The Company’s Bermuda offices are located at 44 Church Street, Hamilton, Bermuda, and the telephone number is (441) 296-8560. The principal offices of the Company’s U.S. subsidiaries are located at 1845 The Exchange, Suite 200, Atlanta, Georgia 30339, and the telephone number is (770) 916-1908.
Year Ended December 31, 1998 1999 2000 2001 2002 (In thousands, except per share and ratio data) Income Statement Data: Revenues: Direct and assumed premiums earned $ 13,114 $18,140 $54,078 $146,765 $140,006 Ceded premiums earned (3,994) (6,015) (27,373) (83,796) (74,057) Net premiums earned 9,120 12,125 26,705 62,969 65,949 Net investment income 2,847 2,878 2,605 3,650 4,016 Interest on notes receivable 2,409 2,614 1,531 767 - Brokerage commission income 1,183 1,389 3,291 2,411 143 Management fees from affiliate 1,344 1,386 1,425 1,496 1,183 Net realized gains (losses) 443 174 (518) 652 710 Real estate income - - - 27,561 51,780 Other income 24 921 939 1,026 186
Total expenses 11,615 15,484 38,499 95,217 120,564 Earnings (loss) before income taxes 5,755 6,003 2,520) 5,315 3,403 Income Taxes (199) 83 (1,157) 1,161 919
Net earnings (loss) $ 5,954 $5,920 $ (1,363) $ 4,154 $ 2,484 ===== ===== ====== ====== ====== Net diluted earnings (loss) per share $ 1.04 $ 0.98 $ (0.25) $ 0.84 $ 0.51 Common shares and common share equivalents used in computing net diluted earnings per share 5,738 6,032 5,497 4,935 4,871
Loss and loss adjustment expense ratio 56.8% 56.9% 69.3% 69.9% 58.0%
The information in the following discussion is presented on the basis of accounting principles generally accepted in the United States of America (“GAAP”) and should be read in conjunction with the Company’s consolidated financial statements and notes thereto included elsewhere in this Report. All amounts and percentages are rounded:
Year Ended December 31, 2000 to 2001 to 2000 2001 2002 2001 2002 (In thousands)
Net Premiums earned: Reinsurance: Workers' Compensation $ 11,151 $ 12,657 $ 1,617 13.5% (87.2)% General Liability 5,479 9,707 5,988 77.2 (38.3) Program Business - 396 204 - (48.5)
Primary Insurance: Commercial Lines 2,638 4,197 772 59.1 (81.6) Workers' Compensation 249 6,376 7,365 2,460.6 15.5 Surety 4,539 5,916 1,158 30.3 (80.4) General Liability 845 18,423 42,740 2,080.2 132.0 Program Business 1,804 5,297 6,105 193.5 15.3
Total commission and fee income 4,717 3,907 1,326 (17.2) (66.1) Net realized gains (losses) (518) 652 710 225.9 8.9 Real estate income - 27,561 51,780 - 87.9 Other income 939 1,026 186 9.3 (81.9)
Interest from Notes Receivable. Interest from notes receivable decreased 100% from $767,000 in 2001 to $0 in 2002 due to the impairment of two loans. During 2001, the Company ceased accruing interest for accounting purposes on two impaired loans with one borrower in accordance with its accounting policies. Average notes receivable have decreased to $7.4 million from $8.5 million. The average annual pretax yield on notes receivable was 9% and 0% in 2001 and 2002, respectively.
Other Income. Other income decreased 81.9% from $1 million in 2001 to $186,000 in 2002 as a result of reduced fees earned by our financial services subsidiary. During 2001, the Company discontinued this financial services business.
Losses and Loss Adjustment Expenses. Loss and loss adjustment expenses decreased 13% from $44 million in 2001 to $38.3 million in 2002 as a result of decreased net premiums earned in commercial lines, surety and workers’ compensation lines of insurance business and a refocusing of the Company’s strategy to concentrate or more profitable lines of business, which caused the loss ratio to decrease from 70% in 2001 to 58% in 2002.
Acquisition Expenses. Policy acquisition expenses increased from $10.4 million in 2001 to $12.5 million in 2002 as a result of increased net earned premiums in the general liability line of business and a change in the reinsurance arrangement between the Company and its risk retention group affiliate.
