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EX-11 - EXHIBIT 11-COMPUTATION OF EARNINGS PER SHARE - AMERICAN SAFETY INSURANCE HOLDINGS LTDex11.htm
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
______________________

FORM 10 Q

Ö  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2010

“OR”

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM  TO .

Commission File Number 1-14795

AMERICAN SAFETY INSURANCE HOLDINGS, LTD.
(Exact name of Registrant as specified in its charter)

Bermuda
 
Not Applicable
(State or other jurisdiction
 
(I.R.S. Employer
of incorporation)
 
Identification No.)
 
The Boyle Building, 2nd Floor
 
 
31 Queen Street
 
 
Hamilton, HM 11, Bermuda
 
 
(Address, zip code of principal executive offices)
 
     
 
(441) 296-8560
 
 
(Registrant's telephone number, including area code)
 


Indicate by check mark whether registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.
_X_ Yes                      ___ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).       Yes ____ No __

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer.  See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act.  (check one)

Large accelerated filer _____
Accelerated filer __X__
Non-accelerated filer ______
Smaller reporting company ______

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
____  Yes                      _X_  No

The aggregate number of shares outstanding of Registrant’s common stock, $0.01 par value, on August 3, 2010 was 10,251,734.



 

 




AMERICAN SAFETY INSURANCE HOLDINGS, LTD.

FORM 10-Q

TABLE OF CONTENTS




 
PART I – FINANCIAL INFORMATION
 
   
Page
Item 1.
Financial Statements
3
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
18
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
25
Item 4.
Controls and Procedures
25
     
 
PART II – OTHER INFORMATION
 
     
Item 1.
Legal Proceedings
26
Item 1A.
Risk Factors
26
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
26
Item 3.
Defaults Upon Senior Securities
26
Item 4.
Reserved
26
Item 5.
Other Information
26
Item 6.
Exhibits
27
     






 
 

 

PART I - FINANCIAL INFORMATION

Item 1.  Financial Statements
American Safety Insurance Holdings, Ltd. and Subsidiaries
Consolidated Balance Sheets
(dollars in thousands except share data)

   
June 30, 2010
(Unaudited)
   
December 31, 2009
 
Assets:
           
Investments available-for-sale:
           
Fixed maturity securities at fair value (including $5,845 and $5,384 from VIE)
  $ 735,049     $ 672,278  
Common stock, at fair value
    7,601       7,519  
Preferred stock, at fair value
    3,257       3,371  
Short-term investments, at fair value (including $2,969 and $1,161 from VIE)
    32,708       67,257  
                 
Total investments
    778,615       750,425  
                 
Cash and cash equivalents (including $317 and $54 from VIE)
    41,970       34,756  
Accrued investment income (including $56 and $50 from VIE)
    6,584       6,305  
Premiums receivable (including $3,472 and $1,058 from VIE)
    29,835       21,515  
Ceded unearned premiums (including $453 and $640 from VIE)
    22,164       41,616  
Reinsurance recoverable (including $13,773 and $13,886 from VIE)
    216,465       200,764  
Deferred income taxes
    3,663       5,647  
Deferred acquisition costs (including $(222) and $(22) from VIE)
    21,415       16,228  
Property, plant and equipment, net
    12,043       10,833  
Goodwill
    11,083       11,083  
Other assets (including $0 and $1,614 from VIE)
    51,047       48,488  
                 
Total assets
  $ 1,194,884     $ 1,147,660  
                 
Liabilities and Shareholders' Equity:
               
                 
Liabilities:
               
Unpaid losses and loss adjustment expenses
(including $17,691 and $17,733 from VIE)
  $ 647,932     $ 616,444  
Unearned premiums (including $1,189 and $1,378 from VIE)
    121,083       124,189  
Ceded premiums payable (including $1,420 and $63 from VIE)
    12,171       10,930  
Funds held (including $182 and $191 from VIE)
    55,597       48,378  
Securities payable
    21       18,790  
Other liabilities (including $2,120 and $785 from VIE)
    14,682       17,089  
Loans payable
    39,129       36,328  
Total liabilities
  $ 890,615     $ 872,148  
                 
Shareholders’ equity
               
Preferred stock, $0.01 par value; authorized 5,000,000 shares;
no shares issued and outstanding
    -       -  
Common stock, $0.01 par value; authorized 30,000,000 shares; issued and outstanding at June 30, 2010, 10,218,234 and December 31, 2009, 10,323,875 shares
    102       103  
Additional paid-in capital
    100,940       102,486  
Retained earnings
    156,490       143,823  
Accumulated other comprehensive income, net
    42,676       25,425  
Total American Safety Insurance Holdings, Ltd. (ASIH, Ltd.) shareholders’ equity
    300,208       271,837  
Equity in non-controlling interest
    4,061       3,675  
Total shareholders' equity
    304,269       275,512  
Total liabilities and shareholders’ equity
  $ 1,194,884     $ 1,147,660  

See accompanying notes to consolidated interim financial statements (unaudited).

