American Safety Insurance Holdings (ASI)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON D.C. 20549

______________________

 

FORM 10 Q

 

 

“OR”

 

 

Commission File Number 1-14795

 

 

 

 

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).       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)

 

 

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, 2009 was 10,320,153.

 

 

AMERICAN SAFETY INSURANCE HOLDINGS, LTD.

 

FORM 10-Q

 

TABLE OF CONTENTS

 

 

 

 

 

 

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

American Safety Insurance Holdings, Ltd. and Subsidiaries

Consolidated Balance Sheets

(dollars in thousands except per share data)

 

 

Continued on Page 4

 

Continued from Page 3

 

 

 

 

See accompanying notes to consolidated interim financial statements (unaudited).

 

 

American Safety Insurance Holdings, Ltd. and Subsidiaries

Consolidated Statements of Operations

(Unaudited)

(dollars in thousands except per share data)

 

 

See accompanying notes to consolidated interim financial statements (unaudited).

 

American Safety Insurance Holdings, Ltd. and Subsidiaries

Consolidated Statements of Cash Flow

(Unaudited)

(dollars in thousands)

 

 

 

Continued on page 7

 

Continued from page 6

(dollars in thousands)

 

 

See accompanying notes to consolidated interim financial statements (unaudited).

 

 

American Safety Insurance Holdings, Ltd. and Subsidiaries

Consolidated Statements of Comprehensive Earnings

(Unaudited)

(dollars in thousands)

 

 

 

 

See accompanying notes to consolidated interim financial statements (unaudited).

 

 

American Safety Insurance Holdings, Ltd. and Subsidiaries

Notes to Consolidated Financial Statements

 

June 30, 2009

(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, reinsurance recoverables, goodwill 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, 2009 may not be indicative of the results that may be expected for the fiscal year ending December 31, 2009. 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, 2008.

 

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 as well as normal recurring adjustments have been eliminated.

 

Certain balance sheet and statement of operations items have been reclassified for the periods ending June 30, 2008 and December 31, 2008. The presentation is consistent with the presentation for the three and six months ended June 30, 2009 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 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 certain environmental, products liability, construction, healthcare and property 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.

 

Note 3 - Investments

 

The amortized cost and estimated fair values of the Company’s investments at June 30, 2009 and December 31, 2008 are as follows (dollars in thousands):

 

 

 

Note 4 - Segment Information

 

We segregate our business into insurance operations and other, with the insurance operations segment being further classified into three lines of operation: excess and surplus lines (E&S), alternative risk transfer (ART) and assumed reinsurance (Assumed Re). 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 specialty insurers and reinsurers. 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 line, 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 general, professional and pollution liability to contractors, consultants and property owners. Construction provides commercial general liability insurance coverages 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 policies, 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 primarily for long-term care facilities.

 

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

 

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

 

The Other segment consists of amounts associated with the Company’s investment in real estate which was essentially completed in 2005, and lines of business that we have placed in run-off, such as workers’ compensation, excess liability insurance for municipalities plus commercial lines and ancillary product lines.

 

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 three months ended June 30, 2009 and June 30, 2008 (dollars in thousands):

 

 

 

 

 

The following table presents key financial data by segment for the six months ended June 30, 2009 and June 30, 2008 (dollars in thousands):

 

 

 

 

 

The following table reconciles gross underwriting profit as shown above to our consolidated income before income taxes:

 

 

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, 2009 and June 30, 2008 (dollars in thousands):

 

 

The following table provides key financial data about the geographic segments for the six months ended June 30, 2009 and June 30, 2008 (dollars in thousands):

 

 

 

Note 5 - Income Taxes

 

Total income tax expense for the periods ended June 30, 2009 and 2008 (dollars in thousands) was allocated as follows:

 

 

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

 

 

The state income tax expense provided for was $64 for the three months ended June 30, 2009 and 2008, and $77 and $78 for the six months ended June 30, 2009 and 2008, respectively, and is included in the current provision.

 

Income tax expense for the periods ended June 30, 2009 and 2008 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:

 

 

 

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, 2008. During the first six months of 2009, the Company granted 135,576 options compared to 136,302 for the same period of 2008. No options were granted for the three months ended June 30, 2009 or 2008. Stock based compensation expense related to outstanding options was $231 for the three months ended June 30, 2009 and 2008 and $489 and $387, for the six months ended June 30, 2009 and 2008, 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 2009, the Company granted 90,224 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 $244 and $504 for the three and six months ended June 30, 2009 respectively, and is reflected in net earnings under payroll and related expenses. For the three and six months ended June 30, 2008, $112 and $130, respectively, were recorded in expense.

 

Note 7 – Acquisition of Victore Insurance Company, Victore Enterprises, Inc. and Agency Bonding Company, Inc.

 

On June 30, 2009, American Safety Casualty Insurance Company (ASCIC), a wholly owned subsidiary of American Safety Insurance Holdings, Ltd., acquired 100% voting equity of Victore Insurance Company (VIC), an Oklahoma domiciled admitted insurance company based in Oklahoma City, Victore Enterprises, Inc., an Oklahoma based holding company and Agency Bonding Company, Inc., an Oklahoma based insurance agency, for a purchase price of $4.7 million. The three companies together are referred to as The Victore Companies.

 

Victore has generated approximately $4 million of surety annual gross written premiums primarily in the Midwest. The additions of VIC expands the geographic perspective of our existing surety business which is more concentrated in the east and west coasts and adds an underwriting expertise in the energy sector.

 

The purchase was accounted for under the guidance of SFAS 141(R) as a business combination under the acquisition method. All identifiable assets and liabilities acquired were recognized using fair value measurement.

 

The assets and liabilities acquired were valued as follows (dollars in thousands):

 

 

Pursuant to the purchase agreement, an Escrow Fund Holdback was established to reimburse the purchaser for any aggregate net claims or losses incurred by VIC from any bonds written by VIC prior to the "Closing Date" which, in the net aggregate, exceeded the total loss reserves as reflected in the

 

purchase price. For a period of eighteen (18) months after the Closing Date ( the "Loss Holdback Period"), if the aggregate net claims incurred by VIC for bonds written prior to the Closing Date exceed the amount of total reserves purchased, the purchaser will be reimbursed from the Escrow Fund. A "Loss Fund Holdback" was also established to reimburse the purchaser for loss, cost and expense related to any breach of representations, warranties or covenants made by the sellers in the purchase agreement. At the end of the 18 month "Loss Holdback Period", the remaining funds will be disbursed to the seller. The Company believes that the reserves established at the date of acquisition were adequate to cover the losses that might be incurred for bonds written prior to the Closing Date.

 

The goodwill is attributable to the revenue stream and book of business in place currently and expected to continue to generate cash flow in the future. The Company will perform impairment testing each year at December 31 to determine whether there has been no impairment of the asset on an ongoing basis.

 

The Company does not expect the acquisition to have a material impact on earnings for 2009.

 

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 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: