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American Safety Insurance Holdings 10-Q 2008

Documents found in this filing:

  1. 10-Q
  2. Ex-11
  3. Ex-31
  4. Ex-31
  5. Ex-32
  6. Ex-32
  7. Ex-32


UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON D.C. 20549

______________________

 

FORM 10 Q

 

Ö QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE

ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED June 30, 2008

 

“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.)

 

 

 

 

 

 

The Boyle Building, 2nd Floor

31 Queen Street

Hamilton, HM 11Bermuda

(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 __X__

Non-accelerated filer ______

Smaller reporting company ______

 

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, 2008 was 10,507,426.




 

 

AMERICAN SAFETY INSURANCE HOLDINGS, LTD.

 

FORM 10-Q

 

TABLE OF CONTENTS

 

 

 

 

PART I – FINANCIAL INFORMATION

 

 

 

Page

Item 1.

Financial Statements

3

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

20

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

31

Item 4.

Controls and Procedures

31

 

 

 

 

PART II – OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

32

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

45

Item 3.

Defaults Upon Senior Securities

45

Item 4.

Submission of Matters to a Vote of Security Holders

45

Item 5.

Other Information

45

Item 6.

Exhibits

46

 

 

 

 

 

 

 

- 2-

 



 

 

 

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

American Safety Insurance Holdings, Ltd. and Subsidiaries

Consolidated Balance Sheets

 

 

June 30,

2008

(Unaudited)

December 31,

2007

 

Assets

 

 

 

 

 

Investments:

 

 

 

 

Fixed maturity securities available for sale,

at fair value

 

 

 

$529,844,253

 

 

 

$ 529,569,518

Common stock, at fair value

 

25,846,608

 

25,393,664

Preferred stock, at fair value

 

4,936,334

 

5,793,165

Short-term investments, at fair value

 

36,870,403

 

56,454,862

 

 

 

 

 

Total investments

 

597,497,598

 

617,211,209

 

 

 

 

 

Cash and cash equivalents

 

6,684,738

 

12,859,681

Accrued investment income

 

6,371,834

 

5,771,983

Premiums receivable

 

36,561,035

 

22,851,520

Ceded unearned premiums

 

31,993,498

 

30,950,752

Reinsurance recoverable

 

195,374,341

 

190,299,574

Deferred income taxes

 

11,164,201

 

9,767,816

Deferred policy acquisition costs

 

20,153,022

 

16,831,357

Property, plant and equipment, net

 

9,768,962

 

9,216,015

Goodwill

 

9,501,227

 

2,316,629

Other assets

 

   34,331,783

 

   15,932,723

 

 

 

 

 

Total assets

 

$959,402,239

 

$ 934,009,259

 

 

 

 

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

Unpaid losses and loss adjustment expenses

 

$537,756,066

 

$ 504,779,132

Unearned premiums

 

122,058,897

 

111,459,142

Ceded premiums payable

 

3,453,370

 

15,368,967

Deferred revenues

 

1,028,592

 

1,074,238

Accounts payable and accrued expenses

 

7,530,431

 

10,004,721

Deferred rent

 

1,705,950

 

1,780,213

Funds held

 

14,907,732

 

18,509,621

Loans payable

 

38,868,871

 

38,645,936

Minority interest

 

     2,034,557

 

     1,986,844

 

 

 

 

 

Total liabilities

 

729,344,466

 

703,608,814

 

 

 

 

 

Continued on Page 4

 

 

- 3-




 

 

Continued from Page 3

 

 

 

 

June 30,

2008

(Unaudited)

 

December 31,

2007

 

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 30,000,000 shares; issued and outstanding at June 30, 2008, 10,494,562 and December 31, 2007, 10,703,457

 

 

 

104,946

 

 

 

107,034

Additional paid-in capital

 

103,012,534

 

106,238,456

Retained earnings

 

131,991,282

 

119,181,362

Accumulated other comprehensive income, net

 

    (5,050,989)

 

     4,873,593

Total shareholders’ equity

 

230,057,773

 

230,400,445

 

 

 

 

 

Total liabilities and shareholders’ equity

 

$ 959,402,239

 

$ 934,009,259

 

 

 

 

 

Book value per share

 

$21.92

 

$ 21.53

Diluted book value per share

 

$21.43

 

$ 20.81

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to consolidated financial statements (unaudited).

 

 

 

- 4-




 

 

American Safety Insurance Holdings, Ltd. and Subsidiaries

 

Consolidated Statements of Operations

(Unaudited)

 

 

Three Months Ended

June 30,

 

Six Months Ended

June 30,

 

2008

2007

 

2008

2007

 

Revenues:

 

 

 

 

 

Direct premiums earned

$47,902,587 

$ 55,279,604 

 

$ 94,270,971 

$110,401,913 

Assumed premiums earned

14,418,773 

1,652,652 

 

22,112,488 

3,165,152 

Ceded premiums earned

(14,179,741)

(17,522,310)

 

  (30,192,870)

(35,798,872)

Net premiums earned

48,141,619 

39,409,946 

 

   86,190,589 

77,768,193 

 

 

 

 

 

 

Net investment income

7,316,408 

7,481,950 

 

14,643,033 

14,705,895 

Net realized gains (losses)