Real Estate Expenses. Real estate expenses associated with Harbour Village increased from $25.1 million in 2001 to $48.5 million in 2002. Of the $48.5 million of costs recognized during 2002, $44.1 million of the costs were previously capitalized variable costs related to the sale of condominium units and boat slips, and the remaining $4.4 million were fixed costs of the project, which includes the $0.5 million for the Town of Ponce Inlet as part of the settlement of material zoning litigation described in Item 3 of this Report. Of the $25.1 million of costs recognized during 2001, $23.5 million of the costs were previously capitalized variable costs related to the sale of condominium units and boat slips, and the remaining $1.6 million were fixed costs of the project. See Exhibit 99 for further information regarding Harbour Village.
Interest from Notes Receivable. Interest from notes receivable decreased 49.9% from $1.5 million in 2000 to $800,000 in 2001 principally from repayment of various loans. Average notes receivable have decreased from $10.9 million in 2000 to $8.5 million in 2001. The average annual pretax yield on notes receivable was 14.1% and 9.0% in 2000 and 2001, respectively. The Company ceased accruing interest on two impaired loans with one borrower in accordance with its accounting policies.
Management Fees. Management fees received from the Company’s risk retention group affiliate increased 5% from $1.43 million in 2000 to $1.5 million in 2001 and is consistent with the prior year.
Net Realized Gains. Net realized gains (losses) from the sale of investments increased from a loss of $518,000 in 2000 to a gain of $652,000 in 2001. These gains were primarily realized from the sale of bonds in the Company’s investment portfolio.
Losses and Loss Adjustment Expenses. Loss and loss adjustment expenses increased 137.7% from $18.5 million in 2000 to $44.0 million in 2001 due to an increase in net premiums earned and increases in surety and commercial lines reserves.
Payroll and Other Expenses. Payroll and other expenses increased 23.4% from $12.2 million in 2000 to $15.1 million in 2001 due to increases in payroll and litigation costs, expense of certain workers’ compensation receivables, and costs associated with the Company’s discontinued financial service subsidiary.
Real Estate Expenses. Real estate expenses associated with Harbour Village increased from $542,000 in 2000 to $25.1 million in 2001. Of the costs recognized in 2001, $20.7 million were previously capitalized variable costs related to the sale of the condominium units and boat slips, and the remaining $721,000 of expenses were fixed costs of the project, including advertising and other administrative costs. See Exhibit 99 included in this Report for further information regarding Harbour Village.
Expense due to Rescission. Expense due to rescission litigation was $600,000 for 2001, as compared to $3.5 million in 2000, which is associated with the rescission of the previously acquired Michigan agency and two related insurance companies.
Total Earnings. Net earnings after tax increased 404.8% to a profit of $4.2 million for 2001 from a loss of $1.4 million for 2000. This increase in net earnings is due to increases in insurance and real estate income. Another reason for the increase is a reduction in rescission expenses in 2001 as compared to 2000.
As discussed in Item 3. “Legal Proceedings”, the Company has a pending material dispute with Berkley Insurance Company, one of the Company’s former reinsurers, with respect to unreimbursed paid claims under treaties totaling $14.9 million and additional ceded case reserves and reserves for incurred but not reported losses totaling approximately $19.6 million as of December 31, 2002. The Company recognized a $1.1 million expense in 2002 for reinsurance recoverables relating to the Berkley dispute as a result of a settlement offer made by the Company. The Company does not believe this dispute will have a material adverse effect on the overall financial condition or liquidity of the Company as management believes the Company has sufficient current cash flows and invested assets to meet its insurance obligations. However, due to the fact that the final decision rests in the hands of an arbitration panel, it is uncertain whether the panel’s decision will be on terms favorable to the Company.
Total assets increased from $297.3 million at December 31, 2001 to $365.4 million at December 31, 2002 primarily due to increases in invested assets, cash and reinsurance recoverables. Cash, invested assets and notes receivable increased from $130.6 million at December 31, 2001 to $174.3 million at December 31, 2002, as a result of increases in fixed maturities and cash. At December 31, 2002, the Company has repurchased 1,612,189 shares of its common stock at a total cost of $9.7 million since January 1999.