 
3

 

American Safety Insurance Holdings, Ltd. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
(dollars in thousands except per share data)

   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2010
   
2009
   
2010
   
2009
 
INCOME STATEMENT DATA:
Revenues:
                       
Direct earned premiums
  $ 60,976     $ 50,400     $ 116,718     $ 101,179  
Assumed earned premiums
    9,270       9,056       18,290       20,096  
Ceded earned premiums
    (23,006 )     (17,867 )     (44,800 )     (35,006 )
Net earned premiums
    47,240       41,589       90,208       86,269  
                                 
Net investment income
    7,929       7,729       15,834       15,519  
Net realized gains
    509       281       1,520       237  
Fee income
    1,155       1,185       2,248       2,118  
Other income
    10       65       30       84  
Total revenues
    56,843       50,849       109,840       104,227  
                                 
Expenses:
                               
Losses and loss adjustment expenses
    29,251       24,175       54,652       51,248  
Acquisition expenses
    8,995       8,873       18,825       19,077  
Other underwriting expenses
    9,849       8,470       19,676       17,316  
Interest expense
    685       810       1,444       1,551  
Corporate and other expenses
    751       743       1,466       1,425  
Total expenses
    49,531       43,071       96,063       90,617  
                                 
Earnings before income taxes
    7,312       7,778       13,777       13,610  
Income taxes
    950       766       851       974  
Net Earnings
  $ 6,362     $ 7,012     $ 12,926     $ 12,636  
Less:  Net earnings attributable to the non-controlling interest
    199       93       256       172  
                                 
Net earnings attributable to ASIH, Ltd.
  $ 6,163     $ 6,919     $ 12,670     $ 12,464  
                                 
Net earnings per share:
                               
Basic
  $ 0.60     $ 0.67     $ 1.23     $ 1.21  
Diluted
  $ 0.58     $ 0.66     $ 1.19     $ 1.19  
                                 
Weighted average number of shares outstanding:
                               
Basic
    10,246,100       10,302,511       10,288,718       10,294,390  
Diluted
    10,589,708       10,523,511       10,616,956       10,515,391  
                                 

See accompanying notes to consolidated interim financial statements (unaudited).


 
4

 

American Safety Insurance Holdings, Ltd. and Subsidiaries
Consolidated Statements of Cash Flow
(Unaudited)
(dollars in thousands)

   
Six Months Ended
June 30,
 
   
2010
   
2009
 
Cash flow from operating activities:
Net earnings
  $ 12,926     $ 12,636  
Adjustments to reconcile net earnings to net cash provided by operating activities:
               
Realized (gains) on sale of investments
    (1,520 )     (237 )
Depreciation expense
    1,402       1,843  
Stock based compensation expense
    1,119       994  
Change in deferred acquisition costs, net
    (5,187 )     591  
Amortization of premiums on investments
    510       570  
Deferred income taxes
    (887 )     (558 )
Change in operating assets and liabilities:
               
Accrued investment income
    (279 )     572  
Premiums receivable
    (8,320 )     2,012  
Reinsurance recoverable
    (15,701 )     (1,071 )
Ceded unearned premiums
    19,452       10,008  
Funds held
    7,219       9,743  
Unpaid losses and loss adjustment expenses
    31,488       17,911  
Unearned premiums
    (3,106 )     (13,706 )
Ceded premiums payable
    1,241       (4,164 )
Other liabilities
    (2,407 )     2,395  
Other assets, net
    (2,675 )     (11,923 )
Net cash provided by operating activities
    35,275       27,616  
                 
Cash flow from investing activities:
               
Purchases of fixed maturities
  $ (168,989 )   $ (130,725 )
Purchases of common stock
    -       (162 )
Proceeds from sale of fixed maturities
    109,380       130,789  
Proceeds from sale of equity securities
    -       8,189  
(Increase) decrease in short-term investments
    34,549       (29,173 )
Consideration paid for acquired companies, net
    -       (3,688 )
Purchase of fixed assets, net
    (2,404 )     (1,157 )
Net cash used in investing activities
    (27,464 )     (25,927 )
                 
Cash flow from financing activities:
               
Stock repurchases
  $ (2,883 )   $ (430 )
Proceeds from exercised stock options
    231       434  
Proceeds from termination of interest rate swaps
    2,055       -  
Net cash (used in) provided by financing activities
    (597 )     4  
                 
Net increase in cash and cash equivalents
    7,214       1,693  
Cash and cash equivalents at beginning of period
    34,756       12,898  
                 
Cash and cash equivalents at end of period
  $ 41,970     $ 14,591  
                 
Supplemental disclosure of cash flow information:
               
Income taxes paid
  $ 10     $ 1,908  
Interest paid
  $ 1,372     $ 1,544  
                 

See accompanying notes to consolidated interim financial statements (unaudited).

