UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended:
December 31, 2013
COMMISSION FILE NUMBER:
000-54627
ATLAS FINANCIAL HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CAYMAN ISLANDS
(State or other jurisdiction of
incorporation or organization)
150 NW POINT BOULEVARD
Elk Grove Village, IL
(Address of principal executive offices)
27-5466079
(I.R.S. Employer
Identification No.)
60007
(Zip Code)
Registrant’s telephone number, including area code: (847) 472-6700
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS:
Common, $0.003 par value per share
NAME OF EACH EXCHANGE ON WHICH REGISTERED:
Nasdaq Stock Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes
Indicate by check mark whether the 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 for such shorter period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes
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 (§ 232.405 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
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act. (Check one):
No
No
No
No
Large Accelerated Filer
Non-Accelerated Filer
(do not check if a smaller reporting company)
Accelerated Filer
Smaller Reporting Company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes
No
There were 9,424,734 shares of the Registrant's common stock outstanding as of March 6, 2014, of which 9,291,871 are ordinary common
shares and 132,863 are restricted shares. As of the last business day of the Registrant’s most recently completed second fiscal quarter, the
aggregate market value of the Registrant's common equity held by non-affiliates of the Registrant was approximately $43.0 million (based
upon the closing sale price of the Registrant’s common shares on June 28, 2013).
For purposes of the foregoing calculation only, which is required by Form 10-K, the Registrant has included in the shares owned by affiliates
those shares owned by directors and officers of the Registrant, and such inclusion shall not be construed as an admission that any such person
is an affiliate for any purpose.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s Definitive Proxy Statement for its 2014 Annual Meeting of Stockholders are incorporated by reference into Part
III of this report.
* * *
1
ATLAS FINANCIAL HOLDINGS, INC.
INDEX TO ANNUAL REPORT ON FORM 10-K
December 31, 2013
Business
Overview
Market
Acquisition of Gateway Insurance Company
Competitive Strengths
Strategic Focus
Geographic Markets
Agency Relationships
Seasonality
Competition
Regulation
Employees
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Management's Discussion and Analysis of Financial Condition and Results of Operations
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Exhibits and Financial Statement Schedules
Signatures
Financial Statement Schedules
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3
4
5
5
6
7
8
8
9
9
10
10
24
24
25
25
26
28
52
74
74
74
75
75
75
75
75
76
78
79
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 7.
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Item 15.
2
PART I
Item 1. BUSINESS
Overview
Atlas Financial Holdings, Inc. ("Atlas" or "We" or "the Company") is a financial services holding company incorporated under
the laws of the Cayman Islands. Our core business is the underwriting of commercial automobile insurance policies, focusing on
the “light” commercial automobile sector, which is carried out through our insurance subsidiaries, American Country Insurance
Company, or American Country, American Service Insurance Company, Inc., or American Service, and Gateway Insurance
Company, or Gateway, which collectively we refer to as our “insurance subsidiaries”. This insurance sector includes taxi cabs,
non-emergency para-transit, limousine, livery and business auto. Our goal is to be the preferred specialty commercial transportation
insurer in any geographic areas where our value proposition delivers benefit to all stakeholders.
We were originally formed as JJR VI, a Canadian capital pool company, on December 21, 2009 under the laws of Ontario, Canada.
On December 31, 2010, we completed a reverse merger wherein American Service and American Country, in exchange for the
consideration set out below, were transferred to us by Kingsway America Inc. ("KAI"), a wholly owned subsidiary of Kingsway
Financial Services Inc. ("KFSI") a Canadian public company whose shares are traded on the Toronto and New York Stock
Exchanges. Prior to the transaction, each of American Service and American Country were wholly owned subsidiaries of KAI.
American Country commenced operations in 1979. With roots dating back to 1925 selling insurance for taxi cabs, American
Country is one of the oldest insurers of taxi and livery businesses in the United States. In 1983, American Service began as a non-
standard personal and commercial auto insurer writing business in the Chicago, Illinois area.
In connection with the acquisition of American Service and American Country, we streamlined the operations of the insurance
subsidiaries to focus on the “light” commercial automobile lines of business we believe will produce favorable underwriting
results. During 2011 and 2012, we disposed of non-core assets and placed into run-off certain non-core lines of business previously
written by the insurance subsidiaries. Since disposing of these non-core assets and lines of business, our sole focus has been the
underwriting of specialty commercial insurance for users of "light" vehicles in the United States. On January 2, 2013, Atlas
acquired its third insurance subsidiary, Gateway, as detailed further on the following pages.
The address of our registered office is Cricket Square, Hutchins Drive, PO Box 2681, Grand Cayman, KY1-1111, Cayman Islands.
Our operating headquarters are located at 150 Northwest Point Boulevard, Elk Grove Village, Illinois 60007, USA. We maintain
a website at http://www.atlas-fin.com. Information on our website or any other website does not constitute a part of this annual
report on Form 10-K.
On December 31, 2010, following the reverse merger transaction described immediately hereafter, we filed a Certificate of
Registration by Way of Continuation in the Cayman Islands to re-domesticate as a Cayman Islands company. In addition, on
December 30, 2010 we filed a Certificate of Incorporation on Change of Name to change our name to Atlas Financial Holdings,
Inc. Our current organization is a result of a reverse merger transaction involving the following companies:
(a)
(b)
(c)
JJR VI, sponsored by JJR Capital, a Toronto based merchant bank;
American Insurance Acquisition Inc., or American Acquisition, a corporation formed under the laws of Delaware as a
wholly owned subsidiary of KAI; and
Atlas Acquisition Corp., a Delaware corporation wholly-owned by JJR VI and formed for the purpose of merging with
and into American Acquisition.
Prior to the transaction, each of American Service and American Country were wholly owned subsidiaries of KAI. In connection
with the reverse merger transaction, KAI transferred 100% of the capital stock of each of American Service and American Country
to American Acquisition (another wholly owed subsidiary of KAI) in exchange for C$35.1 million of common and $18.0 million
of preferred shares of American Acquisition and promissory notes worth C$7.7 million, aggregating C$60.8 million. In addition,
American Acquisition raised C$8.0 million through a private placement offering of subscription receipts to qualified investors in
both the United States and Canada at a price of C$6.00 per subscription receipt.
KAI received 4,601,621 restricted voting common shares of our company, which we refer to as “restricted voting shares”, then
valued at $27.8 million, along with 18,000,000 non-voting preferred shares of our company, then valued at $18.0 million, and
C$8.0 million cash for total consideration of C$60.8 million in exchange for 100% of the outstanding shares of American Acquisition
and full payment of certain promissory notes. Investors in the American Acquisition private placement offering of subscription
3
receipts received 1,327,834 of our ordinary shares, which we refer to as “ordinary shares”, plus warrants to purchase one ordinary
share of our company for each subscription receipt at C$6.00 at any time until December 31, 2013. Every 10 common shares of
JJR VI held by the shareholders of JJR VI immediately prior to the reverse merger were, upon consummation of the merger,
consolidated into one ordinary share of JJR VI. Upon re-domestication in the Cayman Islands, these consolidated shares were
then exchanged on a one-for-one basis for our ordinary shares.
On December 7, 2012, a shareholder meeting was held where a one-for-three reverse stock split was unanimously approved. When
the reverse stock split took effect on January 29, 2013, it decreased the authorized and outstanding ordinary shares and restricted
voting shares at a ratio of one-for-three. The primary objective of the reverse stock split was to increase the per share price of
Atlas' ordinary shares to meet certain listing requirements of the NASDAQ Capital Market. Unless otherwise noted, all historical
share and per share values in this Annual Report on Form 10-K reflect the one-for-three reverse stock split.
On February 11, 2013, an aggregate of 4,125,000 Atlas ordinary shares were offered in Atlas' initial public offering in the United
States. 1,500,000 ordinary shares were offered by Atlas and 2,625,000 ordinary shares were sold by KAI at a price of $5.85 per
share. Atlas also granted the underwriters an option to purchase up to an aggregate of 618,750 additional shares at the public
offering price of $5.85 per share to cover over-allotments, if any. On March 11, 2013, the underwriters exercised this option and
purchased an additional 451,500 shares. After underwriting and other expenses, total proceeds of $9.8 million were realized on
the issuance of the shares. Since that time, Atlas' shares have traded on the NASDAQ under the symbol "AFH."
On June 5, 2013, Atlas delisted from the Toronto Stock Exchange.
The principal purposes of the initial offering in the United States were to create a public market in the United States for Atlas'
ordinary shares and thereby enable future access to the public equity markets in the United States by Atlas and its shareholders,
and to obtain additional capital. The net proceeds from the offering were used to repurchase preferred shares, which accrued
dividends on a cumulative basis at a rate of $0.045 per share per year (4.5%) and were convertible into 2,286,000 common shares
at the option of the holder after December 31, 2015. As originally announced on August 1, 2013, Atlas redeemed $18 million of
outstanding preferred shares for $16.2 million.
Substantially all of our new premiums written are in “light” commercial automobile lines of business. In the year ended December
31, 2013, gross premium written from commercial automobile was $88.6 million, representing a 75.2% increase relative to the
year ended December 31, 2012. As a percentage of the insurance subsidiaries’ overall book of business, commercial auto gross
premium written represented 95.2% of gross premium written in the year ended December 31, 2013 compared to 91.8% during
the year ended December 31, 2012.
We are committed to the “light” commercial automobile and related lines of business. With the completion of the acquisition of
Gateway, we increased the footprint of our current market focus to 40 states and the District of Columbia through the addition of
California, Hawaii, Montana, Nebraska, North Dakota, South Dakota, Washington and West Virginia. Together, our insurance
subsidiaries are licensed to write property and casualty, or P&C, insurance in 49 states plus the District of Columbia in the United
States. Collectively, our insurance subsidiaries actively wrote commercial automobile insurance in more states during 2013 than
in any prior year.
Market
Our core business is the underwriting of commercial automobile insurance policies, focusing on the “light” commercial automobile
sector. The “light” commercial automobile policies we underwrite provide coverage for light weight commercial vehicles typically
with the minimum limits prescribed by statute, municipal or other regulatory requirements. The majority of our policyholders are
individual owners or small fleet operators.
The “light” commercial automobile sector is a subset of the historically profitable commercial automobile insurance industry
segment. Commercial automobile insurance has outperformed the overall P&C industry in each of the past ten years based on
data compiled by A.M. Best. Data published by A.M. Best estimates the total market for commercial automobile liability insurance
to be approximately $24 billion. The size of the commercial automobile insurance market can be affected significantly by many
factors, such as the underwriting capacity and underwriting criteria of automobile insurance carriers and general economic
conditions. Historically, the commercial automobile insurance market has been characterized by periods of excess capacity and
price competition followed by periods of reduced underwriting capacity and higher premium rates.
We believe that there is a positive correlation between the economy and commercial automobile insurance in general. However,
operators of “light” commercial automobiles may be less likely than other business segments within the commercial automobile
insurance market to take vehicles out of service as their businesses and business reputations rely heavily on availability. With
4
respect to certain business lines such as the taxi line, there are also other factors such as the cost and limited supply of medallions
which may discourage a policyholder from taking vehicles out of service in the face of reduced demand for the use of the vehicle.
Acquisition of Gateway Insurance Company
On January 2, 2013 we acquired Camelot Services, Inc., or Camelot Services, a privately owned insurance holding company, and
its sole subsidiary, Gateway, from Hendricks Holding Company, Inc., or Hendricks, an unaffiliated third party. This transaction
was contractually deemed effective as of January 1, 2013. Gateway provides specialized commercial insurance products, including
commercial automobile insurance to niche markets such as taxi, black car and sedan service owners and operators.
Gateway is a St. Louis, Missouri-based insurance company that was writing approximately $10.0 million of annual taxi and
limousine net written premium in states deemed as favorable by Atlas at the time of our acquisition. Gateway is an admitted carrier
in 46 states plus the District of Columbia. Atlas' acquisition of Gateway expanded our distribution channel for core commercial
automobile lines to a total of 40 states and the District of Columbia, including California, Hawaii, Montana, Nebraska, North
Dakota, South Dakota, Washington and West Virginia.
Under the terms of the stock purchase agreement, the purchase price equaled the adjusted book value of Camelot Services at
December 31, 2012, subject to certain pre and post-closing adjustments, including, among others, claim development between the
signing of the stock purchase agreement and December 31, 2012. Additional consideration, principally in the form of preferred
shares, may be paid to the seller, or returned to us by the seller, depending upon, among other things, the future development of
Gateway’s actual loss reserves for certain lines of business and the utilization of certain deferred tax assets over time. Gateway
also wrote contractor's workers’ compensation insurance, which we ceased writing as part of the transaction. An indemnity
reinsurance agreement was entered into pursuant to which 100% of Gateway’s workers’ compensation business was ceded to a
third party captive reinsurer funded by the seller as part of the transaction.
The total purchase price for all of Camelot Services’ outstanding shares was $14.3 million, consisting of a combination of cash
and Atlas preferred shares. Consideration consisted of a $6.0 million dividend paid by Gateway immediately prior to the closing,
$2.0 million of Atlas preferred shares (consisting of a total of 2 million preferred shares) and $6.3 million in cash. We have
contractual protections to offset up to $2.0 million of future adverse reserve development. We have also agreed to provide the
sellers up to $2.0 million in additional consideration in the event of favorable reserve development.
Competitive Strengths
Our value proposition is driven by our competitive strengths, which include the following:
Focus on niche commercial insurance business. We target niche markets that support adequate pricing and believe we are able to
adapt to changing market needs ahead of our competitors through our strategic commitment and operating scale. We develop and
deliver superior specialty commercial automobile insurance products priced to meet our customers’ needs and strive to generate
consistent underwriting profit for our insurance subsidiaries. We have experienced a favorable trend in loss ratios in 2013 attributable
to the increased composition of commercial automobile written premium as a percentage of our insurance subsidiaries' total written
premium coupled with our ability to increase pricing.
There are a limited number of competitors specializing in these lines of business. Management believes a strong value proposition
is very important to attract new business and can result in desirable retention levels as policies renew on an annual basis. There
are also a relatively limited number of agents who specialize in these lines of business. As a result, strategic agent relationships
are important to ensure efficient distribution.
Strong market presence with recognized brands and long-standing distribution relationships. American Country, American Service
and Gateway have a long heritage as insurers of taxi, livery and para-transit businesses. All of our insurance subsidiaries have
strong brand recognition and long-standing distribution relationships in target markets. Through regular interaction with our retail
producers, we strive to thoroughly understand each of the markets we serve in order to deliver strategically priced products to
attractive markets at the right time. Our insurance subsidiaries are currently licensed in more states than those in which we have
currently elected to do business and we routinely re-evaluate other markets to assess future potential opportunities.
Sophisticated underwriting and claims handling expertise. Atlas has extensive experience and expertise with respect to underwriting
and claims management in our specialty area of insurance. Our well-developed underwriting and claims infrastructure includes
an extensive data repository, proprietary technologies, deep market knowledge and established market relationships. Analysis of
the substantial data available through our operating companies drives our product and pricing decisions. We believe our underwriting
and claims handling expertise provides enhanced risk selection, high quality service to our customers and greater control over
5
claims expenses. We are committed to maintaining this underwriting and claims handling expertise as a core competency as our
volume of business increases.
Scalable operations positioned for growth. Significant progress has also been made in aligning our cost base to our expected
revenue going forward. The core functions of our insurance subsidiaries were integrated into a common operating platform. We
believe that our insurance subsidiaries are well-positioned to begin returning to the volume of premium they wrote in the recent
past with better than industry level profitability from the efficient operating infrastructure established subsequent to Atlas'
acquisition of the companies.
Experienced management team. We have a talented and experienced management team who have decades of experience in the
property and casualty insurance industry. Our senior management team has worked in the property and casualty industry for an
average of 23 years and with the insurance subsidiaries, directly or indirectly, for an average of 12 years.
Strategic Focus
Vision
Our goal is to be the preferred specialty commercial transportation insurer in any geographic area where our value proposition
delivers benefit to all stakeholders.
Mission
We develop and deliver superior specialty insurance products priced to meet our customers’ needs and generate consistent
underwriting profit for our insurance subsidiaries. These products are distributed to the insured through independent retail agents
utilizing our company’s operating platform.
We seek to achieve our vision and mission through the design, sophisticated pricing and efficient delivery of specialty transportation
insurance products. Through constant interaction with our retail producers, we strive to thoroughly understand each of the markets
we serve in order to deliver strategically priced products to attractive markets at the right time. Analysis of the substantial data
available through our operating companies drives our product and pricing decisions. We focus on our key strengths and seek to
expand our geographic footprint and products only to the extent these activities support our vision and mission. We target niche
markets that support adequate pricing and believe we are able to adapt to changing market needs ahead of our competitors through
our strategic commitment and increasing scale.
Outlook
Over the past three years, through infrastructure re-organization, dispositions and by placing certain lines of business into run-off,
the insurance subsidiaries have streamlined operations to focus on the lines of business we believe will produce favorable
underwriting results. Significant progress has also been made in aligning the cost base to our expected revenue stream going
forward. The core functions of the insurance subsidiaries were integrated into a common, best practice based, operating platform.
Management believes that our insurance subsidiaries are well-positioned to return to the volume of premium they wrote in the
recent past with better than industry level profitability. Our insurance subsidiaries have a long heritage with respect to their
continuing lines of business and will benefit from the efficient operating infrastructure currently in place. Through its insurance
subsidiaries, Atlas actively wrote business in 40 states and the District of Columbia during 2013, representing more states than in
any prior year, utilizing our well developed underwriting and claim methodology.
We believe that the most significant opportunities going forward are: (i) continued re-energizing of distribution channels with the
objective of recapturing business generated prior to 2009, (ii) building business in previously untapped geographic markets to the
extent that they meet our specific criteria where our insurance subsidiaries are licensed, but not recently active, and (iii)
opportunistically acquiring books of business or similar insurance companies, provided market conditions support this activity.
Primary potential risks related to these activities include: (i) insurance market conditions becoming or remaining “soft” for a
sustained period of time, (ii) not being able to achieve the expected support from distribution partners, and (iii) the insurance
subsidiaries not successfully maintaining their recently improved ratings from A.M. Best.
We seek to deploy our capital to maximize the return for our shareholders, either by investing in growing our operations or by
pursuing other capital initiatives, depending upon insurance and capital market conditions. We focus on our key strengths and
seek to expand our geographic footprint and products only to the extent these activities support our vision and mission. We will
identify and prioritize market expansion opportunities based on the comparative strength of our value proposition relative to
competitors, the market opportunity and the legal and regulatory environment.
6
We intend to continue to grow profitably by undertaking the following:
Re-establish legacy distribution relationships. We continue to build upon relationships with independent agents that have
been our insurance subsidiaries’ distribution partners in the past. We seek to develop and maintain strategic distribution
relationships with a relatively small number of independent agents with substantial market presence in each state in which
we currently operate. We expect to continue to increase the distribution of our core products in the states where we are
actively writing insurance and re-capture insurance premium historically written by the insurance subsidiaries.
Expand our market presence. We are committed to continuing to diversify by leveraging our experience, historical data
and market research to expand our business in previously untapped markets to the extent incremental markets meet our
criteria. Utilizing our established brands and market relationships, we have made significant inroads in new states where
we had no active business in recent years. We will continue to expand into additional states or product lines where we
are licensed, but not currently active, to the extent that our market expansion criteria is met in a given state.
Acquire complementary books of business and insurance companies. We plan to opportunistically pursue acquisitions of
complementary books of business and insurance companies provided market conditions support this activity. We will
evaluate each acquisition opportunity based on its expected economic contribution to our results and support of our market
expansion initiatives. Our recent acquisition of Gateway is consistent with this aspect of our strategy.
Geographic Markets
Currently, we distribute insurance only in the United States. Through our insurance subsidiaries, we are licensed to write P&C
insurance in 49 states plus the District of Columbia in the United States. The following table reflects, in percentages, the principal
geographic distribution of gross premiums written for the year ended December 31, 2013. No other jurisdiction accounted for
more than 5%.
Distribution of Gross Premium Written by Jurisdiction
New York
Illinois
Michigan
Texas
Louisiana
Minnesota
22.1%
12.1%
9.0%
8.1%
5.9%
5.0%
The diagram below outlines the states where we are focused on actively writing new insurance policies and where we believe the
comparative strength of our value proposition, the market opportunity, and the legal and regulatory environment are favorable
(states darkened in the below diagram). With the completion of the acquisition of Gateway, we increased the footprint of our
current market focus to 40 states and the District of Columbia through the addition of California, Hawaii, Montana, Nebraska,
North Dakota, South Dakota, Washington and West Virginia. The diagram below also reflects the 2013 addition of Maine to the
states where we are actively writing new insurance policies.
Gateway historically issued commercial automobile insurance policies in the state of Florida. We do not plan to actively write
insurance for new policyholders in Florida through our insurance subsidiaries and followed the required regulatory procedures to
withdraw from that state in 2013.
7
Agency Relationships
Independent agents are recruited by us directly and through marketing efforts targeting the specialty niche upon which we focus.
Interested agents are evaluated based on their experience, expertise and ethical dealing. Typically, our company enters into
distribution relationships with one out of every ten agents seeking an agency contract. We are generally interested in acting as
one of a relatively small number of insurance partners with whom our independent agents place business and are also careful not
to oversaturate the distribution channel in any given geographic market. This helps to ensure that we are able to receive the
maximum number of submissions for underwriting evaluation without unnecessary downstream pressure from agents to write
business that does not fit our underwriting model. Agents receive commission as a percentage of premiums (generally 10% to
12.5%) as their primary compensation from us. Larger agents may also be eligible for profit sharing based on the growth and
underwriting profitability related to their book of business with us. The quality of business presented and written by each
independent agent is evaluated regularly by our underwriters and is also reviewed quarterly by senior management. Key metrics
for evaluation include overall accuracy and adequacy of underwriting information, performance relative to agreed commitments,
support with respect to claims presented by their customers (as applicable) and overall underwriting profitability of the agent’s
book of business. While we rely on our independent agents for distribution and customer support, underwriting and claim handling
responsibilities are retained by us. Many of our agents have had direct relationships with our insurance subsidiaries for a number
of years. Gateway also historically distributed its taxi and limousine products through independent agents. Their distribution
channel and independent agent relationships were complementary to ours at the time of acquisition and were reviewed and integrated
into Atlas' overall distribution channel in 2013.
Seasonality
Our P&C insurance business is seasonal in nature. Our ability to generate written premium is also impacted by the timing of policy
effective periods in the states in which we operate while our net premiums earned generally follow a relatively smooth trend from
quarter to quarter. Also, our gross premiums written are impacted by certain common renewal dates in larger metropolitan markets
for the light commercial risks that represent our core lines of business. For example, January 1st and March 1st are common taxi
cab renewal dates in Illinois and New York, respectively. Additionally, we implemented our New York “excess taxi program” in
the third quarter of 2012, which had a renewal date in the third quarter 2013. Net underwriting income is driven mainly by the
timing and nature of claims, which can vary widely.
8
Competition
The insurance industry is price competitive in all markets in which the insurance subsidiaries operate. Our company strives to
employ disciplined underwriting practices with the objective of rejecting under priced risks. A recent survey by A.M Best estimates
the total market for commercial automobile liability insurance to be approximately $24 billion. We believe our company requires
only 1% share of this market to achieve our business plan. We believe our current market share of the overall commercial auto
universe in the U.S. as of December 31, 2013 is approximately 0.3%.
Our company competes on a number of factors such as distribution strength, pricing, agency relationships, policy support, claim
service, and market reputation. In our core commercial automobile lines, the primary offerings are policies at the minimum
prescribed limits in each state, as established by statutory, municipal and other regulations. We believe our company differentiates
itself from many larger companies competing for this specialty business by exclusively focusing on these lines of insurance. We
believe our exclusive focus results in the deployment of underwriting and claims professionals who are more familiar with issues
common in specialty commercial automobile lines, and provides the customer better service.
Our competitors generally fall into two categories. The first is made up of large generalist insurers who often sell their products
to our niche through intermediaries such as managing general agents or wholesalers. The second consists primarily of smaller
local insurance companies. These smaller companies may focus primarily on one or more of our niche markets. Or, as is typical
in the majority of geographic areas where we compete, they have a broader focus, often writing a significant amount of non-
standard lines of business.
To compete successfully in the specialty commercial insurance industry, we rely on our ability to: identify markets that are most
likely to produce an underwriting profit; operate with a disciplined underwriting approach; offer diversified products and geographic
platforms; practice prudent claims management; reserve appropriately for unpaid claims; strive for cost containment through
economies of scale where deemed appropriate; and, provide services and competitive commissions to our independent agents.
Regulation
We are subject to extensive regulation, particularly at the state level. The method, extent and substance of such regulation varies
by state, but generally has its source in statutes and regulations which establish standards and requirements for conducting the
business of insurance and that delegate regulatory authority to state insurance regulatory agencies. Insurance companies can also
be subject to so-called “desk drawer rules” of state insurance regulators, which are regulatory rules or best practices that have not
been codified or formally adopted through regulatory proceedings. In general, such regulation is intended for the protection of
those who purchase or use insurance products issued by our insurance subsidiaries, not the holders of securities issued by us. These
laws and regulations have a significant impact on our business and relate to a wide variety of matters including accounting methods,
agent and company licensure, claims procedures, corporate governance, examinations, investing practices, policy forms, pricing,
trade practices, reserve adequacy and underwriting standards.
In recent years, the state insurance regulatory framework has come under increased federal scrutiny. Most recently, pursuant to
the Dodd-Frank Regulatory Reform Act of 2010, the Federal Insurance Office was formed for the purpose of, among other things,
examining and evaluating the effectiveness of the current insurance and reinsurance regulatory framework. In addition, state
legislators and insurance regulators continue to examine the appropriate nature and scope of state insurance regulation.
Many state laws require insurers to file insurance policy forms and/or insurance premium rates and underwriting rules with state
insurance regulators. In some states, such rates, forms and/or rules must be approved prior to use. While these requirements vary
from state to state, generally speaking, regulators review premium rates to ensure they are not excessive, inadequate or unfairly
discriminatory.
As a result, the speed with which an insurer can change prices in response to competition or increased costs depends, in part, on
whether the premium rate laws and regulations (i) require prior approval of the premium rates to be charged, (ii) permit the insurer
to file and use the forms, rates and rules immediately, subject to further review, or (iii) permit the insurer to immediately use the
forms, rates and/or rules and to subsequently file them with the regulator. When state laws and regulations significantly restrict
both underwriting and pricing, it can become more difficult for an insurer to make adjustments quickly in response to changes
which could affect profitability.
Insurance companies are required to report their financial condition and results of operations in accordance with statutory accounting
principles prescribed or permitted by state insurance laws and regulations and the National Association of Insurance Commissioners
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(the “NAIC”). As a result, industry data is available that enables comparisons between insurance companies, including competitors
who are not subject to the requirement to prepare financial statements in conformity with U.S. GAAP. We frequently use industry
publications containing statutory financial information to assess our competitive position. State insurance laws and regulations
also prescribe the form and content of statutory financial statements, require the performance of periodic financial examinations
of insurers, establish standards for the types and amounts of investments insurers may hold and require minimum capital and
surplus levels. Additional requirements include risk-based capital (“RBC”) rules, thresholds intended to enable state insurance
regulators to assess the level of risk inherent in an insurance company’s business and consider items such as asset risk, credit risk,
underwriting risk and other business risks relevant to its operations. In accordance with RBC formulas, a company’s RBC
requirements are calculated and compared to its total adjusted capital to determine whether regulatory intervention is warranted.
At December 31, 2013, the total adjusted capital of each of our insurance subsidiaries exceeded the minimum levels required
under RBC requirements.
It is difficult to predict what specific measures at the state or federal level will be adopted or what effect any such measures would
have on us or our insurance subsidiaries.
Employees
As of December 31, 2013, we had 98 full-time employees, 78 of whom work at the corporate offices in Elk Grove Village, Illinois,
12 of whom work in St. Louis, 5 of whom work in New York and 3 of whom work remotely.
Item 1A. RISK FACTORS
You should read the following risk factors carefully in connection with evaluating our business and the forward-looking information
contained in this Annual Report on Form 10-K. Any of the following risks could materially and adversely affect our business,
operating results, financial condition and the actual outcome of matters as to which forward-looking statements are made in this
Annual Report on Form 10-K. While we believe we have identified and discussed below the key risk factors affecting our business,
there may be additional risks and uncertainties that are not presently known or that are not currently believed to be significant
that may adversely affect our business, operating results or financial condition in the future.
The insurance subsidiaries’ provisions for unpaid claims may be inadequate, which would result in a reduction in our net
income and might adversely affect our financial condition.
Our success depends upon our ability to accurately assess and price the risks covered by the insurance policies that we write. We
establish reserves to cover our estimated liability for the payment of losses and expenses related to the administration of claims
incurred on the insurance policies we write. Establishing an appropriate level of reserves is an inherently uncertain process. Our
provisions for unpaid claims do not represent an exact calculation of actual liability, but are estimates involving actuarial and
statistical projections at a given point in time of what we expect to be the cost of the ultimate settlement and administration of
known and unknown claims. The process for establishing the provision for unpaid claims reflects the uncertainties and significant
judgmental factors inherent in estimating future results of both known and unknown claims and as such, the process is inherently
complex and imprecise. We utilize a third party actuarial firm to assist us in estimating the provision for unpaid claims. These
estimates are based upon various factors, including:
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actuarial and statistical projections of the cost of settlement and administration of claims reflecting facts and
circumstances then known;
historical claims information;
assessments of currently available data;
estimates of future trends in claims severity and frequency;
judicial theories of liability;
economic factors such as inflation;
estimates and assumptions regarding judicial and legislative trends, and actions such as class action lawsuits
and judicial interpretation of coverages or policy exclusions; and
the level of insurance fraud.