290,728 

(26,730)

 

795,207 

(7,772)

Fee income

791,288 

748,293 

 

1,518,251 

1,263,918 

Other income

       15,629 

        15,191 

 

          30,209 

       32,176 

 

Total revenues

56,555,672 

47,628,650 

 

103,177,289 

93,762,410 

Expenses:

 

 

 

 

 

 

Losses and loss adjustment expenses

30,379,945 

23,622,343 

 

52,409,830 

47,573,627 

Acquisition expenses

11,961,664 

7,727,666 

 

21,037,657 

13,845,903 

Payroll and related expenses

5,605,202 

4,521,848 

 

10,245,601 

8,676,245 

Other underwriting expenses

2,770,195 

2,082,479 

 

5,931,814 

4,996,335 

Interest expense

823,616 

821,759 

 

1,655,205 

1,638,166 

Corporate and other expenses

(1,883,857)

922,594 

 

(1,308,154)

1,436,380 

Minority interest

        14,342 

          8,987 

 

      152,003 

       124,088 

Total expenses

49,671,107 

39,707,676 

 

90,123,956 

  78,290,744 

 

 

 

 

 

 

Earnings before income taxes

6,884,565 

7,920,974 

 

13,053,333 

15,471,666 

Income taxes

          95,274 

        649,198 

 

         242,870 

      1,107,790 

Net earnings

$ 6,789,291 

$ 7,271,776 

 

$ 12,810,463 

$ 14,363,876 

 

 

 

 

 

 

Net earnings per share:

 

 

 

 

 

Basic

$ 0.64

$ 0.69

 

$ 1.21

$ 1.36

Diluted

$ 0.63

$ 0.66

 

$ 1.18

$ 1.31

 

 

 

 

 

 

Weighted average number of shares outstanding:

 

 

 

 

 

Basic

10,543,397 

10,605,708 

 

10,619,552 

10,580,917 

Diluted

10,803,446 

10,974,296 

 

10,896,841 

10,952,738 

 

 

 

 

 

 

 

See accompanying notes to consolidated financial statements (unaudited).

 

 

- 5-

 

 




 

 

American Safety Insurance Holdings, Ltd. and Subsidiaries

Consolidated Statements of Cash Flow

(Unaudited)

 

 

 

Six Months Ended

June 30,

 

 

2008

 

2007

Cash flow from operating activities:

Net earnings

 

 

 

$ 12,810,463 

 

 

 

$ 14,363,876  

Adjustments to reconcile net earnings to net cash provided by operating activities:

 

 

 

 

 

 

Realized (gains) losses on sale of investments

 

(795,207)

 

7,772  

Depreciation expense

 

2,074,017 

 

1,438,847  

Stock based compensation expense

 

516,626 

 

268,773  

Amortization of deferred acquisition costs, net

 

(3,321,665)

 

(3,562,540) 

Amortization of premiums on investments

 

232,965 

 

250,767  

Deferred income taxes

 

447,097 

 

(137,379) 

Change in operating assets and liabilities

 

 

 

 

Accrued investment income

 

(599,851)

 

(1,073,824) 

Premiums receivable

 

(13,709,515)

 

(5,832,255) 

Reinsurance recoverable

 

(5,074,766)

 

9,915,313  

Ceded unearned premiums

 

(1,042,746)

 

5,907,543  

Funds held

 

(3,601,889)

 

1,385,329  

Unpaid losses and loss adjustment expenses

 

32,976,934 

 

27,114,105  

Unearned premiums

 

10,599,755 

 

(292,821)

Ceded premiums payable

 

(11,915,597)

 

878,674  

Deferred revenues

 

(45,646)

 

1,564  

Accounts payable and accrued expenses

 

(2,668,421)

 

(3,453,881)

Deferred rent

 

(74,263)

 

324,116  

Other, net

 

(16,318,595)

 

  (1,845,758)

Net cash provided by operating activities

 

 

       489,696 

 

45,658,221 

Cash flow from investing activities:

 

 

 

 

Purchases of fixed maturities

 

$ (98,703,670)

 

$(118,038,130)

Purchases of common stock

 

(2,778,035)

 

(5,169,648)

Proceeds from sale of fixed maturities

 

90,364,053 

 

92,543,259 

Proceeds from sale of common stock

 

150,663 

 

169,891 

Consideration paid for acquired companies

 

(8,927,052)

 

Decrease in short-term investments

 

19,584,459 

 

5,776,314  

Purchase of fixed assets

 

(2,622,631)

 

    (2,775,510)

Net cash used in investing activities

 

 

(2,932,213)

 

(27,493,824)

 

 

 

 

 

 

 

Continued on page 7

 

 

- 6-




 

 

Continued from page 6

 

 

 

Six Months Ended

June 30,

 

 

2008

 

2007

Cash flow from financing activities:

 

 

 

 

 

 

 

 

 

Repurchase of common stock

 

$(4,106,947)

 

$                  - 

Proceeds from exercised stock options

 

      374,521 

 

1,130,912

Net cash (used in) provided by financing activities

 

  (3,732,426)

 

1,130,912

 

 

 

 

 

Net (decrease) increase in cash and cash equivalents

 

(6,174,943)

 

19,295,309

Cash and cash equivalents at beginning of period

 

12,859,681 

 

11,293,296

 

 

 

 

 

Cash and cash equivalents at end of period

 

$ 6,684,738 

 

$ 30,588,605

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

Income taxes paid

 

$ 89,185 

 

$ 5,000

Interest paid

 

$ 1,562,768 

 

$ 1,565,006

 

 

 

 

 

Non-cash activity (1)

 

 

 

 

Fixed asset additions

 

$                -

 

$ 1,409,340

Deferred rent

 

$                -

 

$ 1,409,340

 

 

 

 

 

(1) Represents tenant build out allowance and future reduction in rent over the term of the lease.

