company´s excess product, developing its non-construction general liability business and assisting in the
geographic diversification efforts in the construction line.
With the addition of new staff, the Company has expanded its excess liability product to write over other carriers´s primary
policies and to offer umbrella liability coverage. The Company also increased the available policy limits up to $5.0 million. The
Company´s excess product offering will be focused primarily in the construction and products liability area.
The non-construction general liability business will offer both primary and excess products to small to middle market
accounts. Certain high severity classes of risks such as invasive, medical products, pharmaceuticals, and neutraceuticals will be
avoided. Effective July 1,a new quota share reinsurance arrangement for the excess and non-construction business was completed with
a maximum retention of $1.0 million.
Surety. Net premiums earned increased to $431,000 in the second quarter of 2006 compared to $215,000 for the same period of
2005. Net premiums written increased to $643,000 in the second quarter of 2006 compared to $220,000 for the same period of 2005.
Gross written premiums increased to $1.1 million in the second quarter of 2006 compared to $436,000 for the same period of 2005. The
increase in surety premiums is primarily due to the Company´s focus on growing its environmental contractor surety business, a
currently underserved market segment. In line with the Compan´ss strategy to increase its retention levels, effective June 1, 2006,
the Company did not renew the quota share reinsurance treaty in its surety line.
Alternative Risk Transfer
Specialty Programs. Net premiums earned increased 10.2% to $4.9 million in the second quarter of 2006 compared to $4.5
million for the same quarter of 2005. Net premiums earned increased due to increased retentions. Net premiums written decreased 7.4%
to $5.5 million in the second quarter of 2006 compared to $5.9 million for the same quarter of 2005. Gross written premiums decreased
1.4% to $20.3 million in the second quarter of 2006 compared to $20.6 million for the same quarter of 2005. The decrease was
primarily attributable to premiums generated by a program that was not renewed in the fourth quarter of 2005. The Company added one
new program during the second quarter, a claims made miscellaneous errors & omissions liability program. This program is expected to
add approximately $1.5 million of gross written premiums during 2006 and $5.0 million in 2007. The Company assumes a 20% quota share
retention in the first $2.0 million layer of coverage on this program.
Fully Funded. Net premiums earned increased 180.5% to $572,000 in the second quarter of 2006 compared to $204,000 for the
same quarter of 2005. Net premiums written increased 185.9% to $1.1 million in the second quarter of 2006 compared to $394,000 in the
same quarter of 2005. Fee income earned in the quarter from the fully funded lines increased more than 17% to $374,000 in the second
quarter of 2006 compared to $320,000 in the same quarter of 2005.
Runoff
Both net earned and net premiums written decreased to zero for the quarter ended June 30, 2006 and 2005 respectively. The
Company put its assumed liability program and workers´ compensation business into runoff in 2004 because they did not meet the
Company´s profit or production expectations.
Net Investment Income
Net investment income increased 39.9% to $4.8 million in the quarter ended June 30, 2006 from $3.4 million in the quarter
ended June 30, 2005 due to higher levels of invested assets and an increased investment yield. Average invested assets increased to
$429.3 million in the quarter ended June 30, 2006 from $348.9 million in the same quarter of 2005. The tax equivalent yield
increased 68 basis points to 4.9%
Net Realized Gains and Losses
Net realized losses decreased to $3,000 in the second quarter of 2006 compared to $96,000 for the same period of 2005.
Sales of investments are generally the result of changing investment strategies to maximize investment income
.
Real Estate Income
The Company did not have any real estate income in the second quarter of 2006 compared to $691,000 in the second quarter of
2005. The reduction in real estate income was due to the substantial completion of the Harbour Village project. The final condominium
units at Harbour Village were sold and closed in the second quarter of 2005.
The Company does not engage in any real estate activities, except for the completion of the remainder of the Harbour Village
project, which includes the construction of a beach club and the management of remaining warranty claims on previously sold
condominium units. The Company does not expect to engage in any real estate activities in the future. The earnings and funds
generated from Harbour Village have been invested into the Company´s insurance operations.
Losses and Loss Adjustment Expenses
In the quarter ended June 30, 2006, the Company´s loss ratio decreased 3.0 points to 59.3% as compared to 62.3% for the same
period of 2005. This decrease was attributable to the absence of any adverse loss reserve development in the second quarter of 2006.
For the second quarter of 2005 adverse loss development was $1.1 million on discontinued lines.
Acquisition Expenses
Acquisition expenses are amounts that are paid to agents and brokers for the production of premiums for the Company offset
in part by the ceding commissions we retain from our reinsurers. For our program business, fees are typically earned through ceding
commissions and have the effect of lowering our acquisition expenses. Acquisition expenses also include amounts paid for premium
taxes to the states where the Company does business on an admitted basis. Acquisition expenses were $6.4 million in the quarter
ended June 30, 2006 compared to $6.9 million in the quarter ended June 30, 2005. Acquisition expenses as a function of net earned
premiums were 17.8% in the quarter ended June 30, 2006 and 19.9% in the quarter ended June 30, 2005. The decrease was primarily due
to increased retention levels.
Real Estate Expenses
Real estate expenses decreased to $102,000 for the second quarter of 2006 compared to $424,000 for the same period of 2005.
The decrease in real estate expenses was primarily due to substantial completion of the Harbour Village project.
Payroll and Other Expenses
Payroll and other expenses increased to $7.8 million in the second quarter of 2006 compared to $6.4 million for the same
period of 2005. Payroll expenses increased by $810,000 for the second quarter of 2006 compared to the second quarter of 2005,
resulting from an increased head count and costs associated with the expensing of the cost of stock options resulting from adoption
FAS 123R on January 1, 2006. FASB statement 123R governing the expensing of stock options that was implemented in the first quarter
of 2006. Expensing of options totaled $158,000 for the second quarter of 2006. Other expenses increased by $500,000 for the second
quarter of 2006 compared to the same quarter of 2005. This increase was primarily due to increased interest costs of $574,000
resulting from the issuance of trust preferred securities in November 2005.
Income taxes
Income taxes for the quarter ended June 30, 2006 totaled $600,000 for an effective tax rate of 11.5% compared to $292,000
for an effective tax rate of 8.5% for the same period of 2005. This increase in tax expense is a result of higher earnings for U.S.
operations in 2006 compared to 2005.
Six Months ended June 30, 2006 Compared to Six Months ended June 30, 2005
Net Premiums Earned
Excess and Surplus Lines
Environmental. Net premiums earned decreased 6.3% to $17.4 million in the first six months of 2006 as compared to $18.5
million for the same period in 2005. Net premiums written decreased 17.9% to $19.8 million compared to $24.1 million for the same
time period of 2005. Gross premiums written decreased 1.5% to $26.9 million for the first six months of 2006 compared to $27.3
million for the same period of 2005. The decline in premium writings was due primarily to three factors: (i) $1.8 million of
reinstatement reinsurance premiums resulting from the settlement of a prior year claim (ii) a decline in the Company´s middle-market
business due to increased competition and the overall changing pricing conditions in the market place; and (iii) an expected decline
in the Company´s book of environmental contractor and consultant premiums in the State of New York as a result of changes in the
underwriting process, which the Company believes will improve the ultimate profitability of the environmental business line. These
decreases were offset, in part, by strong growth in business submitted through the Company´s ProStar online rating and quoting system
(“ProStar“) and business from the Company´s environmental impairment liability products. The Company intends to focus its efforts on
expanding ProStar´s capabilities and increasing its market share of insuring environmental risks of small and medium-sized businesses.
Construction. Net premiums earned increased 2.9% to $41.9 million in the first six months of 2006 as compared to $40.7
million for the same time period in 2005. Net premiums written increased 15.5% to $44.0 million compared to $38.1 million for the
same time period of 2005. Gross premiums written increased 1.1% to $47.6 million for the first six months of 2006 compared to $47.0
million for the same period of 2005. The increase in net premiums written and net premiums earned was primarily due to increased
retentions and geographic diversification.
Excess. Net premiums earned increased 4.8% to $239,000 in the first six months of 2006 as compared to $228,000 for the same
time period in 2005. Net premiums written increased 92.3% to $382,000 in the first six months of 2006 compared to $198,000 for the
same time period of 2005. Gross premiums written increased 48.5% to $1.5 million for the first six months of 2006 compared to
$989,000 for the same time period of 2005. The increase in premiums was due to the Company adding a senior underwriting manager and
an underwriting team that will be responsible for growing the Company´s excess product, developing its non-construction general
liability business and assisting in the geographic diversification efforts in the construction line.