Most or all of these factors are not directly quantifiable, particularly on a prospective basis, and the effects of these and unforeseen
factors could negatively impact our ability to accurately assess the risks of the policies that we write. In addition, there may be
significant reporting lags between the occurrence of the insured event and the time it is actually reported to the insurer and additional
lags between the time of reporting and final settlement of claims. Unfavorable development in any of these factors could cause
the level of reserves to be inadequate. The following factors may have a substantial impact on future claims incurred:
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the amounts of claims payments;
the expenses that the insurance subsidiaries incur in resolving claims;
legislative and judicial developments; and
changes in economic conditions, including inflation.
As time passes and more information about the claims becomes known, the estimates are adjusted upward or downward to reflect
this additional information. Because of the elements of uncertainty encompassed in this estimation process, and the extended time
it can take to settle many of the more substantial claims, several years of experience may be required before a meaningful comparison
can be made between actual losses and the original provision for unpaid claims. The development of the provision for unpaid
claims is shown by the difference between estimates of claims as of the initial year end and the re-estimated liability at each
subsequent year end. Favorable development (reserve redundancy) means that the original claims estimates were higher than
subsequently determined or re-estimated. Unfavorable development (reserve deficiency) means that the original claims estimates
were lower than subsequently determined or re-estimated.
For example, in 2010, a detailed review of claim payment and reserving practices was performed, which led to significant changes
in both practices, increasing ultimate loss estimates and accelerating claim payments. We recorded a total of $5.3 million in
unfavorable reserve development in 2010 related to claims incurred during prior periods. Our review continued into 2011 and
Atlas recorded a $1.8 million adjustment to further strengthen its reserves for claims related to policies issued while the insurance
subsidiaries were under previous ownership in years preceding 2010. Although we have not recorded any further adverse
development since that time, we cannot guarantee that we will not have additional unfavorable reserve developments in the future.
In addition, we may in the future acquire other insurance companies. We cannot guarantee that the provisions for unpaid claims
of the companies that we acquire are or will be adequate. Government regulators could require that we increase reserves if they
determine that provisions for unpaid claims are understated. Increases to the provision for unpaid claims cause a reduction in our
insurance subsidiaries’ surplus which could cause a downgrading of our insurance subsidiaries’ ratings. Any such downgrade
could, in turn, adversely affect their ability to sell insurance policies.
In recent periods, Gateway has recorded material reserve deficiencies, and its reserves may be inadequate to pay claims, which
could result in a reduction of our net income and might adversely affect our financial position.
We became responsible for the historical loss reserves established by Gateway’s management upon completion of the Gateway
acquisition. While the stock purchase agreement provides for certain protections in this regard, there can be no assurances they
will be sufficient to offset any further adverse development to Gateway’s historical loss reserves. Gateway recognized approximately
$7.4 million in reserve strengthening in the third and fourth quarters of 2012. During the years ended 2011 and 2010, their provision
for losses and loss adjustment expenses net of reinsurance recoveries increased by approximately $1.7 million and $2.4 million,
respectively, as a result of changes in estimated losses incurred with respect to insured events in prior years. Any such further
unfavorable development in Gateway’s reserves would reduce our net income and have an adverse effect on our financial position
to the extent it exceeds the protections provided for in the stock purchase agreement related to the Gateway acquisition.
Our success depends on our ability to accurately price the risks we underwrite.
Our results of operations and financial condition depend on our ability to underwrite and set premium rates accurately for a wide
variety of risks. Adequate rates are necessary to generate premiums sufficient to pay losses, loss settlement expenses and
underwriting expenses and to earn a profit. To price our products accurately, we must collect and properly analyze a substantial
amount of data; develop, test and apply appropriate pricing techniques; closely monitor and timely recognize changes in trends;
and project both severity and frequency of losses with reasonable accuracy. Our ability to undertake these efforts successfully,
and as a result price our products accurately, is subject to a number of risks and uncertainties, some of which are outside our
control, including:
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the availability of sufficient reliable data and our ability to properly analyze available data;
the uncertainties that inherently characterize estimates and assumptions;
underlying trends or changes affecting risk and loss costs;
our selection and application of appropriate pricing techniques; and
changes in applicable legal liability standards and in the civil litigation system generally.
Consequently, we could under price risks, which would adversely affect our profit margins, or we could over price risks, which
could reduce our sales volume and competitiveness. In either case, our profitability could be materially and adversely affected.
Our insurance subsidiaries rely on independent agents and other producers to bind insurance policies on and to collect premiums
from our policyholders, which exposes us to risks that our producers fail to meet their obligations to us.
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Our insurance subsidiaries market and distribute automobile insurance products through a network of independent agents and
other producers in the United States. Gateway also relies on independent agents to distribute its insurance products and we did
not have existing relationships with many of Gateway’s independent agents prior to our acquisition in 2013. We rely, and will
continue to rely, heavily on these producers to attract new business. Independent producers generally have the ability to bind
insurance policies and collect premiums on our behalf, actions over which we have a limited ability to exercise preventative control.
In the event that an independent agent exceeds their authority by binding us on a risk that does not comply with our underwriting
guidelines, we may be at risk for that policy until we effect a cancellation. Any improper use of such authority may result in losses
that could have a material adverse effect on our business, results of operations and financial condition. In addition, in accordance
with industry practice, policyholders often pay the premiums for their policies to producers for payment to us. These premiums
may be considered paid when received by the producer and thereafter the customer is no longer liable to us for those amounts,
whether or not we have actually received these premium payments from the producer. Consequently, we assume a degree of risk
associated with our reliance on independent agents in connection with the settlement of insurance premium balances.
Our insurance subsidiaries may be unable to mitigate their risk or increase their underwriting capacity through reinsurance
arrangements, which could adversely affect our business, financial condition and results of operations. If reinsurance rates
rise significantly or reinsurance becomes unavailable or reinsurers are unable to pay our claims, we may be adversely affected.
In order to reduce underwriting risk and increase underwriting capacity, our insurance subsidiaries transfer portions of our insurance
risk to other insurers through reinsurance contracts. We generally purchase reinsurance from third parties in order to reduce our
liability on individual risks. Reinsurance does not relieve us of our primary liability to our insurance subsidiaries’ insureds. During
the year ended December 31, 2013, we had ceded premium written of $12.6 million to our reinsurers. The availability, cost and
structure of reinsurance protection are subject to prevailing market conditions that are outside of our control and which may affect
our level of business and profitability. Our ability to provide insurance at competitive premium rates and coverage limits on a
continuing basis depends in part upon the extent to which we can obtain adequate reinsurance in amounts and at rates that will
not adversely affect our competitive position. There are no assurances that we will be able to maintain our current reinsurance
facilities, which generally are subject to annual renewal. If we are unable to renew any of these facilities upon their expiration or
to obtain other reinsurance facilities in adequate amounts and at favorable rates, we may need to modify our underwriting practices
or reduce our underwriting commitments, which could adversely affect our results of operations.
Our insurance subsidiaries are subject to credit risk with respect to the obligations of reinsurers and certain of our insureds.
The inability of our risk sharing partners to meet their obligations could adversely affect our profitability.
Although the reinsurers are liable to us to the extent of risk ceded to them, we remain ultimately liable to policyholders on all
risks, even those reinsured. As a result, ceded reinsurance arrangements do not limit our ultimate obligations to policyholders to
pay claims. We are subject to credit risks with respect to the financial strength of our reinsurers. We are also subject to the risk
that their reinsurers may dispute their obligations to pay our claims. As a result, we may not recover sufficient amounts for claims
that we submit to reinsurers, if at all. As of December 31, 2013, we had an aggregate of $19.1 million of reinsurance recoverables,
of which $8.4 million were unsecured. In addition, our reinsurance agreements are subject to specified limits and we would not
have reinsurance coverage to the extent that those limits are exceeded.
Effective immediately after the close of the Gateway transaction, we entered into a reinsurance agreement with a third party
reinsurer, which covers all in-force premium and loss reserves for Gateway’s workers’ compensation program. Along with the
reserves, any go-forward premium written for the workers’ compensation program will be ceded in its entirety to this third party
reinsurer under the terms of this reinsurance agreement. While Gateway will remain liable to its insureds, we expect to have no
net exposure to any losses related to this workers’ compensation business subsequent to the effective date of the acquisition,
provided the reinsurer continues to make payments to us and otherwise complies with the terms of this reinsurance agreement,
although no assurances thereof can be given.
With respect to insurance programs, the insurance subsidiaries are subject to credit risk with respect to the payment of claims and
on the portion of risk exposure either ceded to captives established by their clients or deductibles retained by their clients. No
assurance can be given regarding the future ability of these entities to meet their obligations. The inability of our risk sharing
partners to meet their obligations could adversely affect our profitability.
The exclusions and limitations in our policies may not be enforceable.
Many of the policies we issue include exclusions or other conditions that define and limit coverage, which exclusions and conditions
are designed to manage our exposure to certain types of risks and expanding theories of legal liability. In addition, many of our
policies limit the period during which a policyholder may bring a claim under the policy, which period in many cases is shorter
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than the statutory period under which these claims can be brought by our policyholders. While these exclusions and limitations
help us assess and control our loss exposure, it is possible that a court or regulatory authority could nullify or void an exclusion
or limitation, or legislation could be enacted modifying or barring the use of these exclusions and limitations. This could result in
higher than anticipated losses and claims handling expenses by extending coverage beyond our underwriting intent or increasing
the number or size of claims, which could have a material adverse effect on our operating results. In some instances, these changes
may not become apparent until some time after we have issued the insurance policies that are affected by the changes. As a result,
the full extent of liability under our insurance contracts may not be known for many years after a policy is issued.
The occurrence of severe catastrophic events may have a material adverse effect on our financial results and financial condition.
Although our business strategy generally precludes us from writing significant amounts of catastrophe exposed business, most
property and casualty insurance contains some exposure to catastrophic loss. We have only limited exposure to natural and man-
made disasters, such as hurricane, typhoon, windstorm, flood, earthquake, acts of war, acts of terrorism and political instability.
While we carefully manage our aggregate exposure to catastrophes, modeling errors and the incidence and severity of catastrophes,
such as hurricanes, windstorms and large-scale terrorist attacks are inherently unpredictable, and our losses from catastrophes
could be substantial. In addition, it is possible we may experience an unusual frequency of smaller losses in a particular period.
In either case, the consequences could be substantial volatility in our financial condition or results of operations for any fiscal
quarter or year, which could have a material adverse effect on our ability to write new business. These losses could deplete our
shareholders’ equity. Increases in the values and geographic concentrations of insured property and the effects of inflation have
resulted in increased severity of industry losses from catastrophic events in recent years and we expect that those factors will
increase the severity of catastrophe losses in the future. It is also possible that catastrophic losses could have an impact on our
investment portfolio.
The risk models we use to quantify catastrophe exposures and risk accumulations may prove inadequate in predicting all
outcomes from potential catastrophe events.
We rely on widely accepted and industry-recognized catastrophe risk modeling, primarily in conjunction with our reinsurance
partners, to help us quantify our aggregate exposure to any one event. As with any model of physical systems, particularly those
with low frequencies of occurrence and potentially high severity of outcomes, the accuracy of the model’s predictions is largely
dependent on the accuracy and quality of the data provided in the underwriting process and the judgments of our employees and
other industry professionals. These models do not anticipate all potential perils or events that could result in a catastrophic loss to
us. Furthermore, it is often difficult for models to anticipate and incorporate events that have not been experienced during or as a
result of prior catastrophes. Accordingly, it is possible for us to be subject to events or contingencies that have not been anticipated
by our catastrophe risk models and which could have a material adverse effect on our reserves and results of operations.
Financial Risks
We are a holding company dependent on the results of operations of our subsidiaries and their ability to pay dividends and
other distributions to us.
Atlas is a holding company with no significant operations of its own and a legal entity separate and distinct from our insurance
subsidiaries. As a result, our only sources of income are dividends and other distributions from our insurance subsidiaries. We will
be limited by the earnings of those subsidiaries, and the distribution or other payment of such earnings to it in the form of dividends,
loans, advances or the reimbursement of expenses. The payment of dividends, the making of loans and advances or the
reimbursement of expenses by our insurance subsidiaries is contingent upon the earnings of those subsidiaries and is subject to
various business considerations and various statutory and regulatory restrictions imposed by the insurance laws of the domiciliary
jurisdiction of such subsidiaries. In Illinois and Missouri, the states of domicile of American Service, American Country and
Gateway, dividends may only be paid out of earned surplus and cannot be paid when the surplus of the company fails to meet
minimum requirements or when payment of the dividend or distribution would reduce its surplus to less than the minimum amount.
The state insurance regulator must be notified in advance of the payment of an extraordinary dividend and be given the opportunity
to disapprove any such dividend. Our insurance subsidiaries cannot currently pay any dividends to Atlas without regulatory
approval. In addition, prior to entering into any loan or certain other agreements between one or more of our insurance subsidiaries
and Atlas or our other affiliates, advance notice must be provided to the state insurance regulator and the insurance regulator has
the opportunity to disapprove such loan or agreement. Additionally, insurance regulators have broad powers to prevent reduction
of statutory capital and surplus to inadequate levels and could refuse to permit the payment of dividends calculated under any
applicable formula. As a result, we may not be able to receive dividends or other distributions from our insurance subsidiaries at
times and in amounts necessary to meet our operating needs, to pay dividends to shareholders or to pay corporate expenses. The
inability of our insurance subsidiaries to pay dividends or make other distributions could have a material adverse effect on our
business and financial condition.
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Our insurance subsidiaries are subject to minimum capital and surplus requirements. Failure to meet these requirements may
subject us to regulatory action.
American Country and American Service are subject to minimum capital and surplus requirements imposed under the laws of
Illinois and each state in which they issue policies. Any failure by one of our insurance subsidiaries to meet minimum capital and
surplus requirements imposed by applicable state law may subject it to corrective action, which may include requiring adoption
of a comprehensive financial plan, revocation of its license to sell insurance products or placing the subsidiary under state regulatory
control. Any new minimum capital and surplus requirements adopted in the future may require us to increase the capital and surplus
of our insurance company subsidiaries, which we may not be able to do. Upon the completion of the Gateway acquisition, we
became subject to minimum capital and surplus requirements imposed under the laws of Missouri with regard to Gateway and
the additional states where Gateway issues policies.
We are subject to assessments and other surcharges from state guaranty funds, and mandatory state insurance facilities, which
may reduce our profitability.
Virtually all states require insurers licensed to do business therein to bear a portion of contingent and incurred claim handling
expenses and the unfunded amount of “covered” claim and unearned premium obligations of impaired or insolvent insurance
companies, either up to the policy's limit, the applicable guaranty fund covered claim obligation cap, or 100% of statutorily defined
workers' compensation benefits, subject to applicable deductibles. These obligations are funded by assessments, made on a
retrospective, prospective or pre-funded basis, which are levied by guaranty associations within the state, up to prescribed limits
(typically 2% of “net direct written premium”), on all member insurers in the state on the basis of the proportionate share of the
premiums written by member insurers in certain covered lines of business in which the impaired, insolvent or failed insurer was
engaged. Accordingly, the total amount of assessments levied on us by the states in which we are licensed to write insurance may
increase as we increase our premiums written. In addition, as a condition to the ability to conduct business in certain states (and
within the jurisdiction of some local governments), insurance companies are subject to or required to participate in various premium
or loss based insurance-related assessments, including mandatory (a/k/a “involuntary”) insurance pools, underwriting associations,
workers' compensation second-injury funds, reinsurance funds and other state insurance facilities. Although we may be entitled
to take premium tax credit (or offsets), recover policy surcharges or include assessments in future premium rate structures for
payments we make under these facilities, the effect of these assessments and insurance-related arrangements, or changes in them,
could reduce our profitability in any given period or limit our ability to grow our business.
Market fluctuations, changes in interest rates or a need to generate liquidity could have significant and negative effects on our
investment portfolio. We may not be able to realize our investment objectives, which could significantly reduce our net income.
We depend on income from our securities portfolio for a substantial portion of our earnings. Investment returns are an important
part of our overall profitability. A significant decline in investment yields in the securities portfolio or an impairment of securities
owned could have a material adverse effect on our business, results of operations and financial condition. We currently maintain
and intend to continue to maintain a securities portfolio comprised primarily of fixed income securities. As of December 31, 2013,
our investment portfolio was primarily invested in fixed income securities. We cannot predict which industry sectors in which we
maintain investments may suffer losses as a result of potential declines in commercial and economic activity, or how any such
decline might impact the ability of companies within the affected industry sectors to pay interest or principal on their securities
and cannot predict how or to what extent the value of any underlying collateral might be affected. Accordingly, adverse fluctuations
in the fixed income or equity markets could adversely impact profitability, financial condition or cash flows. If we are forced to
sell portfolio securities that have unrealized losses for liquidity purposes rather than holding them to maturity or recovery, we
would realize investment losses on those securities when that determination was made. We could also experience a loss of principal
in fixed and non-fixed income investments.
Our ability to achieve our investment objectives is affected by general economic conditions that are beyond our control. General
economic conditions can adversely affect the markets for interest rate sensitive securities, including the extent and timing of
investor participation in such markets, the level and volatility of interest rates and, consequently, the value of fixed maturity
securities. U.S. and global markets have been experiencing volatility since mid-2007. Initiatives taken by the U.S. and foreign
governments have helped to stabilize the financial markets and restore liquidity to the banking system and credit markets. In
addition, markets in the United States and around the world experienced volatility in 2011 due, in part, to sovereign debt downgrades.
Although economic conditions and financial markets have somewhat stabilized, if market conditions were to deteriorate, our
investment portfolio could be adversely affected.
Difficult conditions in the economy generally may materially and adversely affect our business, results of operations and
statement of financial position and these conditions may not improve in the near future.
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Current market conditions and the instability in the global financial markets present additional risks and uncertainties for our
business. In particular, deterioration in the public debt markets could lead to additional investment losses and an erosion of capital
as a result of a reduction in the fair value of investment securities. The severe downturn in the public debt and equity markets,
reflecting uncertainties associated with the mortgage crisis, worsening economic conditions, widening of credit spreads,
bankruptcies and government intervention in large financial institutions, created significant unrealized losses in our securities
portfolio at certain stages in 2009.
Economic uncertainty has recently been exacerbated by the increased potential for default by one or more European sovereign
debt issuers, the potential partial or complete dissolution of the Eurozone and its common currency and the negative impact of
such events on global financial institutions and capital markets generally. Actions or inactions of European governments may
impact these actual or perceived risks. In the U.S. during 2011, one rating agency downgraded the U.S.’s long-term debt credit
rating from AAA. Future actions or inactions of the United States government, including a shutdown of the federal government,
could increase the actual or perceived risk that the U.S. may not ultimately pay its obligations when due and may disrupt financial
markets.
Atlas’ portfolio is managed by an SEC registered investment advisor specializing in the management of insurance company
portfolios. We and our investment manager consider these issues in connection with current asset allocation decisions with the
object of avoiding them going forward. However, depending on market conditions going forward, we could again incur substantial
realized and additional unrealized losses in future periods, which could have an adverse impact on the results of operations and
financial condition. There can be no assurance that the current market conditions will improve in the near future. We could also
experience a reduction in capital in the insurance subsidiaries below levels required by the regulators in the jurisdictions in which
we operate. Certain trust accounts for the benefit of related companies and third parties have been established with collateral on
deposit under the terms and conditions of the relevant trust agreements. The value of collateral could fall below the levels required
under these agreements, putting the subsidiary or subsidiaries in breach of the agreement.
We may not have access to capital in the future.
We may need new or additional financing in the future to conduct our operations or expand our business. However, we may be
unable to raise capital on favorable terms, or at all, including as a result of disruptions, uncertainty and volatility in the global
credit markets, or due to any sustained weakness in the general economic conditions and/or financial markets in the United States
or globally. From time to time, we may rely on access to financial markets as a source of liquidity for operations, acquisitions and
general corporate purposes.
The limited public float and trading volume for our shares may have an adverse impact on the share price or make it difficult
to liquidate.
Our securities are held by a relatively small number of shareholders. Future sales of substantial amounts of our shares in the public
market, or the perception that these sales could occur, may adversely impact the market price of our shares and our shares could
be difficult to liquidate.
Our business depends upon key employees, and if we are unable to retain the services of these key employees or to attract and
retain additional qualified personnel, our business may suffer.
Our operations depend, to a great extent, upon the ability of executive management and other key employees to implement our
business strategy and our ability to attract and retain additional qualified personnel in the future. The loss of the services of any
of our key employees, or the inability to identify, hire and retain other highly qualified personnel in the future could adversely
affect the quality and profitability of our business operations. In addition, we must forecast volume and other factors in changing
business environments with reasonable accuracy and adjust our hiring and employment levels accordingly. Our failure to recognize
the need for such adjustments, or our failure or inability to react appropriately on a timely basis, could lead to over-staffing (which
could adversely affect our cost structure) or under-staffing (which could impair our ability to service current product lines and
new lines of business). In either event, our financial results and customer relationships could be adversely affected.
Compliance Risks
We are subject to comprehensive regulation, and our results may be unfavorably impacted by these regulations.
As a holding company which owns insurance companies domiciled in the United States, we and our insurance subsidiaries are
subject to comprehensive laws, regulations and rules. These laws, regulations and rules generally delegate regulatory, supervisory
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and administrative powers to state insurance regulators. Insurance regulations are generally designed to protect policyholders
rather than shareholders, and are related to matters including but not limited to:
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rate setting;
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• RBC ratio and solvency requirements;
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restrictions on the amount, type, nature, quality and quantity of securities and other investments in which insurers
may invest;
the maintenance of adequate reserves for unearned premiums and unpaid, and incurred but not reported, claims;
restrictions on the types of terms that can be included in insurance policies;
standards for accounting;
claims settlement practices;
the examination of insurance companies by regulatory authorities, including periodic financial and market
conduct examinations;
requirements to comply with medical privacy laws as a result of our administration of Gateway's run-off workers'
compensation business;
the licensing of insurers and their agents;
limitations on dividends and transactions with affiliates;
approval of certain reinsurance transactions;
insolvency proceedings;
ability to enter and exit certain insurance markets, cancel policies or non-renew policies; and
data privacy.
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Such laws, regulations and rules increase our legal and financial compliance costs and make some activities more time-consuming
and costly. Any failure to monitor and address any internal control issues could adversely impact operating results. In addition,
the Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal
control over financial reporting. In connection with the audit of our insurance subsidiaries for the year ended December 31, 2010,
during which our insurance subsidiaries were owned by KAI, the auditors reported to those charged with governance significant
deficiencies in the internal controls of the insurance subsidiaries related to technical account reconciliations and reinsurance
recoverable reconciliations and billings. A deficiency in internal control exists when the design or operation of a control does not
allow management or employees, in the normal course of performing their assigned functions, to prevent or detect and correct
misstatements on a timely basis. A significant deficiency is a deficiency, or combination of deficiencies, in internal control that is
less severe than a material weakness, yet important enough to merit attention by those charged with governance. A material
weakness is a deficiency, or combination of deficiencies, in internal control, such that there is a reasonable possibility that a material
misstatement of the entity's financial statements will not be prevented, or detected and corrected on a timely basis. None of the
significant deficiencies described above were reported as a material weakness. Following the reverse merger on December 31,
2010 wherein the insurance subsidiaries were transferred to us by KAI, we committed resources to addressing these identified
deficiencies in internal controls and we believe they have all been addressed.
State insurance departments conduct periodic examinations of the affairs of insurance companies and require filing of annual and
other reports relating to the financial condition of insurance companies, holding company issues and other matters. Our business
depends on compliance with applicable laws, regulations and rules and our ability to maintain valid licenses and approvals for
our operations. Regulatory authorities may deny or revoke licenses for various reasons, including violations of laws, regulations
and rules. Changes in the level of regulation of the insurance industry or changes in laws, regulations and rules themselves or
interpretations thereof by regulatory authorities could have a material adverse effect on our operations. Because we are subject to
insurance laws, regulations and rules of many jurisdictions that are administered by different regulatory and governmental
authorities, there is also a risk that one authority's interpretation of a legal or regulatory issue may conflict with another authority's
interpretation of the same issue. Insurance companies are also subject to “desk drawer rules” of state insurance regulators, which
are regulatory rules that have not been codified or formally adopted through regulatory proceedings. In addition, we could face
individual, group and class-action lawsuits by our policyholders and others for alleged violations of certain state laws, regulations
and rules. Each of these regulatory risks could have an adverse effect on our profitability.
As a result of our administration of Gateway's run-off workers' compensation business, we are required to comply with state and
federal laws governing the collection, transmission, security and privacy of health information that require significant compliance
costs, and any failure to comply with these laws could result in material criminal and civil penalties. These laws and rules are
subject to administrative interpretation and many are derived from the privacy provisions in the Federal Gramm-Leach-Bliley Act
of 2002. The Gramm-Leach-Bliley Act, which, among other things, protects consumers from the unauthorized dissemination of
certain personal information, and various state laws and regulations addressing privacy issues, require us to maintain appropriate
procedures for managing and protecting certain personal information of our customers and to fully disclose our privacy practices
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to our customers. Given the complexity of these privacy regulations, the possibility that the regulations may change, and the fact
that the regulations are subject to changing and potentially conflicting interpretation, our ability to maintain compliance with the
privacy requirements of state and federal law is uncertain and the costs of compliance are significant.
In addition, Gateway is exiting the workers' compensation line of business across the country and we also exited the Florida market
for all lines of business. Most states have adopted either statutes or regulations or have issued bulletins or informal rules that
regulate the anticipated withdrawal of a product, line or sub-line of insurance business from the insurance marketplace in their
state. While what constitutes a “withdrawal” or its equivalent under each state's statutory or regulatory scheme varies, Gateway
will be subject to regulatory requirements in connection with its withdrawal, including, but not limited to, making notice and/or
plan filings with the applicable insurance regulator in certain states and possibly requiring the prior approval of the applicable
state regulator. A failure by Gateway to comply with and satisfy these regulatory requirements in connection with its planned
withdrawals could lead to regulatory fines, cause a distraction for management requiring us to continue to administer Gateway's
workers' compensation business for longer than anticipated and could result in Gateway continuing to write undesirable commercial
automobile business in Florida, which could have an adverse impact on our reserves, results of operations and financial condition.
It is not possible to predict the future impact of changing federal and state regulation on our operations, and there can be no
assurance that laws enacted in the future will not be more restrictive than existing laws, regulations and rules. New or more
restrictive laws, regulations and rules, including changes in current tax or other regulatory interpretations could make it more
expensive for us to conduct our businesses, restrict or reduce the premiums our insurance subsidiaries are able to charge or otherwise
change the way we do business. In addition, economic and financial market turmoil or other conditions, circumstances or events
may result in U.S. federal oversight of the insurance industry in general.
Our business is subject to risks related to litigation and regulatory actions.
We may, from time to time, be subject to a variety of legal and regulatory actions relating to our current and past business operations,
including, but not limited to:
•
•
•
•
•
•
disputes over coverage or claims adjudication, including claims alleging that we or our insurance subsidiaries
have acted in bad faith in the administration of claims by our policyholders;
disputes regarding sales practices, disclosure, policy issuance and cancellation, premium refunds, licensing,
regulatory compliance and compensation arrangements;
limitations on the conduct of our business;
disputes with our agents, producers or network providers over compensation or the termination of our contracts
with such agents, producers or network providers, including any alleged claim that they may make against us
in connection with a dispute whether in the scope of their agreements or otherwise;
disputes with taxing authorities regarding tax liabilities; and
disputes relating to certain businesses acquired or disposed of by us.
As insurance industry practices and regulatory, judicial and industry conditions change, unexpected and unintended issues related
to pricing, claims, coverage and business practices may emerge. Plaintiffs often target P&C insurers in purported class action
litigation relating to claims handling and insurance sales practices. The resolution and implications of new underwriting, claims
and coverage issues could have a negative effect on our business by extending coverage beyond our underwriting intent, increasing
the size of claims or otherwise requiring us to change our practices. The effects of unforeseen emerging claim and coverage issues
could negatively impact revenues, results of operations and reputation. Current and future court decisions and legislative activity
may increase our exposure to these or other types of claims. Multi-party or class action claims may present additional exposure
to substantial economic, non-economic or punitive damage awards. An unfavorable result with respect to even one of these claims,
if it resulted in a significant damage award or a judicial ruling that was otherwise detrimental, could create a precedent that could
have a material adverse effect on our results of operations and financial condition. This risk of potential liability may make
reasonable settlements of claims more difficult to obtain. We cannot determine with any certainty what new theories of recovery
may evolve or what their impact may be on our business.
We have been and may be subject to governmental or administrative investigations and proceedings. Our insurance subsidiaries
have been subject to numerous inquiries related to the substantial ownership interest in us held by KAI in the past. As of this
document’s filing date, KAI’s ownership is below 10% and they are no longer considered an ultimate controlling party from a
statutory perspective. We remain subject to regulatory action, restrictions or heightened compliance or reporting requirements in
certain states, including Connecticut and Texas. Texas accounts for 5.1% of our net premiums earned to date in 2013. Prior to
Atlas' acquisition of American Country, the Connecticut insurance commissioner issued an order prohibiting American Country
from writing new policies, limiting it to only renewing existing policies in that state. Currently, the insurance subsidiaries do not
write any business in Connecticut, but may seek approval to write business in this state at some point in the future. In 2009, the
17
Texas Department of Insurance indicated to the insurance subsidiaries that it was considering revoking their certificates of authority
to write insurance business in Texas. Following discussions with management of the subsidiaries’ former owner, KFSI, the
insurance subsidiaries were allowed to retain their licenses, in part, in anticipation of a planned spin-off of the insurance subsidiaries
outside of KFSI and subject to their maintenance of a statutory deposit in Texas. If we are not able to successfully comply with
or lift the heightened compliance or disclosure requirements applicable in one or more of these states or any new requirements
that a state may impose in the future, we may not be able to expand our operations in such state in accordance with our growth
strategy or we could be subject to additional regulatory requirements that could impose a material burden on our expansion strategy
or limit or prohibit our ability to write new and renewal insurance policies in such state. Any such limitation or prohibition could
have a material adverse effect on our results of operations and financial conditions and on our ability to execute our strategy in
the future. The result of these inquiries could lead to additional requirements, restrictions or limitations being placed on us or our
insurance subsidiaries, any of which could increase our costs of regulatory compliance and could have an adverse effect on our
ability to operate our business. As a general matter, we cannot predict the outcome of regulatory investigations, proceedings and
reviews, and cannot guarantee that such investigations, proceedings or reviews or related litigation or changes in operating policies
and practices would not materially and adversely affect our results of operations and financial condition. In addition, we have
experienced difficulties with our relationships with regulatory bodies in various jurisdictions, and if such difficulties arise in the
future, they could have a material adverse effect on our ability to do business in that jurisdiction.
