Our offices are located at 31 Queen Street, 2nd Floor, Hamilton, Bermuda, and the telephone number is (441) 296-8560. The principal corporate offices of our U.S. subsidiaries are located at 100 Galleria Parkway, Suite 700, Atlanta, Georgia 30339, and the telephone number is (770) 916-1908.
(2) Expense ratio: The expense ratio is the ratio, expressed as a percentage, of acquisition and other operating expenses less fee income to net earned premiums. Our reported expense ratio excludes certain holding company expenses such as interest expense as well as other corporate expenses.
(4) Return on average shareholders’ equity: Return on average shareholders’ equity is the ratio, expressed as a percentage, of net earnings, excluding realized gains and losses, net of tax, to the average of the beginning of period and end of period total shareholders’ equity, excluding accumulated other comprehensive income.
Within E&S, our environmental insurance products provide general contractor pollution and/or professional liability coverage for contractors and consultants in the environmental remediation industry and property owners. Primary casualty provides general liability insurance for residential and commercial contractors as well as general liability and product liability for smaller manufacturers, 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. Our property product encompasses surplus lines commercial property business and commercial multi-peril (CMP) policies. Surety provides payment and performance bonds primarily to the environmental remediation and construction industries. Healthcare provides customized liability insurance solutions primarily for long-term care facilities. Professional Liability provides miscellaneous liability and professional liability coverage on both a primary and excess basis. Professional liability coverage is provided to lawyers, insurance agents, and other businesses, while miscellaneous liability coverage is provided to private and not for profit entities and, to a lesser extent, public companies.
In our ART division, specialty programs provide insurance to homogeneous niche groups through third-party program managers. Our specialty programs consist primarily of property and casualty insurance coverages for certain classes of specialty risks including, but not limited to, construction contractors, pest control operators, auto dealers, real estate brokers, consultants, and restaurant and tavern owners. Fully funded policies provide our insureds the ability to fund their liability exposure via a self-insurance vehicle for which we generate fee income. We write fully funded general and professional liability for businesses operating primarily in the healthcare and construction industries.
For the year ended December 31, 2011, we reported net earnings of $10.8 million or $1.01 per diluted share compared to 2010 net earnings of $30.5 million or $2.87 per diluted share. Net earnings for 2011 include pre-tax realized net gains from investments of $11.0 million and pre-tax net reserve strengthening of $33.6 million. Of the $33.6 million, $13.4 million relates to prior accident years and $20.2 million relates to current accident year losses that exceeded our expectations either due to catastrophes, weather events or reported losses being higher than expected. Net earnings for 2010 of $30.5 million include pre-tax net realized gains of $2.3 million and net loss reserve development of $0.4 million.
Year Ended December 31, 2011 compared to Year Ended December 31, 2010
Net earned premiums totaled $232.9 in 2011 compared to $200.7 million in 2010, an increase of 16.0%. E&S totaled $119.2 million, a 15.8% increase from $102.9 million the same period in 2010; ART increased to $57.3 million, a 12.9% increase over the 2010 period; Assumed Reinsurance totaled $53.0 million, a 20.2% increase from 2010. The increase in earned premium for the E&S lines division was due to increased production across all product lines but driven primarily by excess, professional liability, property, and healthcare product lines. The ART division’s increase in net earned premiums was due primarily to the growth in programs during 2010 and 2011. This growth included a dealer open lot program as well as hospitality programs, some of which have been non-renewed or moved to other carriers in 2012. As a result, 2012 net earned premiums for the ART division are expected to decrease. The Assumed Reinsurance division’s increase in net earned premiums was due to continued increased writings in targeted classes of business during 2010 and 2011.
Losses and loss adjustment expenses totaled $169.4 million, or 72.7%, of net earned premiums for the year ended December 31, 2011, compared to $120.3 million and 59.9% in 2010. 2011 results include $13.3 million of development to prior year loss reserves as shown below.
See “Business-Losses and Loss Adjustment Expenses Reserves” and Note 13 to the Company’s consolidated financial statements for additional information regarding the Company’s reserves for unpaid losses and loss adjustment expenses.
