Our offices are located at 44 Church Street, Hamilton, Bermuda, and the telephone number is (441) 296-8560. The principal corporate offices of our U.S. subsidiaries are located at 1845 The Exchange, Suite 200, Atlanta, Georgia 30339, and the telephone number is (770) 916-1908.
2001 2002 2003 2004 2005 Statement of Operations Data: Gross premiums written $163,018 $159,290 $212,667 $ 221,576 $ 237,880 Gross premiums earned 151,139 145,308 184,403 227,716 231,438 Net premiums earned 73,311 73,582 109,334 136,391 138,537 Net investment income 4,064 4,388 5,801 9,773 14,316 Net realized gains (losses) 752 685 3,139 208 (51) Real estate sales 27,561 51,780 57,555 67,967 3,000 Total revenue 108,418 130,663 175,991 214,656 155,874 Losses and loss adjustment
expenses incurred 45,585 42,031 65,834 93,503 84,406 Acquisition expenses 15,859 15,167 21,818 26,529 28,512 Real estate expenses 25,126 48,527 53,999 55,480 2,439 Earnings before income taxes 5,304 3,403 10,090 18,453 16,048 Net earnings 4,154 2,484 7,414 14,757 14,656 Net earnings per share: Basic $ 0.87 $ 0.52 $ 1.45 $ 2.15 $2.18 Diluted $ 0.87 $ 0.51 $ 1.42 $ 2.01 $2.05 Common shares and common share equivalents used in computing net basic earnings per share 4,797 4,736 5,106 6,864 6,737 Common shares and common share equivalents used in computing net diluted earnings per share 4,933 4,871 5,234 7,343 7,164 Balance Sheet Data (at end of period): Total investments, excluding real estate $ 90,078 $ 111,926 222,418 $327,037 $415,497 Total assets 322,520 389,342 514,260 584,160 697,135 Unpaid losses and loss adjustment expenses 137,391 179,164 230,104 321,624 394,873 Unearned premiums 59,768 71,675 99,939 93,798 100,241 Loan payable 16,403 22,182 30,441 13,019 37,810 Total liabilities 262,540 326,890 418,916 475,380 578,700 Total shareholders' equity 59,980 62,452 95,344 108,780 118,435 GAAP Underwriting Ratios: Loss and loss adjustment expense ratio 62.1% 57.1% 60.2% 68.6% 60.9% Expense ratio 40.8% 44.2% 36.6% 34.1% 36.9% Combined ratio 102.9% 101.3% 96.8% 102.7% 97.8%
We are a specialty insurance company that provides customized insurance products and solutions to small and medium-sized businesses in industries that we believe are underserved by the standard insurance market. For twenty years, we have developed specialized insurance coverages and alternative risk transfer products not generally available to our customers in the standard insurance 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.
Excess and Surplus: Environmental $ 27,233 $ 35,024 $ 41,477 28.6% 18.4% Construction 73,572 77,894 78,026 5.9 0.2 Surety 734 1,174 1,345 59.9 14.6 101,539 114,092 120,848 12.4 5.9 Alternative Risk Transfer: Programs 15,152 17,273 19,712 13.9 14.1 Fully Funded - 257 2,037 - 692.6 15,152 17,530 21,749 15.7 24.1 Runoff 14,787 299 (2,045) (97.9) (783.9) Total net premiums written $131,478 $131,921 $140,552 0.3% 6.5% ======== ======= ======= ==== ====
Year Ended December 31, 2003 2004 2005 Insurance operations Loss & loss adjustment expense ratio 60.2% 68.6% 60.9% Expense ratio 36.6 34.1 36.9 Combined ratio 96.8% 102.7% 97.8% ===== ===== =====
Net earnings from insurance operations increased to $13.6 million for the year ended December 31, 2005 from $4.3 million for the year ended December 31, 2004. Net earnings were $14.7 million, or $2.05 per diluted share, for the year ended December 31, 2005 as compared to $14.8 million, or $2.01 per diluted share, for the year ended December 31, 2004.
