Transcript of
American Safety Insurance
Holdings, Ltd. (ASI)
Second Quarter 2008 Earnings
Results Conference Call
July 28, 2008
Executives
Stephen R. Crim – President and
Chief Executive Officer
Joseph D.
Scollo, Jr. - Executive Vice President and Chief Operating Officer
William
C. Tepe - Chief Financial Officer
Analysts
David Lewis – Raymond James & Associates, Inc.
Kenneth Billingsley - Signal Hill Capital Group, LLC
John Gwynn - Morgan Keegan & Company, Inc.
Stephen Bick – Cottingham Management Company, LLC
Operator
Greetings ladies and gentlemen and welcome to the American
Safety Insurance second quarter 2008 earnings results conference call. At this
time, all participants are in a listen-only mode. A brief question-and-answer
session will follow the formal presentation. If anyone should require operator
assistance during the conference, please press “*0” on your telephone keypad.
As a reminder this conference is being recorded. It is now my pleasure to
introduce your host, Mr. Steve Crim, President and CEO of American Safety
Insurance. Thank you Mr. Crim, you may begin.
Stephen R. Crim – American Safety Insurance Holdings, Ltd. –
President and Chief Executive Officer
Okay. Thank you very much. Good morning and welcome to our
conference call to discuss our results for the second quarter of 2008, which
were issued prior to the market opening today. In addition to those
participating on this telephone conference, this conference call is being
broadcast over the Internet.
With me in the room are Joe Scollo, our Executive Vice
President and Chief Operating Officer and Bill Tepe our Chief Financial
Officer.
Before we begin, I would like to remind everyone that this
conference call will contain forward-looking statements. Forward-looking
statements involve risks and uncertainties that may cause actual results to
differ materially. For a description of some of the reasons that results may
differ, please see our Form 10-Q for the quarter ended March 31, 2008 as filed with
the SEC.
Now turning to the results for the second quarter, net
earnings declined 7% over the same period in 2007 due to the impact of the soft
market on underwriting profitability. The decline in underwriting profits was
driven primarily by three factors. First, net premiums earned in construction
line, which has historically been one of the most profitable products for the
company continued to decrease due to a slowing housing market and our decision
to let business go in an increasingly competitive market.
Second, the profitability in assumed reinsurance was
negatively impacted by our decision to increase the ultimate loss ratio on a
D&O treaty related to the potential for subprime exposure. This treaty was
terminated effective January 1st of this year.
And third, we experienced $1.5 million of prior year reserve
development in our environmental business line related in large part to New
York Claims. Earnings for the quarter were positively impacted by a $2.8
million decrease in corporate and other expense resulting from a reduction in
accrued warranty liabilities related to our former real estate project in Florida, which was substantially completed in 2005.
Gross premiums written from newer products added in
connection with our product diversification strategy totaled $29.5 million,
which is 41% of the total gross premiums written for the quarter compared to
$12.2 million or 21% of the total for the second quarter of 2007. The largest
contributor was assumed reinsurance, which generated $20 million of premium in
the quarter. Approximately 40% of the assumed reinsurance premiums stemmed
from one large transaction involving our participation on reinsuring healthcare
and pest control risks. I am also pleased with the immediate contribution of our
new healthcare product, which added over $3 million of premium in the quarter.
The combined ratio for the quarter increased to 103.7% from
94.4% in the first quarter of 2007. The increase was driven by a higher
expense ratio, which was primarily due to higher acquisition costs associated
with assumed reinsurance and specialty programs. We are shifting our new
business focus in assumed reinsurance from quota share to excess of loss, which
we expect to lower acquisition costs over time. The loss ratio in the quarter
was adversely impacted by the reserve strengthening in our environmental line.
Over the past two years we have made investments in five new
products through the acquisition of underwriting teams and one company. These
newer products have allowed us to achieve growth while maintaining underwriting
discipline in the midst of a very competitive insurance market. The new
products have also created greater diversity in our product mix as we reduce
our concentration in construction and shift to premiums in shorter tail lines
of business. The investments in these newer products are key to our future
success as they create a broader platform for growth and increased underwriting
profitability when market conditions improve. In the interim, our focus will
be on improving the profitability of our business through a combination of
lowering acquisition expenses in assumed reinsurance by writing less quota share
business, seeking improved terms in our ceded reinsurance, and reducing
operating costs through improved operational efficiency.