Surety. Net premiums earned s increased 80.6% to $784,000 in the first six months of 2006 as compared to $434,000 for the
same time period in 2005. Net premiums written increased 130.4% to $1.1 million compared to $470,000 for the same time period of
2005. Gross premiums written increased 109% to $2.0 million for the first six months of 2006 compared to $935,000 for the same period
of 2005. The increase in premiums is attributable to the Company focusing its growth efforts in environmental contractor surety. In
line with the Company´s strategy to increase its retention levels, effective June 1, 2006, the Company did not renew the quota share
reinsurance treaty in its surety line.
Alternative Risk Transfer
Specialty Programs. Net premiums earned increased 10.1% to $9.7 million for the first six months of 2006 as compared to
$8.8 million for the same time period in 2005. Net premiums written increased 10.5% to $9.7 million compared to $8.8 million for the
same time period of 2005. This increase is primarily due to increased retention levels on selected programs allowing the Company the
opportunity to increase earnings potential from underwriting profits. Gross premiums written decreased 15.4% to $36.6 million for the
first six months of 2006 compared to $43.3 million. The decrease in gross premiums written is attributable to premiums generated by
a program that was not renewed in the fourth quarter of 2005.
Fully Funded. Net premiums earned increased 220.8% to $940,000 for the first six months of 2006 as compared to $293,000
for the same time period in 2005. Net premiums written increased 149.4% to $1.3 million compared to $528,000 for the same time period
of 2005. Fee income earned for the first six months of 2006 increased 110.9% to $867,000 compared to $411,000 for the same period of
2005.
Runoff. Both net premiums earned and net premiums written decreased to zero for the six months ended June 30, 2006 compared to
$155,000 and negative $35,000 for the same period of 2005, respectively
.
Net Investment Income
Net investment income increased 40.8% to $9.3 million in the six months ended June 30, 2006 from $6.6 million in the six
months ended June 30, 2005 due to higher levels of invested assets and increased investment yield. Average invested assets increased
to $425.1 million from $342.5 million. The tax equivalent yield increased 68 basis points to 4.9%.
Net Realized Gains and Losses
Net realized gains and losses changed from a net loss of $44,000 in the six months ended June 30, 2005 to a net gain of
$360,000 for the six months ended June 30, 2006. Sales of investments are generally the result of changing investment strategies to
maximize investment income. In the first quarter of 2006, the Company rebalanced its common stock investment portfolio, in accordance
with its investment policies, which resulted in $215,000 of net realized gains. The remainder of net realized gains were from sales
of fixed income securities.
Real Estate Income
The Company did not have any real estate income in the first six months of 2006 compared to $3.0 million in the
first six months of 2005. The reduction in real estate income was due to the substantial completion of the Harbour Village project.
The final condominium units at Harbour Village were sold and closed in the second quarter of 2005.
Losses and Loss Adjustment Expenses
For the six months ended June 30, 2006, the Company´s loss ratio was 61.1% compared to 61.2% for the same period of 2005.
For the six months ended June 30, 2006 the Company experienced an adverse loss development of $688,000 compared to $1.1 million for
the six months ended June 30, 2005. The 2006 reserve strengthening primarily was related to the settlement of a prior year New York
claim which required $1.0 million of reserve strengthening offset in part by favorable development in the Company´s environmental
business line. The reserve strengthening for the six months ended June 30, 2005 was on the Company´s runoff lines of business.
Acquisition Expenses
Policy acquisition expenses decreased to $13.4 million for the six months ended June 30, 2006 from $14.0 million for the six
months ended June 30, 2005. Acquisition expenses as a function of net earned premiums were 18.9% for the six months ended June 30,
2006 compared to 20.3% for the six months ended June 30, 2005. The decrease was primarily due to increased retention levels.
Real Estate Expenses
Real estate expenses decreased to $170,000 for the first six months of 2006 compared to $2.7 million for the same period of
2005. The decrease in real estate expenses was primarily due to the substantial completion of the Harbour Village project.
Payroll and Other Expenses
Payroll and other expenses increased to $14.9 million for the first six months of 2006 compared to $11.9 million for the
same period of 2005. Payroll expenses increased by $1.4 million for the for the first six months of 2006 compared to 2005, resulting
from an increased head count and costs associated with FASB statement 123R the expensing of stock options which was implemented in
the first quarter of 2006. Expensing of options totaled $299,000 for the first six months of 2006. Other expenses increased by $1.6
million for the first six months of 2006 compared to 2005. This increase was due to increased interest costs of $1.2 million
resulting from the issuance of trust preferred securities in November 2005.
Minority Interest Expense
Minority interest expense is associated with our non-subsidiary affiliate, American Safety RRG. In the past, given the
historical loss position of American Safety RRG, a valuation allowance on its net deferred tax assets had been established. For the
first six months of 2005, American Safety RRG included in income the reduction of its $554,000 valuation allowance as judgment about
the realizability of American Safety RRG´s deferred tax assets change due to its profitability. As a result, the Company´s minority
interest expense for the six months ended June 30, 2005 was $539,000. In first six months of 2006, American Safety RRG included in
expense $764,000 related to the settlement of a prior year claim. Net of taxes, the claim affected American Safety RRG “s net
earnings by $505,000. As a result, minority interest expense for the six months ended June 30, 2006 was a benefit of $512,000.
Income taxes
Income taxes for the six months ended June 30, 2006 totaled $616,000 for an effective tax rate of 6.6% compared to $543,000
for an effective tax rate of 7.5% for the same period of 2005. The primary reason for the lower tax rate for the six months ended
June 30, 2006 was due to the settlement of a prior year New York claim in the first quarter of 2006, which resulted in a $2.8 million
pretax charge. The majority of this settlement was incurred by the Company “s U.S. subsidiaries.
Equity
The Company´s total equity at June 30, 2006 was $168.5 million compared to $118.4 million as at December 31, 2005. During
the second quarter of 2006 the Company raised an additional $46.0 million net of expenses through a public stock offering. The
Company issued $3.2 million shares as a result of this transaction. In July 2006, the Company´s underwriters fully exercised their
over-allotment option, purchasing 480,000 additional shares of common shares at $15.50 per share. This resulted in the Company
receiving an additional $7.0 million net of expenses.
Liquidity and Capital Resources
We meet our cash requirements and finance our growth principally through cash flows generated from operations and the issuance
of securities. Our primary sources of short-term cash flow are premium writings and investment income. Short-term cash requirements
relate to claims payments, reinsurance premiums, commissions, salaries, employee benefits and other operating expenses.
In June 2006 we issued 3,200,000 shares of our common stock in an underwriting public offering at a price of $15.50 per share.
Net of underwriting discounts and expenses we recevied $46.0 million. We intend to use the net proceeds from the sale of the Common
Shares in this offering to implement our business and growth strategy by (i) increasing the capital and surplus base of our
insurance subsidiaries in order to expand in the markets where we currently operate and to retain additional premium on the policies
we currently underwrite and (ii) use the balance of the net proceeds for general corporate purposes, including potential
acquisitions. The precise amounts and timing of expenditures of the net proceeds will depend on our funding requirements and the
availability of other capital resources. Previously in November 2005, we issued $25.0 million in trust preferred securities.
Due to the uncertainty regarding the timing and amount of settlements of unpaid claims, our future liquidity requirements may
vary; therefore, we have structured our investment portfolio maturities to help mitigate the variations in those factors. We believe
our current cash flows are sufficient for the short-term needs of our business and its invested assets are sufficient for the
intermediate term needs of our insurance business.
Net cash provided from operations was $30.8 million for the six months ended June 30, 2006 and $30.9 million for the same
period of 2005.
Our ability to pay future dividends to shareholders will depend, to a significant degree, on the ability of our subsidiaries to
generate earnings from which to pay dividends. The jurisdictions in which we and our 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. Given our expected growth and the capital requirements associated with that growth, we do not anticipate
paying dividends on our common shares in the near future.
We substantially completed the Harbour Village project in 2005. The estimated completion cost for the remainder of the
Harbour Village project is approximately $600,000 and represents amounts needed to construct a beach club and manage remaining
warranty claims on closed condominium units. An accrual of this amount has been established. Management believes that cash on hand
will meet the remaining liquidity needs of Harbour Village.
Off Balance Sheet Arrangements
See "Off-Balance Sheet Arrangements" in Item 7 of the Company´s Form 10-K for the year ended December 31, 2005.