For the year ended December 31, 2005, the Company’s losses and loss adjustment expenses ratio decreased 7.7 percentage points to 60.9% from 68.6% primarily due to improved underwriting results. The table below sets forth the prior year reserve development made by the Company for the years ended December 31, 2004 and 2005 (in thousands):
Excess & Surplus lines $ 94 $ (754) Environmental 7,700 2,204 Construction 37 311 Surety 7,831 1,761 Alternative Risk Transfer Programs 1,496 (266) Runoff 5,075 1,111 Total $ 14,402 $2,606 ======== ======
Other expenses increased to $13.2 million for the year ended December 31, 2005 from $9.6 million for 2004. In 2004, the Company collected $2.6 million as final settlement of a note receivable, which was applied as a reduction to 2004 other expenses. Absent this $2.6 million receipt, other expenses increased $1.0 million primarily due to the establishment of a $1.3 million reinsurance recoverable allowance.
In connection with the Company’s 2000 acquisition of a brokerage firm and a related entity, the Company recorded a benefit of $1.4 million in 2005 due to the reversal of an accrual. This compares to a net benefit of $230,000 in 2004 related to the same dispute as a result of settlement of litigation. See “Legal Proceedings” for additional information.
The effective tax rate decreased to 8.7% for the year ended December 31, 2005 from 20.0% for 2004. This decrease was due primarily to the reversal of a deferred tax asset reserve of our non-subsidiary affiliate American Safety Risk Retention Group, Inc.(“American Safety RRG”), of $555,000. Absent this adjustment, the effective tax rate would have been 12.1% for the year ended December 31, 2005. In addition, the effective tax rate was lower due to a decrease in real estate earnings and lower taxable income on the Company’s U.S. insurance subsidiaries.
The Company conducts business 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 segment for the years ended December 31, 2004 and 2005 (in thousands):
December 31, 2005 U.S. Bermuda Total Income Tax 1,392 - 1,392 Net earnings 4,396 10,260 14,656 Assets 529,768 167,267 697,135 Equity 59,002 59,433 118,435
Year Ended December 31, 2003 compared to Year Ended December 31, 2004
Net earnings from insurance operations decreased to $4.3 million for the year ended December 31, 2004 from $7.1 million for the year ended December 31, 2003. Net earnings increased to $14.8 million, or $2.01 per diluted share, for the year ended December 31, 2004 from $7.4 million, or $1.42 per diluted share, for the year ended December 31, 2003.
The Company’s book value of outstanding shares increased 16.2% to $16.04 at December 31, 2004 from $13.80 at December 31, 2003, due primarily to the Company’s net earnings during the year.
Construction. Net premiums earned increased 39.0% to $79.8 million for the year ended December 31, 2004 compared to $57.4 million for 2003. Net premiums written increased 5.9% to $77.9 million for the year ended December 31, 2004 compared to $73.6 million for 2003. The Company continued to capitalize on market conditions, specifically, the lack of insurance capacity for certain construction risks. In addition, the Company introduced a new excess general liability coverage product in the second quarter of 2004 to meet the market need for higher limits of liability above the Company’s primary policies.
Surety. Net premiums earned increased 69.8% to $1.1 million for the year ended December 31, 2004 from $734,000 for 2003. Net premiums written increased 59.9% to $1.2 million for the year ended December 31, 2004 from $670,000 for 2003. This increase was attributable to the Company’s efforts to modestly expand its surety business as a supporting product line to the environmental business line. In addition, in order to capitalize on underwriting opportunities in this business line, the Company entered into a quota share reinsurance treaty during the second quarter of 2004. This treaty allowed the Company to share half of the exposures in an amount up to $2 million per bond with the reinsurer, which allowed more premiums to be written. This reinsurance agreement has the effect of lowering the Company’s premiums and losses in this business line by 50%.