 

 

 

 

 

 

 

 

 

 

See accompanying notes to consolidated financial statements (unaudited).

 

 

 

- 7-

 



 

 

American Safety Insurance Holdings, Ltd. and Subsidiaries

Consolidated Statements of Comprehensive Earnings

(Unaudited)

 

 

 

 

Three Months Ended

June 30,

 

Six Months Ended

June 30,

 

 

2008

 

2007

 

2008

 

2007

 

 

 

 

 

 

 

 

 

Net earnings

 

$  6,789,291 

 

$  7,271,776   

 

$  12,810,463 

 

$  14,363,876 

Other comprehensive income

before income taxes:

 

 

 

 

 

 

 

 

Unrealized losses on securities available-for-sale, net of minority interest of $(119,689) and $(110,455) for the three months ended June 30, 2008 and 2007, respectively, and $(44,807)and $(94,508) for the six months ended June 30, 2008 and 2007, respectively.

 

(11,461,710)

 

(6,374,553)

 

(10,851,597)

 

(4,984,218)

 

 

 

 

 

 

 

 

 

Unrealized (losses) gains on hedging transactions

 

15,284 

 

(22,533)

 

(104,304)

 

(96,446)

 

 

 

 

 

 

 

 

 

Reclassification adjustment for realized losses included in net earnings

 

     (290,728)

 

 

       27,111 

 

     (795,207)

 

 

         8,153 

 

 

 

 

 

 

 

 

 

Total other comprehensive loss before taxes

 

(11,737,154)

 

(6,369,975)

 

(11,751,108)

 

(5,072,511)

Income tax benefit related to items of other comprehensive income, net of minority interest of $95,290 and $(32,505) for the three months ended June 30, 2008 and 2007 respectively, and $(24,169) and $(25,022) for the six months ended June 30, 2008 and 2007, respectively.

 

 

   (1,976,371)

 

 

 

 

 

(1,235,218)

 

(1,826,526)

 

 

 

 

 

(1,044,847)

Other comprehensive loss net of income taxes

 

(9,760,783)

 

(5,134,757)

 

(9,924,582)

 

(4,027,664)

Total comprehensive (loss) earnings

 

$(2,971,492)

 

2,137,019 

 

2,885,881 

 

$  10,336,212 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to consolidated financial statements (unaudited).

 

 

- 8-

 



 

 

American Safety Insurance Holdings, Ltd. and Subsidiaries

Notes to Consolidated Financial Statements

 

June 30, 2008

(Unaudited)

 

Note 1 - Basis of Presentation

 

The accompanying consolidated financial statements of American Safety Insurance Holdings, Ltd. (“American Safety Insurance”) 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, 2008 may not be indicative of the results that may be expected for the fiscal year ending December 31, 2008. 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 on Form 10-K of the Company for the fiscal year ended December 31, 2007.

 

The unaudited interim consolidated financial statements include the accounts of American Safety Insurance, each of its subsidiaries and American Safety RRG. All significant intercompany balances have been eliminated.

 

Certain balance sheet and statement of operations items have been reclassified for the periods ending June 30, 2007 and December 31, 2007. The presentation is consistent with the presentation for the three and six months ended June 30, 2008 and did not result in any impact to net earnings or shareholders’ equity.

 

Note 2 - Nature of Operations

 

We are a Bermuda-based specialty insurance and reinsurance company that provides customized products and solutions to small and medium-sized business in industries that we believe are underserved by the standard market. For over twenty years we have developed specialized coverages and alternative risk transfer products not generally available to our customers in the standard 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 developing programs for other specialty classes of risks and providing third party reinsurance. See Part II – Other Information, Item 1A for risks facing the Company.

 

 

- 9-

 



 

 

Note 3 - Investments

 

The amortized cost and estimated fair values of the Company’s investments at June 30, 2008 and December 31, 2007 are as follows:

 

 

 

Amortized

cost

 

 

Gross

unrealized

gains

 

 

Gross

unrealized

losses

 

 

 

Estimated

fair value

 

June 30, 2008:

 

Securities available for sale:

Fixed maturities:

U.S. Treasury securities and obligations of U.S. Government corporations and agencies

 

 

 

 

 

 

 

$  64,695,020

 

 

 

 

 

 

 

 

$1,599,153

 

 

 

 

 

 

 

 

$       2,666

 

 

 

 

 

 

 

 

$  66,291,507

States of the U.S. and political subdivisions of the states

30,446,164

 

44,454

 

587,949

 

29,902,669

Corporate securities

247,312,000

 

1,584,326

 

6,822,011

 

242,074,315

Mortgage-backed securities

192,144,690

 