 
5

 

American Safety Insurance Holdings, Ltd. and Subsidiaries
Consolidated Statements of Comprehensive Earnings
(Unaudited)
(dollars in thousands)


   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2010
   
2009
   
2010
   
2009
 
                         
Net earnings
  $ 6,362     $ 7,012     $ 12,926     $ 12,636  
                                 
Other comprehensive income
before income taxes:
                               
                                 
Unrealized gains on securities available-for-sale
    17,282       20,214       22,464       16,616  
                                 
Unrealized gains (losses) on hedging transactions
    (22 )     2,108       (703 )     1,518  
                                 
Reclassification adjustment for realized gains included in net earnings
    (509 )     (281 )     (1,520 )     (237 )
                                 
Total other comprehensive income before taxes
    16,751       22,041       20,241       17,897  
                                 
                                 
Income tax expense related to items of other comprehensive income
    2,553       4,121       2,862       3,098  
                                 
Other comprehensive income net of income taxes
    14,198       17,920       17,379       14,799  
                                 
Comprehensive income
    20,560       24,932       30,305       27,435  
                                 
Less:  Comprehensive income attributable to the non-controlling interest
    311       177       387       266  
                                 
Comprehensive income attributable to ASIH, Ltd.
  $ 20,249     $ 24,755     $ 29,918     $ 27,169  



See accompanying notes to consolidated interim financial statements (unaudited).



 
6

 

American Safety Insurance Holdings, Ltd. and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2010
(Unaudited)


Note 1 - Basis of Presentation

The accompanying consolidated financial statements of American Safety Insurance Holdings, Ltd.  (“American Safety Insurance”) and its subsidiaries and American Safety Risk Retention Group, Inc. (“American Safety RRG”), a non-subsidiary risk retention group affiliate (collectively, the “Company”), are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) as established by the FASB Accounting Standards Codification© ("Codification" or "ASC").  The preparation of financial statements in conformity with GAAP requires management to make estimates, based on the best information available, in recording transactions resulting from business operations.  Certain balance sheet amounts involve accounting estimates and/or actuarial determinations and are therefore subject to change and include, but are not limited to, invested assets, deferred income taxes, reinsurance recoverables, goodwill and the liabilities for unpaid losses and loss adjustment expenses. As additional information becomes available (or actual amounts are determinable), the recorded estimates may be revised and reflected in operating results.  While management believes that these estimates are adequate, such estimates may change in the future.

The results of operations for the three and six months ended June 30, 2010 may not be indicative of the results for the fiscal year ending December 31, 2010.  These unaudited interim consolidated financial statements and notes should be read in conjunction with the financial statements and notes included in the audited consolidated financial statements on Form 10-K of the Company for the fiscal year ended December 31, 2009.

The unaudited interim consolidated financial statements include the accounts of American Safety Insurance, each of its subsidiaries and American Safety RRG.  All significant intercompany balances as well as normal recurring adjustments have been eliminated.  Unless otherwise noted, all balances are presented in thousands.

Certain balance sheet and statement of operations items have been reclassified for the 2009 periods.  The presentation is consistent with the presentation for the three and six months ended June 30, 2010 and did not result in any impact to net earnings or shareholders’ equity.


 
7

 


 
Note 2 - Investments

The amortized cost and estimated fair values of the Company’s investments at June 30, 2010 and December 31, 2009 are as follows:

   
Amortized
cost
   
Gross
unrealized
gains
   
Gross
unrealized
losses
   
Estimated
fair value
 
June 30, 2010
                       
                         
Securities available for sale:
Fixed maturities:
U.S. Treasury securities and obligations of U.S. Government corporations and agencies
  $ 69,423     $ 3,597     $ (1 )   $ 73,019  
States of the U.S. and political subdivisions of the states
    23,531       1,574       (51 )     25,054  
Corporate securities
    296,576       26,581       (465 )     322,692  
Mortgage-backed securities
    31,069       6,516       (7 )     37,578  
Commercial mortgage-backed securities
    238,681       10,768       (48 )     249,401  
Asset-backed securities
    26,418       889       (2 )     27,305  
                                 
Total fixed maturities
  $ 685,767     $ 49,856     $ (574 )   $ 735,049  
                                 
Common stock
  $ 7,582     $ 19     $ 0     $ 7,601  
                                 
Preferred stock
  $ 3,273     $ 145     $ (161 )   $ 3,257  
                                 
December 31, 2009:
                               
                                 
Securities available for sale:
Fixed maturities:
U.S. Treasury securities and obligations of U.S. Government corporations and agencies
  $ 101,638     $ 1,936     $ (316 )   $ 103,258  
States of the U.S. and political subdivisions of the states
    35,253       1,058       (228 )     36,083  
Corporate securities
    260,511       13,937       (378 )     274,070  
Mortgage-backed securities
    196,738       7,483       (537 )     203,684  
Commercial mortgage-backed securities
    28,739       4,813       (21 )     33,531  
Asset-backed securities
    21,034       618       -       21,652  
                                 
Total fixed maturities
  $ 643,913     $ 29,845     $ (1,480 )   $ 672,278  
                                 
Common stock
  $ 7,582     $ -     $ (63 )   $ 7,519  
                                 
Preferred stock
  $ 3,273     $ 179     $ (81 )   $ 3,371  
                                 
                                 


 
8

 

Note 3 – Segment Information

Our business segments are classified into insurance operations and other, with the insurance operations consisting of three divisions:  excess and surplus lines (E&S), alternative risk transfer (ART) and assumed reinsurance (Assumed Re).  E&S includes seven products:  environmental, construction, products liability, excess, property, surety and healthcare.  ART includes two business lines: specialty programs and fully funded.  In our Assumed Re division, the Company assumes specialty property and casualty business from unaffiliated insurers and reinsurers.