Contractual Obligations
See "Contractual Obligations" in Item 7 of the Company´s Form 10-K for the year ended December 31, 2005.
Income Taxes
We are incorporated under the laws of Bermuda and, under current Bermuda law, are not obligated to pay any taxes in Bermuda
based upon income or capital gains. We have received an undertaking from the Minister of Finance in Bermuda pursuant to the
provisions of The Exempted Undertakings Tax Protection Act 1966, which exempts us and our 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. We, exclusive of our United States subsidiaries, do not
consider ourselves to be engaged in a trade or business in the United States and accordingly, do not expect to be subject to direct
United States income taxation. Our U.S. subsidiaries are subject to taxation in the United States.
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. Our reported combined ratio for our insurance operations may not provide an accurate
indication of our overall profitability. For instance, depending on our mix of business, the combined ratio may fluctuate from time
to time and may not reflect the overall profitability of our insurance operations. Our combined ratio excludes certain holding
company expenses as well as real estate and rescission expenses.
Forward-Looking Statements
Certain statements in this report are forward-looking statements within the meaning of U.S. securities laws. You can
generally identify these statements by the use of forward-looking terminology, such as “may,” “will,” “expect,” “estimate,”
“anticipate,” “believe,” “target,” “plan,” “project” or “continue” or the negatives or other variations or similar terminology.
Forward-looking statements relate to, among other things:
o general economic conditions and other factors, including prevailing interest rate levels and stock market performance, which
may affect our ability to sell our insurance products and services, the market value of our investments and the lapse rate
and profitability of our policies;
o the availability and terms of future strategic acquisitions;
o our expenditures for the contributions of new programs;
o our future liquidity requirements
Actual results may differ materially from the results suggested by the forward-looking statements for a number of reasons
including those described in Part II-Item 1A – “Risk Factors”. We have made these statements based on our plans and analyses of our
Company, our business and the insurance industry as a whole. Although we believe that the assumptions underlying the forward-looking
statements contained herein are reasonable, any of the assumptions could over time prove to be inaccurate and, therefore, there can
be no assurance that the forward-looking statements included in this report will themselves prove to be accurate. In light of the
significant uncertainties inherent in the forward-looking statements included herein, the inclusion of this information should not be
regarded as a representation by us or any other person that our objectives will be achieved. We expressly disclaim any obligation to
update any forward-looking statement unless required by law.
See Part II-Item 1A-“Risk Factors”.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
For a in-depth discussion of the Company´s market risks, see Management´s Discussion and Analysis of Quantitative and
Qualitative Disclosures about Market Risk in Item 7A of the Company´s Form 10-K for the year ended December 31, 2005 and Note 4 to
the Consolidated Financial Statements herein.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company´s management, with the participation of the Company´s Chief Executive Officer and Chief Financial Officer, after
evaluating the effectiveness of the Company´s disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) as of
the end of the period covered by this Report, concluded that, as of such date, the Company´s disclosure controls and procedures were
adequate and effective to ensure that material information relating to the Company (including consolidated subsidiaries) would be
made known to them.
Changes in Internal Control
There were no changes in the Company´s internal control over financial reporting identified in connection with the
evaluation described above that occurred during the Company´s last fiscal quarter that has materially affected, or is reasonably
likely to materially affect, the Company´s internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
We, through our subsidiaries, are routinely a party to pending or threatened litigation or arbitration disputes in the
normal course of or related to our business. Based upon information presently available, in view of legal and other defenses
available to our subsidiaries, management does not believe that any pending or threatened litigation or arbitration disputes will
have any material adverse effect on our financial condition or operating results, except for the matters discussed below or in “Legal
Proceedings” in Item 3 of our Form 10-K for the fiscal year ended December 31, 2005 and as discussed herein.
Warranty Reinsurance Litigation. We are a defendant in several cases, liquidation actions and reinsurance claims,
collectively identified as the “National Warranty ” issue. American Safety Reinsurance, Ltd. (“American Safety Re”) was an
excess-of-loss reinsurer through a reinsurance treaty with National Warranty Risk Retention Group (“National Warranty”) that provided
insurance coverage to automobile dealerships and other providers that were obligors on automobile warranty contracts they sold to
consumers. National Warranty filed for liquidation in the Cayman Islands (the location of its legal creation). This liquidation had
a cascading effect, including the subsequent filing of bankruptcy by various obligors of vehicle service contracts insured by
National Warranty. As a result, there are potentially over one million vehicle service contracts that are not being honored by the
obligors.
The liquidators of National Warranty have made claims of $25.4 million pursuant to two reinsurance contracts issued by
American Safety Re to National Warranty in 2002 and 2003. In addition, consumers of vehicle service contracts have sued American
Safety Re, and the trial court certified that case as a class action, although we are appealing that determination. Lastly, claims
have been made by sellers/obligors of the vehicle service contracts who were insured by National Warranty. There are five
sellers/obligors cases against us and other professional services providers, including other reinsurers, relating to National
Warranty, with claims in excess of $2.6 million. All of these claims are based on fraud and/or theories of contractual violations.
We continue to believe that American Safety Re has valid defenses to the claims including, among others, that it had commuted its
obligations under reinsurance treaties, its liability is limited to the amount of coverage provided under the policies, which varies
based on premium and loss ratios, and that most of the claimants cannot make claims directly against it. We have an accrual in place
that we believe will be sufficient to satisfy any potential liability relating to the outcome of these matters.
Griggs et al. v. American Safety Reinsurance, Ltd. et al., Case No. 2003-31509, Circuit Court, Seventh Judicial District,
Volusia County, Florida. Seven plaintiffs filed suit against us and three of our subsidiaries seeking to recover a $2.1 million loan
made by the plaintiffs in 1986 to Ponce Marina, Inc., the former owner of the Harbour Village property. The plaintiffs claimed that
we were responsible for the repayment of the loan, with interest. The plaintiffs propounded four theories of liability and the court
granted judgment for us on three of the theories. However, the court entered judgment on August 10, 2005 against us for
approximately $3.4 million, which includes interest, on the remaining theory. The court held that we, as a condition of our loan,
required Ponce Marina, Inc. to demand that the plaintiffs enter into an agreement with Ponce Marina, Inc., to the detriment of their
loans and to our benefit, and thus, we had entered into a quasi-contract with the plaintiffs to repay their loan with interest.
We filed an appeal in December 2005. Based on the merits of the case and likelihood of ultimate payment, we have not
established an accrual for the decision.
Sizemore v. American Safety Insurance Services, Inc. et al., Case No 2005-31704, Circuit Court, Seventh Judicial District,
Volusia County, Florida. American Safety Insurance Services, Inc., its parents and a number of its affiliates are defendants in a
suit brought by an individual who contends that defendants are liable to him for a debt owed to him by Ponce Marina, Inc. in the
amount of $400,000 plus interest and costs. The plaintiff also intends to seek class certification on behalf of himself and 21 other
unnamed plaintiffs for the case on these claims in excess of $1.7 million plus interest and costs. On January 27, 2006, the trial
court dismissed the case. The plaintiff was permitted to file an amended complaint on or before March 6, 2006. The plaintiff filed
an amended complaint on March 7, 2006, alleging various theories of recovery, some of which were also alleged in the Griggs case. On
May 4, 2006, the trial court dismissed the case and gave the plaintiff 20 days to file an amended complaint. The plaintiff filed a
third amended complaint and our third Motion to Dismiss will be heard on August 22, 2006. We continue to vigorously defend this
case, as we believe that the case is without merit. Based on the merits of the case and the likelihood of ultimate payment, we have
not established an accrual for the decision.
Item 1A. Risk Factors
Risk Factors Relating to American Safety Insurance
A downgrade in our A.M. Best rating or increased capital requirements could impair our ability to sell insurance policies.
Some policyholders are required to obtain insurance coverage from insurance companies that have an “A-” (Excellent) rating
or higher from A.M. Best, the most widely recognized insurance company rating agency. Additionally, many producers are prohibited by
their internal guidelines from representing insurance companies that are rated below “A-” (Excellent) by A.M. Best. In November
2005, A.M. Best reaffirmed its rating of “A” (Excellent), with a “negative” outlook on a group basis of American Safety Insurance,
including our two U.S. insurance subsidiaries, our Bermuda reinsurance subsidiary and our U.S. non-subsidiary risk retention group
affiliate. An “A” (Excellent) rating is assigned to companies that have, in the opinion of A.M. Best, an excellent ability to meet
their ongoing obligations to policyholders. A.M. Best assigned a “negative” outlook to the rating in September 2004 in response to
our reserve strengthening in the second quarter of 2004 because of a concern by A.M. Best with the underwriting results from our core
business lines and the potential for further reserve strengthening in the future. A.M. Best reaffirmed this rating and outlook in
November 2005. If A.M. Best requires us to increase our capital in order to maintain our rating and we are unable to raise the
required amount of capital to be contributed to our insurance subsidiaries, A.M. Best may downgrade us.