As a result of KAI's ownership dropping below 10%, there was a deemed change of control pursuant to insurance statutes and
notice was sent to all states in which the insurance subsidiaries are licensed. In certain states, such as Michigan, a change of
control can require re-application to continue doing business in that state. While we do not expect these requirements to disrupt
our business, regulatory approvals remain pending.
Our business could be adversely affected as a result of changing political, regulatory, economic or other influences.
The insurance industry is subject to changing political, economic and regulatory influences. These influences affect the practices
and operation of insurance and reinsurance organizations. Legislatures in the United States and other jurisdictions have periodically
considered programs to reform or amend their respective insurance and reinsurance regulatory systems. Recently, the insurance
and reinsurance regulatory framework has been subject to increased scrutiny in many jurisdictions. Changes in current insurance
laws, regulations and rules may result in increased governmental involvement in or supervision of the insurance industry or may
otherwise change the business and economic environment in which insurance industry participants operate. Historically, the
automobile insurance industry has been under pressure from time to time from regulators, legislators or special interest groups to
reduce, freeze or set rates at levels that are not necessarily related to underlying costs or risks, including initiatives to reduce
automobile and other commercial line insurance rates. These changes may limit the ability of our insurance subsidiaries to price
automobile insurance adequately and could require us to discontinue unprofitable product lines, make unplanned modifications
of our products and services, or result in delays or cancellations of sales of our products and services.
Strategic Risks
Our geographic concentration ties our performance to the business, economic, regulatory and other conditions of certain
states.
Some jurisdictions (including, most notably New York, Illinois, Michigan, Texas and Louisiana) generate a more significant
percentage of our total premiums than others. Our revenues and profitability are subject to the prevailing regulatory, legal, economic,
political, demographic, competitive, weather and other conditions in the principal states in which we do business. Changes in any
of these conditions could make it less attractive for us to do business in such states and would have a more pronounced effect on
us compared to companies that are more geographically diversified. In addition, our exposure to severe losses from localized
perils, such as earthquakes, hurricanes, tropical storms, tornadoes, wind, ice storms, hail, fires, terrorism, riots and explosions, is
increased in those areas where we have written significant numbers of P&C insurance policies. Given our geographic concentration,
negative publicity regarding our products and services could have a material adverse effect on our business and operations, as
could other regional factors impacting the local economies in that market.
In order to operate in a profitable manner, we need to maintain or increase our current level of earned premiums. We may
experience difficulty in managing historic and future growth, which could adversely affect our results of operations and
financial condition.
We believe that, given our fixed costs associated with underwriting and administering our insurance operations, our insurance
subsidiaries must generate annual net earned premiums in excess of approximately $50 million in order to achieve our targeted
levels of profitability. In order to maintain and increase this level of earned premiums, we intend to expand geographically and
increase our market share via our expanded distribution network. Continued growth could impose significant demands on
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management, including the need to identify, recruit, maintain and integrate additional employees. Growth may also place a strain
on management systems and operational and financial resources, and such systems, procedures and internal controls may not be
adequate to support operations as they expand.
The integration and management of acquired books of business, acquired businesses and other growth initiatives involve numerous
risks that could adversely affect our profitability, and are contingent on many factors, including:
expanding our financial, operational and management information systems;
•
• managing our relationships with independent agents, brokers, and legacy program managers, including
maintaining adequate controls;
expanding our executive management and the infrastructure required to effectively control our growth;
•
• maintaining ratings for certain of our insurance subsidiaries;
•
•
increasing the statutory capital of our insurance subsidiaries to support growth in written premiums;
accurately setting claims provisions for new business where historical underwriting experience may not be
available;
obtaining regulatory approval for appropriate premium rates where applicable; and
obtaining the required regulatory approvals to offer additional insurance products or to expand into additional
states or other jurisdictions.
•
•
Our failure to grow our earned premiums or to manage our growth effectively could have a material adverse effect on our business,
financial condition or results of operations.
A significant portion of our products in the New York City market are distributed by a single agent, and any decrease in the
amount of our products distributed by this agent, or under performance of the book of business controlled by this agent, could
adversely impact our business.
In the third quarter of 2012, we implemented our New York “excess taxi program” with a single agent writing business in the New
York City market, which is a new business arrangement to provide excess coverage above the levels of risk retained by the insured.
This agent was responsible for approximately 13.7% of our gross premium written for the year ended December 31, 2013. We do
not have an exclusive relationship with this agent, and there can be no assurance that this relationship will continue in the future.
If this agent reduces its marketing of our products or moves some or all of its business to another carrier, then our business, financial
condition and results of operations would be adversely affected. In addition, due in part to our limited experience with this program,
and with the New York City market in general, it is uncertain whether policies issued pursuant to this program will be profitable.
For example, if risks associated with these clients differ from those reflected in our underwriting policies, then our business,
financial condition and results of operations would be adversely affected.
Engaging in acquisitions involves risks, and if we are unable to effectively manage these risks, our business may be materially
harmed.
Acquisitions of similar insurance providers, such as Gateway, are expected to be a material component of our growth strategy,
subject to availability of suitable opportunities and market conditions. From time to time, we may engage in discussions concerning
acquisition opportunities and, as a result of such discussions, may enter into acquisition transactions. Upon the announcement of
an acquisition, our share price may fall depending on numerous factors, including but not limited to, the intended target, the size
of the acquisition, the purchase price and the potential dilution to existing shareholders. It is also possible that an acquisition could
dilute earnings per share. Acquisitions entail numerous risks, including the following:
•
•
•
•
•
difficulties in the integration of the acquired business;
assumption of unknown material liabilities, including deficient provisions for unpaid claims;
diversion of management’s attention from other business concerns;
failure to achieve financial or operating objectives; and
potential loss of policyholders or key employees of acquired companies.
We may be unable to integrate or profitably operate any business, operations, personnel, services or products we may acquire in
the future, which may result in our inability to realize expected revenue increases, cost savings, increases in geographic or product
presence, and other projected benefits from the acquisition. Integration may result in the loss of key employees, disruption to our
existing businesses or the business of the acquired company, or otherwise harm our ability to retain customers and employees or
achieve the anticipated benefits of the acquisition. Time and resources spent on integration may also impair our ability to grow
our existing businesses. Also, the negative effect of any financial commitments required by regulatory authorities or rating agencies
in acquisitions or business combinations may be greater than expected.
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Provisions in our organizational documents, corporate laws and the insurance laws of Illinois, Missouri and other states could
impede an attempt to replace or remove management or directors or prevent or delay a merger or sale, which could diminish
the value of our shares.
Our Memorandum of Association, Articles of Association and Code of Regulations and the corporate laws and the insurance laws
of various states contain provisions that could impede an attempt to replace or remove management or directors or prevent the
sale of the insurance subsidiaries that shareholders might consider to be in their best interests. These provisions include, among
others:
•
•
•
•
requiring a vote of holders of 5% of the ordinary shares to call a special meeting of shareholders;
requiring a two-thirds vote to amend the Articles of Association;
requiring the affirmative vote of a majority of the voting power of shares represented at a special meeting of
shareholders; and
statutory requirements prohibiting a merger, consolidation, combination or majority share acquisition between
insurance subsidiaries and an interested shareholder or an affiliate of an interested shareholder without regulatory
approval.
These provisions may prevent shareholders from receiving the benefit of any premium over the market price of our shares offered
by a bidder in a potential takeover, and may adversely affect the prevailing market price of our shares if they are viewed as
discouraging takeover attempts.
In addition, insurance regulatory provisions may delay, defer or prevent a takeover attempt that shareholders may consider in their
best interest. For example, under applicable state statutes, subject to limited exceptions, no person or entity may, directly or
indirectly, acquire control of a domestic insurer without the prior approval of the state insurance regulator. Under the insurance
laws, “control” (including the terms “controlling,” “controlled by” and “under common control with”) is generally defined to
include acquisition of a certain percentage or more of an insurer’s voting securities (such as 10% or more under Illinois and
Missouri law). These requirements would require a potential bidder to obtain prior approval from the insurance departments of
the states in which the insurance subsidiaries are domiciled and commercially domiciled and may require pre-acquisition
notification in other states. Obtaining these approvals could result in material delays or deter any such transaction. Regulatory
requirements could make a potential acquisition of our company more difficult and may prevent shareholders from receiving the
benefit from any premium over the market price of our shares offered by a bidder in a takeover context. Even in the absence of a
takeover attempt, the existence of these provisions may adversely affect the prevailing market price of our shares if they are viewed
as discouraging takeover attempts in the future.
Market and Competition Risks
Because the insurance subsidiaries are commercial automobile insurers, conditions in that industry could adversely affect
their business.
The majority of the gross premiums written by our insurance subsidiaries are generated from commercial automobile insurance
policies. Adverse developments in the market for commercial automobile insurance, including those which could result from
potential declines in commercial and economic activity, could cause our results of operations to suffer. The commercial automobile
insurance industry is cyclical. Historically, the industry has been characterized by periods of price competition and excess capacity
followed by periods of higher premium rates and shortages of underwriting capacity. These fluctuations in the business cycle have
negatively impacted and could continue to negatively impact the revenues of our company. The results of the insurance subsidiaries,
and in turn, us, may also be affected by risks, to the extent they are covered by the insurance policies we issue, that impact the
commercial automobile industry related to severe weather conditions, floods, hurricanes, tornadoes, earthquakes and tsunamis,
as well as explosions, terrorist attacks and riots. The insurance subsidiaries’ commercial automobile insurance business may also
be affected by cost trends that negatively impact profitability, such as a continuing economic downturn, inflation in vehicle repair
costs, vehicle replacement parts costs, used vehicle prices, fuel costs and medical care costs. Increased costs related to the handling
and litigation of claims may also negatively impact profitability. Legacy business previously written by us also includes private
passenger auto, surety and other P&C insurance business. Adverse developments relative to previously written or current business
could have a negative impact on our results.
The insurance and related businesses in which we operate may be subject to periodic negative publicity which may negatively
impact our financial results.
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The products and services of the insurance subsidiaries are ultimately distributed to individual and business customers. From time
to time, consumer advocacy groups or the media may focus attention on insurance products and services, thereby subjecting the
industry to periodic negative publicity. We also may be negatively impacted if participants in one or more of our markets engage
in practices resulting in increased public attention to our business. Negative publicity may also result in increased regulation and
legislative scrutiny of practices in the P&C insurance industry as well as increased litigation. These factors may further increase
our costs of doing business and adversely affect our profitability by impeding our ability to market our products and services,
requiring us to change our products or services or by increasing the regulatory burdens under which we operate.
The highly competitive environment in which we operate could have an adverse effect on our business, results of operations
and financial condition.
The commercial automobile insurance business is highly competitive and, except for regulatory considerations, there are relatively
few barriers to entry. Many of our competitors are substantially larger and may enjoy better name recognition, substantially greater
financial resources, higher ratings by rating agencies, broader and more diversified product lines and more widespread agency
relationships than us. Our underwriting profits could be adversely impacted if new entrants or existing competitors try to compete
with our products, services and programs or offer similar or better products at or below our prices. Insurers in our markets generally
compete on the basis of price, consumer recognition, coverages offered, claims handling, financial stability, customer service and
geographic coverage. Although pricing is influenced to some degree by that of our competitors, it is not in our best interest to
compete solely on price, and we may from time to time experience a loss of market share during periods of intense price competition.
Our business could be adversely impacted by the loss of business to competitors offering competitive insurance products at lower
prices. This competition could affect our ability to attract and retain profitable business. Pricing sophistication and related
underwriting and marketing programs use a number of risk evaluation factors. For auto insurance, these factors can include but
are not limited to vehicle make, model and year; driver age; territory; years licensed; loss history; years insured with prior carrier;
prior liability limits; prior lapse in coverage; and insurance scoring based on credit report information. We believe our pricing
model will generate future underwriting profits, however past performance is not a perfect indicator of future driver performance.
If we are not able to attract and retain independent agents and brokers, our revenues could be negatively affected.
We market and distribute our insurance programs exclusively through independent insurance agents and specialty insurance
brokers. As a result, our business depends in large part on the marketing efforts of these agents and brokers and on our ability to
offer insurance products and services that meet the requirements of the agents, the brokers and their customers. However, these
agents and brokers are not obligated to sell or promote our products and many sell or promote competitors’ insurance products in
addition to our products. Some of our competitors have higher financial strength ratings, offer a larger variety of products, set
lower prices for insurance coverage and/or offer higher commissions than we do. Therefore, we may not be able to continue to
attract and retain independent agents and brokers to sell our insurance products. The failure or inability of independent agents and
brokers to market our insurance products successfully could have a material adverse impact on our business, financial condition
and results of operations.
If we are unable to maintain our claims-paying ratings, our ability to write insurance and to compete with other insurance
companies may be adversely impacted. A decline in rating could adversely affect our position in the insurance market, make
it more difficult to market our insurance products and cause our premiums and earnings to decrease.
Financial ratings are an important factor influencing the competitive position of insurance companies. Third party rating agencies
assess and rate the claims-paying ability of insurers and reinsurers based upon criteria that they have established. Periodically
these rating agencies evaluate the business to confirm that it continues to meet the criteria of the ratings previously assigned.
Financial strength ratings are an important factor in establishing the competitive position of insurance companies and may be
expected to have an effect on an insurance company’s premiums. The insurance subsidiaries are rated by A.M. Best, which issues
independent opinions of an insurer’s financial strength and its ability to meet policyholder obligations. A.M. Best ratings range
from “A++” (Superior) to “F” (In Liquidation), with a total of 16 separate rating categories. The objective of A.M. Best’s rating
system is to provide potential policyholders and other interested parties an opinion of an insurer’s financial strength and ability
to meet ongoing obligations, including paying claims.
On January 29, 2014, A.M. Best affirmed the financial strength rating of American Country, American Service and Gateway as
“B” and the outlook assigned to all ratings is “Stable.” However, there is a risk that A.M. Best will not maintain these ratings in
the future. If the insurance subsidiaries’ ratings are reduced by A.M. Best, their competitive position in the insurance industry
could suffer and it could be more difficult to market their insurance products. A downgrade could result in a significant reduction
in the number of insurance contracts written by the subsidiaries and in a substantial loss of business to other competitors with
higher ratings, causing premiums and earnings to decrease. Rating agencies evaluate insurance companies based on financial
strength and the ability to pay claims, factors that may be more relevant to policyholders than to investors. Financial strength
21
ratings by rating agencies are not ratings of securities or recommendations to buy, hold or sell any security and should not be relied
upon as such.
Our ability to generate written premiums is impacted by seasonality which may cause fluctuations in our operating results and
to our stock price.
The P&C insurance business is seasonal in nature. Our ability to generate written premium is also impacted by the timing of policy
effective periods in the states in which we operate while our net premiums earned generally follow a relatively smooth trend from
quarter to quarter. Also, our gross premiums written are impacted by certain common renewal dates in larger metropolitan markets
for the light commercial risks that represent our core lines of business. For example, January 1st and March 1st are common taxi
cab renewal dates in Illinois and New York, respectively. Additionally, we implemented our New York “excess taxi program” in
the third quarter of 2012, which had a renewal date in the third quarter 2013. Net underwriting income is driven mainly by the
timing and nature of claims, which can vary widely. As a result of this seasonality, investors may not be able to predict our annual
operating results based on a quarter-to-quarter comparison of our operating results. Additionally, this seasonality may cause
fluctuations in our stock price. We believe seasonality will have an ongoing impact on our business.
U.S. Tax Risks
If our company were not to be treated as a U.S. corporation for U.S. federal income tax purposes, certain tax inefficiencies
would result and certain adverse tax rules would apply.
Pursuant to certain “expatriation” provisions of the U.S. Internal Revenue Code of 1986, as amended, the reverse merger agreement
relating to the reverse merger transaction described below provides that the parties intend to treat our company as a U.S. corporation
for U.S. federal income tax purposes. The expatriation provisions are complex, are largely unsettled and subject to differing
interpretations, and are subject to change, perhaps retroactively. If our company were not to be treated as a U.S. corporation for
U.S. federal income tax purposes, certain tax inefficiencies and adverse tax consequences and reporting requirements would result
for both our company and the recipients and holders of stock in our company, including that dividend distributions from our
insurance subsidiaries to us would be subject to 30% U.S. withholding tax, with no available reduction and that members of the
consolidated group may not be permitted to file a consolidated U.S. tax return resulting in the acceleration of cash tax outflow
and potential permanent loss of tax benefits associated with net operating loss carry-forwards that could have otherwise been
utilized.
Our use of losses may be subject to limitations and the tax liability of our company may be increased.
Our ability to utilize the net operating loss carryforwards ("NOLs") is subject to the rules of Section 382 of the Internal Revenue
Code. Section 382 generally restricts the use of NOLs after an “ownership change.” An ownership change occurs if, among other
things, the stockholders (or specified groups of stockholders) who own or have owned, directly or indirectly, five percent (5%) or
more of our common stock or are otherwise treated as five percent (5%) stockholders under Section 382 and the regulations
promulgated thereunder increase their aggregate percentage ownership of our stock by more than 50 percentage points over the
lowest percentage of the stock owned by these stockholders over a three-year rolling period. In the event of an ownership change,
Section 382 imposes an annual limitation on the amount of taxable income a corporation may offset with NOL carryforwards.
This annual limitation is generally equal to the product of the value of our stock on the date of the ownership change, multiplied
by the long-term tax-exempt rate published monthly by the Internal Revenue Service. Any unused annual limitation may be carried
over to later years until the applicable expiration date for the respective NOL carryforwards.
The rules of Section 382 are complex and subject to varying interpretations. Because of our numerous equity issuances, which
have included the issuance of various classes of convertible securities and warrants, uncertainty exists as to whether we may have
undergone an ownership change in the past or will undergo one as a result of our recent U.S. public offering. Even if this offering
does not cause an ownership change, it may increase the likelihood that we may undergo an ownership change in the future. Based
on our recent stock prices, we believe any ownership change would limit our ability to utilize the portion of our NOLs that are
currently not subject to limitation. Accordingly, no assurance can be given that our NOLs will be fully realizable since this is
contingent on our ability to generate profits in future years. As a result, we could pay taxes earlier and in larger amounts than
would be the case if the NOLs were available to reduce the federal income taxes without restriction.
On July 22, 2013, as a result of shareholder activity, a "triggering event" as determined under IRC Section 382 was reached. As
a result, under IRC Section 382, the use of the Company's net operating loss and other carryforwards will be limited as a result of
this "ownership change” for tax purposes, which is defined as a cumulative change of more than 50% during any three-year period
by shareholders of the Company's shares.
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Following this triggering event, the Company estimates that it will retain total tax effected federal net operating loss carryforwards
of approximately $15.3 million as of December 31, 2013. Book value per common share is unaffected by this event as the amount
of lost net deferred tax assets were offset by a corresponding decrease in the valuation allowance which was already held against
the majority of these assets. The completion and filing of the Company's 2013 U.S. Federal tax return will determine the final
adjustment.
Atlas has the following total net operating loss carry-forwards as of the year ended December 31, 2013:
Net Operating Loss Carry-Forward by Expiry (in ‘000s)
Year of Occurrence
2001
2002
2006
2007
2008
2009
2010
2011
2012
Total
Year of Expiration
2021
2022
2026
2027
2028
2029
2030
2031
2032
Amount
$ 11,378
4,317
7,825
3,763
1,949
1,949
2,296
10,183
1,237
$ 44,897
Further limitations on the utilization of losses may apply because of the “dual consolidated loss” rules, which will also require
our company to recapture into income the amount of any such utilized losses in certain circumstances. As a result of the application
of these rules, the future tax liability of our company and our insurance subsidiaries could be significantly increased. In addition,
taxable income may also be recognized by our company or our insurance subsidiaries in connection with the 2010 reverse merger
transaction.
We do not anticipate paying any cash dividends for the foreseeable future.
We currently intend to retain our future earnings, if any, for the foreseeable future, for working capital and other general corporate
purposes. We do not intend to pay any dividends to holders of our ordinary shares. As a result, capital appreciation in the price of
our ordinary shares, if any, will be your only source of gain on an investment in our ordinary shares. We did not declare or pay
cash dividends on our common stock during 2010, 2011, 2012, 2013 or to date in 2014. Any future determination to pay dividends
on our common stock will be at the discretion of our board of directors, subject to applicable laws, and will depend on our financial
condition, results of operations, capital requirements, general business conditions, and other factors that our board of directors
considers relevant. In addition, the insurance laws and regulations governing our insurance subsidiaries contain restrictions on
the ability to pay dividends, or to make other distributions to us, which may limit our ability to pay dividends to our common
shareholders.
Holders of our preferred shares are entitled to dividends on a cumulative basis whether or not declared by our board of directors,
at a rate of $0.045 per preferred share per year, which must be paid or declared and set apart before any dividend may be paid on
our ordinary shares. We declared and paid $2.1 million of preferred dividends during 2013 on the preferred shares held by KAI.
All of the preferred shares held by KAI were repurchased on August 1, 2013, and therefore, no additional dividends will accrue
on the KAI preferred shares, however, dividends on the remaining 2,000,000 outstanding preferred shares will continue to accrue
dividends at the rate indicated above.
Risks Related to Our Recent Initial Public Offering in the United States
The requirements of being a United States public company may strain our resources and divert management’s attention.
As a United States public company, we will be subject to the reporting requirements of the Securities Exchange Act of 1934, as
amended (which we refer to herein as the Exchange Act), the Sarbanes-Oxley Act, the Dodd-Frank Act, the listing requirements
of the NASDAQ Stock Market and other applicable securities rules and regulations. Compliance with these rules and regulations
will increase our legal and financial compliance costs, make some activities more difficult, time-consuming or costly and increase
demand on our systems and resources, particularly after we are no longer an “emerging growth company.” The Exchange Act
requires, among other things, that we file annual, quarterly and current reports with respect to our business and operating results.
The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal
control over financial reporting. In order to maintain and, if required, improve our disclosure controls and procedures and internal
control over financial reporting to meet this standard, significant resources and management oversight may be required. As a result,
management’s attention may be diverted from other business concerns, which could adversely affect our business and operating
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results. We may need to hire more employees in the future or engage outside consultants to comply with these requirements, which
will increase our costs and expenses.
In addition, changing laws, regulations and standards in the United States relating to corporate governance and public disclosure
are creating uncertainty for public companies, increasing legal and financial compliance costs and making some activities more
time consuming. These laws, regulations and standards are subject to varying interpretations, in many cases due to their lack of
specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and
governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by
ongoing revisions to disclosure and governance practices. We intend to invest resources to comply with evolving laws, regulations
and standards, and this investment may result in increased general and administrative expenses and a diversion of management’s
time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new laws, regulations
and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to their application
and practice, regulatory authorities may initiate legal proceedings against us and our business and operating results may be adversely
affected.
For as long as we remain an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012 (which
we refer to herein as the JOBS Act), we may take advantage of certain exemptions from various reporting requirements that are
applicable to other public companies that are not “emerging growth companies,” including, but not limited to, not being required
to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations
regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding
a non-binding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously
approved. We may take advantage of these reporting exemptions until we are no longer an “emerging growth company.”
We will remain an “emerging growth company” for up to five years, although if the market value of our ordinary shares that is
held by non-affiliates exceeds $700 million as of any June 30th before that time, we would cease to be an “emerging growth
company” as of the following December 31st.
As a result of disclosure of information in this Form 10-K and in filings required of a public company in the United States, our
business, results of operations, cash flows and financial condition will become more visible, which may result in threatened or
actual litigation, including by competitors and other third parties. If such claims are successful, our business and operating results
could be adversely affected, and even if the claims do not result in litigation or are resolved in our favor, these claims, and the
time and resources necessary to resolve them, could divert the resources of our management and adversely affect our business
and operating results.
We are an “emerging growth company” and we cannot be certain if the reduced disclosure requirements applicable to emerging
growth companies will make our ordinary shares less attractive to investors.
We are an “emerging growth company,” as defined in the JOBS Act, and we may take advantage of certain exemptions from
various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including,
but not limited to, not being required to comply with the auditor attestation requirements of section 404 of the Sarbanes-Oxley
Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions
from the requirements of holding a non-binding advisory vote on executive compensation and shareholder approval of any golden
parachute payments not previously approved. We cannot predict if investors will find our ordinary shares less attractive because
we may rely on these exemptions. If some investors find our ordinary shares less attractive as a result, there may be a less active
trading market for these shares and our stock price may be more volatile.
Section 107 of the JOBS Act provides that an “emerging growth company” can take advantage of an extended transaction period
for complying with new or revised accounting standards. However, we are choosing to “opt out” of such extended transition period,
and as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards
is required for non-emerging growth companies. Our decision to opt out of the extended transition period for complying with new
or revised accounting standards is irrevocable.
Item 1B. Unresolved Staff Comments
None.
24
Item 2. Properties
Our corporate headquarters is located at 150 Northwest Point Boulevard, Elk Grove Village, Illinois 60007, USA. The facility
consists of one office building totaling 176,844 net rentable square feet of office space on 7.2 acres. We are leasing approximately
30,600 square feet for a term of 60 months that began May 22, 2012, unless terminated or extended pursuant to the lease agreement.
We are paying an annual rent equal to approximately $672,000 or approximately $56,000 per month, with a nominal annual
escalation beginning on the first anniversary date of the lease agreement. We believe the facility is suitable and adequate for our
current business needs.
We own two properties in Alabama, which together comprise approximately 50 acres of land. These properties were transferred
to us from Southern United and are currently held for sale.
Upon completion of the Gateway acquisition, we assumed a lease for 12,937 square feet of office space in St. Louis, Missouri
which is effective through February 2016. We currently pay a monthly rent equal to approximately $28,000. Some of the expenses
related to the lease are shared with Hendricks.
Item 3. Legal Proceedings
In connection with our operations, we are, from time to time, named as defendants in actions for damages and costs allegedly
sustained by the plaintiffs. While it is not possible to estimate the outcome of the various proceedings at this time, such actions
have generally been resolved with minimal damages or expense in excess of amounts provided and our company does not believe
that it will incur any significant additional loss or expense in connection with such actions.
Item 4. Mine Safety Disclosures
Not applicable.
25
Part II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
As of December 31, 2013, there were approximately 650 shareholders of record of our ordinary shares and one shareholder of
record of our restricted voting shares (all of which convert to ordinary shares upon the sale of such shares by the sole shareholder,
KAI, or its subsidiaries). Our ordinary shares have been listed on the NASDAQ under the symbol “AFH” since February 12, 2013
and were previously listed on the Toronto Stock Exchange - Venture ("TSXV") under the same symbol beginning January 6, 2011.
On June 5, 2013, the Company delisted from the TSXV. As of March 6, 2014, there were 9,291,871 ordinary common shares and
132,863 restricted shares outstanding.
Set forth below are the high and low listing prices of the ordinary shares during 2012, 2013 and the first quarter of 2014, through
March 6, 2014 according to the TSXV and the NASDAQ, assuming retroactive application of the one-for-three reverse stock split
(2012 in Canadian dollars):
Summary of Share Prices
2014
First Quarter (through March 6, 2014)
2013
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
2012
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
High
Low
$14.35
$11.84
$14.72
$10.41
$9.17
$6.40
C$6.75
C$5.97
C$5.55
C$6.00
$9.95
$8.61
$6.04
$5.80
C$5.55
C$3.60
C$2.46
C$3.75
Since our ordinary shares began trading on the NASDAQ on February 12, 2013, the high closing price was $14.72 and the low
closing price was $5.85.
During 2013, we declared and paid $2.1 million of dividends related to the KAI preferred shares. Also during 2013, we repurchased
$18.0 million of preferred shares from KAI at 90% of face value and paid all accrued dividends on these shares prior to the
repurchase date of August 1, 2013. The cumulative amount of dividends to which the remaining preferred shareholder is entitled
upon liquidation (or sooner, if we declare dividends) was $90,000 as of December 31, 2013.
Due to insurance regulations there are restrictions on our insurance subsidiaries that currently materially limit the Company's
ability to pay dividends. As a result, we did not pay any dividends to our common shareholders during 2012, 2013 or to date in
2014 and have no current plans to pay dividends to our common shareholders.
During the quarter ended December 31, 2013, Atlas issued 1,191,409 common shares pursuant to the exchange of warrants and
options for aggregate cash consideration of $6.4 million. These common shares were issued in reliance on exemptions from
registration under Section 4(2) of the Securities Act of 1933, as amended (the “Securities Act”), and the rules and regulations
promulgated thereunder, and Regulation S promulgated under the Securities Act. In light of the manner of the sale and information
obtained by the Company from the investors in connection with these transactions, Atlas believes it may rely on these exemptions.
Equity Compensation Plan Information
The following table provides information regarding the number of shares of Common Stock to be issued upon exercise of outstanding
options, warrants and rights under the Company's equity compensation plans and the weighted average exercise price and number
of shares of Common Stock remaining available for issuance under those plans as of December 31, 2013.