I will now turn the call over to Joe Scollo to provide you
with an update on our insurance operations. Joe.
Joseph D. Scollo, Jr. – American Safety Insurance Holdings,
Ltd. – Executive Vice President and Chief Operating Officer
Thank you Steve and good morning. All comparisons are for
the quarter ended June 30, 2008 to the same period in 2007 unless otherwise
noted.
Gross written premiums for the quarter increased
approximately $15 million or 26% to $73 million with growth in our assumed
reinsurance segment representing approximately $11 million of this increase.
Premiums from our newer product lines developed in conjunction with our product
diversification strategy, which includes the assumed reinsurance segment,
contributed 41% of our gross written premiums for the quarter and more than
offset 34% decline in our construction line.
For the six months ended June 30th, our construction lines
premiums represented 16% of our total gross written premiums versus 29% for the
same period in 2007. Market conditions continued to be very competitive during
the quarter in nearly all of our product lines.
Gross written premiums within our excess and surplus lines segment
increased $2.6 million to $36.3 million, a 7% increase. Premiums from our
newer healthcare, property, excess and products liability lines generated a
combined increase of approximately $6 million in gross written premiums, with
most of this increase coming in our healthcare and property lines.
Within our core product lines, our environmental premiums
grew by $1.2 million or 10% for the quarter, driven by growth in affinity type
environmental products offered through our ProStar Online system. We continue
to reduce our exposure to New York as written premiums in that state declined
48% to $1.6 million for the first six months of 2008.
The decline in our construction premiums was due to the
continuation of the slowing housing market and our exercise of underwriting
discipline in a very competitive insurance market. Our surety premiums
increased $1.1 million due primarily to the specialty surety program we
launched in the third quarter of 2007 and increases in our environmental surety
premiums.
Gross written premiums in our alternative risk transfer
segment increased by approximately $900,000 or 6% due to an increase in
premiums in our specialty program line. Premium production from new programs
added in 2007 and 2008 more than offset declines in premium volume experienced
in our more mature programs due to the impact of the soft market.
Premiums in our construction wrap-up program, which insures project
specific residential construction projects, declined $5.7 million due to the
slowing housing market and delays in the funding of new projects. One new
program, a professional liability program for municipal employees, was added
during the quarter. In addition, we expect that the municipal excess liability
program added in the fourth quarter of 2007, will be reporting approximately
$12 million of gross written premiums for July. Premium production under this
program is heavily tied to a July 1 effective date. We take no underwriting
risk on this program and instead receive fee income for acting as the
policy-issuing carrier for another insurance company. Reserves established for
this program are fully collateralized. We believe we will achieve overall
growth for the year in our alternative risk transfer segment as premium production
builds from the new programs added in 2007 and 2008.
We continue to make excellent progress in our assumed
reinsurance segment with reinsurance premiums reaching $20.1 million, an
increase of over 130% from the same period in 2007. The team in Bermuda has done a good job of leveraging their existing relationships and building a
strong premium base. We’ll be adding an experienced reinsurance executive to
the team in August who brings significant experience in the healthcare sector.
Our focus in this segment is on traditional and structured reinsurance
solutions for small specialty insurers, risk retention groups, and captives.
A strategy to achieve growth in the soft market by building
small books of business through diversification of our product portfolio is
continuing to produce results. Despite double-digit declines in premiums in
our construction and specialty program lines for the first six months in 2008,
our total premiums during this period increased by 12%. We continue to focus
our efforts on maintaining underwriting discipline and improving our
efficiencies to preserve profitability over the long term.
I’ll now turn the call over to Bill Tepe for a review of our
second quarter financial performance.
William C. Tepe – American Safety Insurance Holdings, Ltd. –
Chief Financial Officer
Thank you Joe. Net earnings for the quarter were $6.8
million or $0.63 per diluted share compared to $7.3 million or $0.69 per
diluted share for the same period of 2007. Total revenues for the quarter were
$57 million compared to $48 million in 2007. Net premiums earned increased $9
million to $48 million due to the growth of new lines of business implemented
as part of our diversification plan.