A.M. Best assigns ratings that represent an independent opinion of an insurer´s ability to meet its obligations to
policyholders that is of concern primarily to policyholders, insurance brokers and agents and its rating and outlook should not be
considered an investment recommendation. Because A.M. Best continually monitors companies with regard to their ratings, our ratings
could change at any time, and any downgrade of our current rating could impair our ability to sell insurance policies and,
ultimately, our financial condition and operating results.
The exclusions and limitations in our policies may not be enforceable.
We draft the terms and conditions of our excess and surplus lines policies to manage our exposure to expanding theories of
legal liability in business lines such as asbestos abatement, construction defect, environmental and professional liability. Many of
the policies we issue include exclusions or other conditions that define and limit coverage. In addition, many of our policies limit
the period during which a policyholder may bring a claim under the policy, which period in many cases is shorter than the statutory
period under which these claims can be brought against our policyholders. While these exclusions and limitations help us assess and
control our loss exposure, it is possible that a court or regulatory authority could nullify or void an exclusion or limitation, or
legislation could be enacted modifying or barring the use of these exclusions and limitations, particularly with respect to evolving
business lines such as construction defect. This could result in higher than anticipated losses and loss adjustment expenses by
extending coverage beyond our underwriting intent or increasing the number or size of claims, which could have a material adverse
effect on our operating results. In some instances, these changes may not become apparent until some time after we have issued the
insurance policies that are affected by the changes. As a result, the full extent of liability under our insurance contracts may not
be known for many years after a policy is issued.
The risks we underwrite are concentrated in relatively few industries.
We focus much of our underwriting on specialty risks in the construction and environmental remediation industries. For the
year ended December 31, 2005, approximately 61.6% of our gross premiums written were in these two industries. Accordingly, our
operating results could be more exposed than our more diversified competitors to unfavorable changes in business, economic or
regulatory conditions, changes in federal, state or local environmental standards and establishment of legal precedents affecting
these industries. Similarly, a significant incident impacting one of these industries that has the effect of increasing claims
generally (or their settlement value) could negatively impact our financial condition and operating results.
We may respond to market trends by expanding or contracting our underwriting activities, which may cause our financial results to be
volatile.
Although we perform substantial due diligence and risk analysis before entering into a new business line or insuring a new
type of risk, and carefully assess the impact of exiting a business line, changing business lines inherently has more risk than
remaining in the same business lines over a period of time. Because we actively seek to expand or contract our capacity in the
markets we serve in response to factors such as loss experience and premium production, our operating results may experience material
fluctuations.
Our industry is highly competitive and we may lack the financial resources to compete effectively.
We believe that competition in the specialty insurance markets that we target is fragmented and not dominated by one or more
competitors. We face competition from several companies, such as insurance companies, reinsurance companies, underwriting agencies,
program managers and captive insurance companies. Many of our competitors are significantly larger and possess greater financial,
marketing and management resources than we do. We compete on the basis of many factors, including coverage availability, claims
management, payment terms, premium rates, policy terms, types of insurance offered, overall financial strength, financial strength
ratings and reputation. If any of our competitors offers premium rates, policy terms or types of insurance that are more competitive
than ours, we could lose business. If we are unable to compete effectively in the markets in which we operate or to
establish a competitive position in new markets, our financial condition and operating results would be adversely impacted
.
Our actual incurred losses may be greater than reserves for our losses and loss adjustment expenses.
Insurance companies are required to maintain reserves to cover their estimated liability for losses and loss adjustment
expenses with respect to both reported and incurred but not reported (“IBNR”) claims. Reserves are estimates at a given time
involving actuarial and statistical projections of what we expect to be the cost of the ultimate resolution and administration of
claims. These estimates are based on facts and circumstances then known, predictions of future events, estimates of future trends,
projected claims frequency and severity, potential judicial expansion of liability precedents, legislative activity and other
factors, such as inflation. A full actuarial analysis of our reserves is performed on an annual basis, which may include reserve
studies, rate studies and regulatory opinions.
Notwithstanding these efforts, the establishment of appropriate reserves for losses and loss adjustment expenses reserves is
an inherently uncertain process, particularly in the environmental remediation industry, construction industry and some of the other
industries for which we write policies where extensive historical data may not exist or where the risks insured are long-tail in
nature, in that claims that have occurred may not be reported to us for long periods of time. For instance, there is little
empirical data for residential construction defect claims and hence, traditional actuarial analysis may be inapplicable or less
reliable, which may cause our reserve estimates for this business line to be more volatile. Due to these uncertainties, our ultimate
losses could materially exceed our reserves for losses and loss adjustment expenses, especially in business lines where we intend to
increase our risk retention. For example, during the last two years, we increased our loss reserves as a result of litigation
matters specifically related to our construction lines policies and policies written on runoff lines, which lowered our net earnings
and shareholders´ equity during these periods.
To the extent that reserves for losses or loss adjustment expenses are estimated in the future to be inadequate, we would
have to increase our reserves and incur charges to earnings in the periods in which the reserves are increased. In addition,
increases in reserves may also cause additional reinsurance premiums to be payable to our reinsurers in the form of reinstatement
premiums. These increases in reserves and reinstatement premiums would adversely impact our financial condition and operating
results. To the extent any individual case reserves prove to be inadequate, our financial condition and operating results would be
adversely affected. For more information on our losses and loss adjustment expenses, see “Management”s Discussion and Analysis of
Financial Condition and Results of Operations.”
If we are unable to obtain reinsurance on favorable terms, our ability to write new polices would be adversely affected.
Reinsurance is a contractual arrangement under which one insurer (the ceding company) transfers to another insurer (the
reinsurer) a portion of the liabilities that the ceding company has assumed under an insurance policy it has issued. Our business
continues to involve ceding portions of the risks that we underwrite to reinsurers. The availability and cost of reinsurance are
subject to prevailing market conditions that are beyond our control and are factors that could materially impact our financial
condition and operating results. There is no certainty that reinsurance will continue to be available in the form or in the amount
that we require or, if available, at an affordable cost. The availability of reinsurance is dependent not only on reinsurers´
reactions to the specific risks that we underwrite, but also events that impact the overall reinsurance industry, such as the recent
hurricanes in 2005. If we are unable to maintain or replace our reinsurance, our total loss exposure would increase and, if we were
unwilling or unable to assume that increase in exposure, we would be required to mitigate the increase in exposure by writing fewer
policies or writing policies with lower limits or different coverage.
We may be unable to recover amounts due from our reinsurers.
While reinsurance contractually obligates the reinsurer to reimburse us for a portion of our losses, it does not relieve us
of our primary financial liability to our insureds. If our reinsurers are either unwilling or unable to pay some or all of the
claims made by us on a timely basis, we bear the financial exposure. As a result, we are subject to credit risk with respect to our
reinsurers.
We purchase reinsurance from reinsurers we believe to be financially sound. We have written reinsurance security procedures
that establish financial requirements for reinsurance companies that must be met prior to reinsuring any of the business we write.
Among these requirements is a stipulation that reinsurance companies must have an A.M. Best rating of at least “A-” (Excellent) and a
financial size category of Class VIII or greater at the time of writing any reinsurance unless sufficient collateral has been
provided at the time we enter into our reinsurance agreement. A financial size category of Class VIII is assigned by A.M. Best to
companies with adjusted policyholder surplus of $100 million to $250 million, which, on a statutory basis of accounting, is the
amount remaining after all liabilities, including loss reserves, are subtracted from all admitted assets. We have also established
an internal reinsurance security committee, consisting of members of senior management, which meets quarterly to discuss and approve
reinsurance security. To protect against our reinsurers´ inability to satisfy their contractual obligations to us, our reinsurance
contracts stipulate a collateral requirement for reinsurance companies that do not meet the financial strength and size requirements
described above. These collateral requirements can be met through the issuance of unconditional letters of credit, the establishment
and funding of escrow accounts for our benefit or cash advances paid into a segregated account. In the event collateral is not
sufficient, there is no certainty that these reinsurers will be able to provide additional capital.