1,042,668

 

1,611,596

 

191,575,762

 

 

 

 

 

 

 

 

Total fixed maturities

$534,597,874

 

$4,270,601

 

$9,024,222

 

$529,844,253

 

 

 

 

 

 

 

 

Common Stock

$ 26,014,067

 

$2,709,886

 

$2,877,345

 

$ 25,846,608

 

 

 

 

 

 

 

 

Preferred Stock

$   6,741,229

 

$              -

 

$1,804,895

 

$   4,936,334

 

 

 

 

 

 

 

 

December 31, 2007:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities available for sale:

Fixed maturities:

U.S. Treasury securities and obligations of U.S. Government corporations and agencies

 

 

 

 

$  84,566,516

 

 

 

 

 

$ 1,581,197

 

 

 

 

 

$ 12,959

 

 

 

 

 

$  86,134,754

States of the U.S. and political subdivisions of the states

 

7,548,971

 

 

49,633

 

 

118,463

 

 

7,480,141

  Corporate securities

212,127,071

 

3,075,142

 

1,740,186

 

213,462,027

 Mortgage-backed securities

221,402,220

 

     1,840,989

 

         750,613

 

222,492,596

 

 

 

 

 

 

 

 

Total fixed maturities

$525,644,778

 

$ 6,546,961

 

$ 2,622,221

 

$529,569,518

 

 

 

 

 

 

 

 

Common stock

$  23,188,713

 

$ 3,313,413

 

$ 1,108,462

 

$ 25,393,664

 

 

 

 

 

 

 

 

Preferred stock

$    6,939,220

 

$               -

 

$ 1,146,055

 

$   5,793,165

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

- 10-

 



 

 

Note 4 - Segment Information

 

We segregate our business into insurance operations and other, with the insurance operations segment being further classified into four segments: excess and surplus lines (E&S), alternative risk transfer (ART), assumed reinsurance (Assumed Re) and other. E&S is further classified into seven business lines: property, environmental, construction, products liability, excess, surety and healthcare. Assumed Re consists of specialty property and casualty business assumed from unaffiliated insurers and reinsurers, and began operations in the first quarter of 2007. ART is further classified into two business lines: specialty programs and fully funded. Other includes lines of business that we no longer write (run off) as well as real estate and other ancillary product lines. Prior year amounts have been reclassified to conform to the current year presentation.

 

Within the E&S segment, our property coverage encompasses non-standard, surplus lines commercial property business and commercial multi-peril (CMP) policies. The casualty focus of our CMP products is premises liability. Our environmental insurance group provides contractor and consultants’ pollution liability, general liability and professional liability coverages for environmental contractors as well as environmental impairment liability coverages for property owners. Construction provides commercial casualty insurance coverages, generally for residential and commercial contractors. Products liability offers general liability and product liability coverages for smaller manufacturers and distributors, non-habitational real estate and certain real property owner, landlord and tenant risks. Excess provides excess and umbrella liability coverages over our own and other carriers’ primary casualty polices, with a focus on construction risks. Surety provides payment and performance bonds primarily to the environmental remediation and construction industries. Our healthcare line provides customized liability insurance solutions for long-term care facilities.

 

In our Assumed Re segment, the Company provides both traditional and structured specialty property and casualty reinsurance for unaffiliated insurers and reinsurers with a focus on small specialty insurers, risk retention groups and captives.

 

In our ART segment, specialty programs facilitate the offering of insurance to homogeneous niche groups of risk through third party program managers. Our fully funded business provides a mechanism for insureds to post collateral so as to fully self-insure their risks and we are paid a fee for arranging this type of transaction.

 

The other segment consists of amounts associated with realized gains and losses on investments and the Company’s investment in real estate, which was essentially completed in 2005, as well as lines of business that we have placed in run-off, such as workers’ compensation, excess liability insurance for municipalities and commercial lines.

 

The Company measures all segments using net income, total assets and total equity. The reportable insurance operations segments are measured by net premiums earned, incurred losses and loss adjustment expenses and acquisition expenses. Assets are not allocated to the reportable insurance operations segments.

 

 

 

- 11-

 



 

 

The following table presents key financial data by segment for the three months ended June 30, 2008 and June 30, 2007 (in thousands of $ US):

 

June 30, 2008

 

Insurance

Other

Total

 

E & S

Assumed Re

ART

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property

 

Environ

 

Construction

Products Liability

 

Excess

 

Surety

 

Healthcare

 

Specialty Programs

Fully

Funded

 

 

Gross premiums written

$2,441

$13,085

$11,206

$1,748

$1,869

$2,594

$3,361

$20,102

$16,223

$     -

$     -

$72,629

Net premiums written

1,715

9,694

8,689

1,411

411

1,980

2,185

20,102

11,054

-

-

57,241

Net premiums earned

1,029

9,223

10,335

1,168

183

1,726

637

14,419

9,422

-

-

48,142

Fee income earned

-

-

-

-

-

-

-

-

-

454

338

792

Losses & loss adjustment expenses

651

6,736

6,214

697

109

596

331

9,915

5,129

-

2

30,380

Acquisition expenses

250

2,507

2,282

223

(212)

449

92

3,899

2,472

-

-

11,962

Gross underwriting profit (loss)