Net premiums earned from specialty programs increased $2
million from higher retention and assumed reinsurance earned premiums increased
$13 million. These increases were partially offset by a $6.4 million decrease
in earned premiums from our excess and surplus lines due primarily to an $8.5 million
decrease in our construction line.
The combined ratio for the quarter was 103.7% composed of a
loss ratio of 63.1%, an expense ratio of 40.6%. This compares to a combined
ratio for 2007 quarter of 94.4% with a 59.9% loss ratio and a 34.5% expense
ratio. The 3.2 percentage point increase in the loss ratio is primarily
attributable to reserve development in the middle market segment of our
environmental product line of $1.5 million due in large part to New York business. The 6.1 percentage point increase in the expense ratio is primarily the
result of two factors, first, acquisition expenses were higher due to the
changes in the mix of earned premiums from construction to assumed reinsurance
where we pay a higher commission rate, second, the specialty program
reinsurance coverage was changed from a quota share treaty where we received ceding
commissions to an excess of loss treaty where there is no ceding commission.
As a result of these changes, acquisition expenses as a percentage of earned
premiums increased to 24.8% from 19.6%.
Payroll related expenses increased $1 million due to normal
salary increases and increased head count largely attributable to new lines of
business. Other underwriting expenses increased $700,000 primarily from
increased depreciation and professional services expense.
Corporate and other expenses were negative $1.9 million due
to a $2.8 million reversal of a warranty accrual established in 2004 in
connection with our real estate development project, which was essentially
completed in 2005. Without this reversal corporate expenses for the 2008
quarter would be basically flat compared to the 2007 quarter at approximately
$900,000.
Cash flow provided from operations was $2 million compared
to $27 million in the 2007 quarter, due to the funding of the casualty
reinsurance treaty and a change in the mix of business with more premiums from
assumed reinsurance segment where payment is received in arrears. Due to the
timing of the cash settlement for certain assumed reinsurance transactions, we
expect cash flow to improve in the second half of the year.
In the second quarter we repurchased 116,650 shares of our common
stock for $1.9 million. We have approximately 100,000 shares remaining under our
previously announced share repurchase program and expect to have the program
completed during the balance of the year.
Total investments were $597 million at June 30th compared to
$617 million at December 31, 2007 due to the change of unrealized gains and
losses, lower cash flow and the acquisition for cash of our healthcare segment.
At June 30th the portfolio had unrealized losses of $6.7
million compared to unrealized gains at December 31 of $5 million. Fixed maturities
totaled $530 million or 89% of the portfolio with an average rating of AA, a
tax equivalent yield of 5.3% and a modified duration of 5.03. Mortgage backed
securities issued by Fannie Mae, Freddie Mac and Ginnie Mae totaled $156
million. The portfolio also contains $26 million of common stock, $5 million
of preferred stock, and $36 million of short-term investments.
The effective tax rate for the quarter was less than 2% as a
majority of the income occurred in our Bermuda subsidiaries. We believe this
rate will increase over time due to improved profitability of our US subsidiaries. Book value per share and diluted book value per share at June 30th were
$21.92 and $21.35 compared to $21.53 and $20.81 at December 31, 2007
respectively. These book value increases were despite the negative impact of
$0.94 in the book value per share and $0.91 for diluted book value per share
due to the tax affected $11.7 million increase in unrealized losses in the
investment portfolio. Return on average equity was 11.2% compared to 14.1% for
the 2007 quarter.
We are now ready for any questions you may ask.
Operator
Thank you ladies and gentlemen. At this time, we’ll be
conducting a question-and-answer session. If you would like to ask a question,
please press “*1” on your telephone keypad. A confirmation tone will indicate
your line is in the question queue. You may press “*2” if you would like to
remove your question from the queue. For participants using speaker equipment
it may be necessary to pick up your handset before pressing the “*” keys. One
moment please while we poll for questions. Our first question comes from the
line of David Lewis with Raymond James. Please proceed with your question.
David
Lewis –
Raymond James & Associates, Inc.
Thank you. Good morning.
Stephen R. Crim – American Safety Insurance Holdings, Ltd. –
President and Chief Executive Officer
Good morning David.
