The following table sets forth selected consolidated financial data with respect to the Company for the periods indicated. The balance sheet data have been derived from the audited financial statements of the Company. This information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Company's consolidated financial statements and notes thereto included elsewhere in this Report.
The Company insures and places risks through its U.S. insurance subsidiary, as well as its non-subsidiary risk retention group affiliate and substantial unaffiliated insurance and reinsurance companies. The Company also reinsures and places, through its Bermuda reinsurance subsidiary and substantial unaffiliated reinsurers, a portion of the risks underwritten directly by its U.S. insurance subsidiary, its risk retention group affiliate and other insurers. Substantially all of the reinsurance business that the Company currently assumes is for primary insurance programs that the Company has developed and underwritten.
The Company is able to select its roles as program developer, primary underwriter, reinsurer, program manager and broker based on its assessment of each risk profile. After determining its roles, the Company utilizes its insurance and reinsurance subsidiaries, its insurance brokerage and management services subsidiaries, and a risk retention group affiliate to generate risk premium revenues, program management fees, insurance and reinsurance commissions and investment income, as appropriate.
The Company's general, pollution, professional liability, and surety (other than bail bonds) lines of business are written primarily for environmental remediation contractors, consultants and property owners involved with environmental risks. Environmental remediation contractors are involved in the removal or abatement of hazardous materials and conditions such as asbestos, lead, underground storage tanks and other environmental risks. Environmental consultants and similar professional firms engage in the detection and analysis of hazardous materials and the design and monitoring of remediation projects. The general, pollution, and professional liability policies written and reinsured by the Company are issued for specific environmental remediation risks, have limited (rather than absolute) pollution exclusions and contain aggregate limits of liability. The Company's workers' compensation line of business is written primarily for environmental industry businesses and the employee leasing and staffing industry. The workers' compensation coverage for contractors involved in environmental remediation includes coverage for risks which may include occupational diseases from exposure to hazardous substances. Surety bonds issued by the Company guarantee the performance of environmental and other contractors on environmental remediation and construction projects, and the payment of sums due to laborers, materialmen and suppliers.
The Company's revenues are comprised of risk premium revenues, program management fees, insurance and reinsurance brokerage commissions, investment income, interest on secured notes receivable, net realized gains from the sale of investment securities, and other income. The Company's primary revenue source has been reinsurance assumed from its U.S. insurance subsidiary, its risk retention group affiliate and other insurers, for which the Company has developed specialty insurance programs. The Company and its risk retention group affiliate write only casualty coverages and therefore do not participate in reinsuring first party property coverages.
The Company's financial position and results of operations are subject to change based on various factors, including competitive conditions in the insurance industry, unpredictable developments in loss trends, changes in loss reserves, market acceptance of new coverages and enhancements, and changes in levels of general business activity and economic conditions. During this decade, the Company has operated in a soft market cycle which is characterized by excess insurance capacity and declining insurance premium rates.
The combined ratio of an insurance company measures only the underwriting results of insurance operations and not the profitability of the overall company. The Company's reported combined ratio for its insurance operations may not provide an accurate indication of the Company's overall profitability from insurance and reinsurance programs due to the exclusion of fee and commission income and expenses generated in related management and agency subsidiaries. Depending on the Company's mix of business going forward, the combined ratio may fluctuate from time to time and may not reflect the overall profitability of insurance programs to the Company.
The Year 2000 issue is the result of computer programs being written using two digits rather than four digits to define the applicable year. If not corrected, computer applications could fail or create erroneous results by or at the Year 2000. The Company, together with consulting outside vendors, has reviewed its information technology systems (i.e., underwriting, insureds, claims and accounting) and believes that the systems will process date information accurately and without interruption when required to process dates in the year 1999 and beyond.
In the context of Year 2000 issues, the Company has identified the following general categories of business partners as material to the Company's ability to conduct its operations: software, hardware and telecommunication providers, banks and investment managers, insurance brokers, agents and producers, reinsurers and reinsurance intermediaries
and utilities. The Company has been in contact with its material business partners to determine their state of readiness with regard to Year 2000 compliance and the potential impact on the Company. Based on the information available to the Company, the Company has not currently identified a material business partner that will not be compliant with respect to Year 2000 issues. However, there can be no assurance that such material business partners will be Year 2000 compliant, and such noncompliance could have a material affect on the Company's financial condition and results of operations.
The Company anticipates that its information technology systems will be Year 2000 compliant on or before June 30, 1999. The Company's contingency plan for any Year 2000 noncompliance of its information technology systems involves the manual entering and outputting of business records. The Company believes it has sufficient employees and other staff available to maintain its current level of customer service. To date, the Company has spent less than $100,000 on hardware and software relating to Year 2000 compliance and the Company does not anticipate any significant additional expenditures with respect to the Year 2000 issue.