We are subject to risks related to litigation.
From time to time, we are subject to lawsuits and other claims arising out of our insurance and real estate operations. We
have responded to the lawsuits we face and, although the outcome of these lawsuits cannot be predicted, we believe that there are
meritorious defenses and intend to vigorously contest these claims. Adverse judgments in one or more of these lawsuits could require
us to change aspects of our operations in addition to paying significant damage amounts. In addition, the expenses related to these
lawsuits may be significant. Lawsuits can have a material adverse effect on our business and operating results, particularly where
we have not established an accrual, or a sufficient accrual, for damages or expenses. For information on the material litigation in
which we are involved, see “ Part II Other Information ? Legal Proceedings.”
We rely on independent insurance agents and brokers to market our products.
We market most of our insurance products through approximately 230 independent insurance agents and brokers, which we refer
to as producers. These producers are not obligated to promote our products and may sell competitors products. Our profitability
depends, in part, on the marketing efforts of these producers and on our ability to offer insurance products and services while
maintaining financial strength ratings that meet the requirements of our producers and their customers. The failure or inability of
producers to market our insurance products successfully would have a material adverse effect on our business and operating results.
We are subject to credit risk in connection with producers that market our products.
In accordance with industry practice, when the insured pays premiums for our policies to producers for payment over to us,
these premiums are considered to have been paid and, in most cases, the insured is no longer liable to us for those amounts, whether
or not we actually have received the premiums. Consequently, we assume a degree of credit risk associated with the producers with
whom we choose to do business. To date, we have not experienced any material losses related to these credit risks.
Our growth strategy is dependent on several factors, the failure to achieve any one of which may impair our ability to expand our
operations or may prevent us from operating profitably.
Our growth strategy includes expanding in our existing markets, entering new geographic markets, creating relationships with
new producers and developing new insurance products. In order to generate this growth, we are subject to various risks, including
risks associated with our ability to:
o identify insurable risks not adequately served by the standard insurance market;
o maintain adequate levels of capital;
o obtain reinsurance on favorable terms;
o obtain necessary regulatory approvals when writing on an admitted basis;
o attract and retain qualified personnel to manage our expanded operations; and
o maintain our financial strength ratings.
Our inability to achieve any of the above objectives could affect our growth strategy and may cause our business and operating
results to suffer.
If we lose key personnel or are unable to recruit qualified personnel, our ability to implement our business strategies could be
delayed or hindered.
Our future success will depend, in part, upon the efforts of our executive officers and other key personnel. Our ability to
recruit and retain key personnel will depend upon a number of factors, such as our results of operations, business prospects and the
level of competition then prevailing in the market for qualified personnel. The loss of any of these officers or other key personnel
or our inability to recruit key personnel could prevent us from fully implementing our business strategies and could materially
adversely affect our business, financial condition and operating results.
We routinely evaluate opportunities to expand our business through acquisitions of other companies or business lines. There are many
risks associated with acquisitions that we may be unable to control.
We evaluate potential acquisition opportunities as a means to grow our business. There are a number of risks attendant to
any acquisition. These risks include, among others, the difficulty in integrating the operations and personnel of an acquired
company; potential disruption of our ongoing business; inability to successfully integrate acquired systems and insurance programs
into our operations; maintenance of uniform standards, controls and procedures; possible impairment of relationships with employees
and insureds of an acquired business as a result of changes in management; and that the acquired business may not produce the level
of expected profitability. As a result, the impact of any acquisition on our future performance may not be consistent with original
expectations, and may impair our business, financial condition and operating results.
We may require additional capital in the future, which may not be available or may only be available on unfavorable terms.
Our future capital requirements depend on many factors, including our ability to write profitable new business, retain
existing customers and establish premium rates and reserves at levels sufficient to cover losses and related expenses. Many factors
will affect our capital needs and their amount and timing, including our growth and profitability, our claims experience and the
availability of reinsurance, as well as possible acquisition opportunities, market disruptions and other unforeseeable developments.
If we have to raise additional capital, equity or debt financing may not be available at all or may be available only on terms that
are unfavorable to us. In the case of equity financings, dilution to our shareholders could result. In any case, those securities
may have rights, preferences and privileges that are senior to those of the Common Shares offered hereby. In the case of debt
financings, we may be subject to covenants that restrict our ability to freely operate our business. If we cannot obtain adequate
capital on favorable terms or at all, we may not have sufficient funds to implement our operating plans and our business, financial
condition and operating results could be adversely affected.
Changes in the value of our investment portfolio may have a material impact on our operating results.
We derive a significant portion of our net income from our invested assets. As a result, our operating results depend in
part on the performance of our investment portfolio. Our investment portfolio is subject to various risks, including:
o credit risk, which is the risk that our invested assets will decrease in value due to unfavorable changes in the financial
prospects or a downgrade in the credit rating of an entity in which we have invested;
o interest rate risk, which is the risk that our invested assets may decrease due to changes in interest rates;
o equity price risk, which is the risk that we will incur economic loss due to a decline in equity prices; and
o duration risk, which is the risk that our invested assets may not adequately match the duration of our insurance liabilities.
Our investment portfolio is comprised mostly of fixed-income securities. We do not hedge our investments against interest
rate risk and, accordingly, changes in interest rates may result in fluctuations in the value of these investments.
Our investment portfolio is managed by a professional investment management firm in accordance with detailed investment
guidelines established by our Board of Directors that stress diversification of risks, conservation of principal and liquidity. If
our investment portfolio is not appropriately matched with our insurance and reinsurance liabilities, we may be forced to liquidate
investments prior to their maturity at a significant loss in order to cover these liabilities. This might occur, for instance, in
the event of a large or unexpected claim or series of claims. Large investment losses could significantly decrease our asset base,
thereby affecting our ability to underwrite new business.
We rely upon the successful and uninterrupted functioning of our information technology, information processing and telecommunication
systems.
Our business is highly dependent upon the successful and uninterrupted functioning of our information technology,
information processing and telecommunications systems. We rely on these systems to support our marketing operations, process new and
renewal business, provide customer service, make claims payments and facilitate premium collections and policy cancellations. These
systems also enable us to perform actuarial and other modeling functions necessary for underwriting and rate development. We have a
highly trained staff that is committed to the development and maintenance of these systems. However, the failure of these systems
could interrupt our operations or materially impact our ability to evaluate and write new business. Because our information
technology, information processing and telecommunications systems interface with and depend on third party systems, we could
experience service denials if demand for this service exceeds capacity or if the third party systems fail or experience
interruptions. If sustained or repeated, a system failure or service denial could result in a deterioration of our ability to write
and process new and renewal business and provide customer service or compromise our ability to pay claims in a timely manner. There
can be no guarantee that these systems can effectively support our continued growth. Additionally, some of our systems are not fully
redundant, and our disaster recovery planning does not account for all eventualities, which could adversely affect our business.
Risk Factors Related to Taxation
Our Bermuda operations may be subject to U.S. tax.
American Safety Insurance, its reinsurance subsidiary, American Safety Reinsurance (“American Safety Re”), and its
segregated account captive, American Safety Assurance Ltd. (“American Safety Assurance”), are organized in Bermuda. American Safety
Insurance, American Safety Re and American Safety Assurance are operated in a manner such that none should be subject to U.S. tax
(other than U.S. excise tax on insurance and reinsurance premium income attributable to insuring or reinsuring U.S. risks and U.S.
withholding tax on some types of U.S. source investment income) because none of these companies should be treated as engaged in a
trade or business within the U.S. (and, in the case of American Safety Re and American Safety Assurance, to be doing business through
a permanent establishment within the U.S.). However, because there is considerable uncertainty as to the activities that constitute
being engaged in a trade or business within the U.S. (and what constitutes a permanent establishment under the income tax treaty
between the U.S. and Bermuda (the “Bermuda Treaty”) as well as the entitlement of American Safety Re and American Safety Assurance to
treaty benefits), there can be no assurances that the U.S. Internal Revenue Service (the “IRS”) will not contend successfully that
American Safety Insurance, American Safety Re and/or American Safety Assurance is engaged in a trade or business in the U.S. (or that
American Safety Re or American Safety Assurance is carrying on business through a permanent establishment in the U.S.). If any of
American Safety Insurance, American Safety Re or American Safety Assurance were considered to be engaged in a trade or business in
the U.S., it could be subject to U.S. corporate income taxes and additional branch profits taxes on the portion of its earnings
effectively connected to such U.S. business, in which case its operating results could be materially adversely affected.
