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American Safety Insurance Holdings Ltd. (ASI)

Q4 2008 Earnings Call

March 5 2009 9:00 am ET

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

Kenneth Billingsley – Signal Hill Group

Neal Goldman – Goldman Capital

Presentation

Operator

Welcome to the American Safety fourth quarter 2008 earnings call. (Operator Instructions). As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Stephen Crim, President and Chief Executive Officer for American Safety Insurance. Thank you, Mr. Crim, you may begin.

Stephen R. Crim

Welcome to our conference call to discuss our results for the fourth quarter and year ended December 31, 2008, which were issued after the market closed yesterday. 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 September 30, 2008 as filed with the SEC.

Now turning to the results for the fourth quarter, we experienced a net loss of $8.2 million, which included $6 million of realized losses from other than temporary impairment of investments. Gross premiums written in the quarter improved 8% over the same period last year, due primarily to increased writings in the Assumed Reinsurance Segment.

The results for the quarter also included reserve strengthening, reinsurance reinstatement premium, and a valuation allowance for reinsurance recoverables totaling $8 million. The reserve strengthening and reinsurance reinstatement premium stem from adverse claims development from New York environmental contractor business arising from accident years 2002 to 2006.

We began significantly reducing writings in the New York environmental contractor market in 2007 and have approximately $1.2 million of in force premium remaining, which will be non-renewed during the course of this year. At the end of 2008, we conducted an extensive claims review in combination with an actuarial analysis, including both our internal and independent actuaries.

At the end of 2008, we had $26 million of reserves related to New York environmental exposures, of which approximately 45% is IBNR. Based on our year end analysis, we believe these reserves to be sufficient to cover our ultimate liabilities on this line of business.

The valuation allowance was established as a result of increased credit risk with certain reinsures where the company has insufficient collateral to cover the ultimate projected losses. I’m disappointed in the fourth quarter results, which led to management’s decision not to pay bonuses in 2008. We have discussed the fourth quarter results with A.M. Best and do not expect the net loss to impact our A rating.

Two thousand eight was a difficult year for both the insurance industry and American Safety Insurance. A significant amount of capital was depleted from the industry due to a combination of investment and catastrophe losses. While it appears that the industry remains adequately capitalized, the current environment necessitates a change in market conditions to stabilize insurer’s balance sheets.

However, even if rates stabilize during 2009, we believe the economy will place downward pressure on our insured’s revenues and on the overall demand for insurance leading to a reduction in premiums. As a result, I expect our 2009 gross premiums written to decline by approximately 10% to 15%, and our combined ratio to be in the range of 102% to 104%.

Despite the losses we experienced, our balance sheet remains strong and our book value per share remains at $21. The strong cash flow from operations has significantly increased our investment portfolio, which we expect to improve investment income this year even in the face of declining yields.

The diversified product platform that we’ve created over the past three years has resulted in more than one-third of our written premiums being generated from newer products last year, and sets the stage for more significant growth and improved profitability when market conditions improve.

I’ll now turn the call over to Joe Scollo to provide you with an update on our insurance operations.

Joseph D. Scollo, Jr.

All comparisons are for the quarter ended December 31, 2008 to the same period in 2007, unless otherwise noted. Gross written premiums for the quarter increased by $4.1 million or 8%. Premium growth was attributable to a $5 million increase in writings in our Assumed Reinsurance Segment. Premiums from our newer product lines contributed 35% of our gross written premiums for the quarter and more than offset a 48% decline in our construction line.

For the 2008 year, construction line premiums represented 13% of our total gross written premiums versus 27% for the 2007 year. Market conditions remained very competitive in all of our lines during the quarter. Gross written premiums in our Excess and Surplus Line Segment declined 4% to $29.7 million driven by a $5.8 million decline in construction line premiums.

Our construction premiums have been impacted throughout the year by the slowing housing market, soft market pricing and our exercise of underwriting discipline in a very competitive market. Our newer property, healthcare, excess and product liability lines contributed nearly $10 million of gross written premiums during the quarter. We believe we can achieve more significant growth in these product lines when market conditions are more favorable.

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