26
Number of securities to be issued
upon exercise of outstanding
options, warrants & rights
(a)
Weighted average exercise price of
outstanding options, warrants and
rights
(b)
Number of securities remaining
available for future issuance under
equity compensation plans
(excluding securities reflected in
column (a))
224,623 1
C$6.05
609,253 2
Equity compensation plans
approved by security
holders
1
Summation of 224,623 shares outstanding under the March 18, 2010, January 18, 2011 and the January 11, 2013 equity compensation plans
2
Equal to the remainder allowable according to the 2013 Equity Incentive Plan (10% of issued and outstanding ordinary shares)
27
Item 7. Management’s Discussion and Analysis (MD&A) of Financial Condition and Results of Operations
Section
I.
II.
III.
IV.
V.
Description
Overview
Consolidated Performance
Application of Critical Accounting Estimates
Operating Results
Financial Condition
Page
29
32
33
36
40
28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(All amounts in US dollars, except for amounts preceded by “C” as Canadian dollars, share and per share amounts)
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our
consolidated financial statements and related notes that appear elsewhere in this document. In addition to historical consolidated
financial information, the following discussion contains forward-looking statements that may include, but are not limited to,
statements with respect to estimates of future expenses, revenue and profitability; trends affecting financial condition, cash flows
and results of operations; the availability and terms of additional capital; dependence on key suppliers and other strategic partners;
industry trends and the competitive and regulatory environment; the successful integration of Gateway; the impact of losing one
or more senior executives or failing to attract additional key personnel; and other factors referenced in this document. Our actual
results could differ materially from those discussed in the forward-looking statements. Forward-looking statements contained
herein are made as of the date of this filing and we disclaim any obligation to update any forward-looking statements, whether as
a result of new information, future events or results, or otherwise. Factors that could cause or contribute to these differences
include those discussed below and elsewhere, particularly in “Risk Factors.”
In this discussion and analysis, the term “common share” refers to the summation of restricted voting shares and ordinary shares
when used to describe loss or book value per common share.
Forward-looking statements
This report contains “forward-looking statements,” within the meaning of the Private Securities Litigation Reform Act of 1995,
which may include, but are not limited to, statements with respect to estimates of future expenses, revenue and profitability; trends
affecting financial condition and results of operations; the availability and terms of additional capital; dependence on key suppliers,
and other strategic partners; industry trends and the competitive and regulatory environment; the impact of losing one or more
senior executives or failing to attract additional key personnel; and other factors referenced in this report.
Often, but not always, forward-looking statements can be identified by the use of words such as “plans”, “expects”, “is expected”,
“budget”, “scheduled”, “estimates”, “forecasts”, “intends”, “anticipates”, or “believes” or variations (including negative variations)
of such words and phrases, or state that certain actions, events or results “may”, “could”, “would”, “might” or “will” be taken,
occur or be achieved. Forward-looking statements involve known and unknown risks, uncertainties and other factors which may
cause the actual results, performance or achievements of Atlas to be materially different from any future results, performance or
achievements expressed or implied by the forward-looking statements. Such factors include, among others, general business,
economic, competitive, political, regulatory and social uncertainties.
Although Atlas has attempted to identify important factors that could cause actual actions, events or results to differ materially
from those described in forward-looking statements, there may be other factors that cause actions, events or results to differ from
those anticipated, estimated or intended. Forward-looking statements contained herein are made as of the date of this report and
Atlas disclaims any obligation to update any forward-looking statements, whether as a result of new information, future events
or results, or otherwise. There can be no assurance that forward-looking statements will prove to be accurate, as actual results and
future events could differ materially from those anticipated in such statements. Accordingly, readers should not place undue reliance
on forward-looking statements due to the inherent uncertainty in them.
I. OVERVIEW
We are a financial services holding company incorporated under the laws of the Cayman Islands. Our core business is the
underwriting of commercial automobile insurance policies, focusing on the “light” commercial automobile sector, which is carried
out through our insurance subsidiaries. This sector includes taxi cabs, non-emergency para-transit, limousine, livery and business
auto. Our goal is to always be the preferred specialty commercial transportation insurer in any geographic areas where our value
proposition delivers benefit to all stakeholders. We are licensed to write property and casualty, or P&C, insurance in 49 states plus
the District of Columbia in the United States. The insurance subsidiaries distribute their products through a network of independent
retail agents, and actively wrote insurance in 40 states and the District of Columbia during 2013.
Our core business is the underwriting of commercial automobile insurance policies, focusing on the “light” commercial automobile
sector. Over the past three years, we have disposed of non-core assets, consolidated infrastructure and placed into run-off certain
non-core lines of business previously written by the insurance subsidiaries. Our focus going forward is the underwriting of
commercial automobile insurance in the U.S. Substantially all of our new premiums written are in “light” commercial automobile
lines of business.
Commercial Automobile
Our primary target market is made up of small to mid-size taxi, limousine and non-emergency para-transit operators. The “light”
commercial automobile policies we underwrite provide coverage for lightweight commercial vehicles typically with the minimum
limits prescribed by statute, municipal or other regulatory requirements. The majority of our policyholders are individual owners
29
or small fleet operators. In certain jurisdictions like Illinois and New York, we have also been successful working with larger
operators who retain a meaningful amount of their own risk of loss through self-insurance or self-funded captive insurance entity
arrangements. In these cases, we provide support in the areas of day to day policy administration and claims handling consistent
with the value proposition we offer to all of our insureds, generally on a fee for service basis. We may also provide excess coverage
above the levels of risk retained by the insureds where a better than average loss ratio is expected. Through these arrangements,
we are able to effectively utilize the significant specialized operating infrastructure we maintain to generate revenue from business
segments that may otherwise be more price sensitive in the current market environment.
The “light” commercial automobile sector is a subset of the historically profitable commercial automobile insurance industry
segment. Commercial automobile insurance has outperformed the overall P&C industry in each of the past ten years based on
data compiled by A.M. Best. Recent data from A.M. Best estimates the total U.S. market for commercial automobile liability
insurance to be approximately $24 billion. The size of the commercial automobile insurance market can be affected significantly
by many factors, such as the underwriting capacity and underwriting criteria of automobile insurance carriers and general economic
conditions. Historically, the commercial automobile insurance market has been characterized by periods of excess underwriting
capacity and increased price competition followed by periods of reduced capacity and higher premium rates.
We believe that there is a positive correlation between the economy and commercial automobile insurance in general. Operators
of “light” commercial automobiles may be less likely than other business segments within the commercial automobile insurance
market to take vehicles out of service as their businesses and business reputations rely heavily on availability. With respect to
certain business lines such as the taxi line, there are also other factors such as the cost and limited supply of medallions which
may discourage a policyholder from taking vehicles out of service in the face of reduced demand for the use of the vehicle.
Non-Standard Automobile
Non-standard automobile insurance is principally provided to individuals who do not qualify for standard automobile insurance
coverage because of their payment history, driving record, place of residence, age, vehicle type or other factors. Such drivers
typically represent higher than normal risks and pay higher insurance rates for comparable coverage.
Consistent with Atlas’ focus on commercial automobile insurance, Atlas has transitioned away from the non-standard auto line.
Our insurance subsidiaries ceased writing new and renewal policies of this type in 2011 and earned premium discontinued in 2012,
allowing surplus and resources to be devoted to the expected growth of the commercial automobile business.
Other
The other line of business is comprised of Atlas’ surety business, Gateway's truck and workers' compensation programs, Atlas'
non-standard personal lines business, Atlas' workers' compensation related to taxi, other liability and assigned risk business.
Our surety program primarily consists of U.S. Customs bonds. We engage a former affiliate, Avalon Risk Management, to help
coordinate customer service and claim handling for the surety bonds written. This non-core program is 100% reinsured to an
unrelated third party and is being transitioned to another carrier. We anticipate the program will be fully transitioned during 2014.
The Gateway truck and workers' compensation programs were put into run-off during 2012. The truck program had little earned
premium during 2012 and the workers' compensation program is 100% reinsured retrospectively and prospectively to an unrelated
third party.
Revenues
We derive our revenues primarily from premiums from our insurance policies and income from our investment portfolio. Our
underwriting approach is to price our products to generate consistent underwriting profit for the insurance companies we own. As
with all P&C insurance companies, the impact of price changes is reflected in our financial results over time. Price changes on
our in-force policies occur as they are renewed. This cycle generally takes twelve months for our entire book of business and up
to an additional twelve months to earn a full year of premium at the renewal rate.
We approach investment and capital management with the intention of supporting insurance operations by providing a stable
source of income to supplement underwriting income. The goals of our investment policy are to protect capital while optimizing
investment income and capital appreciation and maintaining appropriate liquidity. We follow a formal investment policy and the
Board of Directors reviews the portfolio performance at least quarterly for compliance with the established guidelines. The
Investment Committee of the Board of Directors provides interim guidance and analysis with respect to asset allocation, as deemed
appropriate.
Expenses
Net claims incurred expenses are a function of the amount and type of insurance contracts we write and of the loss experience of
the underlying risks. We record net claims incurred based on an actuarial analysis of the estimated losses we expect to be reported
on contracts written. We seek to establish case reserves at the maximum probable exposure based on our historical claims experience.
Our ability to estimate net claims incurred accurately at the time of pricing our contracts is a critical factor in determining our
30
profitability. The amount reported under net claims incurred in any period includes payments in the period net of the change in
the value of the reserves for net claims incurred between the beginning and the end of the period.
Commissions and other underwriting expenses consist principally of brokerage and agent commissions and to a lesser extent
premium taxes. The brokerage and agent commissions are reduced by ceding commissions received from assuming reinsurers
that represent a percentage of the premiums on insurance policies and reinsurance contracts written and vary depending upon the
amount and types of contracts written.
Other operating and general expenses consist primarily of personnel expenses (including salaries, benefits and certain costs
associated with awards under our equity compensation plans, such as stock compensation expense) and other general operating
expenses. Our personnel expenses are primarily fixed in nature and do not vary with the amount of premiums written.
31
II. CONSOLIDATED PERFORMANCE
2013 Full Year Financial Performance Summary (comparisons to 2012 unless otherwise noted):
• Gross premium written increased by 69.0% from the prior year to $93.1 million, with an increase of 75.2% related
to core lines of business
• We actively marketed our core products in 40 states and the District of Columbia during the year ended December
31, 2013
• The combined ratio improved by 8.0 percentage points to 94.4%
• Underwriting results improved by $4.9 million
• Operating income was $6.1 million, or an improvement of $4.6 million from the prior year
• Net income for the year ended December 31, 2013 was $6.2 million, compared to net income of $3.2 million in the
prior year
$18.0 million of preferred shares were repurchased at a discount of $1.8 million
•
• Diluted earnings per common share was $0.74, inclusive of the accounting treatment for preferred shares
• Book value per diluted common share on December 31, 2013 was $6.54, compared to $6.55 at December 31, 2012
The following financial data is derived from Atlas’ consolidated financial statements for the for the years ended December 31,
2013 and December 31, 2012.
Selected Financial Information ($ in '000s except per share amounts)
Year Ended
December 31, 2013
December 31, 2012
Gross premium written
Net premium earned
Losses on claims
Acquisition costs
Other underwriting expenses
Underwriting expenses related to the integration of Gateway
Net underwriting income /(loss)
Net investment income
Income from operating activities, before tax
Less: Legal/professional fees incurred related to Gateway Acquisition
Add: Realized gains and other income
Income before tax
Income tax expense
Net income
Key Financial Ratios:
Loss ratio
Acquisition cost ratio
Other underwriting expense ratio
Combined ratio
Return on equity
Return on common equity
Operating income per common share, diluted
Earnings per common share, diluted
Book value per common share
$
$
$
$
$
93,060
71,344
45,612
10,373
11,047
337
3,975
2,141
6,116
406
542
6,252
72
6,180
63.9%
14.5%
16.0%
94.4%
10.0%
10.9%
0.56
0.74
6.54
$
$
$
$
$
55,050
38,709
26,545
6,471
6,609
—
(916)
2,453
1,537
—
1,629
3,166
—
3,166
68.6%
16.7%
17.1%
102.4%
5.5%
6.1%
0.18
0.38
6.55
Operating income is an internal performance measure used in the management of the Company's operations. It represents after-
tax operational results excluding, as applicable, net realized gains or losses, net impairment charges recognized in earnings and
32
other items. These amounts are more heavily influenced by market opportunities and other external factors. Operating income
should not be viewed as a substitute for U.S. GAAP net income.
2013 compared to 2012:
Atlas’ combined ratio for the year ended December 31, 2013 was 94.4%, compared to 102.4% for the year ended December 31,
2012.
The acquisition of Gateway combined with the planned organic expansion of our core commercial automobile lines allowed us
to achieve substantial premium growth. There was an increase in gross premium written related to core commercial lines of 75.2%
for the year ended December 31, 2013 as compared to the year ended December 31, 2012. When excluding our excess taxi program
which did not experience a year over year increase in gross premium written, full year 2013 gross premium written on our traditional
core lines increased by 98.9% as compared to the full year 2012. The increased proportion of commercial auto policies, which
historically have had more favorable overall underwriting results coupled with pricing activity were the primary drivers for loss
ratio improvement in 2013. The overall loss ratio for the year ended December 31, 2013 improved to 63.9% compared to 68.6%
in the year ended December 31, 2012.
Atlas generated net investment income of $2.1 million for the year ended December 31, 2013, as well as $529,000 of realized
gains. This resulted in an overall annualized investment yield of 2.1% for the year ended December 31, 2013.
Overall, Atlas generated net income of $6.2 million for the year ended December 31, 2013. After taking the dilutive impact of the
convertible preferred shares, stock options and the impact of the buyback discount of the preferred shares of $1.8 million, diluted
earnings per common share in the year ended December 31, 2013 was $0.74. This compares to net income of $3.2 million or
diluted earnings per common share of $0.38 for the year ended December 31, 2012.
III. APPLICATION OF CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with U.S. GAAP requires management to adopt accounting policies and
make estimates and assumptions that affect amounts reported in the consolidated financial statements. The most critical estimates
include those used in determining:
Fair value and impairment of financial assets;
Deferred policy acquisition costs recoverability;
Reserve for property-liability insurance claims and claims expense estimation; and
Deferred tax asset valuation.
In making these determinations, management makes subjective and complex judgments that frequently require estimates about
matters that are inherently uncertain. Many of these policies, estimates and related judgments are common in the insurance and
financial services industries; others are specific to our businesses and operations. It is reasonably likely that changes in these items
could occur from period to period and result in a material impact on our consolidated financial statements.
A brief summary of each of these critical accounting estimates follows. For a more detailed discussion of the effect of these
estimates on our consolidated financial statements, and the judgments and assumptions related to these estimates, see the referenced
sections of this document. For a complete summary of our significant accounting policies, see the notes to the consolidated financial
statements.
Fair values of financial instruments - Atlas has used the following methods and assumptions in estimating its fair value disclosures:
Fair values for marketable bonds and equity securities are based on quoted market prices, when available. If quoted market prices
are not available, fair values are based on quoted market prices of comparable instruments or values obtained from independent
pricing services through a bank trustee.
Atlas' fixed income portfolio is managed by a SEC registered investment advisor specializing in the management of insurance
company portfolios. Management works directly with them to ensure that Atlas benefits from their expertise and also evaluates
investments as well as specific positions independently using internal resources. Atlas' investment advisor has a team of credit
analysts for all investment grade fixed income sectors. The investment process begins with an independent analyst review of each
security's credit worthiness using both quantitative tools and qualitative review. At the issuer level, this includes reviews of past
financial data, trends in financial stability, projections for the future, reliability of the management team in place, market data
(credit spread, equity prices, trends in this data for the issuer and the issuer's industry). Reviews also consider industry trends and
the macro-economic environment. This analysis is continuous, integrating new information as it becomes available. In short,
Atlas does not rely on rating agency ratings to make investment decisions, but instead with the support of its independent investment
advisors, performs independent fundamental credit analysis to find the best securities possible. Together with its investment
advisor, Atlas found that over time this process creates an ability to sell securities prior to rating agency downgrades or to buy
33
securities before upgrades. As of December 31, 2013, this process did not generate any significant difference in the rating
assessment between Atlas' review and the rating agencies.
Atlas employs specific control processes to determine the reasonableness of the fair value of its financial assets. These processes
are designed to supplement those performed by our external portfolio manager to ensure that the values received from them are
accurately recorded and that the data inputs and the valuation techniques utilized are appropriate, consistently applied, and that
the assumptions are reasonable and consistent with the objective of determining fair value. For example, on a continuing basis,
Atlas assesses the reasonableness of individual security values which have stale prices or whose changes exceed certain thresholds
as compared to previous values received from our external portfolio manager or to expected prices. The portfolio is reviewed
routinely for transaction volumes, new issuances, any changes in spreads, as well as the overall movement of interest rates along
the yield curve to determine if sufficient activity and liquidity exists to provide a credible source for market valuations. When fair
value determinations are expected to be more variable, they are validated through reviews by members of management or the
Board of Directors who have relevant expertise and who are independent of those charged with executing investment transactions.
Impairment of financial assets - Atlas assesses, on a quarterly basis, whether there is objective evidence that a financial asset or
group of financial assets is impaired. An investment is considered impaired when the fair value of the investment is less than its
cost or amortized cost. When an investment is impaired, the Company must make a determination as to whether the impairment
is other-than-temporary.
Under U.S. GAAP, with respect to an investment in an impaired debt security, other-than temporary impairment (OTTI) occurs
if (a) there is intent to sell the debt security, (b) it is more likely than not it will be required to sell the debt security before its
anticipated recovery, or (c) it is probable that all amounts due will be unable to be collected such that the entire cost basis of the
security will not be recovered. If Atlas intends to sell the debt security, or will more likely than not be required to sell the debt
security before the anticipated recovery, a loss in the entire amount of the impairment is reflected in net realized gains (losses) on
investments in the consolidated statements of income and comprehensive income. If Atlas determines that it is probable it will be
unable to collect all amounts and Atlas has no intent to sell the debt security, a credit loss is recognized in net realized gains (losses)
on investments in the consolidated statements of income and comprehensive income to the extent that the fair value is less than
the amortized cost basis; any difference between fair value and the new amortized cost basis (net of the credit loss) is reflected in
accumulated other comprehensive income (losses), net of applicable income taxes.
For equity securities, the Company evaluates its ability to retain its investment in the issuer for a period of time sufficient to allow
for any anticipated recovery in fair value. Evidence considered to determine anticipated recovery are analysts' reports on the near-
term prospects of the issuer and the financial condition of the issuer or the industry, in addition to the length and extent of the
market value decline. If OTTI is identified, the equity security is adjusted to fair value through a charge to earnings. See Note 5
of the Consolidated Financial Statements for further discussion of the other-than-temporary impairment on equity securities.
Deferred policy acquisition costs - Atlas defers brokers’ commissions, premium taxes and other underwriting costs directly relating
to the successful acquisition of premiums written to the extent they are considered recoverable. These costs are then expensed as
the related premiums are earned. The method followed in determining the deferred policy acquisition costs limits the deferral to
its realizable value by giving consideration to estimated future claims and expenses to be incurred as premiums are earned. Changes
in estimates, if any, are recorded in the accounting period in which they are determined. Anticipated investment income is included
in determining the realizable value of the deferred policy acquisition costs. Atlas’ deferred policy acquisition costs are reported
net of deferred ceding commissions.
Valuation of deferred tax assets - Deferred taxes are recognized using the asset and liability method of accounting. Under this
method the future tax consequences attributable to temporary differences in the tax basis of assets, liabilities and items recognized
directly in equity and the financial reporting basis of such items are recognized in the financial statements by recording deferred
tax liabilities or deferred tax assets.
Deferred tax assets related to the carry-forward of unused tax losses and credits and those arising from temporary differences are
recognized only to the extent that it is probable that future taxable income will be available against which they can be utilized.
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect on future tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes the date of enactment or substantive enactment.
In assessing the need for a valuation allowance, Atlas considers both positive and negative evidence related to the likelihood of
realization of the deferred tax assets. If, based on the weight of available evidence, it is more likely than not the deferred tax assets
will not be realized or if it is deemed premature to conclude that these assets will be realized in the near future, a valuation allowance
is recorded.
Claims liabilities - The provision for unpaid claims represent the estimated liabilities for reported claims, plus those incurred but
not yet reported and the related estimated loss adjustment expenses. Unpaid claims expenses are determined using case-basis
evaluations and statistical analyses, including insurance industry loss data, and represent estimates of the ultimate cost of all claims
incurred. Although considerable variability is inherent in such estimates, management believes that the liability for unpaid claims
34
is adequate. The estimates are continually reviewed and adjusted as necessary; such adjustments are included in current operations
and are accounted for as changes in estimates.
35
IV. OPERATING RESULTS
Year ended December 31, 2013 compared to year ended December 31, 2012:
Gross Premium Written
The following table summarizes gross premium written by line of business.
Gross Premium Written by Line of Business ($ in '000s)
Year Ended December 31,
Commercial automobile
Surety
Other
2013
2012
88,567 $
4,142
351
93,060 $
50,546
4,947
(443)
55,050
% Change
75.2 %
(16.3)%
(179.2)%
69.0 %
$
$
For the year ended December 31, 2013, gross premium written was $93.1 million compared to $55.1 million in the year ended
December 31, 2012, representing a 69.0% increase. The increase relative to the year ended December 31, 2012 is due primarily
to the substantial growth of the core commercial auto business, along with the increase in premium from the Gateway acquisition.
During 2012, we implemented a new business arrangement in New York to provide excess coverage above the levels of risk
retained by the insured. Total gross premium written related to this program, which was renewed in the third quarter of 2013, was
$12.8 million in the year ended December 31, 2013 and is included in the "commercial automobile" line of business. Below we
will refer to the arrangement as the "excess taxi program" where it is relevant to explain certain distinctions.
In the year ended December 31, 2013, gross premium written from commercial automobile was $88.6 million, representing a
75.2% increase relative to the year ended December 31, 2012. This substantial increase is primarily the result of the planned
expansion of the commercial auto business and our acquisition of Gateway on January 1, 2013. Removing the impact of the excess
taxi program which did not experience a year over year increase in gross premium written, our traditional commercial automobile
gross premium written was $75.8 million, an increase of 98.9% versus the year ended December 31, 2012. Gross premium written
attributable to the Gateway acquisition was approximately $12.6 million for the full year 2013. As a percentage of the insurance
subsidiaries’ overall book of business, commercial auto gross premium written represented 95.2% of gross premium written in
the year ended December 31, 2013 compared to 91.8% during the year ended December 31, 2012.
Commercial automobile insurance has outperformed the overall P&C industry in each of the past ten years based on data compiled
by the NAIC. Each of the specialty business lines on which Atlas’ strategy is focused is a subset of this industry segment.
Geographic Concentration
Gross Premium Written by State ($ in '000s)
Year Ended December 31,
New York
Illinois
Michigan
Texas
Louisiana
Minnesota
California
Ohio
Georgia
Missouri
Other
Total
2013
2012
$ 20,602
11,244
8,401
7,507
5,523
4,649
3,655
3,334
2,811
2,699
22,635
$ 93,060
22.1% $ 15,833
9,880
12.1%
7,087
9.0%
1,485
8.1%
3,426
5.9%
3,708
5.0%
—
3.9%
1,481
3.6%
951
3.0%
1,209
2.9%
24.4%
9,990
100.0% $ 55,050
28.8%
17.9%
12.9%
2.7%
6.2%
6.7%
—%
2.7%
1.7%
2.2%
18.2%
100.0%
As illustrated by the table above, 22.1% of Atlas’ gross premium written year ended December 31, 2013 came from New York
and 57.2% came from the five states currently producing the most premium volume, as compared to 72.5% in the year ended
December 31, 2012. Our commitment to expanding geographically resulted in 19 states with more than $1 million in written
premium in 2013 compared to only 10 in 2012. Though we built an expanded presence in New York, the impact of Hurricane
Sandy on loss experience was not material.
Ceded Premium Written
Ceded premium written is equal to premium ceded under the terms of Atlas’ inforce reinsurance treaties. Ceded premium written
increased 94.4% to $12.6 million for the year ended December 31, 2013 compared with $6.5 million for the year ended December
31, 2012. The primary driver of the increase in ceded premium written relates to the Gateway workers' compensation reinsurance
36
treaty that was entered into at January 1, 2013. The percentage of premium ceded is driven by the business mix within our total
premium base. Except for the new Gateway workers' compensation program, our reinsurance partners have remained consistent
compared to 2012.
Net Premium Written
Net premium written is equal to gross premium written less the ceded premium written under the terms of Atlas’ inforce reinsurance
treaties. Net premium written increased 65.7% to $80.5 million for the year ended December 31, 2013 compared with $48.6
million for the year ended December 31, 2012. These changes are attributed to the combined effects of the issues cited in the
‘Gross Premium Written’ and ‘Ceded Premium Written’ sections above.
Net Premium Earned
Premiums are earned ratably over the term of the underlying policy. Net premium earned was $71.3 million in the year ended
December 31, 2013, an 84.3% increase compared with $38.7 million in the year ended December 31, 2012. The increase in net
premiums earned is attributable to the strong growth in core commercial lines premiums written and the impact of the Gateway
acquisition.
Claims Incurred
The loss ratio relating to the claims incurred in the year ended December 31, 2013 was 63.9% compared to 68.6% in the year
ended December 31, 2012. Loss ratios improved in the year ended December 31, 2013 relative to prior periods primarily due to
the increased percentage of commercial auto, which has historically had a better overall underwriting result, relative to total written
premium. In both years, the excess taxi program contributed significantly to favorable loss results in the year as we expect better
than average claim experience from this program. We believe that our extensive experience and expertise with respect to
underwriting and claims management in all our commercial lines will allow us to continue this decreasing trend since we expect
100% of net premium earned to be related to core lines of business moving forward. The Company is committed to retain this
claim handling expertise as a core competency as the volume of business increases.
The increased proportion of commercial auto business in the past year, which historically has had more favorable overall
underwriting results, coupled with price and underwriting initiatives, are the primary drivers for loss ratio improvement in 2013.
We believe that our extensive experience and expertise specific to underwriting and claims management in commercial lines will
allow continued loss ratio improvement. The addition of Gateway had no significant impact to the consolidated loss ratio in the
year ended December 31, 2013.
Acquisition Costs
Acquisition costs represent commissions and taxes incurred on net premium earned. Acquisition costs were $10.4 million in the
year ended December 31, 2013 or 14.5% of net premium earned, as compared to 16.7% in the year ended December 31, 2012.
The favorable trend in acquisition costs is primarily due to the shift away from non-standard automobile insurance during 2012
which had carried higher commission rates. We expect acquisition cost ratios to remain consistent with the 2013 ratio going
forward.
Other Underwriting Expenses
The other underwriting expense ratio was 16.0% in the year ended December 31, 2013 compared to 17.1% in the year ended
December 31, 2012. While various cost-saving initiatives were realized in 2013, this full year decline is less significant than in
the prior year as a result of the non-recurring integration costs related to Gateway during 2013. However, we expect our underwriting
expense ratio to continue trending lower as a result of the expansion of our core lines and the acquisition of Gateway and the
impact that these factors have on our operational scale. Approximately 1.0% of the full year 2013 other underwriting expense ratio
was attributed to Gateway integration costs.
The other underwriting expense ratio in 2013 excludes $406,000 in transaction costs incurred in conjunction with the acquisition
of Gateway.
Net Investment Income
Net investment income consists of the interest income and net realized gains or losses that are created by the Company's invested
assets net of expenses associated with managing the portfolio. The table below compares the net investment results for the years
ended December 31, 2013 and 2012.
37
Investment Results ($ in '000s)
Year Ended December 31,
Average securities at cost
Interest income after expenses
Percent earned on average investments
Net realized gains
Total investment income
Total realized yield
2013
$
130,107
2,141
$
2012
121,938
2,453
1.7%
529
2,670
2.1%
2.0%
1,435
3,888
3.2%
Investment income (excluding net realized gains) net of investment expenses decreased by 12.7% to $2.1 million in the year ended
December 31, 2013, compared to $2.5 million in the year ended December 31, 2012. These amounts are primarily comprised of
interest income. This decrease is attributable to the timing of asset disposals, interest rates and the mix of securities on hand.
Net realized investment gains in the year ended December 31, 2013 were $529,000 compared to $1.4 million in the year ended
December 31, 2012. The difference is the result of management's decision to sell certain securities consistent with the Company's
liquidity needs, including those related to the acquisition of Gateway, an other-than-temporary-impairment ("OTTI") realized loss
adjustment of $311,000 recorded in 2013, and the reallocation based on expected duration of claim payment triangles during
favorable market conditions in 2012.
The annualized realized yield on invested assets (including net realized gains of $529,000) in the year ended December 31, 2013
decreased to 2.1% as compared with 3.2% in the year ended December 31, 2012. This is primarily due to the decline in gains
realized during 2013 versus the gains that were realized during 2012.
Other Income
Atlas recorded other income in the year ended December 31, 2013 of $13,000 compared to other income of $194,000 for the year
ended December 31, 2012. Other income prior to June 30, 2012 was primarily comprised of rental income from our corporate
headquarters in Elk Grove Village, Illinois, which was sold in 2012.
Combined Ratio
Underwriting profitability, as opposed to overall profitability or net earnings, is measured by the combined ratio. The combined
ratio is the sum of the loss and loss adjustment expense (LAE) ratio, the acquisition cost ratio and the underwriting expense ratio.
Atlas’ combined ratio for the years ended December 31, 2013 and 2012 are summarized in the table below. The underwriting loss
is attributable to the factors described in the ‘Claims Incurred’, ‘Acquisition Costs’, and ‘Other Underwriting Expenses’ sections
above.
Combined Ratios ($ in '000s)
Year Ended December 31,
38,709
Net premium earned
Underwriting expenses 1
39,626
Combined ratio
102.4%
1 - Underwriting expenses are the combination of claims incurred, acquisition costs, and other underwriting expenses and does
include the Gateway integration costs, however, does not include $406,000 relating to the Gateway transaction costs
71,344
67,369
94.4%
2013
2012
$
$
Our combined ratio improvement in 2013 is attributed to the combined effects of the issues cited in the ‘Claims Incurred’,
‘Acquisition Costs’, 'Other Underwriting Expenses' and 'Net Premium Earned' sections above.