Within E&S, our environmental insurance products provide general, pollution and professional liability coverage for contractors and consultants in the environmental remediation industry and property owners. Construction provides general liability insurance for residential and commercial contractors.  Products liability provides general liability and product liability coverages for smaller manufacturers and 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 policies, with a focus on construction risks. Our property coverage encompasses surplus lines commercial property business and commercial multi-peril (CMP) policies.  Surety coverage provides payment and performance bonds primarily to the environmental remediation and construction industries, while healthcare provides customized general and professional liability insurance solutions primarily for long-term care facilities.

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, consultants, restaurant and tavern owners and bail bondsmen.  Fully funded policies give our insureds the ability to fund their liability exposure via a self-insurance vehicle.  Our fully funded product primarily offers general and professional liability for businesses operating in the healthcare and construction industries.

Our Assumed Reinsurance division offers property and casualty reinsurance products in the form of treaty and facultative contracts.  We provide this coverage primarily on an excess of loss basis targeting small specialty insurers, risk retention groups and captives.  We reinsure casualty business, which includes general liability, commercial auto, professional liability and workers’ compensation, as well as property catastrophe.

Our Other segment includes lines of business that we have placed in run-off, such as workers’ compensation, excess liability insurance for municipalities, other commercial lines, real estate and other ancillary product lines.

The Company measures geographic segments using net income, total assets and total equity.  The reportable insurance divisions are measured by underwriting profit (loss) and pre-tax operating income.


 
9

 

The following table presents key financial data by segment for the three months ended June 30, 2010 and 2009 respectively (dollars in thousands):

   
Three Months Ended June 30, 2010
 
   
Insurance
   
Other
       
   
E&S
   
ART
   
Reinsurance
   
Run-off
   
Total
 
Gross Written Premiums
  $ 36,477     $ 23,886     $ 12,215     $ -     $ 72,578  
Net Written Premiums
    29,475       17,346       10,945       -       57,766  
Net Earned premiums
    24,242       12,900       10,098       -       47,240  
                                         
Underwriting Profit (Loss)
    (1,396 )     735       149       (6 )     (518 )
                                         
Fee Income
    203       873       55       24       1,155  
Other Income
                            10       10  
Investment Income
    5,385       1,139       1,178       227       7,929  
Pre-tax Operating Income
    4,192       2,747       1,382       255       8,576  
Realized Gains
                                    509  
Interest and Holding Company Expenses
                                    1,773  
Earnings Before Income Taxes
                                    7,312  
Income Taxes
                                    950  
Net Earnings
                                    6,362  
Less:  Net Earnings Attributable to the Non-controlling Interest
                                    199  
Net Earnings Attributable to ASIH, Ltd.
                                  $ 6,163  
                                         
Loss Ratio
    56.6 %     65.7 %     69.8 %  
NM
      61.9 %
Expense Ratio
    48.3 %     21.8 %     28.1 %  
NM
      37.5 %
Combined Ratio
    104.9 %     87.5 %     97.9 %  
NM
      99.4 %

   
Three Months Ended June 30, 2009
 
   
Insurance
   
Other
       
   
E&S
   
ART
   
Reinsurance
   
Run-off
   
Total
 
Gross Written Premiums
  $ 29,670     $ 17,228     $ 9,830     $ -     $ 56,728  
Net Written Premiums
    22,903       10,154       9,848       -       42,905  
Net Earned Premiums
    23,368       9,836       8,385       -       41,589  
                                         
Underwriting Profit (Loss)
    (694 )     1,632       34       -       972  
                                         
Fee Income
    231       885       69       -       1,185  
Other Income
                            65       65  
Investment Income
    5,520       1,009       959       241       7,729  
Pre-tax Operating Income
    5,057       3,526       1,062       306       9,951  
Realized Gains
                                    281  
Interest and Holding Company Expenses
                                    2,454  
Earnings Before Income Taxes
                                    7,778  
Income Taxes
                                    766  
Net Earnings
                                    7,012  
Less:  Net Earnings Attributable to the Non-controlling Interest
                                    93  
Net Earnings Attributable to ASIH, Ltd.
                                  $ 6,919  
                                         
Loss Ratio
    58.3 %     51.6 %     65.4 %  
NM
      58.1 %
Expense Ratio
    43.7 %     22.8 %     33.4 %  
NM
      38.9 %
Combined Ratio
    102.0 %     74.4 %     98.8 %  
NM
      97.0 %

*
NM = Ratio is not meaningful
**
The U.S. GAAP combined ratio is a measure of underwriting performance and represents the relationship of losses and loss adjustment expenses, acquisition expenses and other underwriting expenses net of fee income to earned premiums.

