Net written premiums to equity: The net written premiums to equity is the ratio of net written premiums to the total shareholders’ equity.
The following table sets forth the components of the Company’s insurance operations GAAP combined ratio for the periods indicated:
Net earned premiums totaled $168.5 million in 2009, compared to $174.5 million in 2008. E&S totaled $92.0 million, a slight decrease from the same period in 2008; ART added $40.6 million, a 5% increase over the 2008 period; Assumed Reinsurance totaled $36.2 million, a 15.3% decrease from 2008. The decrease in earned premium for the Excess and Surplus lines division was due to market conditions where pricing has been increasingly competitive resulting in reduced premium written. The Alternative Risk Transfer division's increase in earned premium was due to new programs. The Assumed Reinsurance division's decrease in earned premium was due to a business mix shift from quota share to excess of loss. Excess of loss reinsurance generally results in less premium to the reinsurer and accordingly reduced expenses.
The table below sets forth the prior year reserve development for the years ended December 31, 2009 and 2008 (dollars in thousands):
Assets. Assets from Bermuda operations increased to $545.0 million at the end of 2009 compared to $428.6 million at the end of 2008. This increase is primarily due to earnings from operations and increased market value of investment assets. Assets from U.S. operations at the end of 2009 increased to $602.6 million as compared to $597.7 million at the end of 2008 due to earnings for 2009.
Net earnings attributable to American Safety Insurance Holdings, Ltd for the year ended December 31, 2008 were $0.3 million, or $0.03 per diluted share, compared to net earnings attributable to American Safety Insurance Holdings, Ltd of $28.2 million, or $2.56 per diluted share, for 2007. Net earnings for 2008 include pre-tax charges of $23.8 million and are comprised of: (1) $14.3 million of net realized losses on investments, (2) $5.4 million of prior year adverse reserve development, (3) $1.6 million of reinsurance reinstatement premium and (4) $2.5 million provision to increase the valuation allowance on reinsurance recoverables. The 2007 results were impacted by $2.2 million of adverse prior year reserve development and $2.3 million of reinsurance premiums.
Revenues for the year were $192.3 million, an increase of 6.3% over 2007. Excluding net realized losses on investments, revenues for the year were $206.7 million, an increase of $25.4 million, or 14.0%, over 2007, due to increased net premiums earned. Net premiums earned from our lines of business entered since 2006 totaled $56.8 million, an increase of $44.0 million over 2007. The increase from the newer lines was partially offset by a decrease in other lines, including a $29.1 million decrease in our construction line
Other new products launched in recent years increased earned premium as products liability produced $5.0 million of net premiums earned in 2008 compared to $2.4 million in 2007. Excess casualty net premiums earned increased approximately $0.3 million, property premium increased $4.5 million and surety increased $2.1 million. The increase in surety premiums was due to the Company continuing to focus its growth efforts in the environmental contractor surety market due to the lack of capacity serving this segment of the market. Lastly, as part of the diversification strategy we acquired 100% of the membership interests of LTC Risk Management, LLC and LTC Insurance Services, LLC (“LTC Group”). The LTC Group, now known as ASI Healthcare, provides insurance and risk management solutions for the long-term care industry. Net premiums earned for the period ended December 31, 2008 were $3.6 million.
Net premiums earned increased 39.5% to $38.7 million for the year ended December 31, 2008 compared to $27.7 million for 2007. Net premiums earned increased primarily due to the full year impact of the July 1, 2007 casualty reinsurance treaty that increased retention levels on selected programs. During 2008, the Company added four (4) new programs and had fifteen (15) active programs as of December 31, 2008 compared to twelve (12) active programs at December 31, 2007. The Company’s focus on its specialty programs business line is on insurance programs that allow the Company to participate in underwriting profits, while also earning fee income as the policy issuer.
The Company began writing third party assumed reinsurance in 2007. Net premiums earned for the year ended December 31, 2008 totaled $42.5 million compared to $9.4 million in 2007 due to increased assumed reinsurance premiums written as the Company builds this line of business. The Company’s primary focus is on traditional casualty reinsurance for small specialty insurers, risk retention groups and captives. For the year ended December 31, 2008, gross premiums written as a percentage of total assumed reinsurance gross premiums written were 1.6%, 20.6% and 77.8% for facultative, excess of loss and quota share, respectively.
Fee income earned increased 22.7% to $2.6 million for the year ended December 31, 2008 compared to $2.1 million for 2007. The increase is primarily attributable to consulting fees earned through our Ordinance subsidiary, which was acquired during the third quarter of 2007, as well as brokerage fees earned from the ASI Healthcare acquisition.
Losses and loss adjustment expenses totaled $110.1 million or 63.1% of net premiums earned for the year ended December 31, 2008 compared to $91.2 million and 61.3% in 2007. The $18.9 million increase in losses and LAE is due to higher net earned premiums and $5.4 million of prior year adverse reserve development.
The table below sets forth the prior year adverse reserve development for the years ended December 31, 2008 and 2007 (dollars in thousands):
The 2008 prior year adverse reserve development primarily relates to accident years 2002 through 2006 for environmental contractor business written in New York. In 2008, the Company decided to exit the New York contractor business by non-renewing policies. The adverse development in the runoff line relates to increased estimates of workers’ compensation claims related to site cleanup activities following the terrorist attack in New York on 9/11. The adverse development is partially offset by decreases in special programs primarily related to the pest control program.