128

(20)

1,839

248

286

681

214

605

1,821

454

336

6,592

Income tax expense

$     70

25

$ 95

Net earnings

$ 3,775

3,014

$  6,789

 

June 30, 2007

 

Insurance

Other

Total

 

E & S

Assumed Re

ART

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property

 

Environ

 

Construction

Products Liability

 

Excess

 

Surety

 

Healthcare

 

Specialty Programs

Fully

Funded

 

 

Gross premiums written

 

$ 233

$11,844

$ 16,929

 

$ 2,048

$ 1,227

$1,476

 

$     -

$8,742

$ 15,352

$     -

$     -

$57,851

Net premiums written

 

157

9,363

16,811

1,024

156

1,467

 

-

8,742

6,747

-

-

44,467

Net premiums earned

 

7

10,024

18,895

482

184

1,156

 

-

1,653

7,009

-

-

39,410

Fee income earned

-

-

-

-

-

-

-

-

-

748

-

748

Losses & loss adjustment expenses

 

 

4

5,671

11,985

314

119

404

 

 

-

1,184

3,941

-

-

23,622

Acquisition expenses

 

-

2,548

3,449

310

(100)

304

 

-

345

872

-

-

7,728

Gross underwriting profit (loss)

3

1,805

3,461

(142)

165

448

-

124

2,196

748

-

8.808

Income tax expense

(benefit)

 

$    760

(111)

$    649

Net earnings (loss)

$ 7,459

(187)

$ 7,272

 

 

 

 

- 12-

 



 

 

The following table presents key financial data by segment for the six months ended June 30, 2008 and June 30, 2007 (in thousands of $ US):

 

June 30, 2008

 

Insurance

Other

Total

 

E & S

Assumed Re

ART

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property

 

Environ

 

Construction

Products Liability

 

Excess

 

Surety

 

Healthcare

 

Specialty Programs

Fully

Funded

 

 

Gross premiums written

$ 4,290

$26,332

$ 20,070

$ 3,113

$4,330

$4,619

$ 5,103

$ 28,628

$ 30,498

$     -

$     -

$126,983

Net premiums written

3,012

18,621

14,902

2,491

632

3,677

3,317

28,628

20,469

-

-

95,749

Net premiums earned

1,755

17,828

20,689

2,183

363

3,352

721

22,112

17,188

-

-

86,191

Fee income earned

-

-

-

-

-

-

-

-

-

890

628

1,518

Losses & loss adjustment expenses

1,111

11,622

12,434

1,304

217

1,160

375

14,890

9,295

-

2

52,410

Acquisition expenses

412

4,696

4,569

373

(360)

891

103

6,473

3,881

-

-

21,038

Gross underwriting profit

232

1,510

3,686

506

506

1,301

243

749

4,012

890

626

14,261

Income tax expense

$       170

72

$ 242

Net earnings

$    9,340

3,470

$  12,810

Assets

$ 958,967

435

$959,402

Equity

$ 230,113

(55)

$230,058

 

 

June 30, 2007

 

Insurance

Other

Total

 

E & S

Assumed Re

ART

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property

 

Environ

 

Construction

Products Liability

 

Excess

 

Surety

 

Healthcare

 

Specialty Programs

Fully

Funded

 

 

Gross premiums written

 

$ 233

$24,982

$ 32,922

 

$ 2,859

$ 3,196

$2,786

 

$     -

$11,511

$ 34,785

$     -

$     -

$113,274

Net premiums written

 

157

20,111

32,513

1,429

417

2,736

 

-

11,511

14,435

-

-

83,309

Net premiums earned

 

7

19,550

39,259

943

411

2,071

 

-

3,166

12,361

-

-

77,768

Fee income earned

-

-

-

-

-

-

-

-

-

1,264

-

1,264

Losses & loss adjustment expenses

 

 

4

11,309

24,975

613

267

724

 

 

-

2,192

7,490

-

-

47,574

Acquisition expenses

 

-

4,882

7,251

(20)

(187)

535

 

-

645

740

-

-

13,846

Gross underwriting profit

3

3,359

7,033

350

331

812

-

329

4,131

1,264

-

17,612

Income tax expense

(benefit)

 

$    1,228

(120)

$ 1,108

Net earnings (loss)

 $   14,546

(182)

$14,364

Assets

 $ 886,416

64

$886,480

Equity

$ 208,093

33

$208,126

 

 

 

- 13-

 



 

 

Additionally, the Company conducts business in two geographic segments: the United States and Bermuda. Significant differences exist in the regulatory environment in each country. Those differences include laws regarding measurable information about the insurance operations by geographic segments. The following table provides key financial data about the geographic segments for the three months ended June 30, 2008 and June 30, 2007 (in thousands of $ US) are as follows:

 

June 30, 2008

 

United States

 

Bermuda

 

Total

Income tax

 

$      95

 

$        -

 

$     95

Net earnings

 

$    472

 

$6,317

 

$6,789

 

 

 

 

 

 

 

June 30, 2007

 

United States

 

Bermuda

 

Total

Income tax

 

$    649

 

$        -

 

$   649

Net earnings

 

$ 1,259

 

$6,013

 

$7,272

 

 

 

 

 

 

 

 