 
10

 

The following table presents key financial data by segment for the six months ended June 30, 2010 and 2009 respectively (dollars in thousands):

   
Six Months Ended June 30, 2010
 
   
Insurance
   
Other
       
   
E&S
   
ART
   
Reinsurance
   
Run-off
   
Total
 
Gross Written Premiums
  $ 66,106     $ 42,119     $ 23,670     $ -     $ 131,895  
Net Written Premiums
    53,828       31,438       21,281       -       106,457  
Net Earned Premiums
    46,394       24,064       19,750       -       90,208  
                                         
Underwriting Profit (Loss)
    (3,917 )     746       905       (7 )     (2,273 )
                                         
Fee Income
    349       1,704       171       24       2,248  
Other Income
                            30       30  
Investment Income
    10,834       2,268       2,266       466       15,834  
Pre-tax Operating Income
    7,266       4,718       3,342       513       15,839  
Realized Gains
                                    1,520  
Interest and Holding Company Expenses
                                    3,582  
Earnings Before Income Taxes
                                    13,777  
Income Taxes
                                    851  
Net Earnings
                                    12,926  
Less:  Net Earnings Attributable to the Non-controlling Interest
                                    256  
Net Earnings Attributable to ASIH, Ltd.
                                  $ 12,670  
                                         
Loss Ratio
    57.9 %     61.9 %     65.2 %  
NM
      60.6 %
Expense Ratio
    49.8 %     27.9 %     29.4 %  
NM
      40.2 %
Combined Ratio
    107.7 %     89.8 %     94.6 %  
NM
      100.8 %

   
Six Months Ended June 30, 2009
 
   
Insurance
   
Other
       
   
E&S
   
ART
   
Reinsurance
   
Run-off
   
Total
 
Gross Written Premiums
  $ 58,509     $ 30,884     $ 18,228     $ -     $ 107,621  
Net Written Premiums
    44,260       19,644       18,732       -       82,636  
Net Earned Premiums
    46,433       20,496       19,340       -       86,269  
                                         
Underwriting Profit (Loss)
    (1,993 )     2,494       (359 )     -       142  
                                         
Fee Income
    408       1,481       229               2,118  
Other Income
                            84       84  
Investment Income
    11,153       2,016       1,845       505       15,519  
Pre-tax Operating Income
    9,568       5,991       1,715       589       17,863  
Realized Gains
                                    237  
Interest and Holding Company Expenses
                                    4,490  
Earnings Before Income Taxes
                                    13,610  
Income Taxes
                                    974  
Net Earnings
                                    12,636  
Less:  Net Earnings Attributable to the Non-controlling Interest
                                    172  
Net Earnings Attributable to ASIH, Ltd.
                                  $ 12,464  
                                         
Loss Ratio
    58.6 %     52.3 %     68.8 %  
NM
      59.4 %
Expense Ratio
    44.8 %     28.3 %     31.9 %  
NM
      39.7 %
Combined Ratio
    103.4 %     80.6 %     100.7 %  
NM
      99.1 %

*
NM = Ratio is not meaningful
**
The U.S. GAAP combined ratio is a measure of underwriting performance and represents the relationship of losses and loss adjustment expenses, acquisition expenses and other underwriting expenses net of fee income to earned premiums.


 
11

 


The Company conducts business in two geographic segments:  the United States and Bermuda.  Significant differences exist in the regulatory environment in each country.  The following table provides financial data about the geographic segments for the three months ended June 30, 2010 and June 30, 2009 (dollars in thousands):

June 30, 2010
 
United
States
   
Bermuda
   
Total
 
Income tax
  $ 950     $ -     $ 950  
Net earnings attributable to American Safety Insurance Holdings, Ltd.
  $ 1,550     $ 4,613     $ 6,163  
                         
June 30, 2009
 
United
States
   
Bermuda
   
Total
 
Income tax
  $ 766     $ -     $ 766  
Net earnings attributable to American Safety Insurance Holdings, Ltd.
  $ 2,604     $ 4,315     $ 6,919  

The following table provides financial data about the geographic segments for the six months ended June 30, 2010 and June 30, 2009 (dollars in thousands):

June 30, 2010
 
United
States
   
Bermuda
   
Total
 
Income tax
  $ 851     $ -     $ 851  
Net earnings attributable to American Safety Insurance Holdings, Ltd.
  $ 2,214     $ 10,456     $ 12,670  
Assets
  $ 648,759     $ 546,125     $ 1,194,884  
Equity
  $ 102,198     $ 202,071     $ 304,269  
                         
June 30, 2009
 
United
States
   
Bermuda
   
Total
 
Income tax
  $ 974     $ -     $ 974  
Net earnings attributable to American Safety Insurance Holdings, Ltd.
  $ 3,185     $ 9,279     $ 12,464  
Assets
  $ 613,415     $ 473,486     $ 1,086,901  
Equity
  $ 92,718     $ 155,884     $ 248,602  

Note 4 - Income Taxes

United States federal and state income tax expense from operations consists of the following components

   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2010
   
2009
   
2010
   
2009
 
Current
  $ 760     $ 1,190     $ 1,293     $ 1,883  
Deferred
    190       (117 )     (188 )     (558 )
Change in valuation allowance
    -       (307 )     (254 )     (351 )
                                 