If you acquire 10% or more of the Common Shares, you may be subject to taxation under the “controlled foreign corporation”(“CFC”)
rules.
Under certain circumstances, a “U.S. 10% shareholder” (as defined in “Certain Tax Considerations Certain U.S. Federal Income
Tax Considerations Tax Treatment of Shareholders Classification as a Controlled Foreign Corporation”) of a foreign corporation that
is a CFC for an uninterrupted period of 30 days or more during a taxable year must include in gross income for U.S. federal income
tax purposes that U.S. 10% shareholder's “Subpart F Income,” even if the “Subpart F Income” is not distributed to that U.S. 10%
shareholder. “Subpart F Income” of a foreign insurance corporation typically includes foreign personal holding company income (such
as interest, dividends and other types of passive income), as well as insurance and reinsurance income (including underwriting and
investment income) attributable to the insurance of risks situated outside the CFC´s country of incorporation.
We believe that because of the dispersion of our Common Share ownership, provisions in our organizational documents that
limit voting power and other factors, no U.S. person who acquires Common Shares directly or indirectly through one or more foreign
entities should be required to include our “Subpart F Income” in income under the CFC rules of the Internal Revenue Code of 1986, as
amended (the “Code”). It is possible, however, that the IRS could challenge the effectiveness of these provisions and that a court
could sustain that challenge, in which case your investment could be materially adversely affected.
U.S. persons who hold Common Shares may be subject to U.S. federal income taxation at ordinary income rates on their proportionate
share of our “related party insurance income” (“RPII”).
If the RPII of American Safety Re or American Safety Assurance were to equal or exceed 20% of its gross insurance income in
any taxable year and direct or indirect insureds (and persons related to those insureds) own directly or indirectly through entities
20% or more of the voting power or value of American Safety Re or American Safety Assurance, then a U.S. person who owns any Common
Shares (directly or indirectly through foreign entities) on the last day of the taxable year would be required to include in its
income for U.S. federal income tax purposes that person´s pro rata share of that company´s RPII for the entire taxable year,
determined as if that RPII were distributed proportionately only to U.S. persons at that date regardless of whether that income is
distributed. In addition, any RPII that is includible in the income of a U.S. tax-exempt organization may be treated as unrelated
business taxable income. Neither American Safety Re nor American Safety Assurance expects gross RPII to equal or exceed 20% of its
gross income for 2005 or subsequent years, and neither expects its direct or indirect insureds (including related persons) to
directly or indirectly hold 20% or more of its voting power or value, but we cannot be certain that this will be the case because
some of the factors which determine the extent of RPII may be beyond our control. If these thresholds are met or exceeded, and if
you are an affected U.S. person, your investment could be materially adversely affected. The RPII provisions, however, have never
been interpreted by the courts or the U.S. Treasury Department (the “Treasury Department”) in final regulations, and regulations
interpreting the RPII provisions of the Code exist only in proposed form. It is not certain whether these regulations will be
adopted in their proposed form or what changes or clarifications might ultimately be made thereto or whether any of those changes, as
well as any interpretation or application of RPII by the IRS, the courts or otherwise, might have retroactive effect. The Treasury
Department has authority to impose, among other things, additional reporting requirements with respect to RPII. Accordingly, the
meaning of the RPII provisions and the application thereof to us is uncertain.
U.S. persons who dispose of Common Shares may be subject to U.S. federal income taxation at the rates applicable to dividends on a
portion of their gain, if any.
Section 1248 of the Code provides that if a U.S. person sells or exchanges stock of a foreign corporation and that person
owned, directly, indirectly through certain foreign entities or constructively, 10% or more of the voting power of the corporation at
any time during the five-year period ending on the date of disposition when the corporation was a CFC, any gain from the sale or
exchange of the shares will be treated as a dividend to the extent of that person´s share of the CFC´s earnings and profits
(determined under U.S. federal income tax principles) during the period that person held the shares and while the corporation was a
CFC (with certain adjustments). We believe that because of the dispersion of our Common Share ownership, provisions in our
organizational documents that limit voting power and other factors, no U.S. shareholder of American Safety Insurance, other than
Frederick C. Treadway or Treadway Associates, L.P., or their successors, heirs or assigns, should be treated as owning (directly,
indirectly through foreign entities or constructively) 10% or more of the total voting power of American Safety Insurance. As a
result, American Safety Insurance should not be a CFC and Section 1248 of the Code, as applicable under the general CFC rules, should
not apply to dispositions of our shares. It is possible, however, that the IRS could challenge these provisions in our
organizational documents and that a court could sustain that challenge. To the extent American Safety Insurance is a CFC, a 10% U.S.
Shareholder may in certain circumstances be required to report a disposition of Common Shares by attaching IRS Form 5471 to the U.S.
federal income tax or information return that it would normally file for the taxable year in which the disposition occurs.
For purposes of Section 1248 of the Code and the requirement to file Form 5471, special rules apply with respect to a U.S.
person´s disposition of shares of a foreign insurance company that has RPII during the five-year period ending on the date of the
disposition. In general, if a U.S. person disposes of shares in a foreign insurance corporation in which U.S. persons own 25% or
more of the shares (even if the amount of gross RPII is less than 20% of the corporation´s gross insurance income and the ownership
of its shares by direct or indirect insureds and related persons is less than the 20% threshold), any gain from the disposition will
generally be treated as a dividend to the extent of that person´s shares of the corporation´s undistributed earnings and profits that
were accumulated during the period that person owned the shares (whether or not those earnings and profits are attributable to
RPII). As a result of the special rules and proposed Treasury Department regulations, the IRS may assert that Section 1248 of the
Code and the requirements to file Form 5471 apply to dispositions of Common Shares because American Safety Insurance is engaged in
the insurance business indirectly through subsidiaries.
U.S. persons who hold Common Shares will be subject to adverse tax consequences if American Safety Insurance is considered to be a
Passive Foreign Investment Company (a “PFIC”) for U.S. federal income tax purposes.
If American Safety Insurance is considered a PFIC for U.S. federal income tax purposes, a U.S. person who owns Common Shares
will be subject to adverse tax consequences, including subjecting the investor to a greater tax liability than might otherwise apply
and subjecting the investor to tax on amounts in advance of when tax would otherwise be imposed, in which case your investment could
be materially adversely affected. In addition, if American Safety Insurance were considered a PFIC, upon the death of any U.S.
individual owning Common Shares, that individual´s heirs or estate would not be entitled to a “step-up” in the basis of the shares
which might otherwise be available under U.S. federal income tax laws. American Safety Insurance does not believe that it is, and
does not expect to become, a PFIC for U.S. federal income tax purposes. No assurance can be given, however, that American Safety
Insurance will not be deemed a PFIC by the IRS. If American Safety Insurance were considered a PFIC, it could have material adverse
tax consequences for an investor that is subject to U.S. federal income taxation. There are currently no regulations regarding the
application of the PFIC provisions to an insurance company. New regulations or pronouncements interpreting or clarifying these rules
may be forthcoming. We cannot predict what impact, if any, that guidance would have on an investor that is subject to U.S.federal income taxation.
American Safety Insurance, American Safety Re and American Safety Assurance may become subject to Bermuda taxes in the future.
Bermuda currently imposes no income tax on corporations. American Safety Insurance, American Safety Re and American Safety
Assurance have received an assurance from the Bermuda Minister of Finance, under The Exempted Undertakings Tax Protection Act 1966 of
Bermuda, as amended (the "Tax Protection Act"), that if any legislation is enacted in Bermuda that would impose tax computed on
profits or income, or computed on any capital asset, gain or appreciation, or any tax in the nature of estate duty or inheritance
tax, then the imposition of that tax will not be applicable to American Safety Insurance, American Safety Re or American Safety
Assurance until March 28, 2016. No assurance can be given that American Safety Insurance, American Safety Re or American Safety
Assurance will not be subject to any Bermuda tax after that date.
The impact of Bermuda“s letter of commitment to the Organization for Economic Cooperation and Development to eliminate harmful tax
practices is uncertain and could adversely affect American Safety Insurance´s, American Safety Re“s and American Safety Assurance“s
tax status in Bermuda.