Income before Income Taxes
Atlas generated pre-tax income of $6.3 million in the year ended December 31, 2013, compared to pre-tax income of $3.2 million
in year ended December 31, 2012.
Income Tax Benefit
Atlas recognized $72,000 of tax expense in the year ended December 31, 2013, however recognized no tax expense for the year
ended December 31, 2012. The following table reconciles tax benefit from applying the statutory U.S. Federal tax rate of 34.0%
to the actual percentage of pre-tax income provided for the years ended December 31, 2013 and 2012:
38
Tax Rate Reconciliation ($ in '000s)
Expected income tax expense at statutory rate
Change in valuation allowance
Nondeductible expenses
State tax (net of federal benefit)
Tax Net Operating Loss Limitation Write-Down (excluding valuation allowance)
Other
Total
2013
2012
Amount
%
Amount
%
$
$
2,126
(2,802)
100
47
626
(25)
72
34.0 % $
(44.8)%
1.6 %
0.8 %
10.0 %
(0.4)%
1.2 % $
1,076
(1,119)
48
—
—
(5)
—
34.0 %
(35.3)%
1.5 %
— %
— %
(0.2)%
— %
Upon the transaction forming Atlas on December 31, 2010, a yearly limitation as required by U.S. tax law Section 382 that applies
to changes in ownership on the future utilization of Atlas’ net operating loss carry-forwards was calculated. The insurance
subsidiaries’ prior parent retained those tax assets previously attributed to the insurance subsidiaries which could not be utilized
by Atlas as a result of this limitation. As a result, Atlas’ ability to recognize future tax benefits associated with a portion of its
deferred tax assets generated during prior years and the current year have been permanently limited to the amount determined
under U.S. tax law Section 382. The result is a maximum expected net deferred tax asset, which Atlas has available after the merger
and believed more-likely-than-not to be utilized in the future, after consideration of valuation allowance.
Net Income and Earnings per Common Share
Atlas earned $6.2 million during the year ended December 31, 2013 versus net income of $3.2 million during the year ended
December 31, 2012. After taking the impact of the liquidation preference of the preferred shares into consideration and the discount
generated as a result of the repurchase of 18,000,000 preferred shares, the diluted earnings per common share in the year ended
December 31, 2013 was $0.74 versus diluted earnings per common share of $0.38 in year ended December 31, 2012.
For the year ended December 31, 2013, there were 8,007,458 weighted average common shares outstanding used to compute basic
earnings per share and 10,840,868 were used for diluted earnings per share. For the year ended December 31, 2012, there were
6,144,281weighted average common shares outstanding used to compute basic earnings per share and 8,434,948 used for diluted
earnings per share.
In computing the diluted earnings per share on a year to date basis, the Company included the dilutive impact of the convertible
preferred shares that were redeemed during the third quarter of 2013 on a pro-rata basis for the period during which those convertible
preferred shares were outstanding. This dilutive impact increased the denominator in the full year 2013 diluted EPS computation
by 1,333,500 shares; however, this has no impact on the actual earnings used for the numerator in the EPS computation. The
Company did not include the dilutive impact related to the third quarter redemption of the convertible preferred shares in its diluted
EPS computations in the amounts of 762,000 shares and 1,778,000 shares for the third quarter 2013 or the year to date September
30, 2013 computation, respectively. This had no impact on the actual earnings used for the numerator in the EPS computation for
the third quarter 2013. Including the dilutive impact of the redeemed convertible preferred shares on a pro-rata basis for the period
during which those convertible preferred shares were outstanding, the diluted EPS for the third quarter 2013 would have been
$0.36 and the diluted EPS for year to date September 30, 2013 would have been $0.56 as compared to the previously reported
amounts of $0.39 and $0.69, respectively. The preferred shares redeemed decreased diluted earnings per share for the year by
$0.10. Future diluted earnings per share computations will not be impacted by the convertible impact of the preferred shares
redeemed.
39
V. FINANCIAL CONDITION
Consolidated Statements of Financial Condition
($ in '000s, except for share and per share data)
Assets
Investments, available for sale
December 31,
2013
December 31,
2012
Fixed income securities, at fair value (Amortized cost $130,751 and $95,423)
$
128,585
$
Equity securities, at fair value (cost $258 and $1,563)
Other investments
Total Investments
Cash and cash equivalents
Accrued investment income
Accounts receivable and other assets (Net of allowance of $776 and $484)
Reinsurance recoverables on reserves
Reinsurance recoverables on on amounts paid
Prepaid reinsurance premiums
Deferred policy acquisition costs
Deferred tax asset, net
Intangible Assets
Software and office equipment, net
Assets held for sale
Total Assets
Claims liabilities
Unearned premiums
Due to reinsurers and other insurers
Other liabilities and accrued expenses
Total Liabilities
Liabilities
Shareholders’ Equity
Preferred shares, par value per share $0.001, 100,000,000 shares authorized, 2,000,000
shares issued and outstanding at December 31, 2013 and18,000,000 shares issued and
outstanding December 31, 2012. Liquidation value $1.00 per share
Ordinary common shares, par value per share $0.003, 266,666,667 shares authorized,
9,291,871 shares issued and outstanding at December 31, 2013 and 2,256,921 at
December 31, 2012
Restricted common shares, par value per share $0.003, 33,333,334 shares authorized,
132,863 shares issued and outstanding at December 31, 2013 and 3,887,471 at December
31, 2012
Additional paid-in capital
Retained deficit
Accumulated other comprehensive (expense) income, net of tax
Total Shareholders’ Equity
258
1,234
130,077
9,811
694
37,944
18,144
1,002
2,207
6,674
9,319
740
2,500
166
98,079
1,571
1,262
100,912
19,912
517
21,923
5,681
339
2,111
3,764
6,605
—
1,137
166
$
$
$
$
219,278
$
163,067
101,385
$
44,232
2,613
7,350
70,067
25,457
3,803
3,876
155,580
$
103,203
2,000
$
18,000
28
—
169,595
(106,496)
(1,429)
63,698
4
14
152,769
(112,676)
1,753
59,864
163,067
Total Liabilities and Shareholders’ Equity
$
219,278
$
40
Investments
Investments Overview and Strategy
Atlas aligns its securities portfolio to support the liabilities and operating cash needs of the insurance subsidiaries, to preserve
capital and to generate investment returns. Atlas invests predominantly in corporate and government bonds with a portion of the
portfolio in relatively short durations that correlate with the payout patterns of Atlas’ claims liabilities. A third-party investment
management firm manages Atlas’ investment portfolio pursuant to the Company’s investment policies and guidelines as approved
by its Board of Directors. Atlas monitors the third-party investment manager’s performance and its compliance with both its
mandate and Atlas’ investment policies and guidelines. In 2013, the Board of Directors established an Investment Committee to
provide further analysis and guidance in connection with the company's investment activities.
Atlas’ investment guidelines stress the preservation of capital, market liquidity to support payment of liabilities and the
diversification of risk. With respect to fixed income securities, Atlas generally purchases securities with the expectation of holding
them to their maturities; however, the securities are available for sale if liquidity needs arise.
Portfolio Composition
Atlas held securities with a fair value of $130.1 million as of the year ended December 31, 2013, which was primarily comprised
of fixed income securities. The securities held by the insurance subsidiaries must comply with applicable regulations that prescribe
the type, quality and concentration of securities. These regulations in the various jurisdictions in which the insurance subsidiaries
are domiciled permit investments in government, state, municipal and corporate bonds, preferred and common equities, and other
high quality investments, within specified limits and subject to certain qualifications.
The amortized cost, gross unrealized gains and losses and fair value for Atlas’ investments in fixed maturities, equity, and other
investments by type and sector are as follows (all amounts in '000s):
December 31, 2013
Fixed Income:
U.S.
Government
Corporate
Banking/Financial Services
Consumer Goods
Capital Goods
Energy
Telecommunications/Utilities
Health Care
Total Corporate
Mortgage backed - Agency
Mortgage backed - Commercial
Total Mortgage backed
Other asset backed
Total Fixed Income
Equities
Other investments
Totals
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
$ 22,067 $
36 $
620 $ 21,483
16,655
5,044
12,951
3,928
4,979
2,025
45,582
28,877
22,131
51,008
12,093
238
28
208
—
50
—
524
120
53
173
15
247
77
180
114
55
87
760
910
614
1,524
9
16,646
4,995
12,979
3,814
4,974
1,938
45,346
28,087
21,570
49,657
12,099
$ 130,750 $
748 $
2,913 $ 128,585
258
1,234
—
—
—
—
258
1,234
$ 132,242 $
748 $
2,913 $ 130,077
41
December 31, 2012
Fixed Income:
U.S.
Government
Corporate
Banking/Financial Services
Consumer Goods
Capital Goods
Energy
Telecommunications/Utilities
Health Care
Total Corporate
Mortgage backed - Agency
Mortgage backed - Commercial
Total Mortgage backed
Other asset backed
Total Fixed Income
Equities
Other investments
Totals
Liquidity and Cash Flow Risk
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
$ 15,313 $
417 $
3 $ 15,727
10,576
4,404
12,691
4,208
2,314
1,728
35,921
19,681
20,387
40,068
376
66
506
159
110
37
1,254
461
433
894
5
9
2
—
—
—
16
6
7
13
10,947
4,461
13,195
4,367
2,424
1,765
37,159
20,136
20,813
40,949
4,121
$ 95,423 $
123
2,688 $
1,563
1,262
8
—
4,244
—
32 $ 98,079
—
—
1,571
1,262
$ 98,248 $
2,696 $
32 $ 100,912
The following table summarizes the fair value by contractual maturities of the fixed income securities portfolio, excluding cash
and cash equivalents, at the dates indicated.
Fair Value of Fixed Income Securities by Contractual Maturity Date ($ in '000s)
As of December 31,
Due in less than one year
Due in one through five years
Due after five through ten years
Due after ten years
Total
2013
2012
Amount
7,571
$
43,693
28,080
49,241
$ 128,585
%
5.9% $
34.0%
21.8%
38.3%
100.0% $
Amount
9,513
23,124
20,524
44,918
98,079
%
9.7%
23.6%
20.9%
45.8%
100.0%
As of the year ended December 31, 2013, 39.9% of the fixed income securities, including treasury bills, bankers’ acceptances,
government bonds and corporate bonds had contractual maturities of five years or less. Actual maturities may differ from contractual
maturities because certain issuers have the right to call or prepay obligations with or without call or prepayment penalties. Atlas
holds cash and high grade short-term assets which, along with fixed income security maturities, management believes are sufficient
for the payment of claims on a timely basis. In the event that additional cash is required to meet obligations to policyholders, Atlas
believes that high quality securities portfolio provides us with sufficient liquidity. With a weighted contractual duration of 4.7
years, changes in interest rates will have a modest market value impact on the Atlas portfolio relative to longer duration portfolios.
Atlas can and typically does hold bonds to maturity by matching duration with the anticipated liquidity needs.
Market Risk
Market risk is the risk that Atlas will incur losses due to adverse changes in interest rates, currency exchange rates or equity prices.
Having disposed of a majority of its asset backed securities, its primary market risk exposure in the fixed income securities portfolio
is to changes in interest rates. Because Atlas’ securities portfolio is comprised of primarily fixed income securities that are usually
held to maturity, periodic changes in interest rate levels generally impact its financial results to the extent that the securities in its
available for sale portfolio are recorded at market value. During periods of rising interest rates, the market value of the existing
fixed income securities will generally decrease and realized gains on fixed income securities will likely be reduced. The reverse
is true during periods of declining interest rates.
42
Credit Risk
Credit risk is defined as the risk of financial loss due to failure of the other party to a financial instrument to discharge an obligation.
Atlas is exposed to credit risk principally through its investments and balances receivable from policyholders and reinsurers. It
monitors concentration and credit quality risk through policies designed to limit and monitor its exposure to individual issuers or
related groups (with the exception of U.S. government bonds) as well as through ongoing review of the credit ratings of issuers
in the securities portfolio. Credit exposure to any one individual policyholder is not material. The Company's policies, however,
are distributed by agents who may manage cash collection on its behalf pursuant to the terms of their agency agreement. Atlas has
policies to evaluate the financial condition of its reinsurers and monitors concentrations of credit risk arising from similar geographic
regions, activities, or economic characteristics of the reinsurers to minimize its exposure to significant losses from reinsurers’
insolvency.
The following table summarizes the composition of the fair value of the fixed income securities portfolio (excluding the bond
which has been classified in Level 3 within the fair value hierarchy), excluding cash and cash equivalents, as of the dates indicated,
by ratings assigned by Fitch, S&P or Moody’s Investors Service. The fixed income securities portfolio consists of predominantly
very high quality securities in corporate and government bonds with 88.3% rated ‘A’ or better as of the year ended December 31,
2013 compared to 88.1% as of the year ended December 31, 2012.
Credit Ratings of Fixed Income Securities Portfolio ($ in '000s)
As of December 31,
2013
2012
AAA/Aaa
AA/Aa
A/A
BBB/Baa
Total Securities
Other-than-temporary impairment
Amount
76,616
$
12,733
23,624
14,995
$ 127,968
% of
Total
59.8% $
10.0%
18.5%
11.7%
100.0% $
Amount
58,765
7,569
19,894
11,617
97,845
% of
Total
60.1%
7.7%
20.3%
11.9%
100.0%
Atlas recognizes losses on securities for which a decline in market value was deemed to be other-than-temporary. Management
performs a quarterly analysis of the securities holdings to determine if declines in market value are other-than-temporary. Atlas
recognized charges of $311,000 for securities impairments that were considered other-than-temporary for the year ended December
31, 2013 and did not recognize any charges for the year ended December 31, 2012.
The length of time securities may be held in an unrealized loss position may vary based on the opinion of the appointed investment
manager and their respective analyses related to valuation and to the various credit risks that may prevent us from recapturing the
principal investment. In cases of securities with a maturity date where the appointed investment manager determines that there is
little or no risk of default prior to the maturity of a holding, Atlas would elect to hold the security in an unrealized loss position
until the price recovers or the security matures. In situations where facts emerge that might increase the risk associated with
recapture of principal, Atlas may elect to sell securities at a loss. Atlas had no material gross unrealized losses in its portfolio as
of the year ended December 31, 2013 or as of the year ended December 31, 2012.
Estimated impact of changes in interest rates and securities prices
For Atlas’ available-for-sale fixed income securities held as of the year ended December 31, 2013, a 100 basis point increase in
interest rates on such held fixed income securities would have increased net investment income and income before taxes by
approximately $105,000. Conversely, a 100 basis point decrease in interest rates on such held fixed income securities would
decrease net investment income and income before taxes by $70,000.
A 100 basis point increase would have also decreased other comprehensive income by approximately $4.3 million due to “mark-
to-market” requirements; however, holding investments to maturity would mitigate this impact. Conversely, a 100 basis point
decrease would increase other comprehensive income by the same amount. The impacts described here are approximately linear
to the change in interest rates.
Due from Reinsurers and Other Insurers
Atlas purchases reinsurance from third parties in order to reduce its liability on individual risks and its exposure to large losses.
Reinsurance is coverage purchased by one insurance company from another for part of the risk originally underwritten by the
purchasing (ceding) insurance company. The practice of ceding insurance to reinsurers allows an insurance company to reduce
its exposure to loss by size, geographic area, and type of risk or on a particular policy. An effect of ceding insurance is to permit
an insurance company to write additional insurance for risks in greater number or in larger amounts than it would otherwise insure
independently, based on its statutory capital, risk tolerance and other factors.
43
Atlas generally purchases reinsurance to limit net exposure to a maximum amount on any one loss of $500,000 with respect to
commercial automobile liability claims. Atlas also purchases reinsurance to protect against awards in excess of its policy limits.
Atlas continually evaluates and adjusts its reinsurance needs based on business volume, mix, and supply levels.
Reinsurance ceded does not relieve Atlas of its ultimate liability to its insured in the event that any reinsurer is unable to meet
their obligations under its reinsurance contracts. Therefore, Atlas enters into reinsurance contracts with only those reinsurers
deemed to have sufficient financial resources to provide the requested coverage. Reinsurance treaties are generally subject to
cancellation by the reinsurers or Atlas on the anniversary date and are subject to renegotiation annually. Atlas regularly evaluates
the financial condition of its reinsurers and monitors the concentrations of credit risk to minimize its exposure to significant losses
as a result of the insolvency of a reinsurer. Atlas believes that the amounts it has recorded as reinsurance recoverables are
appropriately established. Estimating amounts of reinsurance recoverables, however, is subject to various uncertainties and the
amounts ultimately recoverable may vary from amounts currently recorded. Atlas had $19.1 million recoverable from third party
reinsurers (exclusive of amounts prepaid) and other insurers as of the year ended December 31, 2013 as compared to $6.0 million
as of the year ended December 31, 2012.
Estimating amounts of reinsurance recoverables is also impacted by the uncertainties involved in the establishment of provisions
for unpaid claims. As underlying reserves potentially develop, the amounts ultimately recoverable may vary from amounts currently
recorded. Atlas’ reinsurance recoverables are generally unsecured. Atlas regularly evaluates its reinsurers, and the respective
amounts recoverable, and an allowance for uncollectible reinsurance is provided for, if needed.
Atlas’ largest reinsurance partners are Gen Re, a subsidiary of Berkshire Hathaway, Inc. and White Rock Insurance (SAC) Ltd.
Gen Re has a financial strength rating of Aa1 from Moody’s while White Rock is unrated. The White Rock balances are specifically
related to the Gateway workers' compensation program that was exited during 2013 and are fully secured by a letter-of-credit.
Deferred Tax Asset
Components of Deferred Tax (in '000s)
As of the year ended December 31,
Deferred tax assets:
Unpaid claims and unearned premiums
Loss carry-forwards
Bad debts
Other
Valuation allowance
Total gross deferred tax assets
Deferred tax liabilities:
Investment securities
Deferred policy acquisition costs
Other
Total gross deferred tax liabilities
Net deferred tax assets
2013
2012
4,783 $
15,265
264
1,446
(9,446)
12,312 $
345 $
2,269
379
2,993
9,319 $
3,144
16,128
164
907
(11,242)
9,101
910
1,280
306
2,496
6,605
$
$
$
$
Atlas established a valuation allowance of approximately $9.4 million and $11.2 million for its gross future deferred tax assets as
of the year ended December 31, 2013 and as of the year ended December 31, 2012, respectively.
Based on Atlas’ expectations of future taxable income, as well as the reversal of gross future deferred tax liabilities, management
believes it is more likely than not that Atlas will fully realize the net future tax assets, with the exception of the aforementioned
valuation allowance. Atlas has therefore established the valuation allowance as a result of the potential inability to utilize a portion
of its net operation losses in the U.S. which are subject to a yearly limitation. The Company has been reducing its valuation
allowance against deferred tax assets by an amount equal to the amount of income tax expense generate for the period. The
Company will continue this process until such time as the management determines that certain specific events warrant a reassessment
of this policy which could result in future reductions or the elimination of the valuation allowance. These events include but are
not limited to continued underwriting profitability, the lack of significant prior year loss reserve development, continuing favorable
market conditions, continued positive trend in taxable earnings, and other such indications deemed positive.
On July 22, 2013, as a result of shareholder activity, a "triggering event" as determined under IRC Section 382 was reached. As
a result, under IRC Section 382, the use of the Company's net operating loss and other carryforwards will be limited as a result of
this "ownership change” for tax purposes, which is defined as a cumulative change of more than 50% during any three-year period
by shareholders of the Company's shares.
44
Following this triggering event, the Company estimates that it will retain total tax effected federal net operating loss carryforwards
of approximately $15.3 million as of December 31, 2013. Book value per common share is unaffected by this event as the amount
of lost net deferred tax assets of $578,000 were offset by a corresponding decrease in the valuation allowance which was already
held against the majority of these assets. The completion and filing of the Company's 2013 U.S. Federal tax return will determine
the final adjustment.
Atlas has the following total net operating loss carry-forwards as of the year ended December 31, 2013:
Net Operating Loss Carry-Forward by Expiry ($ in '000s)
Year of Occurrence
Year of Expiration
2001
2002
2006
2007
2008
2009
2010
2011
2012
Total
Assets Held for Sale
2021
2022
2026
2027
2028
2029
2030
2031
2032
Amount
$ 11,378
4,317
7,825
3,763
1,949
1,949
2,296
10,183
1,237
$ 44,897
On May 22, 2012, Atlas closed the sale of the headquarters building to 150 Northwest Point, LLC, a Delaware limited liability
company. The total sales price of the property, which was paid in cash, amounted to $14.0 million, less closing costs and related
expenses of approximately $633,000. In connection with the sale, the Company also wrote down an accrual of approximately
$792,000 held for real-estate taxes. Approximately $830,000 of the sales price was held in escrow for real-estate taxes. Atlas
recognized a gain on the sale of this property of $213,000, which will be deferred and recognized over the 5 year lease term. Atlas
recognized $43,000 and $26,000 as an offset to rent expense for the years ended December 31, 2013 and 2012, respectively. Total
rental expense recognized on the headquarters building was $699,000 and $357,000 for the years ended December 31, 2013 and
2012, respectively.
There are two properties located in Alabama which are still for sale. These properties are listed for sale for amounts greater than
carried values. Both were assets of Southern United Fire Insurance Company, which was merged into American Service in February
2010.
Claims Liabilities
The table below shows the amounts of total case reserves and incurred but not reported (“IBNR”) claims provision as of the year
ended December 31, 2013 and as of the year ended December 31, 2012. The provision for unpaid claims increased by 44.7% to
$101.4 million as of the year ended December 31, 2013 compared to $70.1 million as of the year ended December 31, 2012.
During the year ended December 31, 2013, case reserves increased by 38.5% compared to December 31, 2012, while IBNR
reserves increased by 65.9% generally due to the acquisition of Gateway and the consolidation of its reserve balances and the
increase in premiums earned in our core commercial lines of business.
Provision for Unpaid Claims by Type - Gross of Reinsurance ($ in '000s)
As of the year ended December 31,
Case reserves
IBNR
Total
2013
2012
YTD%
Change
$
$
75,260 $
26,125
101,385 $
54,321
15,746
70,067
38.5%
65.9%
44.7%
45
Provision for Unpaid Claims by Line of Business – Gross of Reinsurance ($ in '000s)
As of the year ended December 31,
Commercial auto liability and auto physical damage
Other
Total
2013
2012
YTD%
Change
$
$
80,903 $
20,482
101,385 $
54,126
15,941
70,067
49.5%
28.5%
44.7%
Provision for Unpaid Claims by Line of Business - Net of Reinsurance Recoverables ($ in '000s)
As of the year ended December 31,
Commercial auto liability and auto physical damage
Other
Total
2013
2012
$
$
76,750 $
6,491
83,241 $
52,538
11,849
64,387
YTD%
Change
46.1 %
(45.2)%
29.3 %
The other line of business is comprised of Atlas’ surety business, Gateway's truck and workers' compensation programs, Atlas'
non-standard personal lines business, Atlas' workers' compensation related to taxi, other liability and assigned risk business.
Our surety program primarily consists of U.S. Customs bonds. We engage a former affiliate, Avalon Risk Management, to help
coordinate customer service and claim handling for the surety bonds written. This non-core program is 100% reinsured to an
unrelated third party and is being transitioned to another carrier. We anticipate the program will be fully transitioned during 2014.
Our non-standard personal lines business was fully transitioned from the Company during 2012.
The Gateway truck and workers' compensation programs were put into run-off during 2012. The truck program had little earned
premium during 2012 and the workers' compensation program is 100% reinsured retrospectively and prospectively to an unrelated
third party.
Claims liabilities - The changes in the provision for unpaid claims, net of amounts recoverable from reinsurers, for the years
ended December 31, 2013 and December 31, 2012 were as follows ($ in '000's):
As of the year ended December 31,
Unpaid claims, beginning of period
Less: reinsurance recoverable
Net beginning unpaid claims reserves
Net reserves acquired
Loss portfolio transfer
Incurred related to:
Current year
Prior years
Paid related to:
Current year
Prior years
Net unpaid claims, end of period
Add: reinsurance recoverable
Unpaid claims, end of period
2013
2012
$
70,067
$
5,680
64,387
29,923
(5,919)
45,604
8
45,612
12,874
37,888
50,762
83,241
18,144
101,385
$
$
$
$
91,643
7,825
83,818
—
—
26,329
216
26,545
8,925
37,051
45,976
64,387
5,680
70,067
The process of establishing the estimated provision for unpaid claims is complex and imprecise as it relies on the judgment and
opinions of a large number of individuals, on historical precedent and trends, on prevailing legal, economic, social and regulatory
trends and on expectations as to future developments. The process of determining the provision necessarily involves risks that the
actual results will deviate, perhaps substantially, from the best estimates made.
The change to the provision for unpaid claims is consistent with the changes in written premium and the addition of reserves
related to the Gateway acquisition. However, because the establishment of reserves is an inherently uncertain process involving
46
estimates, current provisions may not be sufficient. Adjustments to reserves, both positive and negative, are reflected quarterly in
the statement of income as estimates are updated.
The financial statements are presented on a calendar year basis for all data. Claims payments and changes in reserves, however,
may be made on accidents that occurred in prior years, not solely on business that is currently insured. Calendar year losses consist
of payments and reserve changes that have been recorded in the financial statements during the applicable reporting period, without
regard to the period in which the accident occurred. Calendar year results do not change after the end of the applicable reporting
period, even as new claim information develops. Accident year losses consist of payments and reserve changes that are assigned
to the period in which the accident occurred. Accident year results will change over time as the estimates of losses change due to
payments and reserve changes for all accidents that occurred during that period.
The table below summarizes the changes over time in the provision for unpaid loss and loss adjustment expenses. The first section
of the table shows the provision for unpaid loss and loss adjustment expenses recorded at the balance sheet date for each of the
indicated years. The original provision for each year is presented on a gross basis as well as net of estimated reinsurance recoverable
on unpaid loss and loss adjustment expenses.The second section displays the cumulative amount of payments made through the
end of each subsequent year with respect to each original provision. The third section presents the re-estimation over subsequent
years of each year’s original net liability for unpaid loss and loss adjustment expenses as more information becomes known and
trends become more apparent. The final section compares the latest re-estimation to the original estimate for each year presented
in the table on both a gross and net basis.
The development of the provision for unpaid loss and loss adjustment expenses is shown by the difference between the original
estimates and the re-estimated liabilities at each subsequent year-end. The re-estimated liabilities at each year-end are based on
actual payments in full or partial settlement of claims plus re-estimates of the payments required for claims still open or IBNR
claims. Favorable development (redundancy) means that the original estimated provision was higher than subsequently re-
estimated. Unfavorable development (deficiency) means that the original estimated provision was lower than subsequently re-
estimated. The cumulative development represents the aggregate change in the estimates over all prior years.
47
Provision for Unpaid Claims, Net of Recoveries from Reinsurers as of December 31, 2013
($ in ‘000s)
2013
2012
2011
2010
2009
2008 (1)
2007
2006
2005
2004
2003
Gross reserves for unpaid claims and claims expenses
$ 101,385 $ 70,068
$179,054
Less: Reinsurance recoverable on unpaid claims and claims
5,196
$132,578
$ 91,643
12,225
6,477
5,680
7,824
$173,652
$183,649
$191,171
$202,677
$195,437
$189,262
103,612
107,837
111,911
95,215
90,596
91,079
Reserve for unpaid claims and claims expenses, net
89,160
64,388
83,819
126,101
173,858
70,040
75,812
79,260
107,462
104,841
98,183
$ 37,888
$ 37,052
57,047
$ 58,562
87,803
103,939
Cumulative paid on originally established reserve as of:
One year later
Two years later
Three years later
Four years later
Five years later
Six years later
Seven years later
Eight years later
Nine years later
Ten years later
$ 76,835
125,455
149,800
162,221
$ (38,449) $ 29,811
2,812
38,650
59,370
70,075
74,843
13,573
43,671
59,181
66,934
$ 29,917
49,804
33,742
57,853
69,428
73,803
76,485
$ 30,637
52,182
66,806
60,877
75,935
81,347
83,175
84,916
$ 56,431
Unpaid claims as of:
One year later
Two years later
Three years later
Four years later
Five years later
Six years later
Seven years later
Eight years later
Nine years later
Ten years later
$ 46,983
25,913
$ 69,230
35,206
21,124
$102,173
56,268
29,375
18,229
$114,284
65,101
35,500
17,139
10,489
$ 46,338
75,258
43,336
21,859
9,910
6,063
$ 50,772
31,322
46,116
25,534
11,061
5,523
3,046
$ 76,344
56,428
43,015
26,714
15,329
6,712
3,948
2,622
$ 84,035
82,960
$ 94,319
Re-estimated liability as of:
One year later
Two years later
Three years later
Four years later
Five years later
Six years later
Seven years later
Eight years later
Nine years later
Ten years later
As of December 31, 2013:
Cumulative (redundancy) deficiency
$127,792
123,009
125,063
$179,008
181,723
179,175
180,450
$ 75,835
78,674
79,171
76,320
77,423
$ 76,149
78,070
81,986
81,229
79,985
80,906
$ 80,689
81,126
79,858
83,387
80,489
79,326
79,531
$106,981
108,610
109,821
87,591
91,264
88,059
87,123
87,538
$ 37,220
56,126
69,801
78,028
76,174
85,150
88,755
89,698
91,042
$ 62,895
46,081
34,082
26,833
14,797
9,359
4,339
2,751
1,819
$100,115
102,207
103,883
104,861
90,971
94,509
93,094
92,449
92,861
$ 41,426
66,428
77,919
85,576
89,396
88,820
93,142
95,401
95,848
96,483
$ 57,873
35,431
25,491
19,231
16,245
8,674
6,108
3,300
1,998
1,638
$ 99,299
101,859
103,410
104,807
105,641
97,494
99,250
98,701
97,846
98,121
$ 5,094
Cumulative (redundancy) deficiency as a % of reserves originally established- net
(859) $ (1,038) $ 6,592
$ 7,383
$
$
8
$
271
$ (19,924) $ (11,980) $
(62)
—%
-1.0%
-0.8%
3.8%
10.5%
6.7%
0.3%
-18.5%
-11.4%
-0.1%
Re-estimated liability- gross
$105,814
$ 91,538
$132,650
$186,953
$193,063
$196,895
$199,910
$212,508
$209,772
$211,292
Less: Re-established reinsurance recoverable
11,495
8,578
7,587
Re-estimated provision- net
94,319
Cumulative (redundancy) deficiency– gross
(462)
82,960
(105)
125,063
6,503
115,640
115,989
120,379
124,970
116,911
113,171
180,450
77,423
80,906
79,531
87,538
92,861
98,121
8,739
72
(1) Negative payment as of one year later results from the commutation of reinsured reserves by Kingsway Re.