The income tax benefit totaled $(3.4) million and $(2.1) million for the years ended December 31, 2011 and 2010, respectively. In 2010, $1.6 million of the remaining valuation allowance established in 2008 was reversed. Additionally, as shown below, a larger percentage of our earnings for 2011 and 2010 were generated in Bermuda. Also contributing to the tax benefit were losses incurred in primarily the ART division which are retained in the U.S.
Equity. Equity in the Bermuda operations was $228.0 million at the end of 2011 compared to $219.2 million at the end of 2010. The increase is due to net earnings coupled with an increase in net unrealized gains associated with the investment portfolio. Equity of U.S. operations increased to $106.7 million at the end of 2011 from $99.4 million at December 31, 2010, due to net unrealized gains in the investment portfolio.
Year Ended December 31, 2010 compared to Year Ended December 31, 2009
Net earned premiums totaled $200.7 in 2010 compared to $168.5 million in 2009, an increase of 19.1%. E&S totaled $102.9 million, an 11.8% increase from $92.0 million the same period in 2009; ART added $13.1 million, a 32.4% increase over the 2009 period; Assumed Reinsurance totaled $44.1 million, a 22.4% increase from 2009. The increase in earned premium for the E&S lines division was due to growth in product lines added since 2006 such as property, surety, excess and products liability, and professional liability. The Alternative Risk Transfer division’s increase in net earned premium was due primarily to the addition of a dealer open lot program. The Assumed Reinsurance division’s increase in net earned premium was due to continued penetration in targeted classes of business such as medical malpractice, professional liability, and general liability.
Fee income earned decreased to $4.6 million for the year ended December 31, 2010, compared to $5.4 million for 2009 due to less opportunity in the risk transfer market and the sale of a wholly owned agency subsidiary in 2010 that produced fee income during all of 2009.
Net realized gains for the period ended December 31, 2010, were $2.3 million as compared to $0.2 million in 2009.
Losses and loss adjustment expenses totaled $120.3 million, or 59.9%, of net earned premiums for the year ended December 31, 2010, compared to $97.6 million and 57.9% in 2009. 2010 results include $0.4 million of development to prior year loss reserves as shown below.
The table below sets forth the prior year reserve development for the years ended December 31, 2010 and 2009 (dollars in millions):
Acquisition expenses are commissions paid to our producers, offset by ceding commissions we receive from our reinsurers. Acquisition expenses also include premium taxes paid to states in which we are admitted to conduct business. Acquisition expenses increased to $43.5 million for the year ended December 31, 2010, as compared to $37.2 million for the same period of 2009, but, as a percentage of net earned premiums, decreased to 21.7% for the year ended December 31, 2010, compared to 22.1% for the same period of 2009. The dollar increase year over year is the result of growth in gross written premiums in 2010 as compared to 2009 while the percentage decrease is primarily attributable to reduced reinsurance costs and higher retentions.
Corporate and other underwriting expenses increased 10.7% to $45.0 million for the year ended December 31, 2010, compared to $41.4 million for the same 2009 period. Payroll increased primarily due to the addition of new underwriting teams. Other underwriting expenses increased as a result of the increase in the reinsurance recoverable allowance by $2.5 million.
Net Earnings attributable to American Safety Insurance Holdings, Ltd. Net earnings attributable to American Safety Insurance Holdings, Ltd., from Bermuda operations increased to $29.6 million for the year ended December 31, 2010, compared to $20.3 million for 2009, due to improved loss ratios in the Bermuda operations. The U.S. operations net earnings attributable to American Safety Insurance Holdings, Ltd., of $0.9 million for the year ended December 31, 2010, compared to $4.0 million for 2009. In 2010, the U.S. operations incurred a $2.2 million charge related to reinsurance balances recoverable in addition to the loss reserve development in the ART division.
Net cash provided by operations was $61.9 million for the year ended December 31, 2011, and $59.6 million for the year ended December 31, 2010.