Total
  $ 950     $ 766     $ 851     $ 974  


 
12

 

Income tax expense for the periods ended June 30, 2010 and 2009 differed from the amount computed by applying the United States Federal income tax rate of 34% to earnings before Federal income taxes as a result of the following:

   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2010
   
2009
   
2010
   
2009
 
Expected income tax expense
  $ 2,419     $ 2,645     $ 4,597     $ 4,627  
Foreign earned income not subject to U.S. taxation
    (1,564 )     (1,500 )     (3,555 )     (3,214 )
Change in valuation allowance
    -       (307 )     (254 )     (351 )
Tax-exempt interest
    (3 )     (65 )     (21 )     (135 )
State taxes and other
    98       (7 )     84       47  
Total
  $ 950     $ 766     $ 851     $ 974  

Note 5 – Equity Based Compensation

The Company’s incentive stock plan grants incentive stock options to employees.  The majority of the options outstanding under the plan vest evenly over a three year period and have a term of 10 years.  The Company uses the Black-Scholes option pricing model to value stock options.  The Company’s methodology for valuing stock options has not changed from December 31, 2009.  During the first six months of 2010, the Company granted 78,775 stock options compared to 135,576 for the same period of 2009.  No options were granted for the three months ended June 30, 2010 or 2009.  Stock based compensation expense related to outstanding stock options was $274 and $231 for the three months ended June 30, 2010 and 2009 respectively and $442 and $489 for the six months ended June 30, 2010 and 2009, respectively, and is reflected in net earnings as part of other underwriting expenses.

In addition to stock options discussed above, the Company may grant restricted shares to employees under the incentive stock plan.  No restricted stock was granted during the three month period ending June 30, 2010 or 2009.  During the first six months of 2010, the Company granted 209,254 shares of restricted stock compared to 90,224 for the same period in 2009.  Of the restricted stock granted, 56,754 shares vest on the grant date anniversary ratably over three years at 25%, 25% and 50%, respectively and 2,500 shares vest at the end of five years.  The remaining 150,000 shares cliff vest at the end of three years and are subject to performance targets.  Stock based compensation expense related to the restricted shares was $329 and $164 for the three months ended June 30, 2010 and 2009, respectively, and is reflected in net earnings as part of other underwriting expenses.  For the six months ended June 30, 2010 and 2009, $517 and $344 were recorded as compensation expense, respectively, and is reflected in net earnings as part of other underwriting expenses.

Additionally, the Company recorded $80 in expense for both the three months ended 2010 and 2009 related to stock awards made as a portion of Director compensation.  For the six months periods $160 was recorded in both 2010 and 2009 related to Director compensation.

Note 6 –Fair Value Measurements

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  Fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability, or in the absence of a principal market, the most advantageous market.  Market participants are buyers and sellers in the principal (or most advantageous) market that are independent, knowledgeable, able to transact for the asset or liability and willing to transact for the asset or liability.


 
13

 

We determined the fair values of certain financial instruments based on the fair value hierarchy established in “Fair Value Measurements”, topic ASC 820-10-05.  The guidance requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value.

 
Our Level 1 instruments are primarily U.S. Treasuries, money market funds and equity securities listed on stock exchanges. We use quoted prices for identical instruments to measure fair value.

 
Our Level 2 instruments include most of our fixed maturity securities, which consist of U.S. government agency securities, municipal bonds, corporate debt securities, and mortgage and asset-backed securities.  We measure fair value of our Level 2 instruments using quoted prices of securities with similar characteristics.

 
Our Level 3 instruments include an investment in an unrelated third party insurance entity.  Fair value is based on internally developed criteria that use assumptions or other data that are not readily observable from objective sources.

The Company receives fair value prices from its third-party investment managers who use an independent pricing service.  These prices are determined using observable market information such as dealer quotes, market spreads, cash flows, yield curves, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the security's terms and conditions, among other things.  The Company has reviewed the processes used by the third party providers for pricing the securities, and has determined that these processes result in fair values consistent with the GAAP requirements.  In addition, the Company reviews these prices for reasonableness, and has not adjusted any prices received from the third-party providers as of June 30, 2010.

Assets measured at fair value on a recurring basis are summarized below:

As of June 30, 2010
Fair Value Measurements Using
(dollars in thousands)

   
Quoted Prices in Active Markets for Identical Assets
   
Significant Other Observable Inputs
   
Significant Unobservable Inputs
       
   
(Level 1)
   
(Level 2)
   
(Level 3)
   
Total
 
Fixed Maturities:
                       
U.S. Treasury securities and obligations of U.S. Government corporations and agencies
  $ 30,779     $ 42,240     $ -     $ 73,019  
States of the U.S. and political subdivisions of the states
    -       25,054       -       25,054  
Corporate securities
    -       322,692       -       322,692  
Mortgage-backed securities
    -       37,578       -       37,578  
Commercial mortgage-backed securities
    -       249,401       -       249,401  
Asset-backed securities
    -       27,305       -       27,305  
Total fixed maturities
  $ 30,779     $ 704,270     $ -     $ 735,049  
Equities securities
    5,776       -       5,082       10,858  
Short term investments
    32,708       -       -       32,708  
                                 