The following table provides key financial data about the geographic segments for the six months ended June 30, 2008 and June 30, 2007 (in thousands of $ US):

 

June 30, 2008

 

United States

 

Bermuda

 

Total

Income tax

 

$        243

 

$           -

 

$       243

Net earnings

 

$        948

 

$  11,862

 

$  12,810

Assets

 

$ 540,990

 

$418,412

 

$959,402

Equity

 

$   79,095

 

$150,963

 

$230,058

 

 

 

 

 

 

 

June 30, 2007

 

United States

 

Bermuda

 

Total

Income tax

 

$    1,108

 

$            -

 

$     1,108

Net earnings

 

$    2,123

 

$   12,241

 

$  14,364

Assets

 

$527,060

 

$359,420

 

$886,480

Equity

 

$  69,120

 

$139,006

 

$208,126

 

 

 

 

 

 

 

 

 

 

- 14-

 



 

 

Note 5 - Income Taxes

 

Total income tax expense for the periods ended June 30, 2008 and 2007 was allocated as follows:

 

 

 

Three Months Ended

June 30,

 

Six Months Ended

June 30,

Tax expense attributable to:

 

2008

 

2007

 

2008

 

2007

Income from operations

 

$ 95,274 

 

$ 649,198  

 

$ 242,870 

 

$1,107,790 

Change in unrealized gain (loss) on hedging transactions

 

5,196 

 

 

(7,661)

 

(54,085)

 

 

(32,791)

Change in unrealized gain/loss on securities available for sale

 

   (2,022,857)

 

 

(1,260,062)

 

   (1,748,272)

 

 

 (1,037,078)

 

 

 

 

 

 

 

 

 

Total

 

$(1,922,387)

 

$ (618,525)

 

$(1,559,487)

 

$ 37,921 

 

 

 

 

 

 

 

 

 

 

 

United States federal and state income tax expense (benefit) from operations consists of the following components:

 

 

 

Three Months Ended

June 30,

 

Six Months Ended

June 30,

 

 

2008

 

2007

 

2008

 

2007

Current

 

$ (166,158)

 

$ 948,856 

 

$(163,105)

 

$1,375,949 

Deferred

 

247,791 

 

(221,533)

 

447,097 

 

(137,379)

Change in valuation allowance

 

        13,641 

 

       (78,125)

 

   (41,122)

 

    (130,780)

Total

 

$ 95,274 

 

$ 649,198 

 

$ 242,870 

 

$1,107,790 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The state income tax expense aggregated $64,395 and $16,783 for the three months ended June 30, 2008 and 2007, respectively, and $77,765 and $8,429 for the six months ended June 30, 2008 and 2007, respectively, and is included in the current provision.

 

 

- 15-

 



 

 

Income tax expense from operations for the periods ended June 30, 2008 and 2007 differed from the amount 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

June 30,

 

Six Months Ended

June 30,

 

 

2008

 

2007

 

2008

 

2007

Expected income tax expense

 

$2,340,752 

 

$2,693,135 

 

$4,438,133 

 

$5,260,370 

Foreign earned income not subject to U.S. taxation

 

(2,147,852)

 

(2,044,379)

 

(4,033,385)

 

(4,161,879)

Change in valuation allowance

 

13,641  

 

 

(78,125)

 

(41,122)

 

 

(130,780)

Tax-exempt interest

 

(50,165)

 

 

(98,790)

 

-

State taxes and other

 

 (61,102)

 

          78,567 

 

     (21,966)

 

      140,079 

Total

 

$    95,274  

 

$   649,198 

 

$  242,870 

 

$1,107,790 

 

 

Note 6 - Employee Stock Options

 

The Company’s incentive stock plan grants incentive stock options to employees. The majority of the options outstanding under the plan 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’s methodology for valuing options has not changed from December 31, 2007. During the first six months of 2008, the Company granted 136,302 options compared to 67,500 for the same period of 2007. No options were granted for the three months ended June 30, 2008 or 2007. Stock based compensation expense related to outstanding options was $231,310 and $142,677, for the three months ended June 30, 2008 and 2007, respectively, and $386,716 and $268,773, for the six months ended June 30, 2008 and 2007, respectively, and is reflected in net earnings under payroll and related expenses.

 

In addition to stock options discussed above, the Company may grant restricted shares to employees under the incentive stock plan. During the first six months of 2008, the Company granted 40,618 shares of restricted stock. The restricted shares vest on the grant date anniversary ratably over three years at 25%, 25% and 50%, respectively. Stock based compensation expense related to the restricted shares was $112,466 and $129,969 for the three and six months ended June 30, 2008 respectively, and is reflected in net earnings under payroll and related expenses. There was no expense incurred during the 2007 period.

 

Note 7 – Acquisition of LTC Companies

 

On February 11, 2008, the Company acquired 100% of the membership interests of LTC Risk Management, LLC and LTC Insurance Services, LLC ("LTC Group") for $8,771,000. The LTC Group provides insurance and risk management solutions for the long-term care industry and will allow the Company to further diversify its business interests. The purchase excluded liabilities for any policies produced by the LTC Group prior to the effective date of the transaction. The results of the LTC Group’s operations have been included with the Company’s results since the acquisition date. The allocation of the purchase price assigned approximately $6,986,000 to goodwill and approximately $1,602,000 to

 

- 16-

 



 

intangible assets which are being amortized over their estimated useful life of ten years. The remaining purchase price was allocated to other operating assets acquired as part of the acquisition. Proforma financial statements are not presented as the Company does not deem this transaction to be material.