David
Lewis –
Raymond James & Associates, Inc.
A couple of questions. First, Steve maybe talk a little bit
about what you see on some of the pricing trends. Clearly the market’s been
soft; you’re starting to see some opportunities in some of these new lines. I
guess my concern is are you getting adequate pricing and what do you think your
pricing that new business had on a combined ratio basis?
Stephen R. Crim – American Safety Insurance Holdings, Ltd. –
President and Chief Executive Officer
Well, as far as our direct products, do you want to address
that Joe?
Joseph D. Scollo, Jr. – American Safety Insurance Holdings,
Ltd. – Executive Vice President and Chief Operating Officer
Yeah, I mean the market continues to be soft. We are seeing
rate declines in the US business so it is anywhere between 5% and 15% with the
lower end of that range being on our ProStar products and the higher end being
obviously in our construction and middle market environmental business. The
market is pretty much status quo in terms of the degree of softness. I don’t
think we saw any significant acceleration in the softening so it’s pretty much
status quo with what we saw last quarter and I think Steve would probably want
to add something about the reinsurance side.
Stephen R. Crim – American Safety Insurance Holdings, Ltd. –
President and Chief Executive Officer
Yeah. Well on the reinsurance side a lot of the different
programs that we’ve been participating on thus far are risk retention groups,
captives and they tend to write smaller businesses and risks for smaller
accounts. So I think those are going to be less impacted by the market and a
little less rate sensitive than some larger business. Weve been, as I
mentioned on the call, we’ve been writing mostly quota share treaties. We are
looking at shifting that over time. We’re bringing in a new chief underwriter
starting next month and he’s going to be focusing more on excess of loss
treaties and while on one hand it does create the potential for a little more
volatility in the earnings it will have a higher margin and will give us a
lower acquisition cost. I think that will bring better balance to the
reinsurance book as we look forward.
William C. Tepe – American Safety Insurance Holdings, Ltd. –
Chief Financial Officer
And just to add to that, a lot of the growth is coming from
these newer products and the new teams that we’ve brought on and they’re just
building their books of business and they’re all small books of business, so
certainly from a pricing perspective, we’re cherry picking the risks that we
feel hit our underwriting guidelines.
David
Lewis –
Raymond James & Associates, Inc.
And you feel like you’re pricing that business below 100%
combined in this environment or what’s your thought?
Stephen R. Crim – American Safety Insurance Holdings, Ltd. –
President and Chief Executive Officer
Well when you talk about certainly in the loss ratio, yes,
the issue that we’ve had in the quarter, the quarter was impacted somewhat by
some reserve development and we have had some higher acquisition costs but over
time we think we can get those acquisition expenses down a little bit and so
yeah we should be able to get it there.
David
Lewis –
Raymond James & Associates, Inc.
Okay. And can you talk a little bit more about the assumed
reinsurance charge you took in the quarter related to the subprime exposure? I
think you mentioned that. Oh the D&O coverage.
Stephen R. Crim – American Safety Insurance Holdings, Ltd. –
President and Chief Executive Officer
Oh, I am sorry. Yeah well, it was basically…it was one
treaty that we entered into about I guess it was January of ‘07 and it was a
D&O treaty that had historically been very profitable. We took a very
small piece of an excess layer on that and what we determined after the whole
subprime issue that came out we decided that it would be prudent to increase
our reserve, so we actually really significantly increased the ultimate loss
pick on that. That treaty was not renewed on January 1st of this year, so it
is in runoff and so, whatever adverse impact that we’re having, that will be
completely runoff by this year and next year will not be an issue.
David
Lewis –
Raymond James & Associates, Inc.
Okay. I assume that’s a claims-made policy so you’ve got an
indication of what kind of claims have been made on that policy?
Stephen R. Crim – American Safety Insurance Holdings, Ltd. –
President and Chief Executive Officer
Yes, we do and that’s a great point. We’re certainly going
to wait and see what it looks like at the end of the year and so I think we’ll
have a much better picture by the end of this year because it is claims-made.
We have already done one claims audit and we’ll be doing another just to check
and make sure we’re comfortable with the case reserves. We haven’t seen
anything that would lead me to believe that there is an issue beyond what we’ve
already put up at this stage; it is really more assessing what it looks like at
the end of the year to get a clearer picture.