Total
  $ 69,263     $ 704,270     $ 5,082     $ 778,615  


 
14

 


   
Fair Value Measurements
Using Significant Unobservable Inputs (Level 3) (dollars in thousands)
 
       
Level 3 Financial Instruments
 
Equities
 
       
Balance at December 31, 2009
  $ 5,082  
Total gains(losses) realized (unrealized):
       
Included in earnings
    -  
Included in other comprehensive income
    -  
Net purchases, sales & distributions
    -  
Net transfers in (out of) Level 3
    -  
Balance at June 30, 2010
  $ 5,082  
         
Change in net unrealized gains relating to assets still held at reporting date
  $ -  
         
 
 
There were no transfers in and out of Level 1 and 2 categories during the first six months of 2010.

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”), Accounting for Non-Current Marketable Equity Securities; ASC-320-10-05, 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:

·
percentage decline in value and the length of time during which the decline has occurred;
·
recoverability of principal and interest;
·
market conditions;
·
ability and intent to hold the investment to recovery;
·
a pattern of continuing operating losses of the issuer;
·
rating agency actions that affect the issuer’s credit status;
·
adverse changes in the issuer’s availability of production resources, revenue sources, technological conditions; and
·
adverse changes in the issuer’s economic, regulatory or political environment.

The Company routinely monitors and evaluates the difference between the cost and fair value of its investments.  Additionally, credit analysis and/or credit rating issues related to specific investments may trigger more intensive monitoring to determine if a decline in market value is other than temporary ("OTTI").  For investments with a market value below cost, the process includes evaluating the length of time and the extent to which cost exceeds market value, the prospects and financial condition of the issuer, and evaluation for a potential recovery in market value, among other factors.  This process is not exact and further requires consideration of risks such as credit risk and interest rate risk.  Therefore, if an investment’s cost exceeds its market value solely due to changes in interest rates, impairment may not be appropriate.  For the six months ended June 30, 2010 and 2009, the Company did not incur any OTTI.


 
15

 

The OTTI is split between a credit loss portion and a portion due to other factors like liquidity and market interest rate changes.  The credit portion of the OTTI is the difference between the amortized cost of the debt security and the present value of the estimated cash flows to be received from the security and is charged to expense.  The non-credit portion is recorded in a new category of other comprehensive income ("OCI"), net of applicable deferred taxes, separately from unrealized gains and losses on available-for-sale ("AFS") securities.
In addition to the fair value estimates on our investments, the Company uses the following methods and assumptions to estimate the fair value of each class of financial instruments for which it is practicable to estimate such value:

·  
Cash and cash equivalents – The carrying amounts approximate fair value because of the short-term maturity of those instruments.
·  
Premiums receivable – The carrying value of premiums receivable approximates fair value due to the short-term nature.
·  
Long-term debt – The carrying value of those notes is a reasonable estimate of fair value.

Note 7 – Credit Facility

On July 31, 2009 the Company entered into a line of credit facility with Regions Bank for $15 million.  The facility is unsecured with a term that was extended through August 31, 2010.

The principal amount outstanding under the credit facility provides for interest at Libor plus 200 basis points with a 3% floor.  In addition, the credit facility provides for an unused facility fee of 15 basis points payable in monthly installments.  The unsecured credit facility contains certain covenants and at June 30, 2010, the Company is in compliance with all covenants.  The Company has no outstanding borrowings at June 30, 2010.

Note 8 – Loans Payable

Trust Preferred Offerings

In 2003, American Safety Capital Trust and American Safety Capital Trust II, both non-consolidated, wholly-owned subsidiaries of the Company, issued $8 million and $5 million, respectively, of variable rate 30-year trust preferred securities.  The proceeds were used by the Company to support its insurance business.  The securities require interest payments on a quarterly basis calculated at a floating rate of LIBOR + 4.2% and LIBOR + 3.95% for American Safety Capital and American Safety Capital II, respectively. The securities can be redeemed at the Company’s option after five years from the date of original issuance.

In 2005, the American Safety Capital Trust III, a non-consolidated wholly-owned subsidiary of the Company, issued a 30-year trust preferred obligation in the amount of $25 million. This obligation bears a fixed interest rate of 8.31% for the first five years and LIBOR plus 3.4% thereafter. Interest is payable on a quarterly basis and the securities may be redeemed at the Company’s option after five years from the date of original issuance.

During 2009 the Company entered into interest rate swaps on the Trust Preferred debt that were designated as hedging instruments.  On February 12, 2010, the Company terminated these swaps resulting in $2.1 million in cash proceeds.  For accounting purposes, that gain is reported in comprehensive income net of tax and recognized through earnings using the effective interest method over the time period the derivative was originally designated to hedge interest payments on the underlying debt.