The 2007 prior year adverse reserve development for the environmental line primarily relates to increased claim activity on 2004 claims for environmental contractors in New York. This development was partially offset by decreases in construction, surety and runoff business lines reserves.
Income tax expense totaled $0.03 million or 9.1% and $0.7 million, or 2.5% of pre-tax earnings for the years ended December 31, 2008 and 2007, respectively. The reduction in income tax expense is primarily the result of the prior year reserve development and the allowance for reinsurance recoverables, which reduced taxable income in our U.S. subsidiaries. During the year ended December 31, 2008, the Company established a deferred tax asset of $2.6 million related to realized losses on securities held and established a valuation allowance for the same amount as it determined that it is not more likely than not that all of the deferred tax asset related to realized losses on securities held will be realized.
The Company operates through its subsidiaries in the U.S. and Bermuda. Significant differences exist in the regulatory environment in each country. The table below describes the Company’s operations by geographic location for the years ended December 31, 2008 and 2007 (dollars in thousands):
As management is ultimately responsible for determining the fair value measurements for all securities, we selectively validate prices received by comparing the fair value estimates to our knowledge of the current market and investigate prices deemed not to be representative of fair value.
On a quarterly basis, we evaluate whether the fair values of the Company’s individual securities are other-than-temporarily impaired when the fair value is below amortized cost. To make this assessment we consider several factors including (i) our intent and ability to hold the security, (ii) the potential for the security to recover in value, (iii) an analysis of the financial condition of the issuer, (iv) an analysis of the
The Company meets its cash requirements and finances its growth principally through cash flows generated from operations. Due to the soft market, the Company has experienced a reduction in premium rates due to the entrance of new insurance competitors and overall market conditions. The Company’s primary sources of short-term cash flow are premium writings and investment income. Short-term cash requirements relate to claims payments, ceded reinsurance premiums, commissions, salaries, employee benefits and other operating expenses. Due to the uncertainty regarding the timing and amount of settlements of unpaid claims, the Company’s future liquidity requirements may vary; therefore, the Company has structured its investment portfolio maturities to mitigate the variations in those factors. The Company believes its current cash flows are sufficient for the short-term needs of its business and its invested assets are sufficient for the long-term needs of its insurance business.
For these purposes, routine purchases of services, including insurance, that are expected to be used in the ordinary course of the Company’s business have been excluded. More information about our contractual obligations appears in Notes 8 and 11 to our consolidated financial statements.
See Note 1(n), “Summary of Significant Accounting Polices,” to the Company’s consolidated financial statements included herein for a discussion on recent accounting pronouncements.
At December 31, 2009, mortgage backed securities comprised 26.0% of the entire portfolio. All mortgage backed securities are issued by agencies of the U.S. Government or government sponsored entities. The Company's investment in corporate debt securities totaled $274.1 million with $163.4 million in the industrial sector, $39.2 million in the financial sector, $39.2 million in utilities and $32.3 million in other securities. One of the largest issuers is Verizon Communications, having a par value of $6.2 million. The Company also has concentrations to the financial services sector with the largest single security being JP Morgan Chase & Co., with a par value of $7 million. U.S. Government securities were 13.4% of the total portfolio.
The Company does not write a material amount of short-tail business. Short-tail business is defined as business for which claims are received and settled within one year. Total net reserves for short tail business and as of December 31, 2009 were approximately 2.1% of total net reserves. In the aggregate, our primary long-tail lines are construction, where we offer general liability insurance to construction contractors and environmental where we offer general liability and professional liability insurance to environmental contractors and consultants.
Because the Company primarily writes long-tail business, the current year ultimate loss reserve is developed using the expected loss ratio method. The method is appropriate because there are very few claims reported from the most recent accident year for long-tail lines of business. The expected loss ratio is determined based on the review of the projected ultimate loss ratios for the prior accident years. At December 31, 2009 the carried loss and loss adjustment expense reserves for accident years prior to 2009 were determined largely based on the indications produced by the Bornhuetter-Ferguson method because of the additional claims experience gained as the business line matures.
On a quarterly basis, the Company’s in-house actuary performs a review of our major lines of business. The evaluation entails the examination of our current actuarial assumptions compared to actual claim activity. If there is a material deviation from actual emerged losses and the actuarially determined expected losses, further research is completed to determine the cause. Discussions with the claims staff and the underwriting staff about these deviations, in some cases, reveal trends that warrant modifications of the current assumptions about loss development patterns and or expected loss ratios.
The following table displays the resulting range of possible deviation of the net carried reserves for each division at December 31, 2009 (in thousands of dollars):
The following table depicts the effects on our financial position and results of operations of our ceded reinsurance activities (in thousands of dollars):
Deferred Income Taxes. We are required to establish a valuation allowance for the portion of any deferred tax asset that we believe will not be realized. The majority of our deferred taxes associated with our premium writings will be realized over the policy period and payout of related claims. We believe it is more likely than not that we will realize the full benefit of our deferred tax assets, except for deferred tax assets associated with American Safety RRG. See Note 5 to the Company’s consolidated financial statements for additional information on deferred tax assets.
We are incorporated under the laws of Bermuda and, under current Bermuda law, are not obligated to pay 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. Exclusive of our United States subsidiaries, we 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.