David
Lewis –
Raymond James & Associates, Inc.
Now, are these claims associated with lawsuits by
shareholders or what have you as the subprime issues have kind of flowed
through the market and pressured financial company evaluations, is that the
primary gist of it?
Stephen R. Crim – American Safety Insurance Holdings, Ltd. –
President and Chief Executive Officer
Well yeah, I need to say that so far we hadn’t seen those
losses rolling through. We’ve had some of those and we anticipated some more
activity on that and that’s why we put up the reserve, but we haven’t
necessarily seen that materialize yet.
David
Lewis –
Raymond James & Associates, Inc.
I guess where I’m going with that, the question out there
is, is D&O coverage something that should be hit from a claims standpoint
relating to subprime? Because I guess the way I look at D&O coverage it’s
a company specific type issue where the Ds and Os were somewhat fraudulent
whereas subprime was basically a bad business decision. So I don’t know and
time will tell what the courts ultimately do, but the question is whether
that’s something that ultimately pays out, particularly from the excess side.
If you’re not going to have to pay any of the legal expenses is there an
alternate settlement or do you have any thoughts on that?
Stephen R. Crim – American Safety Insurance Holdings, Ltd. –
President and Chief Executive Officer
No, I don’t have any direct thoughts. I think time will
tell and all I can say is what I’ve already talked to you about, to say that we
haven’t seen those losses even materialize. To the extent that they do
materialize we’ll have to see how they play out, but I think by the end of this
year we’re going to have a pretty good picture on it.
David
Lewis –
Raymond James & Associates, Inc.
Okay. And just two quick ones. Tax rate outlook, a little
lower now than what I was expecting in the quarter. Any thought on what we
should assume in the second half?
William C. Tepe – American Safety Insurance Holdings, Ltd. –
Chief Financial Officer
Obviously the tax rate was below 2% and I believe the rate
is going to increase a little bit in the second half, but it is going to be
below the 10% rate that we’ve been saying in the past.
David
Lewis –
Raymond James & Associates, Inc.
So something on the upper single digits, probably a good
starting point?
William C. Tepe – American Safety Insurance Holdings, Ltd. –
Chief Financial Officer
Yes, I think so.
David
Lewis –
Raymond James & Associates, Inc.
And how quick do you think the expense ratio can start to
trend down a little from the second quarter, any thoughts on that? I know your
new underwriter doesn’t come on until next month, so it’s probably more of a
2009 impact, is that the way to look at it?
Stephen R. Crim – American Safety Insurance Holdings, Ltd. –
President and Chief Executive Officer
Yeah. Well as you know the expense ratio is calculated
based on earned premiums, so it’s going to come down as the premiums flow
through, so it’s definitely going to be next year. I really don’t see much
happening this year that could move the needle.
David
Lewis –
Raymond James & Associates, Inc.
Okay, great. Thanks very much.
Stephen R. Crim – American Safety Insurance Holdings, Ltd. –
President and Chief Executive Officer
Okay.
Operator
Thank you. Our next question comes from the line of Ken
Billingsley with Signal Hill. Please proceed with your question.
Kenneth Billingsley – Signal Hill Capital Group, LLC
Hey good morning.
Stephen R. Crim – American Safety Insurance Holdings, Ltd. –
President and Chief Executive Officer
Good morning Ken.
Joseph D. Scollo, Jr. – American Safety Insurance Holdings,
Ltd. – Executive Vice President and Chief Operating Officer
Good morning.
Kenneth Billingsley – Signal Hill Capital Group, LLC
I wanted to ask you about, without the new business that
came on in the second quarter, I guess a lot of it assumed, was it gross
premiums written have been down about 15% over a six month period
year-over-year?
Stephen R. Crim – American Safety Insurance Holdings, Ltd. –
President and Chief Executive Officer
Did you say 15%?
Kenneth Billingsley – Signal Hill Capital Group, LLC
Yes.
Stephen R. Crim – American Safety Insurance Holdings, Ltd. –
President and Chief Executive Officer
Just to make sure I understand your question is that
excluding assumed reinsurance all together or just taking out the growth that
we saw in the assumed?