13,246
19,411
7,899
9,831
14,335
22,030
Due to Reinsurers
The decrease in due to reinsurers is consistent with the payout patterns of the underlying claims liabilities.
48
Off-balance sheet arrangements
As of December 31, 2013, Atlas has the following cash obligations related to its operating leases.
Operating Lease Commitments (in '000s)
Year
2014
2015
2016
2017
2018 & Beyond
Total
Amount
$
1,155 $
1,186 $
845 $
281 $
— $
3,467
Shareholders’ Equity
The table below identifies changes in shareholders’ equity for the year ended December 31, 2013 and December 31, 2012:
Changes in Shareholders' Equity
(in '000s)
Balance December 31, 2011 $
Net income
Other comprehensive
income
Share-based compensation
Stock options exercised
Balance December 31, 2012 $
Net income
U.S. Initial Public Offering
Issuance of preferred
shares
Warrants exercised
Other comprehensive loss
Share-based compensation
Repurchase of preferred
shares
Preferred dividends
declared and paid
Other
Preferred
Shares
Ordinary
Common
Shares
Restricted
Common
Shares
Additional
Paid-in
Capital
Retained
Deficit
Accumulated
Other
Comprehensive
Income (Loss)
Total
18,000
$
4
$
14
$152,652
$
(115,841) $
1,425
$
56,254
3,166
113
3
328
3,166
328
113
3
18,000
$
4
$
14
$
152,768
$
(112,675) $
1,753
$
59,864
16
5
2,000
(18,000)
6,180
(10)
9,750
7,176
247
1,800
(2,145)
6,180
9,756
2,000
7,181
(3,181)
247
(16,200)
(2,145)
(3,181)
3
(4)
(1)
(1)
(1)
(4)
Balance December 31, 2013 $
2,000
$
28
$
— $
169,595
$
(106,496) $
(1,429) $
63,698
As of March 6, 2014, there were 9,291,871 ordinary common shares outstanding and 132,863 restricted common shares outstanding,
and 2,000,000 preferred shares issued and outstanding.
The holders of restricted voting shares are entitled to vote at all meetings of shareholders, except at meetings of holders of a specific
class that are entitled to vote separately as a class. The restricted voting common shares as a class shall not carry more than 30%
of the aggregate votes eligible to be voted at a general meeting of common shareholders.
All of the issued and outstanding restricted voting common shares are beneficially owned or controlled by Kingsway America,
inc. ("KAI"), or its affiliated entities. The restricted voting common shares will convert to ordinary voting common shares in the
event that these KAI owned shares are sold to non-affiliates of KAI.
On February 11, 2013, an aggregate of 4,125,000 Atlas ordinary shares were offered in Atlas' initial public offering in the United
States. 1,500,000 ordinary shares were offered by Atlas and 2,625,000 ordinary shares were sold by KAI, a wholly-owned
subsidiary of Kingsway Financial Services Inc., or other Kingsway subsidiaries (collectively ”Kingsway”) at a price of $5.85 per
share, less underwriting discounts and expenses. Atlas also granted the underwriters an option to purchase up to an aggregate of
618,750 additional shares at the public offering price of $5.85 per share to cover over-allotments, if any. On March 11, 2013, the
49
underwriters exercised this option and purchased an additional 451,500 shares. After underwriting and other expenses, Atlas
realized combined proceeds of $9.8 million.
All of the issued and outstanding restricted voting common shares are beneficially owned or controlled by Kingsway. In the event
that such shares are disposed of such that Kingsway’s beneficial interest is less than 10% of the issued and outstanding restricted
voting common shares (which is now the case), the restricted voting common shares shall be converted into fully paid and non-
assessable ordinary voting common shares. The restricted voting common shares are entitled to vote at all meetings of shareholders,
except at meetings of holders of a specific class that are entitled to vote separately as a class. The restricted voting common shares
as a class shall not carry more than 30% of the aggregate votes eligible to be voted at a general meeting of common shareholders.
The restricted voting common shares will convert to ordinary voting common shares in the event that these Kingsway owned
shares are sold to non-affiliates of the Company.
On August 1, 2013, Atlas repurchased 18,000,000 preferred shares owned by Kingsway pursuant to the Share Repurchase
Agreement. Atlas recorded a $1.8 million benefit related to the discount on the repurchase of these shares from Kingsway.
On October 18, 2013 and on November 13, 2013, Kingsway notified the Company that it had sold 529,608 and 600,000 of its
restricted shares, respectively, bringing its restricted share count to 132,863 or 1.4% of the outstanding common shares as of
December 31, 2013.
During 2013, Atlas declared and paid $2.1 million in dividends earned through the preferred shares to Kingsway, the cumulative
amount to which they were entitled through the end of July 2013.
During 2013, 1,327,840 warrants and 1,000 options were exercised which resulted in the issuance of 1,328,840 common shares.
The remaining outstanding preferred shares are not entitled to vote and are beneficially owned or controlled by Hendricks as of
the year ended December 31, 2013. Preferred shareholders are entitled to dividends on a cumulative basis whether or not declared
by the Board of Directors at the rate of $0.045 per share per year (4.5%) and may be paid in cash or in additional preferred shares
at the option of Atlas. In liquidation, dissolution or winding-up of Atlas, preferred shareholders receive the greater of $1.00 per
share plus all declared and unpaid dividends or the amount it would receive in liquidation if the preferred shares had been converted
to restricted voting common shares or ordinary voting common shares immediately prior to liquidation. Preferred shares are
convertible into ordinary voting shares at the option of the holder at any date after the fifth year of issuance at the rate of 0.1270
ordinary voting common shares for each preferred share. The conversion rate is subject to change if the number of ordinary voting
common shares or restricted voting common shares changes. The preferred shares are redeemable at the option of Atlas at a price
of $1.00 per share plus accrued and unpaid dividends commencing at the earlier of two years from January 1, 2013 (the issuance
date of the preferred shares).
The cumulative amount of dividends to which the preferred shareholders are entitled upon liquidation or sooner, if Atlas declares
dividends, is $90,000 as of the year ended December 31, 2013, or $0.01 per common share.
Book Value per Ordinary Share
Book value per ordinary share was as follows:
($ in '000s, except for shares and per share data)
December 31, 2013
December 31, 2012
Shareholders' equity
Preferred stock in equity
Accumulated dividends on preferred stock
Common equity
Shares outstanding
Book value per common share outstanding
Liquidity and Capital Resources
$
$
$
63,698 $
2,000
90
61,608 $
9,424,734
6.54 $
59,864
18,000
1,620
40,244
6,144,392
6.55
The purpose of liquidity management is to ensure there is sufficient cash to meet all financial commitments and obligations as
they become due. The liquidity requirements of Atlas’ business have been met primarily by funds generated from operations, asset
maturities and income and other returns received on securities. Cash provided from these sources is used primarily for payment
of claims and operating expenses. The timing and amount of catastrophe claims are inherently unpredictable and may create
increased liquidity requirements.
50
The total purchase price for all of Camelot Services’ outstanding shares was $14.3 million, consisting of a combination of cash
and Atlas preferred shares. Consideration consisted of a $6.0 million dividend paid to the sellers immediately prior to the closing,
$2.0 million of Atlas preferred shares (consisting of a total of 2,000,000 preferred shares) and $6.3 million in cash. This transaction
did not impair our near-term liquidity.
As a holding company, Atlas may derive cash from its subsidiaries generally in the form of dividends and in the future may charge
management fees to the extent allowed by statute or other regulatory approval requirements to meet its obligations. The insurance
subsidiaries fund their obligations primarily through premium and investment income and maturities in their securities portfolio.
Refer also to the discussion “Investments Overview and Strategy." The insurance subsidiaries require regulatory approval for the
return of capital and, in certain circumstances, payment of dividends. In the event that dividends and management fees available
to the holding company are inadequate to service its obligations, the holding company would need to raise capital, sell assets or
incur debt obligations. As at December 31, 2013, Atlas did not have any outstanding debt, and therefore, no near term debt service
obligations. Atlas currently has no material commitments for capital expenditures.
The following table summarizes consolidated cash flow activities:
Summary of Cash Flows (in ‘000s)
As of the year ended December 31,
Cash Used by Operating Activities
Cash (Used by) Provided by Financing Activities
Cash (Used by) Provided by Investing Activities
Net decrease in cash
2013
2012
(5,920) $
(1,405)
(2,776)
(10,101) $
(20,741)
3
17,401
(3,337)
$
$
Cash used in operations during the year ended December 31, 2013 was favorable relative to the year ended December 31, 2012
primarily as a result of fewer payments for claims. Cash used by investing activities during the year ended December 31, 2013
was lower relative to the year ended December 31, 2012 primarily as a result of the timing and nature of investment purchases
and sales and reduced requirement of claim payments during the course of 2013.
51
Item 8. Financial Statements and Supplemental Data
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Atlas Financial Holdings, Inc.
We have audited the accompanying consolidated statements of financial position of Atlas Financial Holdings, Inc. ("the
Company") as of December 31, 2013 and 2012, and the related consolidated statements of income and comprehensive income,
shareholders' equity and cash flows for the years ended December 31, 2013 and 2012. Our audits also included the financial
statement schedules listed in Item 15 of the Company's Form 10-K. These consolidated financial statements and financial
statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit
of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. Our
audit of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated
financial position of Atlas Financial Holdings, Inc. as of December 31, 2013 and 2012, and the results of its consolidated
operations and its cash flows for the years ended December 31, 2013 and 2012, in conformity with accounting principles
generally accepted in the United States of America. In addition, in our opinion, such financial statement schedules, when
considered in relation to the basic consolidated financial statements as a whole, present fairly, in all material respects, the
information set forth therein.
/s/ Johnson Lambert LLP
Arlington Heights, Illinois
March 10, 2014
52
ATLAS FINANCIAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
($ in '000s, except for share and per share data)
Assets
Investments, available for sale
December 31,
2013
December 31,
2012
Fixed income securities, at fair value (Amortized cost $130,751 and $95,423)
$
128,585
$
Equity securities, at fair value (cost $258 and $1,563)
Other investments
Total Investments
Cash and cash equivalents
Accrued investment income
Accounts receivable and other assets (Net of allowance of $776 and $484)
Reinsurance recoverables on reserves
Reinsurance recoverables on on amounts paid
Prepaid reinsurance premiums
Deferred policy acquisition costs
Deferred tax asset, net
Intangible Assets
Software and office equipment, net
Assets held for sale
Total Assets
Claims liabilities
Unearned premiums
Due to reinsurers and other insurers
Other liabilities and accrued expenses
Total Liabilities
Liabilities
Shareholders’ Equity
Preferred shares, par value per share $0.001, 100,000,000 shares authorized, 2,000,000
shares issued and outstanding at December 31, 2013 and18,000,000 shares issued and
outstanding December 31, 2012. Liquidation value $1.00 per share
Ordinary common shares, par value per share $0.003, 266,666,667 shares authorized,
9,291,871 shares issued and outstanding at December 31, 2013 and 2,256,921 at
December 31, 2012
Restricted common shares, par value per share $0.003, 33,333,334 shares authorized,
132,863 shares issued and outstanding at December 31, 2013 and 3,887,471 at December
31, 2012
Additional paid-in capital
Retained deficit
Accumulated other comprehensive (expense) income, net of tax
Total Shareholders’ Equity
258
1,234
130,077
9,811
694
37,944
18,144
1,002
2,207
6,674
9,319
740
2,500
166
98,079
1,571
1,262
100,912
19,912
517
21,923
5,681
339
2,111
3,764
6,605
—
1,137
166
$
$
$
$
219,278
$
163,067
101,385
$
44,232
2,613
7,350
70,067
25,457
3,803
3,876
155,580
$
103,203
2,000
$
18,000
28
—
169,595
(106,496)
(1,429)
63,698
4
14
152,769
(112,676)
1,753
59,864
163,067
Total Liabilities and Shareholders’ Equity
$
219,278
$
See accompanying Notes to Consolidated Financial Statements.
53
ATLAS FINANCIAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
($ in '000s, except for share and per share data)
Consolidated Statements of Income
Net premiums earned
Net investment income
Net investment gains
Other income
Total revenue
Net claims incurred
Acquisition costs
Other underwriting expenses
Expenses incurred related to Gateway acquisition
Total expenses
Income before income tax expense
Income tax expense
Net income attributable to Atlas
Add: Discount realized on preferred share buyback
Less: Preferred share dividends
Net income attributable to common shareholders
Basic weighted average common shares outstanding
Earnings per common share, basic
Diluted weighted average common shares outstanding
Earnings per common share, diluted
Consolidated Statements of Comprehensive Income
Net income attributable to Atlas
Other comprehensive (loss) income:
Changes in net unrealized (losses) gains
Reclassification to income of net realized (losses)
Effect of income tax expense (benefit)
Other comprehensive (loss) income for the period
Total comprehensive income
Year Ended December 31,
2013
2012
$
71,344
$
38,709
2,141
529
13
74,027
45,612
10,373
11,384
406
67,775
6,252
72
6,180
1,800
619
7,361
$
2,453
1,435
194
42,791
26,545
6,471
6,609
—
39,625
3,166
—
3,166
—
810
2,356
8,007,458
6,144,281
0.92
10,840,868
0.74
$
$
0.38
8,434,948
0.38
6,180
$
3,166
(4,354)
(469)
1,642
(3,181)
2,999
$
1,446
(948)
(170)
328
3,494
$
$
$
$
$
See accompanying Notes to Consolidated Financial Statements.
54
ATLAS FINANCIAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
Preferred
Shares
Ordinary
Common
Shares
Restricted
Common
Shares
Additional
Paid-in
Capital
Retained
Deficit
Accumulated
Other
Comprehensive
Income (Loss)
Total
18,000
$
4
$
14
$152,652
$ (115,841) $
1,425
$ 56,254
3,166
113
3
$ (112,675) $
6,180
328
3,166
328
113
3
1,753
$ 59,864
6,180
9,756
2,000
7,181
(3,181)
247
(16,200)
(3,181)
2,000
(18,000)
16
5
(10)
9,750
7,176
247
1,800
(in '000s)
Balance December 31, 2011 $
Net income
Other comprehensive
income
Share-based compensation
Stock options exercised
Net income
U.S. Initial Public Offering
Issuance of preferred
shares
Warrants exercised
Other comprehensive loss
Share-based compensation
Repurchase of preferred
shares
Preferred dividends
declared and paid
Other
Balance December 31, 2013 $
2,000
$
3
28
$
(2,145)
(1)
169,595
(4)
— $
(1)
$ (106,496) $
(2,145)
(4)
(1,429) $ 63,698
(1)
Balance December 31, 2012 $
18,000
$
4
$
14
$
152,768
See accompanying Notes to Consolidated Financial Statements.
55
ATLAS FINANCIAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in '000's)
Operating activities:
Net income
Adjustments to reconcile net income to net cash used by operating activities:
Amortization of fixed assets
Share-based compensation expense
Amortization of deferred gain on sale of headquarters building
Deferred income taxes
Net realized gains
Loss in equity of investee
Amortization of bond premiums and discounts
Net changes for non-cash items:
Accounts receivable and other assets, net
Due from reinsurers and other insurers
Deferred policy acquisition costs
Other assets and accrued investment income
Claims liabilities
Unearned premiums
Due to reinsurers and other insurers
Accounts payable and accrued liabilities
Net cash flows used in operating activities
Investing activities:
Purchase of Gateway (net of cash acquired)
Purchases of investments
Proceeds from sale and maturity of investments
Sale of asets held for sale
Purchases of property and equipment and other
Net cash flows (used) provided by investing activities
Financing activities:
Preferred share buyback
Proceeds from initial public offering
Warrants exercised
Dividends paid
Options exercised
Net cash flows (used) provided by financing activities
Net change in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
Year Ended December 31,
2013
2012
$
6,180
$
3,166
795
247
(43)
(1,072)
(433)
28
1,092
(7,490)
(6,872)
(1,676)
(14)
(4,891)
9,174
(1,476)
531
(5,920)
11,081
(69,328)
56,716
—
(1,245)
(2,776)
(16,200)
9,756
7,181
(2,145)
3
(1,405)
(10,101)
$
19,912
9,811
$
315
113
(26)
—
(1,435)
—
921
(12,344)
2,127
(744)
69
(21,576)
9,766
(1,898)
805
(20,741)
—
(54,720)
59,452
13,342
(673)
17,401
—
—
—
—
3
3
(3,337)
23,249
19,912
See accompanying Notes to Consolidated Financial Statements.
Supplemental disclosure of cash information (in '000's):
Cash paid for :
Interest
Income taxes
Year Ended December 31,
2012
2013
$
129
1,430 $
—
50
56
ATLAS FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Atlas Financial Holdings, Inc. ("Atlas" or the "Company") commenced operations on December 31, 2010. The primary business
of Atlas is underwriting commercial automobile insurance in the United States, with a niche market orientation and focus on
insurance for the “light” commercial automobile sector. This sector includes taxi cabs, non-emergency para-transit, limousine,
livery and business autos. Automobile insurance products provide insurance coverage in three major areas: liability, accident
benefits and physical damage. Liability insurance provides coverage subject to policy terms and conditions where the insured is
determined to be responsible and/or liable for an automobile accident, for the payment for injuries and property damage to third
parties. Accident benefit policies or personal injury protection policies provide coverage for loss of income, medical and
rehabilitation expenses for insured persons who are injured in an automobile accident, regardless of fault. Physical damage coverage
subject to policy terms and conditions provides for the payment of damages to an insured automobile arising from a collision with
another object or from other risks such as fire or theft. In the short run, automobile physical damage and liability coverage generally
provides more predictable results than automobile accident benefit or personal injury insurance.
Atlas' business is carried out through its insurance subsidiaries: American Country Insurance Company (“American Country”),
American Service Insurance Company, Inc. (“American Service”) and, as of January 1st, 2013, Gateway Insurance Company
("Gateway"). The insurance subsidiaries distribute their insurance products through a network of retail independent agents.
Together, the insurance subsidiaries are licensed to write property and casualty insurance in 49 states and the District of Columbia
in the United States. The insurance subsidiaries share common management and operating infrastructure .
Atlas ordinary common shares had been listed on the TSXV under the symbol “AFH” since January 6, 2011. Atlas ordinary
common shares became listed on the NASDAQ stock exchange on February 11, 2013 and continue to trade on this exchange under
the same symbol. The Company delisted from the TSXV on June 5, 2013.
Basis of presentation - These statements have been prepared in conformity with accounting principles generally accepted in the
United States of America ("U.S. GAAP"). All significant intercompany accounts and transactions have been eliminated. To conform
to the current year presentation, certain amounts in the prior years’ consolidated financial statements and notes have been
reclassified.
Beginning with the year ended December 31, 2012, Atlas has changed where certain items appear on its Consolidated Statements
of Income and Comprehensive Income according to Rule 7-04 of Regulation S-X.
Summary of Significant Accounting Policies
Principles of consolidation - The consolidated financial statements include the accounts of Atlas and the entities it controls.
Subsidiaries are entities over which Atlas, directly or indirectly, has the power to govern the financial and operating policies in
order to obtain the benefits from their activities, generally accompanying an equity shareholding of more than one half of the
voting rights. Subsidiaries are fully consolidated from the date on which control is transferred to Atlas and would be de-consolidated
from the date that control ceases. The operating results of subsidiaries acquired or disposed of during the year will be included in
the consolidated statements of income and comprehensive income from the effective date of acquisition and up to the effective
date of disposal, as appropriate. All significant intercompany transactions and balances are eliminated in consolidation. Accounting
policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by Atlas.
The following are Atlas’ subsidiaries, all of which are 100% owned, either directly or indirectly, together with the jurisdiction of
incorporation that are included in consolidated financial statements:
American Insurance Acquisition Inc. (Delaware)
American Country Insurance Company (Illinois)
American Service Insurance Company, Inc. (Illinois)
Camelot Services, Inc. (Missouri) (beginning January 2, 2013) - See Note 3
Gateway Insurance Company (Missouri) (beginning January 2, 2013) - See Note 3
Classification of assets and liabilities - It is not customary in the insurance and financial services industries to classify assets
and liabilities as current (settled in 1 year or less) and non-current (settled beyond 1 year). Assets and liabilities that could otherwise
be classified as current include cash and cash equivalents, accrued investment income, accounts receivable and other assets, certain
amounts due from reinsurers and other insurers, income tax receivable, deferred policy acquisition costs, assets held for sale,
accounts payable and accrued expenses, due to reinsurers and other insurers. Balances that would otherwise be classified as non-
current include deferred tax assets and office equipment. All other assets and liabilities include balances that are both current and
non-current.
57
Estimates and assumptions - The preparation of financial statements requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the
financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from
these estimates and changes in estimates are recorded in the accounting period in which they are determined. The liability for
unpaid loss and loss adjustment expenses and related amounts recoverable from reinsurers represents the most significant estimate
in the accompanying financial statements. Significant estimates in the accompanying financial statements also include the fair
values of investments in bonds, deferred tax asset valuation, premium receivable bad debt allowance and deferred policy acquisition
cost recoverability.
Financial instruments - Financial instruments are recognized and derecognized using trade date accounting, since that is the date
Atlas contractually commits to the purchase or sale with the counterparty.
Effective interest method - Atlas utilizes the effective interest method for calculating the amortized cost of a financial asset and
to allocate interest income or interest expense over the relevant period. The effective interest rate is the rate that exactly discounts
the estimated future cash flows through the expected life of the financial instrument. Interest income is reported net of amortization
of premium and accretion of discount. Realized gains and losses on disposition of available-for-sale securities are based on the
net proceeds and the adjusted cost of the securities sold, using the specific identification method.
Financial assets - Atlas classifies financial assets as described below. Management determines the classification at initial
recognition based on the purpose of the financial asset.
Cash and cash equivalents - Cash and cash equivalents include cash and highly liquid securities with original maturities of 90
days or less.
Available for sale (“AFS”) - Investments in fixed income securities are classified as available for sale. Securities are classified
as available-for-sale when Atlas may decide to sell those securities due to changes in market interest rates, liquidity needs, changes
in yields or alternative investments, and for other reasons. Available-for-sale securities are carried at fair value, with unrealized
gains and losses, net of income tax, included as a separate component of accumulated other comprehensive income (loss) in
shareholder’s equity.
Impairment of financial assets - Atlas assesses, on a quarterly basis, whether there is evidence that a financial asset or group of
financial assets is impaired. An investment is considered impaired when the fair value of the investment is less than its cost or
amortized cost. When an investment is impaired, the Company must make a determination as to whether the impairment is other-
than-temporary.
Under Accounting Standards Codification ("ASC"), with respect to an investment in an impaired debt security, other-than temporary
impairment ("OTTI") occurs if (a) there is intent to sell the debt security, (b) it is more likely than not it will be required to sell
the debt security before its anticipated recovery, or (c) it is probable that all amounts due will be unable to be collected such that
the entire cost basis of the security will not be recovered. If Atlas intends to sell the debt security, or will more likely than not be
required to sell the debt security before the anticipated recovery, a loss in the entire amount of the impairment is reflected in net
investment gains (losses) on investments in the consolidated statements of income. If Atlas determines that it is probable it will
be unable to collect all amounts and Atlas has no intent to sell the debt security, a credit loss is recognized in net investment gains
(losses) on investments in the consolidated statements of income to the extent that the present value of expected cash flows is less
than the amortized cost basis; any difference between fair value and the new amortized cost basis (net of the credit loss) is reflected
in other comprehensive income (losses), net of applicable income taxes.
For equity securities, the Company evaluates its ability to retain its investment in the issuer for a period of time sufficient to allow
for any anticipated recovery in fair value. Evidence considered to determine anticipated recovery are analysts' reports on the near-
term prospects of the issuer and the financial condition of the issuer or the industry, in addition to the length and extent of the
market value decline. If OTTI is identified, the equity security is adjusted to fair value through a charge to earnings. See Note 5
of the Consolidated Financial Statements for further discussion of the other-than-temporary impairment on equity securities.
Fair values of financial instruments - Atlas has used the following methods and assumptions in estimating its fair value disclosures:
Fair values for investments are based on quoted market prices, when available. If quoted market prices are not available, fair values
are based on quoted market prices of comparable instruments or values obtained from independent pricing services.
Atlas' fixed income portfolio is managed by a SEC registered investment advisor specializing in the management of insurance
company portfolios. Management works directly with them to ensure that Atlas benefits from their expertise and also evaluates
investments as well as specific positions independently using internal resources. Atlas' investment advisor has a team of credit
analysts for all investment grade fixed income sectors. The investment process begins with an independent analyst review of each
security's credit worthiness using both quantitative tools and qualitative review. At the issuer level, this includes reviews of past
financial data, trends in financial stability, projections for the future, reliability of the management team in place, market data
(credit spread, equity prices, trends in this data for the issuer and the issuer's industry). Reviews also consider industry trends and
the macro-economic environment. This analysis is continuous, integrating new information as it becomes available. In short,
58
Atlas does not rely on rating agency ratings to make investment decisions, but instead with the support of its independent investment
advisors, performs independent fundamental credit analysis to find the best securities possible. Together with its investment
advisor, Atlas found that over time this process creates an ability to sell securities prior to rating agency downgrades or to buy
securities before upgrades. As of December 31, 2013, this process did not generate any significant difference in the rating
assessment between Atlas' review and the rating agencies. The Company recognizes transfers between levels of the fair value
hierarchy at the end of the period in which events occur impacting the availability of inputs to the fair value methodology.
Atlas employs specific control processes to determine the reasonableness of the fair value of its financial assets. These processes
are designed to supplement those performed by Atlas' investment advisor to ensure that the values received from them are accurately
recorded and that the data inputs and the valuation techniques utilized are appropriate, consistently applied, and that the assumptions
are reasonable and consistent with the objective of determining fair value. For example, on a continuing basis, Atlas assesses the
reasonableness of individual security values which have stale prices or whose changes exceed certain thresholds as compared to
previous values received from Atlas' investment advisor or to expected prices. The portfolio is reviewed routinely for transaction
volumes, new issuances, any changes in spreads, as well as the overall movement of interest rates along the yield curve to determine
if sufficient activity and liquidity exists to provide a credible source for market valuations. When fair value determinations are
expected to be more variable, they are validated through reviews by members of management or the Board of Directors who have
relevant expertise and who are independent of those charged with executing investment transactions.
Accounts receivable and other assets - Accounts receivable include premium balances due and uncollected and installment
premiums not yet due from agents and insureds.
Atlas evaluates the collectibility of accounts receivable based on a combination of factors. When aware of a specific customer's
inability to meet its financial obligations, such as in the case of bankruptcy or deterioration in the customer's operating results or
financial position, Atlas records a specific reserve for bad debt to reduce the related receivable to the amount Atlas reasonably
believes is collectible. Atlas also records reserves for bad debt for all other customers based on a variety of factors, including the
length of time the receivables are past due and historical collection experience. Accounts are reviewed for potential write-off on
a case-by-case basis. Accounts deemed uncollectible are written off, net of expected recoveries. If circumstances related to specific
customers change, estimates of the recoverability of receivables could be further adjusted.
Deferred policy acquisition costs ("DPAC") - Atlas defers producers’ commissions, premium taxes and other underwriting and
costs directly relating to the successful acquisition of premiums written to the extent they are considered recoverable. These costs
are then expensed as the related premiums are earned. The method followed in determining the deferred policy acquisition costs
limits the deferral to its realizable value by giving consideration to estimated future claims and expenses to be incurred as premiums
are earned. Changes in estimates, if any, are recorded in the accounting period in which they are determined. Anticipated investment
income is included in determining the realizable value of the deferred policy acquisition costs. Atlas’ deferred policy acquisition
costs are reported net of deferred ceding commissions.
When anticipated losses, loss adjustment expenses, commissions and other acquisition costs exceed recorded unearned premium
and any future installment premiums on existing policies, a premium deficiency reserve is recognized by recording a reduction
to DPAC with a corresponding charge to operations. Atlas utilizes anticipated investment income as a factor in its premium
deficiency calculation. Atlas concluded that no premium deficiency adjustments were necessary in either of the years ended
December 31, 2013 and December 31, 2012.
Income taxes - Income taxes expense (benefit) includes all taxes based on taxable income (loss) of Atlas and its subsidiaries, and
are recognized in the statement of income and comprehensive income except to the extent that they relate to items recognized
directly in other comprehensive income, in which case the income tax effect is also recognized in other comprehensive income.
Deferred taxes are recognized using the asset and liability method of accounting. Under this method the future tax consequences
attributable to temporary differences in the tax basis of assets, liabilities and items recognized directly in equity and the financial
reporting basis of such items are recognized in the financial statements by recording deferred tax liabilities or deferred tax assets.
Deferred tax assets are recognized only to the extent that it is probable that future taxable income will be available against which
they can be utilized. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income
in the years in which those temporary differences are expected to be recovered or settled. The effect on future tax assets and
liabilities of a change in tax rates is recognized in income in the period of enactment.