Specialty Programs. Net premiums earned increased 17.4% to $16.5 million for the year ended December 31, 2004 compared to $14.1 million for 2003. Net premiums written increased 13.9% to $17.3 million for the year ended December 31, 2004 compared to $15.2 million for 2003. Prior to 2002, the Company had not retained significant portions of risk in this business line. In 2003, the Company expanded its risk position in certain programs. These increased retentions drove the increase in premiums earned. The Company also earns fee income on certain specialty program business that it writes. The Company had 15 active programs at the end of 2004 compared to 14 at the end of 2003.
Fully-Funded Policies. Net premiums earned increased to $89,000 for the year ended December 31, 2004 as compared to $0 for 2003. Net premiums written increased to $257,000 for the year ended December 31, 2004 as compared to $0 for 2003. Fee income earned for the year ended December 31, 2004 increased to $210,000 from $62,000 for 2003.
Net realized gains from the sale of investments decreased to $0.2 million for the year ended December 31, 2004 from $3.1 million for 2003. This decrease was due to the Company’s decision to realize gains on fixed income securities in 2003.
Real estate income increased to $68.0 million for the year ended December 31, 2004 compared to $57.6 million for 2003. This revenue was generated from closings of condominium units and boat slips at the Company’s Harbour Village project. We did not recognize revenue until a closing occurred and title passed to the buyer. The following chart shows the number of condominium units and boat slips that were closed each year:
For the year ended December 31, 2004, the Company’s losses and loss adjustment expenses ratio increased 8.4 percentage points to 68.6% from 60.2% primarily due to increase reserve development for prior years. For the year ended December 31, 2004, reserve development for prior years increased to $14.4 million from $5.2 million for 2003. The table below sets forth the reserve development (in thousands) made for prior years by the Company for the years ended December 31, 2003 and 2004:
Payroll and other expenses decreased to $19.9 million for the year ended December 31, 2004 from $23.7 million for 2003. Payroll expenses increased to $10.3 million for the year ended December 31, 2004 from $9.0 million for 2003 due to additional employees. Other expenses in 2004 included a $2.6 million recovery related to impaired notes receivable, and other expenses in 2003 included a $3.9 million impairment charge.
Rescission expenses decreased to a benefit of $230,000 in 2004 from an expense of $255,000 in 2003. The benefit in 2004 included a $1.8 million payment received in settlement of professional liability claims in a rescission matter relating to the Company’s acquisition of a brokerage firm and a related entity. Also included in 2004 are $1.4 million of additional expenses as a result of adverse court rulings in March 2005 in connection with the same dispute See “Legal Proceedings” for additional information.
The effective tax rate decreased to 20% for the year ended December 31, 2004 from 27% for 2003. This decrease was the result of lower taxable income in the Company’s U.S. subsidiaries during 2004.
December 31, 2003 U.S. Bermuda Total Income tax 2,675 - 2,675 Net earnings 5,827 1,587 7,414 Assets 410,177 104,083 514,260 Equity 50,445 44,898 95,343
Assets. Assets from Bermuda operations increased to $134.8 million at the end of 2004 compared to $104.1 million at the end of 2003. This increase was a result of a public stock offering in 2003 and an increase in premium writings assumed from growing U.S. operations. Assets from U.S. operations at the end of 2004 increased to $449.3 million, compared to $410.2 million at the end of 2003. This change was a result of increased premium writings as the Company has capitalized on favorable market conditions offset by a decrease in real estate assets at the end of 2004. Real estate assets decreased at the end of 2004 as the Harbour Village project neared completion.
Equity. Equity of the Bermuda operations increased to $52.6 million at the end of 2004 compared to $44.9 million at the end of 2003. This increase was largely due to a public stock offering in 2003 which raised $27.2 million in new equity, higher net income and increased net unrealized gains in the Company’s investment portfolio offset by a stock repurchase during the third quarter of 2004. Equity of the U.S. operations increased to $56.1 million at the end of 2004 compared to $50.4 million at the end of 2003. This increase was a result of higher net income and increased net unrealized gains in the Company’s investment portfolio.