Kenneth Billingsley – Signal Hill Capital Group, LLC
The growth and maybe it is using new business, not all of it
being assumed.
Stephen R. Crim – American Safety Insurance Holdings, Ltd. –
President and Chief Executive Officer
I don’t think it would have been down that much.
William C. Tepe – American Safety Insurance Holdings, Ltd. –
Chief Financial Officer
There is a slight uptick in growth I think. Ken, if you did
that I haven’t done the calculations so we would have to actually do that, but
it would be flat to slightly higher from what I could see.
Joseph D. Scollo, Jr. – American Safety Insurance Holdings,
Ltd. – Executive Vice President and Chief Operating Officer
Yes just at a quick glance that seems to…I don’t think it
would have been negative.
Kenneth Billingsley – Signal Hill Capital Group, LLC
You don’t think it would have been negative?
Joseph D. Scollo, Jr. – American Safety Insurance Holdings,
Ltd. – Executive Vice President and Chief Operating Officer
No, just to give you a…our US premiums were for the six
months I believe down 3% over last year.
Kenneth Billingsley – Signal Hill Capital Group, LLC
Okay, and when you do the shift from quota share to excess
of loss, are you targeting new customers or rewriting the policy?
Stephen R. Crim – American Safety Insurance Holdings, Ltd. –
President and Chief Executive Officer
Yes, I think it would be a combination of both. We have
some treaties now that we’re participating in on a quota share basis and we’re
looking at the renewals to see if it makes more sense to restructure those on
an excess of loss basis. So I think it’ll be a combination. Clearly, I would
say that the majority of that will be new business as we’re brining in a new
underwriter, he has his own contacts, his own markets and that’s predominantly
what he has focused on in the past and what he will continue to focus on.
Kenneth Billingsley – Signal Hill Capital Group, LLC
Okay. And this growth for the quarter then, was this one
time in nature for the size or you are expecting to see…should we see that over
the next few quarters as well?
Stephen R. Crim – American Safety Insurance Holdings, Ltd. –
President and Chief Executive Officer
I think that it’s somewhat anomalous. There was an $8
million transaction that I mentioned briefly in my opening remarks that it was
actually three programs controlled by one program manager that were pest
control and healthcare related, that is about $8 million. So, I don’t see that
type of transaction recurring. So I think you’ll see going forward definitely
expect some growth, but I think that will level off. Next year on the assumed
reinsurance I think you’re going to see, as we make that transition, we’ll be
taking some of our quota share treaties and if we can’t restructure those we
may actually let some of those go and replace them with excess of loss to get
us a little bit better balance.
Kenneth Billingsley – Signal Hill Capital Group, LLC
In those quota shares, some of the new ones you take, have
you ever taken a higher percentage then who is ceding it?
Stephen R. Crim – American Safety Insurance Holdings, Ltd. –
President and Chief Executive Officer
No, we will be taking lower percentages in all those cases.
So that business, even though the margin is not quite as high as the excess of
loss, the other side of it is there is less volatility in the result, so there
are tradeoffs either way.
Kenneth Billingsley – Signal Hill Capital Group, LLC
And the last question is, I missed this as you made your
comments you obviously were buying back shares, how much is remaining in the
buy\ back?
William C. Tepe – American Safety Insurance Holdings, Ltd. –
Chief Financial Officer
About 100,000 shares.
Kenneth Billingsley – Signal Hill Capital Group, LLC
100,000 shares. And do you see any change in future use of
capital?
William C. Tepe – American Safety Insurance Holdings, Ltd. –
Chief Financial Officer
Well we expect to complete the share repurchase by the end
of the year, but right now that’s our only plan.
Kenneth Billingsley – Signal Hill Capital Group, LLC
And the remainder is just to support growth opportunities?
William C. Tepe – American Safety Insurance Holdings, Ltd. –
Chief Financial Officer
Yes.
Stephen R. Crim – American Safety Insurance Holdings, Ltd. –
President and Chief Executive Officer
Yes. That’s right.
Kenneth Billingsley – Signal Hill Capital Group, LLC
Very good. Thank you.