When considering the extent of the valuation allowance on Atlas' deferred tax asset, weight is given by management to both
positive and negative evidence. GAAP states that a cumulative loss in recent years is a significant piece of negative evidence that
is difficult to overcome in determining that a valuation allowance is not needed against deferred tax assets. However, the strength
and trend of earnings, as well as other relevant factors are considered.
Office equipment and software – Office equipment is stated at historical cost less deprecation. Subsequent costs are included in
the asset’s carrying amount or capitalized as a separate asset only when it is probable that future economic benefits will be realized.
Repairs and maintenance are recognized as an expense during the period incurred. Depreciation on equipment is provided on a
59
straight-line basis over the estimated useful lives which range from 5 years for vehicles, 5 years for furniture, 3 years for software
and computer equipment and the term of the lease for leased equipment.
Rent expense for the lease on Atlas' headquarters is recognized on a straight-line basis over the life of the lease.
Insurance contracts – Contracts under which Atlas’ insurance subsidiaries accept risk at the inception of the contract from another
party (the insured holder of the policy) by agreeing to compensate the policyholder or other insured beneficiary if a specified
future event (the insured event) adversely affects the holder of the policy are classified as insurance contracts. All policies are
short-duration contracts.
Revenue recognition - Premium income is recognized on a pro rata basis over the terms of the respective insurance contracts.
Unearned premiums represent the portion of premiums written that are related to the unexpired terms of the policies in force.
Claims liabilities - The provision for unpaid claims represent the estimated liabilities for reported claims, plus those incurred but
not yet reported and the related estimated loss adjustment expenses, such as legal fees. Unpaid claims expenses are determined
using case-basis evaluations and statistical analyses, including insurance industry loss data, and represent estimates of the ultimate
cost of all claims incurred. Although considerable variability is inherent in such estimates, management believes that the liability
for unpaid claims is adequate. The estimates are continually reviewed and adjusted as necessary; such adjustments are included
in current operations and are accounted for as changes in estimates.
Reinsurance - As part of Atlas’ insurance risk management policies, portions of its insurance risk is ceded to reinsurers. Reinsurance
premiums and claims expenses are accounted for on a basis consistent with those used in accounting for the original policies issued
and the terms of the reinsurance contracts. Premiums and claims ceded to other companies have been reported as a reduction of
premium revenue and claims incurred expense. Commissions paid to Atlas by reinsurers on business ceded have been accounted
for as a reduction of the related policy acquisition costs. Reinsurance receivables are recorded for that portion of paid and unpaid
losses and loss adjustment expenses that are ceded to other companies. Prepaid reinsurance premiums are recorded for unearned
premiums that have been ceded to other companies.
Share-based payments - Atlas has a stock-based compensation plan which is described fully in Note 12 of the Consolidated
Financial Statements. Under U.S. GAAP, the fair-value method of accounting is used to determine and account for equity settled
transactions and to determine stock-based compensation awards granted to employees and non-employees using the Black-Scholes
option pricing model. Compensation expense is recognized over the period that the stock options vest, with a corresponding
increase to additional paid in capital.
For option awards with graded vesting, expense is recognized on a straight line basis over the service period for the entire award.
Operating segments - Atlas is in a single operating segment – property and casualty insurance.
2. NEW ACCOUNTING STANDARDS
In September 2011, the Financial Accounting Standards Board ("FASB") issued amended guidance on testing goodwill for
impairment. This guidance was intended to reduce the cost and complexity of the annual goodwill impairment test by allowing
an entity to utilize more qualitative factors. The Company considered this guidance in the performance of its goodwill impairment
test in the fourth quarter as of December 31, 2013.
In July 2012, the FASB issued amended guidance on testing indefinite lived intangible assets for impairment. This guidance is
intended to reduce the cost and complexity of the annual impairment test by allowing an entity to utilize more qualitative factors.
This guidance is effective for fiscal years beginning after September 15, 2012. This guidance did not affect the Company’s financial
position, result of operations or cash flows.
3. ACQUISITION OF GATEWAY INSURANCE COMPANY
On January 2, 2013 we acquired Camelot Services, Inc. ("Camelot Services"), a privately owned insurance holding company, and
its sole subsidiary, Gateway Insurance Company, or Gateway, from Hendricks Holding Company, Inc., or Hendricks, an unaffiliated
third party. Gateway provides specialized commercial insurance products, including commercial automobile insurance to niche
markets such as taxi, black car and sedan service owners and operators.
Under the terms of the stock purchase agreement, the purchase price equaled the tangible GAAP book value of Camelot Services
at December 31, 2012, subject to certain pre and post-closing adjustments, including, among others, claim development between
the signing of the stock purchase agreement and December 31, 2012. Additional consideration may be paid to the seller, or returned
to us by the seller, depending upon, among other things, the future development of Gateway’s actual loss reserves for certain lines
of business and the utilization of certain deferred tax assets over time. Gateway also writes workers’ compensation insurance.
However, an indemnity reinsurance agreement was entered into pursuant to which 100% of Gateway’s workers’ compensation
business was ceded to a third party captive reinsurer funded by the seller as part of the transaction.
60
The total purchase price for all of Camelot Services’ outstanding shares was $14.3 million, consisting of a combination of cash
and Atlas preferred shares. Consideration consisted of a $6.0 million dividend paid by Gateway immediately prior to the closing,
$2.0 million of Atlas preferred shares (consisting of a total of 2 million preferred shares) and $6.3 million in cash. The agreement
includes contractual protections to offset up to $2.0 million of future reserve development. We have also agreed to provide the
sellers up to $2.0 million in additional consideration in the event of favorable reserve development.
We began consolidating Gateway on January 1, 2013, therefore, Gateway's financial results have not been included in Atlas'
financial results for the year ended December 31, 2012. However, the following unaudited pro forma summary presents Atlas'
consolidated financial information as if Gateway had been acquired on January 1, 2012. These amounts have been calculated after
applying the Company's accounting policies had the acquisition been completed on January 1, 2012. These results were prepared
for comparative purposes only and do not purport to be indicative of the results of operations which may have actually resulted
had the acquisitions occurred on the indicated dates, nor are they indicative of potential future operating results of the Company.
(in '000s)
Year Ended December 31,
Revenue
Net loss
2012
53,708
(1,346)
$
$
The values of certain assets and liabilities acquired are preliminary in nature and are subject to adjustment as additional information
is obtained, including, but not limited to, valuation of separately identifiable intangibles, fixed assets, etc.. These valuations are
to be finalized within one year of the close of the acquisition. When valuations are finalized, any changes to the preliminary
valuation of assets acquired or liabilities assumed may result in adjustments to separately identifiable intangibles or goodwill.
Changes to the purchase price allocation are adjusted retrospectively in the Consolidated Financial Statements.The valuation of
certain assets and liabilities acquired have been finalized since the acquisition occurred on January 1, 2013. The following table
presents assets acquired and liabilities assumed from the Gateway acquisition based on the Company's assessment of fair value
as of January 1, 2013:
(in '000s)
Purchase Consideration
Cash
Preferred stock
Total
Allocation of Purchase Price
Cash and investments
Accounts receivable and other assets
Reinsurance recoverables
Intangible assets
Property and equipment
Deferred policy acquisition costs
Total Assets
Claims liabilities
Unearned premiums
Accounts payable and other liabilities
Total Liabilities
Net assets acquired
$
$
$
$
$
$
$
12,282
2,000
14,282
45,421
9,249
6,007
740
923
1,234
63,574
36,209
9,601
3,482
49,292
14,282
The acquisition of Gateway resulted in the recognition of intangible assets, comprised entirely of state insurance licenses valued
at $740,000. The state insurance licenses are considered to have an infinite life and will not be amortized, but will be evaluated
for impairment at least annually. Thus, Atlas recognized no amortization expense during the year ended December 31, 2013 related
to intangible assets acquired in the Gateway transaction.
Atlas incurred $406,000 in legal and professional fee expenses related to the transaction during the the first quarter of 2013. Atlas
incurred $337,000 in one-time employee termination costs during the year ended December 31, 2013, plans for which were
formulated in the same period, and also incurred $372,000 of additional interim transition/integration costs. These termination
and transition/integration costs are included in "Other Underwriting Expenses" on the Consolidated Statements of Income and
61
Comprehensive Income. The objective of the restructuring is to eliminate managerial and staff positions deemed duplicative
subsequent to the acquisition. Activity related to the employee termination plan for the year ended December 31, 2013 is as follows
(in '000s):
Balance - beginning of period
Recognized in earnings
Spending
Balance - end of period
4. EARNINGS PER SHARE
Employee Termination
Costs
$
$
—
337
(337)
—
Earnings per ordinary and restricted common share (collectively, the "common shares") for the years ended December 31, 2013
and December 31, 2012 are as follows ($ in '000's except for share and per share amounts):
Basic:
Net income attributable to Atlas
Add: Discount from preferred share buyback
Less: Preferred share dividends
Net income attributable to common shareholders for basic earnings per common share
Weighted average common shares outstanding
Basic earnings per common share
Diluted:
Net income attributable to Atlas
Add: Discount from preferred share buyback
Net income attributable to common shareholders for dilutive earnings per common share
Weighted average common shares outstanding
Dilutive potential ordinary shares:
Dilutive stock options outstanding
Dilutive warrants
Dilutive shares upon preferred share conversion
Dilutive average common shares outstanding
Dilutive earnings per common share
2013
2012
$
$
$
$
$
$
6,180
1,800
619
7,361
8,007,458
0.92
6,180
1,800
7,980
8,007,458
87,825
1,158,085
1,587,500
10,840,868
0.74
$
$
$
$
$
$
3,166
—
810
2,356
6,144,281
0.38
3,166
—
3,166
6,144,281
4,667
—
2,286,000
8,434,948
0.38
Diluted earnings per common share is computed by dividing net income attributable to Atlas by the weighted average number of
common shares outstanding for each period plus the incremental number of shares added as a result of converting dilutive potential
ordinary shares, calculated using the treasury stock method (or, in the case of the convertible preferred shares, using the "if-
converted" method).
As of the year ended December 31, 2013 there were no outstanding warrants and 18 million preferred shares were repurchased
on August 1, 2013. Atlas’ dilutive potential ordinary shares consist of outstanding stock options to purchase ordinary common
shares and 2,000,000 preferred shares potentially convertible to ordinary common shares at the option of the holder at any date
after December 31, 2015 at the rate of 0.1270 ordinary common shares for each preferred share. The effects of these convertible
instruments are excluded from the computation of diluted earnings per share in periods in which the effect would be anti-dilutive.
Convertible preferred shares are anti-dilutive when the amount of dividend declared or accumulated in the current period per
common share obtainable upon conversion exceeds basic earnings per share. As of the year ended December 31, 2013 and the
year ended December 31, 2012, convertible preferred shares and stock options were deemed to be dilutive.
In computing the diluted earnings per share on a year to date basis, the Company included the dilutive impact of the convertible
preferred shares that were redeemed during the third quarter of 2013 on a pro-rata basis for the period during which those convertible
preferred shares were outstanding. This dilutive impact increased the denominator in the full year 2013 diluted EPS computation
by 1,333,500 shares; however, this has no impact on the actual earnings used for the numerator in the EPS computation. The
preferred shares redeemed decreased diluted earnings per share for the year by $0.10. Future diluted earnings per share computations
will not be impacted by the convertible impact of the preferred shares redeemed.
5. INVESTMENTS
62
The amortized cost, gross unrealized gains and losses and fair value for Atlas’ investments in fixed maturities, equities and other
investments are as follows (all amounts in '000s):
December 31, 2013
Fixed Income:
U.S.
Government
Corporate
Banking/Financial Services
Consumer Goods
Capital Goods
Energy
Telecommunications/Utilities
Health Care
Total Corporate
Mortgage backed - Agency
Mortgage backed - Commercial
Total Mortgage backed
Other asset backed
Total Fixed Income
Equities
Other investments
Totals
December 31, 2012
Fixed Income:
U.S.
Government
Corporate
Banking/Financial Services
Consumer Goods
Capital Goods
Energy
Telecommunications/Utilities
Health Care
Total Corporate
Mortgage backed - Agency
Mortgage backed - Commercial
Total Mortgage backed
Other asset backed
Total Fixed Income
Equities
Other investments
Totals
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
$ 22,067 $
36 $
620 $ 21,483
16,655
5,044
12,951
3,928
4,979
2,025
45,582
28,877
22,131
51,008
12,093
$ 130,750 $
258
1,234
$ 132,242 $
238
28
208
—
50
—
524
120
53
173
15
748 $
—
—
748 $
247
77
180
114
55
87
760
910
614
1,524
9
16,646
4,995
12,979
3,814
4,974
1,938
45,346
28,087
21,570
49,657
12,099
2,913 $ 128,585
258
1,234
2,913 $ 130,077
—
—
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
$ 15,313 $
417 $
3 $ 15,727
10,576
4,404
12,691
4,208
2,314
1,728
35,921
19,681
20,387
40,068
4,121
$ 95,423 $
1,563
1,262
$ 98,248 $
376
66
506
159
110
37
1,254
461
433
894
123
2,688 $
8
—
2,696 $
10,947
5
4,461
9
13,195
2
4,367
—
2,424
—
1,765
—
37,159
16
20,136
6
20,813
7
40,949
13
—
4,244
32 $ 98,079
1,571
—
—
1,262
32 $ 100,912
Atlas' other investment is in a limited partnership that primarily invests in income-producing real estate. Atlas' interest is not
deemed minor and the investment is accounted for under the equity method of accounting. As of the year ended December 31,
2013, the carrying value was approximately $1.2 million versus approximately $1.3 million as of the year ended December 31,
2012. The carrying value of this investment is Atlas' share of the net book value, an amount that approximates fair value. Atlas
receives dividends on a routine basis which approximate the income earned on the investment.
The following tables summarize carrying amounts of fixed income securities by contractual maturity (all amounts in '000s). As
certain securities and debentures have the right to call or prepay obligations, the actual settlement dates may differ from contractual
maturity.
63
As of the year ended December 31, 2013
Fixed income securities
Percentage of total
One year or
less
One to five
years
Five to ten
years
More than
ten years
Total
$
7,571
$ 43,693
$ 28,080
$ 49,241
$ 128,585
5.9%
34.0%
21.8%
38.3%
100.0%
As of the year ended December 31, 2012
Fixed income securities
Percentage of total
One year or
less
9,513
$
One to five
years
$ 23,124
Five to ten
years
$ 20,524
More than
ten years
$ 44,918
$
9.7%
23.6%
20.9%
45.8%
Total
98,079
100.0%
Management performs a quarterly analysis of Atlas’ investment holdings to determine if declines in fair value are other than
temporary. The analysis includes some or all of the following procedures as deemed appropriate by management:
identifying all security holdings in unrealized loss positions that have existed for at least six months or other circumstances
that management believes may impact the recoverability of the security;
obtaining a valuation analysis from third party investment managers regarding these holdings based on their knowledge,
experience and other market based valuation techniques;
reviewing the trading range of certain securities over the preceding calendar period;
assessing if declines in market value are other than temporary for debt security holdings based on credit ratings from
third party security rating agencies; and
determining the necessary provision for declines in market value that are considered other than temporary based on the
analyses performed.
The risks and uncertainties inherent in the assessment methodology utilized to determine declines in market value that are other
than temporary include, but may not be limited to, the following:
the opinion of professional investment managers could be incorrect;
the past trading patterns of individual securities may not reflect future valuation trends;
the credit ratings assigned by independent credit rating agencies may be incorrect due to unforeseen or unknown facts
related to a company’s financial situation; and
the debt service pattern of non-investment grade securities may not reflect future debt service capabilities and may not
reflect a company’s unknown underlying financial problems.
As a result of the above analysis performed by management to determine declines in fair value that may be other than temporary
there was an impairment related to an equity position that was recorded in 2013. The Company reduced the fair value of its equity
position by $311,000 and recorded an adjustment through the Consolidated Statements of Income and Comprehensive Income to
account for this other than temporary impairment.
As of the year ended December 31, 2013, a portion of Atlas' portfolio was in an unrealized loss position. This was primarily driven
by a rise in the 5-year US Treasury interest rates during the second half of 2013. All securities in an unrealized loss position as
of December 31, 2013 and December 31, 2012 have been in said position for less than 12 months. The total fair value of the
securities currently in an unrealized loss position were $106.3 million at December 31, 2013 with a total temporary impairment
relating to unrealized losses of $2.2 million. Atlas has the ability and intent to hold these securities until their fair value is recovered.
Therefore, Atlas does not expect the near term change in market value of these securities to be realized.
The following table summarizes the components of net investment income for the years ended December 31, 2013 and 2012 (all
amounts in '000s):
Total investment income
Interest income
Dividends
Income from other investments
Investment expenses
Net investment income
2013
2012
$ 2,716 $ 2,757
19
55
(378)
$ 2,141 $ 2,453
9
(84)
(500)
The following table summarizes the components of net investment realized gains for the years ended December 31:
64
Fixed income securities
Equities (losses) / gains
Net investment realized gains
Collateral pledged:
2013
2012
$
$
351 $
178
529 $ 1,435
799
636
At December 31, 2013, bonds and term deposits with a fair value of $14.5 million were on deposit with state and provincial
regulatory authorities, versus $9.8 million at December 31, 2012. Also, from time to time, the Company pledges securities to third
parties to collateralize liabilities incurred under its policies of insurance. At the year ended December 31, 2013, the amount of
such pledged securities was $7.9 million versus $8.3 million at December 31, 2012. Collateral pledging transactions are conducted
under terms that are common and customary to standard collateral pledging and are subject to the Company’s standard risk
management controls. These assets and investment income related thereto remain the property of the Company while pledged.
Neither the state and/or provincial regulatory authorities nor any other third party has the right to re-pledge or sell said securities
held on deposit.
6. FINANCIAL AND CREDIT RISK MANAGEMENT
By virtue of the nature of Atlas’ business activities, financial instruments make up the majority of the balance sheet. The risks
which arise from transacting financial instruments include credit risk, market risk, liquidity risk and cash flow risk. These risks
may be caused by factors specific to an individual instrument or factors affecting all instruments traded in the market. Atlas has
a risk management framework in place to monitor, evaluate and manage the risks assumed in conducting its business. Atlas’ risk
management policies and practices are as follows:
Credit risk - Atlas is exposed to credit risk principally through its fixed income securities and balances receivable from
policyholders and reinsurers. Atlas controls and monitors concentration and credit quality risk through policies to limit and monitor
its exposure to individual issuers or related groups (with the exception of U.S. Government bonds) as well as through ongoing
review of the credit ratings of issuers held in the securities portfolio. Atlas’ credit exposure to any one individual policyholder is
not material. Atlas has policies requiring evaluation of the financial condition of its reinsurers and monitors concentrations of
credit risk arising from similar geographic regions, activities, or economic characteristics of the reinsurers to minimize its exposure
to significant losses from reinsurer insolvency.
As of the year ended December 31, 2013, Atlas' allowance for bad debt was $776,000. Atlas' allowance for bad debt increased by
$292,000 compared to $484,000 as of the year ended December 31, 2012. This increase does not relate to any specific uncollectible
account but rather relates to formulaic modeling utilizing historic bad debt patterns and correlates to the increase in accounts
receivable experienced during 2013.
Equity price risk - This is the risk of loss due to adverse movements in equity prices. Atlas' investment in equity securities
comprises a small percentage of its total portfolio, and as a result, the exposure to this type of risk is minimal.
Foreign currency risk - Atlas is not currently exposed to material changes in the U.S. dollar currency exchange rates with any
other foreign currency.
Liquidity and cash flow risk - Liquidity risk is the risk of having insufficient cash resources to meet current financial obligations
without raising funds at unfavorable rates or selling assets on a forced basis. Liquidity risk arises from general business activities
and in the course of managing the assets and liabilities of Atlas. There is the risk of loss to the extent that the sale of a security
prior to its maturity is required to provide liquidity to satisfy policyholder and other cash outflows. Cash flow risk arises from risk
that future inflation of policyholder cash flow exceeds returns on long-term investment securities. The purpose of liquidity and
cash flow management is to ensure that there is sufficient cash to meet all financial commitments and obligations as they fall due.
The liquidity and cash flow requirements of Atlas’ business have been met primarily by funds generated from operations, asset
maturities and income and other returns received on securities. Cash provided from these sources is used primarily for claims and
claim adjustment expense payments and operating expenses. The timing and amount of catastrophe claims are inherently
unpredictable and may create increased liquidity requirements.
Fair value - Fair value amounts represent estimates of the consideration that would currently be agreed upon between
knowledgeable, willing parties who are under no compulsion to act.
Atlas records the available for sale securities held in its securities portfolio at their fair value. Atlas primarily uses the services of
external securities pricing vendors to obtain these values. The securities are valued using quoted market prices or prices established
using observable market inputs. In volatile market conditions, these quoted market prices or observable market inputs can change
rapidly causing a significant impact on fair value and financial results recorded.
Atlas employs a fair value hierarchy to categorize the inputs it uses in valuation techniques to measure the fair value. The hierarchy
is comprised of quoted market prices (Level 1), third party models using observable market information (Level 2) and internal
65
models without observable market information (Level 3). The following table summarizes Atlas' investments at fair value as at
the year ended December 31, 2013 and as of the year ended December 31, 2012 (all amounts in '000s):
December 31, 2013
Fixed income securities
Equities
Other investments
Totals
December 31, 2012
Fixed income securities
Equities
Other investments
Totals
Level 1
Level 2
Level 3
Total
$
12,624 $ 115,344 $
258
—
—
—
$
12,882 $ 115,344 $
617 $ 128,585
258
—
1,234 $
1,234
1,851 $ 130,077
Level 1
Level 2
Level 3
Total
$
$
9,843 $
1,571
—
11,414 $
88,002 $
—
—
88,002 $
98,079
234 $
1,571
—
1,262 $
1,262
1,496 $ 100,912
Of the total portfolio of fixed income securities, only holdings of U.S. Treasury Securities are classified within Level 1. There
were no transfers in or out of Level 2 or Level 3 during either period.
The fair value of the fixed income security in Level 3 was calculated using risk-adjusted value ranges and estimates, and the asset
is the same at December 31, 2013 as at December 31, 2012. The other investment in Level 3 at December 31, 2013 is also the
same as at December 31, 2012. Its effect on income has been immaterial during both 2013 and 2012. Both securities received
Level 3 classification due to the absence of fair value quotes from Atlas' third party valuation service provider.
Though Atlas believes its valuation methods are appropriate, the use of different methodologies or assumptions to determine its
fair value could result in a different fair value as of December 31, 2013. Management does not believe that reasonable changes to
the inputs to its valuation methodology would result in a significantly higher or lower fair value measurement.
Capital management - The Company manages capital using both regulatory capital measures and internal metrics. The Company’s
capital is primarily derived from common shareholders’ equity, retained deficit and accumulated other comprehensive income
(loss).
As a holding company, Atlas could derive cash from its insurance subsidiaries generally in the form of dividends to meet its
obligations, which will primarily consist of operating expense payments. Atlas’ insurance subsidiaries fund their obligations
primarily through premium and investment income and maturities in the securities portfolio. The insurance subsidiaries require
regulatory approval for the return of capital and, in certain circumstances, prior to the payment of dividends. In the event that
dividends available to the holding company are inadequate to cover its operating expenses, the holding company would need to
raise capital, sell assets or incur future debt.
The insurance subsidiaries must each maintain a minimum statutory capital and surplus of $1.5 million and $2.4 million under
the provisions of the Illinois Insurance Code and the Missouri Insurance Code, respectively. Dividends may only be paid from
statutory unassigned surplus, and payments may not be made if such surplus is less than a stipulated amount. The dividend restriction
is the greater of statutory net income or 10% of total statutory capital and surplus. As of December 31, 2013, all dividends required
prior regulatory approval prior to distribution.
Net income computed under statutory-basis accounting was $1.6 million, $3.6 million and $2.1 million for American Country,
American Service and Gateway, respectively. Net income for the year ended December 31, 2012 was $457,000 for American
Country while American Service and Gateway generated net losses of $1.6 million and $12.1 million, respectively. Statutory
capital and surplus of the insurance subsidiaries was $53.1 million and $52.2 million (without Gateway for 2012) at December
31, 2013 and 2012, respectively.
Atlas did not declare or pay any dividends to its common shareholders during the year ended December 31, 2013 or in the year
ended December 31, 2012.
7. INCOME TAXES
The effective tax rate was 1.2% and 0.0% for the years ended December 31, 2013 and 2012, respectively, compared to the U.S.
statutory income tax rate of 34% as shown below ($ in '000s):
66
Expected income tax expense at statutory rate
Change in valuation allowance
Nondeductible expenses
State tax (net of federal benefit)
Tax net operating loss limitation write-down (excluding valuation allowance)
Other
Total
2013
2012
Amount
2,126
$
(2,802)
100
47
626
(25)
72
$
%
34.0 % $
(44.8)%
1.6 %
0.8 %
10.0 %
(0.4)%
1.2 % $
Amount
1,076
(1,119)
48
—
—
(5)
—
%
34.0 %
(35.3)%
1.5 %
— %
— %
(0.2)%
— %
Income tax expense consists of the following for the year ended December 31, 2013 and December 31, 2012:
Current tax expense
Deferred tax benefit, net of change in valuation allowance
Total
2013
2012
$
$
1,144 $
(1,072)
72 $
—
—
—
Upon the transaction forming Atlas on December 31, 2010, a yearly limitation as required by U.S. tax law Section 382 that applies
to changes in ownership on the future utilization of Atlas’ net operating loss carry-forwards was calculated. The insurance
subsidiaries’ prior parent retained those tax assets previously attributed to the insurance subsidiaries which could not be utilized
by Atlas as a result of this limitation. As a result, Atlas’ ability to recognize future tax benefits associated with a portion of its
deferred tax assets generated during prior years and the current year have been permanently limited to the amount determined
under U.S. tax law Section 382. The result is a maximum expected net deferred tax asset which Atlas has available after the merger
which is believed more-likely-than-not to be utilized in the future, after consideration of valuation allowance.
On July 22, 2013, as a result of shareholder activity, a "triggering event" as determined under IRC Section 382 was reached. As
a result, under IRC Section 382, the use of the Company's net operating loss and other carryforwards will be limited as a result of
this "ownership change” for tax purposes, which is defined as a cumulative change of more than 50% during any three-year period
by shareholders of the Company's shares.
Following this triggering event, the Company estimates that it will retain total tax effected federal net operating loss carryforwards
of approximately $15.3 million as of December 31, 2013. Book value per common share is unaffected by this event as the amount
of lost net deferred tax assets of $578,000 were offset by a corresponding decrease in the valuation allowance which was already
held against the majority of these assets. The completion and filing of the Company's 2013 U.S. Federal tax return will determine
the final adjustment.
The components of deferred income tax assets and liabilities as of December 31, 2013 and December 31, 2012 are as follows (all
amounts in '000s):
Deferred tax assets:
Unpaid claims and unearned premiums
Taxable loss carry-forwards
Bad debts
Other
Valuation allowance
Total deferred tax assets, net of allowance
Deferred tax liabilities:
Investment securities
Deferred policy acquisition costs
Other
Total gross deferred tax liabilities
Net deferred tax assets
December 31,
2013
December 31,
2012
$
$
4,783 $
15,265
264
1,446
(9,446)
12,312
345
2,269
379
2,993
9,319 $
3,144
16,128
164
907
(11,242)
9,101
910
1,280
306
2,496
6,605
Amounts and expiration dates of the operating loss carry forwards as of December 31, 2013 are as follows (all amounts in '000s):
67
Year of Occurrence
2001
2002
2006
2007
2008
2009
2010
2011
2012
Total
Year of Expiration
2021
2022
2026
2027
2028
2029
2030
2031
2032
Amount
11,378
4,317
7,825
3,763
1,949
1,949
2,296
10,183
1,237
44,897
$
$
Atlas established a valuation allowance of $9.4 million and $11.2 million for its gross deferred tax assets as of the year ended
December 31, 2013 and as of the year ended December 31, 2012, respectively.
In assessing the need for a valuation allowance, Atlas considers both positive and negative evidence related to the likelihood of
realization of the deferred tax assets. If, based on the weight of available evidence, it is more likely than not the deferred tax assets
will not be realized or if it is deemed premature to conclude that these assets will be realized in the near future, a valuation allowance
is recorded. The weight given to the positive and negative evidence is commensurate with the extent to which the evidence may
be objectively verified. GAAP states that a cumulative loss in recent years is a significant piece of negative evidence that is difficult
to overcome in determining that a valuation allowance is not needed against deferred tax assets. Atlas' assessment also considered
the recent spin-off from prior ownership, the nature and extent of cumulative financial losses and trends in recent quarterly earnings.
The Company has been reducing its valuation allowance against deferred tax assets by an amount equal to the amount of income
tax expense generated for the period. The Company will continue this process until such time as management determines that
certain specific events warrant a reassessment of this policy which could result in future reductions or the elimination of the
valuation allowance. These events include but are not limited to continued underwriting profitability, the lack of significant prior
year loss reserve development, continuing favorable market conditions, continued positive trend in taxable earnings, and other
such indications deemed positive.
Atlas accounts for uncertain tax positions in accordance with the income taxes accounting guidance. Atlas has analyzed filing
positions in the federal and state jurisdiction where it is required to file tax returns, as well as the open tax years in these jurisdictions.
Atlas believes that its federal and state income tax filing positions and deductions will be sustained on audit and does not anticipate
any adjustments that will result in a material change to its financial position. Therefore, no reserves for uncertain federal and state
income tax positions have been recorded. Atlas would recognize interest and penalties related to unrecognized tax benefits as a
component of the provision for federal income taxes. Atlas did not incur any federal income tax related interest income, interest
expense or penalties for the years ended December 31, 2013 or 2012. Tax years 2009 through 2013 are subject to examination by
the Internal Revenue Service.