 

Note 8 – Fair Value Measurements

 

Effective January 1, 2008 on a prospective basis, we determined the fair values of certain financial instruments based on the fair value hierarchy established in Statement of Financial Accounting Standard No. 157, "Fair Value Measurements" ("SFAS 157").  SFAS 157 requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.  The standard describes three levels of inputs that may be used to measure fair value.

 

Level 1: quoted price (unadjusted) in active markets for identical assets

 

Level 2: inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the instrument

 

Level 3: inputs to the valuation methodology are unobservable for the asset or liability

 

SFAS 157 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.

 

To measure fair value, we obtain quoted market prices for our available-for-sale securities.

 

Assets measured at fair value on a recurring basis are summarized below:

 

 

 

As of June 30, 2008

 

 

Fair Value Measurements Using

($ in 000's)

 

 

Quoted Prices in Active Markets for Identical Assets

 

Significant Other Observable Inputs

 

Significant Unobservable Inputs

 

 

Description

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Total

 

 

 

 

 

 

 

 

 

Available-for-sale securities

 $597,498

 

  $                -

 

  $                -

 

 $597,498

 

 

 

 

 

 

 

 

 

Total

 

$597,498

 

$                -

 

$                -

 

$597,498

 

As noted in the above table, we do not have any assets measured at fair value on a recurring basis using significant other observable inputs (Level 2) or significant unobservable inputs (Level 3) during the period.

 

 

- 17-

 



 

 

Note 9 - 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 December 2007, the FASB issued SFAS No. 160, “Non-controlling Interests in Consolidated Financial Statements – an amendment of ARB No. 51” (“SFAS 160”). SFAS 160 establishes new accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. Specifically, this statement requires the recognition of a non-controlling interest as equity in the consolidated financial statements and separate from the parent’s equity. The amount of net income attributable to the non-controlling interest will be included in consolidated net income on the face of the income statement. SFAS 160 clarifies that changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation are equity transactions if the parent retains its controlling financial interest. In addition, this statement requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated. Such gain or loss will be measured using the fair value of the non-controlling equity investment on the deconsolidation date. SFAS 160 also includes expanded disclosure requirements regarding the interests of the parent and its non-controlling interests. SFAS 160 is effective for the Company beginning January 1, 2009. The Company is currently evaluating the impact of the adoption of SFAS 160.

 

In December 2007, the FASB issued SFAS 141(R), “Business Combinations” (“SFAS 141(R)”). SFAS 141(R) expands on the guidance of SFAS 141, extending its applicability to all transactions and other events in which an entity obtains control over one or more other businesses. It broadens the fair value measurement and recognition of assets acquired, liabilities assumed and interests transferred as a result of business combinations. SFAS 141(R) expands on required disclosures to improve the statement users’ abilities to evaluate the nature and financial effects of business combinations. SFAS 141(R) establishes principles and requirements for determining how an enterprise recognizes and measures the fair value of certain assets and liabilities acquired in a business combination, including non-controlling interest, contingent consideration and certain acquired contingencies. SFAS 141(R) also requires acquisition-related transaction expenses and restructuring cost be expensed as incurred rather than capitalized as a component of the business combination. SFAS 141(R) is effective for any acquisitions made on or after January 1, 2009. The pronouncement will only have an affect to the extent the Company completes business acquisitions after the effective date.

 

In February 2008, the FASB issued FASB Staff Position No. FAS 157-2, “Effective Date of FASB Statement No. 157” (“FSP No. 157-2”),  which delays the effective date of SFAS 157 for non-financial assets and non-financial liabilities to fiscal years beginning after November 15, 2008. The Company is currently evaluating the impact of the adoption of FSP No. 157-2. As allowed under FSP No. 157-2 as of January 1, 2008, we have elected not to fully adopt SFAS 157 and are deferring adoption for certain non-financial assets and liabilities until January 1, 2009.

 

In March 2008, the FASB issued SFAS No. 161, “Disclosures About Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133” ("SFAS 161").  SFAS No. 161 enhances the disclosure requirements of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”, regarding an entity’s derivative instruments and hedging activities. SFAS No. 161 is effective for the Company’s fiscal year beginning January 1, 2009. The Company is currently evaluating the impact of the adoption of SFAS 161.

 

 

- 18-

 



 

 

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” ("SFAS 162").  SFAS 162  identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of non-governmental entities that are presented in conformity with generally accepted accounting principles (GAAP) in the United States (the GAAP hierarchy). SFAS 162 is effective sixty days following the SEC’s approval of the Public Accounting Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in conformity with Generally Accepted Accounting Principles. The Company does not believe that the adoption of SFAS 162 will have a material impact on its financial statements.

 

In May 2008, the FASB issued SFAS No. 163, “Accounting for Financial Guarantee Insurance Contracts” ("SFAS 163").  SFAS 163 clarifies how FASB Statement No. 60 applies to financial guarantee insurance contracts, including the recognition and measurement of premium revenue and claim liabilities as well as expanded disclosure requirements regarding financial guarantee insurance contracts. SFAS 163 is effective for the Company beginning January 1, 2009. The Company is currently evaluating the impact of the adoption of SFAS 163.