Stephen R. Crim – American Safety Insurance Holdings, Ltd. –
President and Chief Executive Officer
Thanks.
Operator
Thank you. Our next question comes from the line of John Gwynn with Morgan Keegan. Please proceed with your question.
John
Gwynn –
Morgan Keegan & Company, Inc.
Thanks. Steve, the transition from quota share to excess,
are we talking about your primary healthcare business principally there?
Stephen R. Crim – American Safety Insurance Holdings, Ltd. –
President and Chief Executive Officer
No, we’re talking about the…in the assumed reinsurance
line. The primary healthcare business is a direct business that came about
from an acquisition earlier this year; that’s a completely different segment.
The assumed reinsurance is all over the map in terms of different types of
risks and I’m talking about the assumed reinsurance piece.
John
Gwynn –
Morgan Keegan & Company, Inc.
Okay, and that assumed reinsurance is primarily liability or
casualty business?
Stephen R. Crim – American Safety Insurance Holdings, Ltd. –
President and Chief Executive Officer
Yes, primarily it’s liability and casualty business, mostly
liability; a lot of general liability specifically in there. And again, it’s
targeted risk retention groups, captives, small specialty insurance companies,
that’s the market.
John
Gwynn –
Morgan Keegan & Company, Inc.
Okay and is that brokered business?
Stephen R. Crim – American Safety Insurance Holdings, Ltd. –
President and Chief Executive Officer
Yes, it is brokered; we deal, all that is through
reinsurance intermediaries, Benfield, Aon, recognized names.
John
Gwynn –
Morgan Keegan & Company, Inc.
Right, and the reserve strengthening, was this a recurrence
of that stuff from a couple of years ago?
Joseph D. Scollo, Jr. – American Safety Insurance Holdings,
Ltd. – Executive Vice President and Chief Operating Officer
No that was in our construction line actually.
John
Gwynn –
Morgan Keegan & Company, Inc.
Okay, thanks Joe, so this is a new deal.
Joseph D. Scollo, Jr. – American Safety Insurance Holdings,
Ltd. – Executive Vice President and Chief Operating Officer
It’s environmental business that we wrote in New York, kind of similar type of loss though, the action over labor loss stuff.
John
Gwynn –
Morgan Keegan & Company, Inc.
Is this a source of litigation probably?
Stephen R. Crim – American Safety Insurance Holdings, Ltd. –
President and Chief Executive Officer
Well those cases are litigated, but that’s not a new thing,
we’ve had that forever. I think the issue is just that we had a book of New York business that’s developed more adversely than we expected and that’s when we had
some development there, but I think it’s important to recognize that we significantly
reduced our exposure that we started two years ago. In the environmental
books, specifically shifting out of New York and in Joe’s opening remarks he
talked about, I think what, we have $1.6 million?
Joseph D. Scollo, Jr. – American Safety Insurance Holdings,
Ltd. – Executive Vice President and Chief Operating Officer
Yes, which is 48% lower than last year.
Stephen R. Crim – American Safety Insurance Holdings, Ltd. –
President and Chief Executive Officer
So for all intents and purposes we’re out of New York not
only in construction, which is what you originally talked about, but also in
environmental. So, we’ve had a bad experience in both and I think going
forward we don’t expect to have those recurring issues.
John
Gwynn –
Morgan Keegan & Company, Inc.
Okay. And Steve did the HCC block trade during the quarter?
Stephen R. Crim – American Safety Insurance Holdings, Ltd. –
President and Chief Executive Officer
Yes, it did. They sold 100% of their position in the
company and my understanding is that just based on the filings that that was
now taken over by Argo Group.
John
Gwynn –
Morgan Keegan & Company, Inc.
By who? I am sorry.
Stephen R. Crim – American Safety Insurance Holdings, Ltd. –
President and Chief Executive Officer
Argo Group out of Bermuda.
John
Gwynn –
Morgan Keegan & Company, Inc.
How do you spell that?
Stephen R. Crim – American Safety Insurance Holdings, Ltd. –
President and Chief Executive Officer
A-r-g-o.
John
Gwynn –
Morgan Keegan & Company, Inc.
Oh okay. Argo then.
Stephen R. Crim – American Safety Insurance Holdings, Ltd. –
President and Chief Executive Officer
Okay.