8. ASSETS HELD FOR SALE
On May 22, 2012, Atlas closed the sale of the headquarters building to 150 Northwest Point, LLC, a Delaware limited liability
company. The total sales price of the property, which was paid in cash, amounted to $14.0 million, less closing costs and related
expenses of approximately $633,000. In connection with the sale, the Company also wrote down an accrual of approximately
$792,000 held for real-estate taxes. Approximately $830,000 of the sales price was held in escrow for real-estate taxes. Atlas
recognized a gain on the sale of this property of $213,000, which will be deferred and recognized over the 5 year lease term. Atlas
recognized $43,000 and $26,000 as an offset to rent expense for the years ended December 31, 2013 and 2012, respectively. Total
rental expense recognized on the headquarters building was $699,000 and $357,000 for the years ended December 31, 2013 and
2012, respectively. There are two properties located in Alabama which are still for sale. These properties are listed for sale for
amounts greater than carried values. Both were assets of Southern United Fire Insurance Company, which was merged into
American Service in February 2010.
As of December 31, 2013, Atlas has the following cash obligations related to its lease of its headquarters building.
Lease Commitments Related to Headquarters Building (in '000s)
Year
2014
2015
2016
2017
2018 & Beyond
Total
Amount
$
672 $
692 $
713 $
281 $
— $
2,358
9. INTERNAL USE SOFTWARE AND CAPITAL ASSETS
68
Atlas held the following internal-use software and capital assets at December 31 (excluding assets held for sale):
Leasehold improvements
Internal use software
Computer equipment
Furniture and other office equipment
Total
Accumulated Depreciation
Balance, end of period
2013
2012
$
$
501
6,344
1,750
394
8,989
(6,489)
2,500
$
$
501
4,560
1,505
306
6,872
(5,735)
1,137
10. UNDERWRITING POLICY AND REINSURANCE CEDED
Underwriting Risk - Underwriting risk is the risk that the total cost of claims and acquisition expenses will exceed premiums
received and can arise from numerous factors, including pricing risk, reserving risk, catastrophic loss risk, reinsurance coverage
risk and that loss and loss adjustment expense reserves are not sufficient.
Reinsurance Ceded - As is customary in the insurance industry, Atlas reinsures portions of certain insurance policies it writes,
thereby providing a greater diversification of risk and minimizing exposure on larger risks. Atlas remains contingently at risk with
respect to any reinsurance ceded and would incur an additional loss if an assuming company were unable to meet its obligation
under the reinsurance treaty.
Atlas monitors the financial condition of its reinsurers to minimize its exposure to significant losses from reinsurer insolvencies.
Letters of credit are maintained for any unauthorized reinsurer to cover ceded unearned premium, ceded loss reserve balances and
ceded paid losses. These policies mitigate the risk of credit quality or dispute from becoming a danger to financial strength. To
date, the Company has not experienced any material difficulties in collecting reinsurance recoverables.
Gross premiums written and ceded premiums, losses and commissions as of and for the years ended December 31, 2013 and
December 31, 2012 are as follows (all amounts in '000s):
Gross premiums written
Ceded premiums written
Net premiums written
Ceded premiums earned
Ceded losses and loss adjustment expenses
Ceding commissions
Ceded unpaid losses and loss adjustment expenses
Prepaid reinsurance premiums
Other amounts due from reinsurers
11. UNPAID CLAIMS
2013
2012
$ 93,060 $ 55,050
6,472
48,578
12,580
80,480
12,542
4,883
2,241
18,144
2,207
1,003
6,575
3,628
5,441
5,680
2,111
340
Claims liabilities - The changes in the provision for unpaid claims, net of amounts recoverable from reinsurers, for the years
ended December 31, 2013 and December 31, 2012 were as follows (all amounts in '000s):
69
As of the year ended December 31,
Unpaid claims, beginning of period
Less: reinsurance recoverable
Net beginning unpaid claims reserves
Net reserves acquired
Loss portfolio transfer
Incurred related to:
Current year
Prior years
Paid related to:
Current year
Prior years
Net unpaid claims, end of period
Add: reinsurance recoverable
Unpaid claims, end of period
2013
2012
$ 70,067
$
91,643
5,680
64,387
29,923
(5,919)
7,825
83,818
—
—
45,604
26,329
8
216
45,612
26,545
12,874
37,888
50,762
8,925
37,051
45,976
$ 83,241
$
64,387
18,144
5,680
$ 101,385
$
70,067
The process of establishing the estimated provision for unpaid claims is complex and imprecise as it relies on the judgment and
opinions of a large number of individuals, on historical precedent and trends, on prevailing legal, economic, social and regulatory
trends and on expectations as to future developments. The process of determining the provision necessarily involves risks that the
actual results will deviate, perhaps substantially, from the best estimates made. Atlas experienced minimal unfavorable prior year
development in 2013 and 2012, reflected as incurred related to prior years in the table above. The unfavorable prior year development
relates to various non-core lines.
12. STOCK OPTIONS AND WARRANTS
Stock options - Stock option activity for the year ended December 31, 2013 and December 31, 2012 follows (all prices in Canadian
dollars):
2013
2012
Outstanding, beginning of period
Granted
Exercised
Expired
Outstanding, end of period
Information about options outstanding at December 31, 2013 is as follows:
Number
133,955 $
91,668
(1,000)
—
224,623 $
Avg. Price
5.76
6.45
3.00
—
6.05
Number
136,114 $
—
(922)
(1,237)
133,955 $
Avg. Price
5.70
—
3.00
3.00
5.76
Grant Date
January 11, 2013
January 18, 2011
March 18, 2010
Total
Expiration Date
January 11, 2023
January 18, 2021
March 18, 2020
Number Outstanding
Number Exercisable
91,668
123,255
9,700
224,623
22,917
61,628
9,700
94,245
On January 11, 2013, Atlas granted options to purchase 91,668 ordinary shares of Atlas stock to officers at an exercise price of
C$6.45 per share. The options vest 25% at date of grant and 25% on each of the next three anniversary dates and expire on January
11, 2023.
70
On January 18, 2011, Atlas granted options to purchase 123,255 ordinary shares of Atlas stock to officers and directors at an
exercise price of C$6.00 per share. The options vest 25% at date of grant and 25% on each of the next three anniversary dates and
expire on January 18, 2021.
The Black-Scholes option pricing model was used to estimate the fair value of compensation expense using the following
assumptions – risk-free interest rate 2.27% to 3.13%; dividend yield 0.0%; expected volatility 100%; expected life of 6 to 9 years.
In accordance with U.S. GAAP, Atlas has recognized stock compensation expense on a straight-line basis over the requisite service
period of the last separately vesting portion of the award. Atlas recognized $247,000 and $113,000 in expense for the years ended
December 31, 2013 and 2012, respectively, which is a component of other underwriting expenses on the income statement. Total
unrecognized stock compensation expense of $113,000 associated with the January 18, 2011 grant and $281,000 associated with
the January 11, 2013 grant as of the year ended December 31, 2013 which will be recognized ratably through the next 2 years.
The weighted average exercise price of all the shares exercisable at December 31, 2013 and December 31, 2012 was C$6.05 and
C$5.76 and the grants have a weighted average remaining life of 7.8 years. The outstanding stock options have an intrinsic value
of $2.0 million as of the year ended December 31, 2013.
Warrants - On November 1, 2010, American Acquisition closed a private placement where it issued 1,327,840 subscription
receipts for ordinary voting common shares of Atlas and warrants to purchase 1,327,840 ordinary voting common shares of Atlas
for C$6.00 per share in connection with the merger. The subscription receipts were converted to Atlas ordinary common shares
in connection with the merger. All the warrants were exercised on or before December 31, 2013 and 1,327,840 ordinary common
shares were issued as a result. There were no warrants that had expired on December 31, 2013.
Atlas' closing stock price on December 31, 2013 was $14.72.
13. OTHER EMPLOYEE BENEFIT PLANS
Defined Contribution Plan - In January 2011, Atlas formed a defined contribution 401(k) plan covering all qualified employees
of Atlas and its subsidiaries. Employees can choose to contribute up to 60% of their annual earnings but not more than $17,500
for 2013 to the plan. Qualifying employees age 50 and older can contribute an additional $5,500 in 2013. Atlas matches 50% of
the employee contribution up to 5% of annual earnings for a total maximum expense of 2.5% of annual earnings per participant.
Atlas contributions are discretionary. Employees are 100% vested in their own contributions and vest in Atlas contributions based
on years of service with 100% vested after five years. Company contributions were $118,000 and $110,000, for the years ended
December 31, 2013 and December 31, 2012, respectively.
Employee Stock Purchase Plan - In the second quarter of 2011, Atlas initiated the Atlas Employee Stock Purchase Plan (the
“ESPP”) to encourage continued employee interest in the operation, growth and development of Atlas and to provide an additional
investment opportunity to employees. Beginning in June 2011, full time and permanent part time employees working more than
30 hours per week are allowed to invest up to 5% of adjusted salary in Atlas ordinary voting common shares. Atlas matches 50%
of the employee contribution up to 5% of annual earnings for a total maximum expense of 2.5% of annual earnings per participant.
Employees who signed up for the ESPP by May 30, 2011 each received an additional 100 ordinary common shares as an initial
participation incentive. Atlas will also pay administrative costs related to this plan. During the years ended December 31, 2013
and December 31, 2012, Atlas incurred costs related to the plan of $58,000 and $51,000, respectively.
14. SHARE CAPITAL
On December 7, 2012, a shareholder meeting was held where a one-for-three reverse stock split was unanimously approved. When
the reverse stock split took effect on January 29, 2013, it decreased the authorized and outstanding ordinary common shares and
restricted common shares at a ratio of one-for-three. The primary objective of the reverse stock split was to increase the per share
price of Atlas' common shares to meet certain listing requirements of the NASDAQ Capital Market. The share capital for the
common shares is as follows:
As of December 31,
Ordinary
Restricted
Total common shares
2013
2012
Shares
Authorized
Shares Issued
and
Outstanding
Amount
(in '000s)
Shares
Issued and
Outstanding
Amount
(in '000s)
266,666,667
9,291,871 $
28
2,256,921
33,333,334
132,863
— 3,887,471
300,000,001
9,424,734 $
28
6,144,392
$
$
4
14
18
On February 11, 2013, an aggregate of 4,125,000 Atlas ordinary common shares were offered in Atlas' initial public offering in
the United States. 1,500,000 ordinary common shares were offered by Atlas and 2,625,000 ordinary common shares were sold by
Kingsway at a price of $5.85 per share, less underwriting discounts and expenses. Atlas also granted the underwriters an option
to purchase up to an aggregate of 618,750 additional ordinary common shares at the public offering price of $5.85 per share to
71
cover over-allotments, if any. On March 11, 2013, the underwriters exercised this option and purchased an additional 451,500
ordinary common shares. After underwriting and other expenses, Atlas realized combined proceeds of $9.8 million.
All of the issued and outstanding restricted common shares are beneficially owned or controlled by Kingsway. The restricted
common shares are entitled to vote at all meetings of shareholders, except at meetings of holders of a specific class that are entitled
to vote separately as a class. The restricted common shares as a class shall not carry more than 30% of the aggregate votes eligible
to be voted at a general meeting of common shareholders. The restricted common shares will convert to ordinary common shares
in the event that these Kingsway owned shares are sold to non-affiliates of the Company.
During 2013, Atlas declared and paid $2.1 million in dividends earned through the preferred shares to Kingsway, the cumulative
amount to which they were entitled through the end of July 2013.
On August 1, 2013, Atlas repurchased 18,000,000 preferred shares owned by Kingsway pursuant to the Share Repurchase
Agreement. Atlas recorded a $1.8 million benefit related to the discount on the repurchase of these shares from Kingsway.
On October 18, 2013 and on November 13, 2013, Kingsway notified the Company that it had sold 529,608 and 600,000 of its
restricted common shares, respectively, bringing its restricted common share count to 132,863 or 1.4% of the outstanding common
shares as of December 31, 2013.
During 2013, 1,327,840 warrants and 1,000 options were exercised which resulted in the issuance of 1,328,840 common shares.
The remaining outstanding preferred shares are not entitled to vote and are beneficially owned or controlled by Hendricks as of
the year ended December 31, 2013. Preferred shareholders are entitled to dividends on a cumulative basis whether or not declared
by the Board of Directors at the rate of $0.045 per share per year (4.5%) and may be paid in cash or in additional preferred shares
at the option of Atlas. In liquidation, dissolution or winding-up of Atlas, preferred shareholders receive the greater of $1.00 per
share plus all declared and unpaid dividends or the amount it would receive in liquidation if the preferred shares had been converted
to restricted voting common shares or ordinary voting common shares immediately prior to liquidation. Preferred shares are
convertible into ordinary voting shares at the option of the holder at any date after the fifth year of issuance at the rate of 0.1270
ordinary voting common shares for each preferred share. The conversion rate is subject to change if the number of ordinary voting
common shares or restricted voting common shares changes. The preferred shares are redeemable at the option of Atlas at a price
of $1.00 per share plus accrued and unpaid dividends commencing at two years from January 1, 2013 (the issuance date of the
preferred shares).
The cumulative amount of dividends to which the preferred shareholders are entitled upon liquidation or sooner, if Atlas declares
dividends, is $90,000 as of the year ended December 31, 2013, or $0.01 per common share.
15. DEFERRED POLICY ACQUISITION COSTS
Deferred policy acquisition costs for the year ended December 31, 2013 and December 31, 2012 (in '000s):
Balance, beginning of period
Acquisition costs deferred
Amortization charged to income
Balance, end of period
16. RELATED PARTY TRANSACTIONS
2013
2012
$
$
3,764
$
13,283
10,373
6,674
$
3,020
7,215
6,471
3,764
The business of Atlas is carried on through its insurance subsidiaries. Atlas’ insurance subsidiaries have been a party to various
transactions with affiliates in the past, although activity in this regard has diminished over time. Related party transactions,
including services provided to or received by Atlas’ insurance subsidiaries, are carried out in the normal course of operations and
are measured at the amount of consideration paid or received as established and agreed upon by the parties. Such transactions
typically include claims handling services, marketing services and commission payments. Management believes that consideration
paid for such services approximates fair value.
As a result of the preferred shares repurchased by the Company on August 1, 2013 pursuant to the Share Repurchase Agreement
and the restricted shares sold by Kingsway on October 18, 2013 and on November 13, 2013, Atlas is no longer part of the Kingsway
holding company system and therefore is not considered a related party to Kingsway as of December 31, 2013.
As at December 31, 2012, Atlas reported net amounts receivable from (payable to) affiliates as follows which are included within
other assets and accounts payable and accrued expenses on the balance sheets (all amounts in '000s):
72
As of December 31,
Kingsway America, Inc.
Kingsway Amigo Insurance Company
Total
2012
43
1
44
$
$
17. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
(in ‘000s, except per share data)
Gross premium written
Net premium earned
Underwriting income
Net income attributable to Atlas
Net income attributable to common shareholders
Basic earnings per common share
Diluted earnings per common share
(in ‘000s, except per share data)
Gross premium written
Net premium earned
Underwriting income/(loss)
Net income attributable to Atlas
Net income/(loss) attributable to common shareholders
Basic earnings/(loss) per common share
Diluted earnings/(loss) per common share
18. SUBSEQUENT EVENTS
Stock and Option Grants
2013
Q4
Q3
Q2
Q1
$ 22,069 $ 32,075 $ 16,562 $ 22,354
20,512
17,976
16,968
15,888
1,753
2,178
2,155
1,096
1,699
3,404
828
1,701
1,476
$
$
0.25 $
0.22 $
0.41 $
0.39 $
0.18 $
0.16 $
298
602
326
0.05
0.04
2012
Q4
Q3
Q2
Q1
$ 10,701 $ 23,353 $ 9,242 $ 11,754
11,914
305
1,244
1,037
$
$
0.17 $
0.15 $
10,934
1,657
1,455
264
8,310
7,552
(617)
(868)
135
130
(64)
(72)
0.24 $ (0.01) $ —
0.24 $ (0.01) $ —
It is the Company’s objective to ensure alignment between incentives for directors and officers with the creation of shareholder
value. On February 28, 2014, Atlas granted 185,190 restricted shares under the Company’s equity incentive plan, all of which
were granted to the Company’s directors. This grant is a component of the Company’s director compensation plan. To qualify,
each director personally purchased $100,000 of Company stock during the second half of 2013. The granted restricted shares vest
equally on the anniversary of the grant date for the next five consecutive years. Additional terms and conditions are set forth in
the grant agreements which were filed as exhibits to the Company’s current report on Form 8-K filed on March 4, 2014.
On March 6, 2014, Atlas granted to certain executive officers (i) stock options to purchase 175,000 common shares, with an
exercise price of $13.26 and a three year vesting period, and (ii) 37,700 fully-vested, unrestricted common shares. These grants
were made under the Company's equity incentive plan.
73
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We have established disclosure controls and procedures to ensure that material information relating to us, including our consolidated
subsidiaries, is made known to the officers who certify our financial reports and to the members of senior management and the
Board of Directors.
Based on management’s evaluation as of December 31, 2013, our president and chief executive officer and our vice president,
chief financial officer and treasurer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e)
and 15d-15(e) under the Exchange Act) are effective to ensure that the information required to be disclosed by us in our reports
that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified
in the SEC’s rules and forms, and is accumulated and communicated to our management, including our president and chief executive
officer and our vice president, chief financial officer and treasurer to allow timely decisions regarding required disclosure.
Changes in Internal Controls
There were no changes to our internal controls over financial reporting during the fiscal quarter ended December 31, 2013 that
have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term
is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our management, including our
chief executive officer and chief financial officer, we conducted an evaluation of the effectiveness of our internal control over
financial reporting based on the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control - Integrated
Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2013.
Item 9B. Other Information
None.
74
Part III.
Item 10. Directors, Executive Officers and Corporate Governance
The information required by this Item will be included under the section entitled “Corporate Governance Practices and Code of
Ethics" in the Proxy Statement, which information is incorporated by reference in this Annual Report on Form 10-K.
Item 11. Executive Compensation
The information required by this Item will be included under the section entitled “Executive Compensation” in the Proxy Statement,
which information is incorporated by reference in this Annual Report on Form 10-K.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information regarding security ownership of certain beneficial owners and management is incorporated in this Item 12 by reference
to the section of the Proxy Statement entitled "Security Ownership of Certain Beneficial Owners and Directors & Executive
Officers".
The following table includes information as of December 31, 2013 with respect to Atlas' equity compensation plans:
Equity Compensation Plan Information
Number of securities to be issued
upon exercise of outstanding
options, warrants & rights
(a)
Weighted average exercise price
of outstanding options,
warrants and rights
(b)
Number of securities remaining
available for future issuance under
equity compensation plans (excluding
securities reflected in column (a))
Equity compensation plans
approved by security holders
224,623 1
C$6.05
609,253 2
1
Summation of 224,623 shares outstanding under the March 18, 2010, January 18, 2011 and the January 11, 2013 equity compensation plans
2
Equal to the remainder allowable according to the 2013 Equity Incentive Plan (10% of issued and outstanding ordinary shares)
ITEM 13. Certain Relationships and Related Transactions, and Director Independence
Information required for Item 13 is incorporated by reference to the material in the Proxy Statement under the captions “Related
Person Transactions” and “Corporate Governance Practices and Code of Ethics – Determination of Independence of Nominees
for Election” and " – Committees of the Board".
ITEM 14. Principal Accounting Fees and Services
Information required for Item 14 is incorporated by reference to the material in the Proxy Statement under the captions “Management
Proposals to be Voted On – Proposal 2. Ratification of Appointment of Independent Registered Public Accountant”.
75
Part IV.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) (1) The following consolidated financial statements, notes thereto and related information of Atlas Financial
Holdings, Inc. are included in Item 8.
Consolidated Statements of Income and Comprehensive Income
Consolidated Statements of Financial Position
Consolidated Statements of Shareholders’ Equity
Consolidated Statements of Cash Flows
Notes to the Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
(a) (2) The following additional financial statement schedules and independent auditors' report are furnished herewith pursuant
to the requirements of Form 10-K:
Schedules required to be filed under the provisions of Regulation S-X Article 7:
Schedule II - Condensed Financial Information of Registrant
Schedule IV - Reinsurance
Schedule V - Valuation and qualifying accounts
Schedule VI - Supplemental information concerning property - casualty insurance operations
All other schedules pursuant to Article 7 of Regulation S-X are omitted because they are not applicable, or because the required
information is included in the consolidated financial statements or in the notes thereto.
(a) (3) The following is a list of the exhibits filed as part of this Form 10-K. The exhibit numbers followed by an
asterisk (*) indicate exhibits that are management contracts or compensatory plans or arrangements.
76
Exhibit
Description
3.1
3.2
4.1(1)
4.2(1)
4.3
10.1(1)
10.2(1)
10.3(1)
10.4(1)
10.5
10.6(2)
10.7(2)
10.8(2)
10.9(2)
10.10
10.11
Memorandum of Association of Atlas Financial Holdings, Inc. dated December 24, 2010 (incorporated by reference from our general form for
registration of securities on Form 10 filed March 26, 2012)
Special Resolution amending Article Six of the Amended and Restated Memorandum of Association, filed with the Registrar of Companies in the
Cayman Islands on January 29, 2013 (incorporated by reference from our current report on Form 8-K filed January 30, 2013)
Specimen Ordinary Share Certificate
Specimen Warrant Agreement
Articles of Association of Atlas Financial Holdings, Inc., dated December 24, 2010 (included in Exhibit 3.1 hereto)
Atlas Financial Holdings, Inc. Stock Option Plan dated January 6, 2011 *
Form of Atlas Employment Agreement for Executive Management, updated January 1, 2012 *
Employee Share Purchase Plan Agreement, as adopted June 1, 2011 *
Defined Contribution Plan Document dated August 11, 2011 *
Transition Services Agreement between Kingsway Financial Services, Inc. and American Insurance Acquisition, Inc., dated December 31, 2010
(incorporated by reference from our annual report on Form 10-K/A for the year ended December 31, 2011 (amendment no. 1), filed on May 5,
2012)
150 Northwest Point - Sale Agreement
150 Northwest Point - Sale Agreement, Amendment 1
150 Northwest Point - Sale Agreement, Amendment 2
150 Northwest Point - Lease Agreement
Stock Purchase Agreement among Atlas Financial Holdings, Inc., and Hendricks Holding Company, Inc. dated as of October 24, 2012
(incorporated by reference from our current report on Form 8-K filed October 31, 2012)
Atlas Financial Holdings, Inc. 2013 Equity Incentive Plan (incorporated by reference from our proxy statement relating to our 2013 annual
meeting of shareholders, filed May 7, 2013) ("Equity Incentive Plan")*
10.12
First amendment to Equity Incentive Plan.*
10.13
10.14
10.15
10.16
10.17
21
23.1
Share Sale Agreement between Atlas Financial Holdings, Inc. and Kingsway America, Inc. dated August 1, 2013 (incorporated by reference from
our current report on Form 8-K filed August 1, 2013)
Director Compensation and Stock Ownership Guidelines (incorporated by reference from our current report on Form 8-K filed June 20, 2013) *
Amendment to Director Compensation and Stock Ownership Guidelines (incorporated by reference from our registration statement filed on Form
S-1 filed September 19, 2013) *
Amended and Restated Option Agreement, dated November 26, 2013, between Atlas Financial Holdings, Inc. and Jordon Kupinsky (incorporated
by reference from our registration statement filed on Form S-8 filed November 27, 2013) *
Executed Underwriting Agreement, dated February 11, 2013 (incorporated by reference from our current report on Form 8-K filed February 15,
2013)
List of Subsidiaries (incorporated by reference from our registration statement filed on Form S-1 filed September 19, 2013)
Consent of Johnson Lambert LLP
Item 31 – Rule 13a-14(a)/15d-14(a) Certifications
31.1
31.2
Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) or Rule 15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) or Rule 15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
Item 32 – Section 1350 Certifications
32.1
32.2
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
Item 101 - Interactive Data Files
101.INS XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB XBRL Taxonomy Extension Label Linkbase Document.
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document.
(1) Incorporated by reference from our annual report on Form 10-K for the year ended December 31, 2011, filed on March 26, 2012.
(2) Incorporated by reference from our quarterly report on Form 10-Q for the quarter ended September 30, 2012, filed on November 4, 2012.
(*) Management contracts and compensatory plans or agreements.
77
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
ATLAS FINANCIAL HOLDINGS, INC.
(Registrant)
/s/ Paul A. Romano
By: Paul A. Romano
(Vice President and Chief Financial Officer)
March 10, 2014
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ Scott D. Wollney
Scott D. Wollney
/s/ Paul A. Romano
Paul A. Romano
/s/ Gordon G. Pratt
President, Chief Executive Officer
and Director
March 10, 2014
Vice President, Chief Financial Officer
and Principal Accounting Officer
March 10, 2014
Gordon G. Pratt
Director, Chairman of the Board
March 10, 2014
/s/ Jordan M. Kupinsky
Jordan M. Kupinsky
/s/ Larry G. Swets, Jr.
Larry G. Swets, Jr.
/s/ John T. Fitzgerald
John T. Fitzgerald
Director
March 10, 2014
Director
March 10, 2014
Director
March 10, 2014
78
Schedule II – Condensed Financial Information of Registrant
Statements of Comprehensive Income
($ in thousands)
Net investment gain
Other underwriting expense
Loss from operations before income tax benefit
Income tax benefit
(Loss) income before equity in net income of subsidiaries
Equity in net income of subsidiaries
Net income
See accompanying Notes to Condensed Financial Information of Registrant
Year ended December 31,
2012
2013
96 $
542
(446)
(67)
(379) $
6,559
6,180 $
—
113
(113)
(1,158)
1,045
2,121
3,166
$
$
$
79
Schedule II – Condensed Financial Information of Registrant (continued)
Statements of Financial Position
($ in thousands)
Assets
Cash and cash equivalents
Accounts receivable and other assets
Deferred tax asset, net
Investment in subsidiaries
Total Assets
Liabilities
Other liabilities and accrued expenses
Total Liabilities
Shareholders’ Equity
Preferred shares, par value per share $0.001, 100,000,000 shares authorized, 2,000,000 shares issued
and outstanding at December 31, 2013 and18,000,000 shares issued and outstanding December 31,
2012. Liquidation value $1.00 per share
Ordinary common shares, par value per share $0.003, 266,666,667 shares authorized, 9,291,871
shares issued and outstanding at December 31, 2013 and 2,256,921 at December 31, 2012
Restricted common shares, par value per share $0.003, 33,333,334 shares authorized, 132,863 shares
issued and outstanding at December 31, 2013 and 3,887,471 at December 31, 2012
Additional paid-in capital
Retained deficit
Accumulated other comprehensive (expense) income, net of tax
Total Shareholders’ Equity
Total Liabilities and Shareholders’ Equity
See accompanying notes to Condensed Financial Information of Registrant
December 31,
2013
2012
$
289 $
25
215
67
—
104
63,313
59,693
$ 63,842 $
59,864
$
$
144 $
144 $
—
—
$
2,000 $
18,000
28
—
4
14
169,595
(106,496)
(1,429)
63,698
152,768
(112,675)
1,753
59,864
$ 63,842 $
59,864
80
Schedule II – Condensed Financial Information of Registrant (continued)
Statements of Cash Flow
($ in '000's)
Operating Activities
Net income (loss)
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in net income of subsidiaries
Share-based compensation expense
Deferred income taxes
Net changes in operating assets and liabilities:
Other assets
Accounts payable and accrued liabilities
Net cash flows used in operating activities
Financing activities:
Preferred share buyback
Proceeds from initial public offering
Warrants exercised
Dividends paid
Dividends received
Options exercised
Net cash flows provided by financing activities
Net change in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
Cash paid for:
Interest
Income taxes
See accompanying notes to Condensed Financial Information of Registrant
Year Ended December 31,
2013
2012
$
6,180 $
3,166
(6,559)
247
(112)
(25)
144
(125)
(16,200)
9,756
7,181
(2,145)
1,752
3
347
222
67
289 $
129
25
$
$
(2,121)
113
(1,158)
52
—
52
—
—
—
—
—
—
52
15
67
—
—
81
Schedule II – Condensed Financial Information of Registrant (continued)
Notes to Condensed Financial Information
The financial statements of the Registrant should be read in conjunction with the Consolidated Financial Statements and notes
thereto included in Item 8.
Atlas has no material contingencies, long-term debt obligations or guarantees.
Atlas has not received cash dividends from its subsidiaries since its inception on December 31, 2010.
Schedule IV – Reinsurance
(in '000s)
December 31, 2013
Premiums earned
December 31, 2012
Premiums earned
Schedule V – Valuation and qualifying accounts
(in '000s)
December 31, 2013
Allowance for uncollectible receivables
Valuation allowance for deferred tax assets
December 31, 2012
Allowance for uncollectible receivables
Valuation allowance for deferred tax assets
Gross
Amount
Ceded to
Other
Companies
Assumed
from
Other
Companies
Net
Amount
% of
Amount
Assumed
to Net
$ 83,358
(12,542)
528
71,344
0.7%
$ 45,165 $ (6,575) $
119 $ 38,709
0.3%
Balance at
Beginning
of Period
Charged to
Expenses
Other
additions Deductions
Balance at
End of
Period
$
484 $
11,242
764 $
—
281 $
(753) $
1,006
(2,802)
776
9,446
$
4,254 $
12,361
52 $
—
— $ (3,822) $
— (1,119)
484
11,242
Schedule VI - Supplemental information concerning property-casualty insurance operations
(in '000s)
Deferred policy acquisition costs
Reserves for insurance claims and claims expense
Unearned premiums
Earned premiums
Net investment income
Claims and claims adjustment expense incurred
Current year
Prior year
Amortization of deferred policy acquisition costs
Paid claims and claim adjustment expense
Gross premium written
82
Year Ended December 31,
2013
2012
$
6,674 $
101,385
44,232
71,344
2,141
45,604
8
10,373
50,762
93,060
3,764
70,067
25,457
38,709
2,453
26,329
216
6,471
45,976
55,050