 
16

 

Note 9 – Variable Interest Entity

American Safety RRG (“RRG”) is a variable interest entity (VIE) which is consolidated in our financial statements in accordance with ASC 810-10-5, as through contractual relationships we are the primary beneficiary of the variability in the underwriting profits of the RRG.  The Company has adopted new guidance for topic ASC 810 which does not change our financial condition as the Company continues to consolidate the entity.  The assets and liabilities as parenthetically noted on the face of the balance sheet, represent separate assets and liabilities of the legal entity and there is no recourse to the Company for the obligations outside of obligations that exist due to contractual loss sharing or reinsurance arrangements that exist between RRG and other entities under common control in the ordinary course of the business.  The equity of RRG is for the benefit of the policyholders and is considered a non-controlling interest in the equity section of the Company's consolidated balance sheet.  Should losses persist and the equity of RRG decline below regulatory minimum capital levels or result in a deficit, there is no obligation of the Company to fund those losses or contribute capital to the VIE.  The profit and loss of the VIE increases or decreases the value of the non-controlling interest on the balance sheet of the Company and does not contribute to earnings or equity attributable to American Safety Insurance Holdings, Ltd.

Assets and Liabilities of the VIE as consolidated in the consolidated balance sheets

      6/30/2010    
12/31/2009
 
Investments
  $ 8,814     $ 6,545  
Cash and equivalents
    317       54  
Accrued investment income
    56       50  
Premiums receivable
    3,472       1,058  
Ceded unearned premiums
    453       640  
Reinsurance receivables
    13,773       13,886  
DAC
    (222 )     (22 )
Other assets
    0       1,614  
Total Assets
  $ 26,663     $ 23,825  
                 
Unpaid losses and loss adjustment expenses
  $ 17,691     $ 17,733  
Unearned premium
    1,189       1,378  
Ceded premiums payable
    1,420       63  
Funds held
    182       191  
Other liabilities
    2,120       785  
Total Liabilities
  $ 22,602     $ 20,150  

Note 10 – Subsequent Events

The Company evaluated subsequent events through the filing date of this form 10Q and determined there were none.


 
17

 


Item 2.         Management’s Discussion and Analysis of Financial Condition and Results of Operations

Our business segments are classified into insurance operations and other, with the insurance operations consisting of three divisions:  excess and surplus lines (E&S), alternative risk transfer (ART) and assumed reinsurance (Assumed Re).  E&S includes seven products:  environmental, construction, products liability, excess, property, surety and healthcare.  ART includes two business lines: specialty programs and fully funded.  In our Assumed Re division, the Company assumes specialty property and casualty business from unaffiliated insurers and reinsurers.

Within E&S, our environmental insurance products provide general, pollution and professional liability coverage for contractors and consultants in the environmental remediation industry and property owners. Construction provides general liability insurance for residential and commercial contractors.  Products liability provides general liability and product liability coverages for smaller manufacturers and 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 policies, with a focus on construction risks. Our property coverage encompasses surplus lines commercial property business and commercial multi-peril (CMP) policies.  Surety coverage provides payment and performance bonds primarily to the environmental remediation and construction industries, while healthcare provides customized general and professional liability insurance solutions primarily for long-term care facilities.

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, consultants, restaurant and tavern owners and bail bondsmen.  Fully funded policies give our insureds the ability to fund their liability exposure via a self-insurance vehicle.  Our fully funded product primarily offers general and professional liability for businesses operating in the healthcare and construction industries.

Our Assumed Reinsurance division offers property and casualty reinsurance products in the form of treaty and facultative contracts.  We provide this coverage primarily on an excess of loss basis targeting small specialty insurers, risk retention groups and captives.  We reinsure casualty business, which includes general liability, commercial auto, professional liability and workers’ compensation, as well as property catastrophe.

Our Other segment includes lines of business that we have placed in run-off, such as workers’ compensation, excess liability insurance for municipalities, other commercial lines, real estate and other ancillary product lines.

For management reporting purposes, the Company allocates invested assets to its insurance and other operations and measures the insurance operations based on underwriting profit and pre-tax income.

The following information is presented on the basis of accounting principles generally accepted in the United States of America (“GAAP”).



 
18

 

The following table presents key financial data by segment for the three months ended June 30, 2010 and 2009 respectively (dollars in thousands):

   
Three Months Ended June 30, 2010
 
   
Insurance
   
Other
       
   
E&S
   
ART
   
Reinsurance
   
Run-off
   
Total
 
Gross Written Premiums
  $ 36,477     $ 23,886     $ 12,215     $ -     $ 72,578  
Net Written Premiums
    29,475       17,346       10,945       -       57,766  
Net Earned Premiums
    24,242       12,900       10,098       -       47,240  
                                         
Underwriting Profit (Loss)
    (1,396 )     735       149       (6 )     (518 )
                                         
Fee Income
    203       873       55       24       1,155  
Other Income
                            10       10  
Investment Income
    5,385       1,139       1,178       227       7,929  
Pre-tax Operating Income
    4,192       2,747       1,382       255       8,576  
Realized Gains
                                    509  
Interest and Holding Company Expenses
                                    1,773  
Earnings Before Income Taxes
                                    7,312  
Income Taxes
                                    950  
Net Earnings
                                    6,362  
Less:  Net Earnings Attributable to the Non-controlling Interest
                                    199  
Net Earnings Attributable to ASIH, Ltd.
                                  $ 6,163