John
Gwynn –
Morgan Keegan & Company, Inc.
Okay. All right. Thanks a lot. That’s all I have.
Stephen R. Crim – American Safety Insurance Holdings, Ltd. –
President and Chief Executive Officer
Okay. Thanks.
Operator
Ladies and gentlemen, as a reminder if you would like to ask
a question you may do so by pressing “*1” on your telephone keypad. Our next
question comes from the line of Steve Bick with Cottingham Management. Please
proceed with your question.
Steve
Bick – Cottingham Management Company, LLC - CEO
Yeah, good morning. I am Steve. I have a couple of
questions regarding the total investments, $597 and did you say it was $5
million perhaps and $36 million in short-term investments?
William C. Tepe – American Safety Insurance Holdings, Ltd. –
Chief Financial Officer
Yes, the investments were $530 million and we had
(inaudible) stocks that totaled about $156 million, so fixed maturities were
about $530 million; mortgage backs were $156; we had $26 million in common
stock, $5 in preferred stock and $36 million in short-term.
Steve
Bick – Cottingham Management Company, LLC - CEO
Okay. Very good, so it seems like there is a de-leveraging
in the Fannie and Freddie area?
William C. Tepe – American Safety Insurance Holdings, Ltd. –
Chief Financial Officer
We have reduced our investment slightly.
Steve
Bick – Cottingham Management Company, LLC - CEO
Right and then as far as the roll down in the credit ratings
has there been a shift downwards still or is that consolidated around the AA
area?
William C. Tepe – American Safety Insurance Holdings, Ltd. –
Chief Financial Officer
It’s still consolidated around the AA area.
Steve
Bick – Cottingham Management Company, LLC - CEO
Okay, because at one point there was a movement downwards
and that’s actually stopped now, has that abated?
William C. Tepe – American Safety Insurance Holdings, Ltd. –
Chief Financial Officer
Yes, it has slowed down.
Steve
Bick – Cottingham Management Company, LLC - CEO
Okay. That’s excellent. And then my next question I didn’t
quite catch what you said about the excess in the $12 million in June or July
at least?
Stephen R. Crim – American Safety Insurance Holdings, Ltd. –
President and Chief Executive Officer
Right, we have a program that ensures excess municipal
liability for self-insured pools that we added in the fourth quarter of last
year. Those policies that are written under that program are heavily tied to a
July 1 date and we have been informed by the program manager that they will be
reporting about a $12 million writing for the month of July.
Steve
Bick – Cottingham Management Company, LLC - CEO
Okay, very good and is that going to be going forward? I
mean that’ll be everything happening in July from here onwards or…
Stephen R. Crim – American Safety Insurance Holdings, Ltd. –
President and Chief Executive Officer
Well, there are some October dates as well, but I would say
90% to 95% of the premium for the year will be transacted in July and just to
clarify, we don’t take risk, underwriting risk on that program, we front it for
another insurance company and we receive the income and they collateralize the
reserves that we establish back in the form of a trust.
Steve
Bick – Cottingham Management Company, LLC - CEO
Okay and so will that frustrate your net premiums earned or
what will be the pretension there?
Joseph D. Scollo, Jr. – American Safety Insurance Holdings,
Ltd. – Executive Vice President and Chief Operating Officer
There will be no impact on net earned premiums because we
cede 100% of the premium back to the insurance company that we front for and
then they just pay us a fee for doing that.
Steve
Bick – Cottingham Management Company, LLC - CEO
I see, okay. Okay, very good. Those are my questions.
Thanks very much.
Joseph D. Scollo, Jr. – American Safety Insurance Holdings,
Ltd. – Executive Vice President and Chief Operating Officer
Thank you.
Operator
Thank you. Ladies and gentlemen, there are no further
questions at this time. I’d like to turn the floor back to management for
closing comments.
Stephen R. Crim – American Safety Insurance Holdings, Ltd. –
President and Chief Executive Officer
Okay, I just got a couple of corporate matters. We will be
filing the 10-Q on a timely basis by the August 11 deadline and our next
conference call is scheduled for Monday, October 27 at 9:00 A.M. Eastern.
Thank you very much.