Net Premiums Earned. Net premiums earned increased 10.1% from $8.3 million in 1997 to $9.2 million in 1998. The principal factors accounting for the result were an increase of workers' compensation reinsurance premiums by 19.3% or $991,000 and an increase of general liability reinsurance premiums by 62.7% or $918,000. Those increases were partially offset due to a decrease of surety premiums by 66.8% or $1,163,000, which can be attributed to reduced bail bond premium production from a discontinued program during 1997 which produced $1.4 million in net earned premium in such year.
Net Investment Income. Net investment income increased 72.9% from $1.6 million in 1997 to $2.8 million in 1998 as a result of the investment of additional cash flows from insurance operations and from investment of the Company's initial public offering proceeds during 1998. The average annual pre-tax yield on investments was 7.0% in 1997 and 7.1% in 1998. The average annual after-tax yield on investments was 6.3% in 1997 and 6.7% in 1998.
Brokerage Commission Income. Income from insurance brokerage operations decreased 44.3% from $2.0 million in 1997 to $1.1 million in 1998 as a result of additional premiums being written by the Company's U.S. insurance subsidiary in which acquisition expenses and brokerage income are eliminated due to consolidation.
Management Fees. Management fees increased 18.8% from $601,000 in 1997 to $714,000 in 1998 as a result of increased service levels provided by the Company to its risk retention group affiliate.
Net Realized Gains. Net realized gains from the sale of investments increased from $84,000 in 1997 to $443,000 in 1998, primarily from the sale of fixed maturities due to favorable market conditions.
Losses and Loss Adjustment Expenses. Loss and loss adjustment expenses increased 26.5% from $4.1 million in 1997 to $5.2 million in 1998 primarily due to a 10.1% increase in net earned premiums combined with an increase in the projected losses for workers' compensation and a decrease in the projected losses for general liability. The Company has recorded loss and loss adjustment expenses for workers' compensation to the aggregate stop-loss attachment point of its reinsurance.
Income Taxes. Federal and state income taxes decreased from $355,531 in 1997 to a benefit of $199,244 in 1998 due to additional premiums being ceded to the Company's Bermuda reinsurance subsidiary and investment income earned in Bermuda.
Net Investment Income. Net investment income increased 36.5% from $1.2 million in 1996 to $1.6 million in 1997 as a result of the investment of additional cash flows from insurance operations. The average annual pre-tax yield on investments was 6.2% in 1996 and 7% in 1997. The average annual after-tax yield on investments was 5.6% in 1996 and 6.3% in 1997.
Brokerage Commission Income. Income from insurance brokerage operations increased 6.3% from $1.9 million in 1996 to $2 million in 1997 as a result of increased
commissions derived from insurance business produced through the Company's risk retention group affiliate and unaffiliated insurance companies.
Management Fees. Management fees increased 25.5% from $479,000 in 1996 to $601,000 in 1997 as a result of increased service levels provided by the Company to its risk retention group affiliate.
Net Realized Gains. Net realized gains from the sale of investments decreased from $177,000 in 1996 to $84,000 in 1997.
On a consolidated basis, net cash provided from operations was $3.6 million for 1996, $9.4 million for 1997 and $2.7 million for 1998. The positive cash flows for said periods were primarily attributable to net premiums written, net earnings, and increases in reserves for unpaid losses. Because workers' compensation and general liability claims may be paid over an extended period of time, the Company has established relatively large loss reserves for such lines of business. The assets supporting the Company's reserves continue to earn investment income until claim payments are made.
Total assets increased from $31.3 million at December 31, 1996 to $47.7 million at December 31, 1997, and to $86.1 million at December 31, 1998, primarily due to increases in cash, invested assets, and notes receivable. Cash, invested assets and notes receivable increased from $27.3 million at December 31, 1996 to $37.4 million at December 31, 1997, and to $72 million at December 31, 1998 as a result of increases in net premiums written, investment income, and the proceeds from the Company's initial public offering.
In January 1997, the Securities and Exchange Commission approved rule amendments regarding disclosures concerning derivative financial instruments, other financial instruments and derivative commodity instruments (the "Release"). The Release requires inclusion in the footnotes to the financial statements of extensive detail about the accounting policies followed by a company in connection with its accounting for derivative financial instruments and derivative commodity instruments. As of December 31, 1998, the Company had no investments in derivative instruments.
American Safety is incorporated under the laws of Bermuda and, under current Bermuda law, is not obligated to pay any taxes in Bermuda based upon income or capital gains. American Safety has received an undertaking from the Minister of Finance in Bermuda pursuant to the provisions of The Exempted Undertakings Tax Protection Act 1966, which exempts American Safety and its 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. The Company, exclusive of its United States subsidiaries, does not consider itself to be engaged in a trade or business in the United States and accordingly does not expect to be subject to direct United States income taxation. The Company's U.S. subsidiaries are subject to taxation in the United States.
The Company's consolidated financial statements required under this Item 8 are included as part of Item 14 of this Report.