 

 

- 19-

 



 

 

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

We are a Bermuda-based specialty insurance and reinsurance company that provides customized products and solutions to small and medium-sized businesses in industries that we believe are underserved by the standard market. For over twenty years, we have developed specialized coverages and alternative risk transfer products not generally available to our customers in the standard 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 and providing third party reinsurance.

 

We segregate our business into insurance operations and other, with the insurance operations segment further classified into four segments: excess and surplus lines (E&S), alternative risk transfer (ART), assumed reinsurance (Assumed Re) and other. E&S is further classified into seven business lines: property, environmental, construction, products liability, excess, surety and healthcare. ART is further classified into two business lines: specialty programs and fully funded. Assumed Re consists of specialty property and casualty business assumed from unaffiliated insurers and reinsurers, and began operations in the first quarter of 2007. Other includes lines of business that we no longer write (run off) as well as real estate and other ancillary product lines. Prior year amounts have been reclassified to conform to the current year presentation.

 

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 unaudited consolidated financial statements and the related notes included elsewhere in this report. All amounts and percentages are rounded.

 

 

- 20-

 



 

 

The table below summarizes the Company’s net premiums written and net premiums earned by business line, consolidated revenues and percentage change year over year:

 

 

 

Three Months Ended

June 30,

Six Months Ended

June 30,

Three Months Ended

June 30,

Six Months Ended

June 30,

 

 

2008

 

2007

2008

 

2007

2008/2007

2008/2007

 

 

(in thousands)

(in thousands)

 

 

Net premiums written:

 

 

 

 

 

 

 

 

 

Excess and Surplus Lines Segment

 

 

 

 

 

 

 

 

 

Environmental

 

$ 9,694

 

$ 9,363

$18,620

 

$ 20,111

3.5 %

(7.4)% 

Construction

 

8,689

 

16,811

14,902

 

32,513

(48.3)%

(54.2)% 

Excess

 

410

 

156

632

 

417

162.8 %

51.6 %

Healthcare

 

2,185

 

-

3,317

 

-

100.0 %

100.0 %

Products Liability

 

1,411

 

1,024

2,491

 

1,429

37.8 %

74.3%

Property

 

1,715

 

157

3,012

 

157

992.4 %

1,818.5%

Surety

 

    1,980

 

    1,467

    3,677

 

    2,736

35.0 %

34.4%

 

 

 

 

 

 

 

 

 

 

Total Excess & Surplus Lines

       Segment

 

26,084

 

28,978

46,651

 

57,363

(10.0)%

(18.7)%

 

 

 

 

 

 

 

 

 

 

Alternative Risk Transfer Segment

 

 

 

 

 

 

 

 

 

Specialty Programs

 

11,055

 

6,747

20,469

 

14,435

63.9 %

41.8%

 

 

 

 

 

 

 

 

 

 

Assumed Reinsurance Segment

 

  20,102

 

   8,742

  28,628

 

11,511

129.9 %

148.7%

 

 

 

 

 

 

 

 

 

 

Total net premiums written

 

$57,241

 

$ 44,467

$95,748

 

$83,309

28.7 %

14.9%

 

 

 

 

 

 

 

 

 

 

Net premiums earned:

    Excess and Surplus Lines Segment

 

 

 

 

 

 

 

 

 

Environmental

 

$ 9,223

 

$ 10,024 

$ 17,829

 

$ 19,550 

(8.0)%

(8.8)%     

Construction

 

10,335

 

18,895 

20,688

 

39,259 

(45.3)%

(47.3)%

Excess

 

183

 

184 

363

 

411 

(0.5)%

(11.7)%

Healthcare

 

637

 

721

 

100.0 %

100.0 %     

Products Liability

 

1,168

 

482 

2,183

 

943 

142.3 %

131.5 %     

Property

 

1,029

 

1,755

 

14,600.0 %

24,971.4 %     

Surety

 

    1,726

 

    1,156 

    3,352

 

    2,071 

49.3 %

61.9 %    

Total Excess & Surplus Lines

        Segment

 

24,301

 

30,748 

46,891

 

62,241 

(21.0)%

(24.7)%    

 

 

 

 

 

 

 

 

 

 

Alternative Risk Transfer Segment

 

 

 

 

 

 

 

 

 

Specialty Programs

 

9,422

 

7,009 

17,188

 

12,361 

34.4 %

39.1 %    

 

 

 

 

 

 

 

 

 

 

Assumed Reinsurance Segment

 

14,419

 

1,653 

22,112

 

3,166 

772.3 %

598.4 %    

 

 

 

 

 

 

 

 

 

 

Total net premiums earned

 

$ 48,142

 

$ 39,410 

$ 86,191

 

$ 77,768 

22.2 %

10.8 %    

 

 

 

 

 

 

 

 

 

 

Net investment income

 

7,316

 

7,482 

14,643

 

14,706 

(2.2)%

(0.4)%    

Net realized gains / (losses)

 

291

 

(27)

795

 

(8)

(1,177.8)%

(10,037.5)%    

Fee income