Net cash provided from operations was $70.4 million for the year ended December 31, 2005, $89.8 million for the year ended December 31, 2004 and $80.2 million for the year ended December 31, 2003. The decrease in cash flow from operations between 2005 and 2004 was primarily caused by increased loss payments, which increased to $46.9 million from $20.5 million. During 2004, the Company received $2.6 million in final settlement of previously fully reserved notes receivable and also received $1.8 million in settlement of professional liability claims in a rescission matter relating to the Company’s acquisition of a brokerage firm and a related entity. See “Legal Proceedings” for additional information.
The Company’s ability to pay future dividends to shareholders will depend, to a significant degree, on the ability of its subsidiaries to generate earnings from which to pay dividends. The jurisdictions in which the Company 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. Given the Company’s growth and the capital requirements associated with that growth, the Company does not anticipate paying dividends on the Common Shares in the near future.
Our contractual obligations (in thousands) as of December 31, 2005 were:
(1) The above table includes all interest payments through the expiration of interest rate swaps as discussed in Note 8 to the Company’s consolidated financial statements. At that time the Company may redeem the debt or continue with variable interest payments. 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 current interest rates to the respective LIBOR for each capital trust, the interest rate is 9.0%, 8.8% and 8.2% for American Safety Capital Trust, American Safety Capital Trust II and American Safety Capital Trust III, respectively. These rates are used to calculate the variable interest rate obligations through maturity. Fixed rates include, where applicable, the effects of interest rate derivatives employed to manage such interest rate risk.
Investments. We routinely review our investments that have experienced declines in fair value to determine if the decline is other than temporary. These reviews are performed with consideration of the facts and circumstances of an issuer in accordance with the Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin No. 59, Accounting for Non-Current Marketable Equity Securities; Statement of Financial Accounting Standards (“SFAS”) No. 115, Accounting for Certain Investments in Debt and Equity Securities; and related guidance. The identification of distressed investments, and the assessment of whether a decline is other than temporary involve significant management judgment and require evaluation of factors including but not limited to:
|X| Percentage decline in value and the length of time during which the decline has occurred, |X| Recoverability of principal and interest, |X| Market conditions, |X| Ability to hold the investment to maturity, |X| A pattern of continuing operating losses of the issuer, |X| Rating agency actions that affect the issuer's credit status, |X| Adverse changes in the issuer's availability of production resources, revenue sources, technological conditions, and |X| Adverse changes in the issuer's economic, regulatory or political environment.
Reserves. Certain of our insurance policies and reinsurance assumed, including general and pollution liability policies covering environmental remediation, construction, and workers’ compensation risks, may be subject to claims brought years after an incident has occurred or the policy period has ended. Claims made policies provide coverage for claims that are reported during the policy period. Occurrence form policies provide coverage for claims that occur during the policy period regardless of when they are reported. We are required by our regulators to maintain reserves to cover the unpaid portion of our ultimate liability for losses and loss adjustment expenses with respect to (i) reported claims and (ii) IBNR claims. A full actuarial analysis is performed to estimate all of our unpaid losses and loss adjustment expenses under the terms of our contracts and agreements. In evaluating whether the reserves are reasonable for unpaid losses and loss adjustment expenses, it is necessary to project future losses and loss adjustment expenses payments. It is certain that the actual future losses and loss adjustment expenses will not develop exactly as projected and may, in fact, vary significantly from the projections. If the net loss reserves were to increase by 5% this would reduce pre-tax income by $11.7 million. If the net loss reserves were to decrease by 5% this would increase pre-tax income by $11.7 million.
We continuously monitor the financial condition of our reinsurers. Our policy is to periodically charge to earnings, in the form of an allowance, an estimate of unrecoverable amounts from troubled or insolvent reinsurers. We believe that current reserve levels for uncollectible reinsurance are sufficient to cover our exposures.
Policy 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 premiums written.
The combined ratio of an insurance company measures only the underwriting results of insurance operations and not the profitability of the overall company. Our reported combined ratio for our insurance operations may not provide an accurate indication of our overall profitability. For instance, depending on our mix of business, the combined ratio may fluctuate from time to time and may not reflect the overall profitability of our insurance operations.