Our contractual obligations (in thousands of dollars) as of December 31, 2011, were:
(1) The above table includes all interest payments through the expiration of debt instruments. All amounts are reflected based on final maturity dates. Variable rate interest obligations are estimated based on current interest rates. As a result of applying interest rates based on the current LIBOR rate plus the contractual spread for each capital trust, the interest rates were 4.7%, 4.5% and 4.0% for American Safety Capital Trust, American Safety Capital Trust II and American Safety Capital Trust III, respectively as of December 31, 2011. These rates are used to calculate the variable interest rate obligations through maturity.
percentage decline in value and the length of time during which the decline has occurred;
adverse changes in the issuer’s availability of production resources, revenue sources, technological conditions; and
Our Level 3 instruments include privately held equity securities. Fair value is based on internally developed criteria that use assumptions or other data that are not readily observable from objective sources.
At December 31, 2011, mortgage backed securities comprised 30.7% of the entire portfolio. As of December 31, 2011, 99.8% of our 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 $326.9 million, or 37.0% of the entire portfolio, with $149.2 million in the industrial sector, $110.3 million in the financial sector, $57.4 million in utilities and $10.0 million in other securities. U.S. Government securities were 2.8% of the total portfolio.
Because the Company’s loss reserves are primarily comprised of long-tail business, current year ultimate losses are developed using mostly 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 similar risks from the prior years. At December 31, 2011, the carried loss and loss adjustment expense reserves for accident years prior to 2008 were determined largely based on the indications produced by the Bornhuetter-Ferguson method or loss development factor method because of the additional claims experience gained as the business line matures.
On a quarterly basis, the Company’s internal 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 relative to these deviations, in some cases, reveal trends that warrant modifications of the current assumptions about loss development patterns and or expected loss ratios.
As part of our year-end process, the Company has an external actuarial firm review the analysis prepared by our internal actuary and issues an actuarial opinion on the insurance operating companies’ carried loss and loss adjustment expense reserves.
In addition to evaluating the loss reserves on all exposures on a combined basis the actuarial staff evaluates reserves for each of the following exclusive categories: (1) construction defect claims in California; (2) construction defect in all other states; (3) commercial and residential contractors claims other than construction defects; (4) claims in New York state; (5) claims from product liability exposures; (6) claims from habitational risks; and (7) claims from miscellaneous risks.
A number of assumptions were made in the determination of the best reserve estimates for each line of business at December 31, 2011. The key assumptions among them were the expected loss ratios and loss development patterns. If the actual future losses and loss adjustment expenses develop materially differently from those key assumptions, there could be a potential for significant variation in the development of loss reserves. The effect of any specific assumptions can vary by accident year and line of business. We performed sensitivity analyses that tested the effects on the loss reserve position of using alternative loss ratios and loss development patterns rather than those actually used in determining the net carried reserve at December 31, 2011. The tests addressed each major line of business for which a material deviation to the overall reserve position is possible and used what we believed was a reasonably likely range of potential deviation for each line of business. If our net carried reserves were to decrease from our best estimate, this would increase our net earnings, while an increase in our net carried reserves would decrease our earnings.
See Part I “Ceded Reinsurance” for additional discussion relative to reinsurance coverage.
Acquisition Costs. We defer commissions and premium taxes that are related to the acquisition of insurance contracts. These costs are capitalized and charged to expense in proportion to premium revenue recognized. The method followed in computing deferred policy acquisition costs limits the amount of such deferred costs to their estimated realizable value. This would also give effect to the premiums to be earned and anticipated losses and settlement expenses as well as certain other costs expected to be incurred as the premiums are earned. Judgments as to the ultimate recoverability of such deferred costs are highly dependent upon estimated future loss costs associated with the written premiums as well as investment income.
Deferred Income Taxes. 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.
Recognition of Premium Income. Our premiums are primarily estimated based upon the annual revenues of the underlying insureds or other factors specific to the class of business. Additional or return premiums are recognized for differences between provisional premiums billed and ultimate premiums due when a final audit is complete after the policy has expired. Our premiums are earned ratably over the policy period with unearned premium calculated on a pro rata basis over the lives of the underlying coverages. The Company reviews the collectability of its premium receivables on a quarterly basis.