American Safety is an insurance holding company whose principal assets are its investment portfolio and its investment in the capital stock of its subsidiaries. American Safety’s ability to pay dividends to its shareholders will depend, to a significant degree, on the ability of the Company’s subsidiaries to generate earnings from which to pay dividends to American Safety. The jurisdictions in which American Safety and its insurance and reinsurance subsidiaries are domiciled place limitations on the amount of dividends or other distributions payable by insurance companies in order to protect the solvency of insurers.
Management has planned that the Harbour Village project would be developed in three Phases with projected completion in 2005. Through December 31, 2002, the Company had outstanding borrowings of $17.0 million from an initial $37 million development and construction loan facility. The estimated completion cost for the remainder of the Harbour Village project was approximately $67.5 million at December 31, 2002. See Item 3. “Legal Proceedings” with respect to the settlement of material zoning litigation involving the Harbour Village project. See Exhibit 99 for further information regarding Harbour Village.
Deferred Income Taxes. The Company is required to establish a valuation allowance for the portion of any deferred tax asset, which amounted to $7.4 million at December 31, 2002, that management believes will not be realized. The Company believes that it is more likely than not that the Company will realize the full benefit of its deferred tax assets in future periods. Accordingly, no valuation allowance has been established.
Construction Accounting. The Company recognizes revenue on Harbour Village, its real estate development project, when title to each condominium unit and boat slip transfers to the purchaser. When title transfers, the Company uses a percentage of completion method based on actual costs to total estimated costs (including allocated common costs) to recognize revenue. The estimated future common costs of amenities at December 31, 2002 were $2.0 million, of which $836,000 related to condominium units that were closed in 2002. The percentage of completion method is based upon future estimated costs, and actual costs may vary greatly from these estimated costs requiring an adjustment to be recorded in future periods.
Property and casualty insurance premiums are established before the amounts of losses and loss adjustment expenses are known and therefore before the extent by which inflation may affect such expenses is known. Consequently, the Company attempts, in establishing its premiums, to anticipate the potential impact of inflation. However, for competitive and regulatory reasons, the Company may be limited in raising its premiums consistent with anticipated inflation, in which event the Company, rather than its insureds, would absorb inflation costs. Inflation also affects the rate of investment return on the Company’s investment portfolio with a corresponding effect on the Company’s investment income.
This Report contains forward-looking statements within the meaning of United States’ securities laws which are intended to be covered by the safe harbors created thereby. Such statements include the Company’s estimations of future insurance claims and losses, and the Company’s expectations with respect to the outcome of the Principal Management acquisition rescission litigation, the arbitration of the Berkley reinsurance recoverables dispute, and the future profitability and value of the Harbour Village real estate project, as reflected in the Company’s consolidated financial statements and Exhibit 99 to this Report. In addition, all statements, other than statements of historical facts, included or incorporated by reference in this Report that address activities, events or developments that the Company expects or anticipates will or may occur in the future constitute forward-looking statements.
Forward-looking statements involve risks and uncertainties which may cause actual results to differ materially, and are subject to change based on various insurance industry factors, including, without limitation, competitive conditions in the insurance industry, levels of new and renewal insurance business, unpredictable developments in loss trends, adequacy and changes in loss reserves, timing or collectibility of reinsurance receivables, market acceptance of new coverages and enhancements, changes in reinsurance costs and availability, potential adverse decisions in litigation and arbitration proceedings, and changes in levels of general business activity and economic conditions. With respect to the development of the Harbour Village project, such forward-looking statements involve risks and uncertainties which may cause actual results to differ materially, and are subject to change based on various real estate development industry factors, including competitive housing conditions in the local market area, risks inherent in real estate development and new construction, increases in construction costs, construction delays, weather, zoning, litigation, changes in interest rates and the availability of mortgage financing for prospective purchasers of condominium units and boat slips, and changes in local and national levels of general business activity and economic conditions. An adverse outcome of the Principal Management acquisition rescission litigation or the arbitration of the Berkley reinsurance recoverables dispute would have a material adverse effect on the financial condition of the Company. See discussion in Item 3. of this Report as to these material matters.