The Organization for Economic Cooperation and Development (the “OECD”) has published reports and launched a global dialogue
among member and non-member countries on measures to limit harmful tax competition. These measures are largely directed at
counteracting the effects of tax havens and preferential tax regimes in countries around the world. In the OECD´s report dated
April 18, 2002 and updated as of June 2004, Bermuda was not listed as an uncooperative tax haven jurisdiction because it had
previously committed to eliminate harmful tax practices and to embrace international tax standards for transparency, exchange of
information and the elimination of any aspects of the regimes for financial and other services that attract business with no
substantial domestic activity. We are not able to predict what changes will arise from the commitment or whether these changes will
subject us to additional taxes.
Risk Factors Relating to the Property and Casualty Insurance Industry
Policy pricing in our industry is cyclical, and our financial results are impacted by that cyclicality.
The property and casualty insurance industry has historically been a cyclical industry consisting of both “soft market”
periods and “hard market” periods. During soft market periods, insurers tend to be more aggressive in writing policies and
competitive in the pricing of those policies. Hard market periods are characterized by shortages of underwriting capacity and high
premium rates. Beginning in 2000, we believe our industry experienced a hardening market, reflected by increasing rates and more
restrictive coverage terms. These trends appeared to have started slowing in 2004. We believe the industry is now experiencing a
softening market, where pricing generally has become more competitive and policy terms and conditions have become less restrictive.
Therefore, we may not be able to achieve our growth and profitability goals. Because this cyclicality is due in large part to the
economy, the particular needs of insureds and the actions of our competitors, we cannot predict the timing or duration of changes in
the insurance market cycle.
Our industry is subject to significant and increasing regulatory scrutiny.
Recently, the insurance industry has been subject to a significant and increasing level of scrutiny by various regulatory
bodies, including state attorneys general and insurance departments, concerning certain practices within the insurance industry.
These practices include the receipt of contingent commissions by insurance brokers and agents from insurance companies and the extent
to which this compensation has been disclosed, bid rigging and related matters. As a result of these and related matters, there have
been a number of recent revisions to existing, or proposals to modify or enact new, laws and regulations regarding the relationship
between insurance companies and producers. Any changes or further requirements that are adopted by federal, state or local
governments could adversely affect our business and operating results.
We operate in a heavily regulated industry, and existing and future regulations may constrain how we conduct our business and could
impose liabilities and other obligations upon us.
Insurance Regulation. Our primary insurance and reinsurance subsidiaries, as well as our non-subsidiary risk retention group
affiliate, are subject to regulation under applicable insurance statutes of the jurisdictions in which they are domiciled or licensed
and write insurance. This regulation may limit our ability to, or speed with which we can, effectively respond to market
opportunities and may require us to incur significant annual regulatory compliance expenditures. Insurance regulation is intended to
provide safeguards for policyholders rather than to protect shareholders of our insurance companies. Insurance regulation relates to
authorized business lines, capital and surplus requirements, types and amounts of investments, underwriting limitations, trade
practices, policy forms, claims practices, mandated participation in shared markets, loss reserve adequacy, insurer solvency,
transactions with related parties, changes in control, payment of dividends and a variety of other financial and nonfinancial
components of an insurance company´s business. For instance, our insurance subsidiaries are subject to risk-based capital, or RBC,
restrictions. RBC is a method of measuring the amount of capital appropriate for an insurance company to support its overall
business in light of its size and risk profile. The ratio of a company´s actual policyholder surplus to its minimum capital
requirements will determine whether any state regulatory action is required. State regulatory authorities use the RBC formula to
identify insurance companies which may be undercapitalized and may require further regulatory attention. Each of our domestic
insurance subsidiaries satisfies its minimum capital requirements and none of them has been identified by any regulatory authority as
being undercapitalized or requiring further regulatory attention. A number of legislative initiatives currently are under
consideration by Congress. Any changes in insurance laws and regulations could materially adversely affect our operating results.
We are unable to predict what additional laws and regulations, if any, affecting our business may be promulgated in the future or how
they might be interpreted.
Dividend Regulation. Like other insurance holding companies, American Safety Insurance Holdings, Ltd. relies on dividends
from its insurance subsidiaries to be able to pay dividends and fulfill its other financial obligations. The payment of dividends by
these subsidiaries and other intercompany transactions are subject to regulatory restrictions and will depend on the surplus and
earnings of these subsidiaries. As a result, insurance holding companies may not be able to receive dividends from their
subsidiaries at times and in amounts sufficient to pay dividends and fulfill their other financial obligations. Additionally, as a
Bermuda holding company, American Safety Insurance Holdings, Ltd. is subject to Bermuda regulatory constraints that will affect its
ability to pay dividends on the Common Shares and to make other payments. Under the Companies Act, 1981 of Bermuda (the “Companies
Act”), insurance holding companies may declare or pay a dividend out of distributable reserves only if it has reasonable grounds to
believe that it is, and would after the payment be, able to pay liabilities as they become due and if the realizable value of its
assets would thereby not be less than the aggregate of its liabilities and issued share capital and share premium accounts. We do
not anticipate paying cash dividends on the Common Shares in the near future.
Environmental Regulation. Environmental remediation activities and other environmental risks are heavily regulated by both
federal and state governments. Environmental regulation is continually evolving, and changes in the regulatory patterns at federal
and state levels may have a significant effect upon potential claims against our insureds and us. These changes also may affect the
demand for the types of insurance offered by and through us and the availability or cost to us of reinsurance. We are unable to
predict what additional laws and regulations, if any, affecting environmental remediation activities and other environmental risks
may be promulgated in the future, how they might be applied, and what their impact might be.
Risk Factors Relating to the Common Shares
Our stock price may be subject to significant fluctuations.
The stock price for the Common Shares may fluctuate in response to a number of factors, including:
o quarterly variations in our operating results;
o changes in expectations about our future operating results;
o changes in financial estimates and recommendations by securities analysts concerning us or the insurance industry generally;
o operating and stock price performance of other companies that investors may deem comparable;
o news reports relating to our business and trends in our markets;
o changes in the laws and regulations affecting our business;
o acquisitions and financings by us or others in the insurance industry; and
o sales, or the possibility of future sales, of substantial amounts of Common Shares by our executive officers,
directors or principal shareholders, or the perception that these sales will or could occur.
Common Shares held by our executive officers and directors, as well as any Common Shares held by the selling shareholders not subject
to this offering are subject to lock-up agreements for a period of 90 days after the date of the underwriting agreement. See
“Underwriting.”
The trading market for the Common Shares is thin, which could result in illiquidity of an investment in the Common Shares.
The Common Shares trade on the New York Stock Exchange. The average daily trading volume of the 52 weeks ended August 11,
2006 was approximately 23,000 shares. While the Common Shares to be sold in this offering will increase the number of shares
available for trading, a more active trading market may not develop and, if it does develop, it may not be sustained, which could
result in illiquidity of an investment in the Common Shares.
Limitations on share ownership and voting rights might prevent a third party from acquiring us.
Our Bye-Laws provide that no shareholder may vote more than 9.5% of the outstanding Common Shares, regardless of the
percentage of the Common Shares a shareholder owns. This restriction does not apply to Frederick C. Treadway (one of our founders)
or Treadway Associates, L.P., a limited partnership owned by Mr. Treadway and his children, including their respective heirs,
successors and assigns. Additionally, this provision may only be amended with the consent of Mr. Treadway or Treadway Associates,
L.P.
Our Bye-Laws contain other provisions that may be viewed as preventing a third party from acquiring us. Specifically, our
Bye-Laws prohibit an “interested shareholder” of American Safety Insurance from either directly or indirectly being a party to or
taking any action in connection with any “business combination” with American Safety Insurance for a period of five years following
the date that person first became an “interested shareholder,” unless (a) the “business combination” was approved by a prior
resolution of the “continuing directors” of our Board of Directors or (b) the “business combination” was approved by a prior
resolution of at least 66(2)/3% of the outstanding voting shares of American Safety Insurance other than those voting shares
beneficially held by an “interested shareholder.” Under these provisions, Mr. Treadway and Treadway Associates L.P., and their
respective heirs, successors and assigns, are not interested shareholders. Our Bye-Laws require the affirmative vote of at least
66(2)/3% of the outstanding voting shares to amend, repeal or adopt any provision inconsistent with the foregoing provision. In
addition, our Bye-Laws provide for a classified or “staggered” Board of Directors.
These provisions could have the effect of discouraging a prospective acquirer from making a tender offer or otherwise
attempting to acquire us. To the extent that these provisions discourage takeover attempts, they could deprive shareholders of
opportunities to realize takeover premiums for their shares or could depress the market price of the Common Shares. Further, any
acquisition of us would require the prior approval of the Bermuda Monetary Authority. In addition, under Delaware and Oklahoma law,
as a result of our ownership of American Safety Casualty Insurance Company and American Safety Indemnity Company, respectively, no
person may obtain 10% or more of our voting shares without the prior approval of the insurance departments of those states. For more
information on the limitations on our share ownership and the ability to exercise voting power on our shares, see “Description of the
Common Shares.”
The risk factors presented above are all of the ones we consider material as of the date of this filing. However, they are
not the only risks facing our company. Additional risks not presently known to us, or which we consider immaterial, may also
adversely affect us. There may be risks that a particular investor views differently from us, and our analysis may be incorrect. If
any of the risks that we face actually occurs, our business, financial condition and operating results could be materially adversely
affected and could differ materially from any possible results suggested by any forward-looking statements that we have made or might
make. In that case, the trading price of the Common Shares could decline, and you could lose part or all of your investment. We
expressly disclaim any obligation to update or revise any forward-looking statements, whether as a result of new information, future
events or otherwise, except as required by law.
Item 2. Unregistered Sales of Equity 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 Company held its annual meeting of shareholders on June 19, 2006. Cody W. Birdwell, Frank D. Lackner, and Thomas W.
Mueller were reappointed as directors of the Company. Steven L. Groot was elected a director of the Company. BDO Seidman,
LLP was ratified as the Company´s independent registered accounting firm.
Item 5. Other Information
None.
Item 6. Exhibits
The following exhibits are filed as part of this report:
Exhibit No. Description
3.1 Memorandum of Association of American Safety Insurance Holdings, Ltd.
(incorporated by reference to Exhibit 3.1 to Amendment No.1 to the Registration
Statement on Form S-1 of American Safety Insurance Holdings, Ltd. (Registration
No.333-42749) as filed with the SEC on January 27, 1998) and the Certificate of
Incorporation of Change of Name
3.2 Bye-Laws of American Safety Insurance Holdings, Ltd. (incorporated by reference
to Exhibit 3.2 to Amendment No. 1 to the Registration Statement on Form S-1 of
American Safety Insurance Holdings, Ltd. (Registration No.333-42749) as filed
with the SEC on January 27, 1998)
11 Computation of Earnings Per Share
31.1 Certification Pursuant to § 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification Pursuant to § 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification Pursuant to § 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification Pursuant to § 906 of the Sarbanes-Oxley Act of 2002
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 August 2006.
American Safety Insurance Holdings, Ltd.
By: /s/ Stephen R. Crim
Stephen R. Crim
President and Chief Executive Officer
By: /s/ William C. Tepe
William C. Tepe
Chief Financial Officer
(Principal Financial Officer)
Exhibit 11
American Safety Insurance Holdings, Ltd. and subsidiaries
Computation of Earnings Per Share
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
2005 2006 2005 2006
Basic:
Earnings available to common
shareholders........................ $ 3,138,754 $ 4,627,134 $ 6,785,097 $ 8,728,133
============ ============ ============ ============
Weighted average common shares
outstanding........................ 6,718,269 7,106,393 6,754,670 6,935,489
=========== ============ =========== =========
Basic earnings per common shares ... $ 0.47 $ 0.65 $ 1.00 $ 1.26
============ =========== ============ ===========
Diluted:
Earnings available to common
shareholders.......................... $ 3,138,754 $ 4,627,134 $ 6,785,097 $ 8,728,133
============ =========== ============ ============
Weighted average common shares
outstanding............................ 6,718,269 7,106,393 6,754,670 6,935,489
Weighted average common shares
equivalents associated with options.... 400,382 391,613 442,421 393,469
Total weighted average common
shares................................. 7,118,651 7,498,006 7,197,091 7,328,958
============ =========== =========== ============
Diluted earnings per common
shares.............................. $ 0.44 $ 0.62 $ 0.94 $ 1.19
============ =========== =========== =============
Exhibit 31.1
Certification Pursuant to § 302 of the Sarbanes-Oxley Act of 2002,
Stephen R. Crim, certify that:
1) I have reviewed this report on Form 10-Q of American Safety Insurance Holdings, Ltd.;
2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in
all material respects the financial condition, results of operations and cash flows of the registrant as of, and for,
the periods presented in this report;
4) The registrant ´s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period
in which this report is being prepared;
(b) Evaluated the effectiveness of the registrant´s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant´s internal control over financial reporting that occurred during the
registrant´s most recent fiscal quarter (the registrant´s fourth fiscal quarter in the case of an annual report)
that has materially affected, or is reasonably likely to materially affect, the registrant´s internal control
over financial reporting; and
5) The registrant´s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant´s auditors and the audit committee of the registrant´s board of directors
(or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant´s ability to record, process, summarize and
report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant´s internal controls over financial reporting.
Date: August 14, 2006
/s/Stephen R. Crim
Stephen R. Crim
President and Chief Executive Officer
Exhibit 31.2
Certification Pursuant to § 302 of the Sarbanes-Oxley Act of 2002
I, William C. Tepe, certify that:
1) I have reviewed this report on Form 10-Q of American Safety Insurance Holdings, Ltd.;
2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in
all material respects the financial condition, results of operations and cash flows of the registrant as of, and for,
the periods presented in this report;
4) The registrant´s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Evaluated the effectiveness of the registrant´s disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant´s internal control over financial reporting that occurred
during the registrant´s most recent fiscal quarter (the registrant´s fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect, the registrant´s internal control
over financial reporting; and
5) The registrant´s other certifying officer(s) and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the registrant´s auditors and the audit committee of the
registrant´s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant´s ability to record, process, summarize and
report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant´s internal controls over financial reporting.
Date: August 14, 2006
/s/William C. Tepe
William C. Tepe
Chief Financial Officer
Exhibit 32.1
Certification Pursuant to § 906 of the
Sarbanes-Oxley Act of 2002
The undersigned, as the Chief Executive Officer of American Safety Insurance Group, Ltd., certifies that, to the best of his
knowledge and belief, the Quarterly Report on Form 10-Q for the period ended June 30, 2006, which accompanies this certification
fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and the information contained in the
periodic report fairly presents, in all material respects, the financial condition and results of operations of American Safety
Insurance Group, Ltd. at the dates and for the periods indicated. The foregoing certification is made pursuant to § 906 of the
Sarbanes-Oxley Act of 2003 (18 U.S.C. §1350) and shall not be relied upon for any other purpose.
Date: August 14, 2006 /s/ Stephen R. Crim
Stephen R. Crim
Chief Executive Officer
A signed original of this written statement required by § 906, or other document authenticating, acknowledging, or otherwise
adopting the signature that appears in typed form within the electronic version of this written statement required by § 906, has been
provided to American Safety Insurance Holdings, Ltd. and will be retained by American Safety Insurance Holdings, Ltd. and furnished
to the Securities and Exchange Commission or its staff upon request.
The information in this Exhibit 32.1 shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act
of 1934, as amended, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933, except as shall
be expressly set forth by specific reference in such filing.
Exhibit 32.2
Certification Pursuant to § 906 of the
Sarbanes-Oxley Act of 2002
The undersigned, as the Chief Financial Officer of American Safety Insurance Group, Ltd., certifies that, to the best of his
knowledge and belief, the Quarterly Report on Form 10-Q for the period ended June 30, 2006, which accompanies this certification
fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and the information contained in the
periodic report fairly presents, in all material respects, the financial condition and results of operations of American Safety
Insurance Group, Ltd. at the dates and for the periods indicated. The foregoing certification is made pursuant to § 906 of the
Sarbanes-Oxley Act of 2003 (18 U.S.C. §1350) and shall not be relied upon for any other purpose.
Date: August 14, 2006 /s/ William C. Tepe
William C. Tepe
Chief Financial Officer
A signed original of this written statement required by § 906, or other document authenticating, acknowledging, or otherwise
adopting the signature that appears in typed form within the electronic version of this written statement required by § 906, has been
provided to American Safety Insurance Holdings, Ltd. and will be retained by American Safety Insurance Holdings, Ltd. and furnished
to the Securities and Exchange Commission or its staff upon request.
The information in this Exhibit 32.1 shall not be deemed "filed" for purposes of Section 18 of the Securities Exchange Act
of 1934, as amended, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933, except as shall
be expressly set forth by specific reference in such filing.