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, 2016
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 12,030,703 shares of the Registrant's common stock outstanding as of March 10, 2017, of which 11,902,512 are ordinary voting
common shares and 128,191 are restricted voting common 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 $184.0 million (based upon the closing sale price of the Registrant’s common shares on June 30, 2016).
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 2017 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, 2016
Part I.
Item 1.
Business
Overview
Competitive Strengths
Strategic Focus
Market
Agency Relationships
Seasonality
Competition
Regulation
Employees
Item 1A.
Available Information about Atlas
Risk Factors
Item 1B.
Unresolved Staff Comments
Item 2.
Item 3.
Item 4.
Part II.
Item 5.
Item 6.
Item 7.
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Selected Financial Data
Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A.
Quantitative and Qualitative Disclosures about Market Risk
Item 8.
Item 9.
Financial Statements and Supplemental Schedules
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A.
Controls and Procedures
Item 9B.
Other Information
Part III.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Part IV.
Item 15.
Item 16.
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
Form 10-K Summary
Signatures
Financial Statement Schedules
2
3
3
5
5
6
8
9
9
9
10
11
12
27
27
27
27
28
31
32
64
66
104
104
104
105
105
105
105
105
106
108
109
110
Part I.
Item 1. Business
Overview
Atlas Financial Holdings, Inc. ("Atlas" or "We" or "the Company") is a financial services holding company whose subsidiaries
specialize in the underwriting of commercial automobile insurance policies, focusing on the “light” commercial automobile sector.
This sector includes taxi cabs, non-emergency para-transit, limousine, livery and business auto. With roots dating back to 1925
selling insurance for taxi cabs, we are one of the oldest insurers of taxi and livery businesses in the United States. This experience
serves as the foundation of our hyper-focused specialty insurance business that embraces continuous improvement, analytics and
technology. Our goal is to be the preferred specialty commercial transportation insurer in any geographic area 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 Insurance Company, Inc. ("American Service")
and American Country Insurance Company ("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, American Service
and American Country were wholly owned subsidiaries of KAI. American Country commenced operations in 1979. In 1983,
American Service began as a non-standard personal and commercial auto insurer writing business in the Chicago, Illinois area.
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., ("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.
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 owned subsidiary of KAI) in exchange for C$35.1 million of common
shares 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, 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 receipts received 1,327,834 of our ordinary
voting common shares, plus warrants to purchase one ordinary voting common 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 voting common 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 voting common shares.
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 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 voting common shares
and restricted voting 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' ordinary voting common 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.
3
On January 2, 2013 we acquired Camelot Services, Inc. ("Camelot Services"), a privately owned insurance holding company, and
its sole subsidiary, Gateway Insurance Company ("Gateway"), from 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 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.
Under the terms of the stock purchase agreement, the purchase price equaled the adjusted book value of Camelot Services as of
December 31, 2012, subject to certain pre and post-closing adjustments, including, among others, the future development of
Gateway’s actual claims reserves for certain lines of business and the utilization of certain deferred tax assets over time. 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 2,000,000 preferred shares) and $6.3 million in cash. Pursuant to the terms of
the stock purchase agreement, the Company issued an additional 940,500 preferred shares due to the favorable development of
Gateway’s actual claims reserves for certain lines of business during the first quarter of 2015. During the first quarter of 2016, the
Company canceled 401,940 preferred shares pursuant to the Gateway stock purchase agreement due to the unfavorable development
of Gateway’s actual claims reserves for certain lines of business. During the third quarter of 2016, the Company and the former
owner of Camelot Services agreed to settle the additional consideration related to future claims development and utilization of
certain tax assets. Atlas redeemed all 2,538,560 of the remaining preferred shares issued to the former owner of Gateway.
On February 11, 2013, an aggregate of 4,125,000 Atlas ordinary voting common shares were offered in Atlas' initial public offering
in the United States. 1,500,000 ordinary voting common shares were offered by Atlas and 2,625,000 ordinary voting common
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." The principal purposes of the initial offering in the United States were to create a public market in the
United States for Atlas' ordinary voting common 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.
On June 5, 2013, Atlas delisted from the Toronto Stock Exchange.
On August 1, 2013, Atlas used the net proceeds from the U.S. initial public offering to partially fund the repurchase of 18,000,000
of its outstanding preferred shares owned by KAI for $16.2 million. These preferred shares had 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. These shares were redeemed in their entirety for $0.90 for every dollar of outstanding face value plus
accrued interest.
On May 13, 2014, an aggregate of 2,000,000 Atlas ordinary voting common shares were offered in a subsequent public offering
in the United States at a price of $12.50 per share. Atlas also granted the underwriters an option to purchase up to an aggregate of
300,000 additional shares at the public offering price of $12.50 per share to cover over-allotments, if any. On May 27, 2014, the
underwriters exercised this option and purchased an additional 161,000 shares. After underwriting and other expenses, total
proceeds of $25.0 million were realized on the issuance of the shares. A portion of the net proceeds from the offering was used to
support the acquisition of Anchor Holdings Group, Inc. and its affiliated entities as described further below.
During the fourth quarter of 2014, Camelot Services was merged into American Acquisition.
On March 11, 2015, we acquired Anchor Holdings Group, Inc. ("Anchor Holdings"), a privately owned insurance holding company,
and its wholly owned subsidiary, Global Liberty Insurance Company of New York ("Global Liberty"), along with its affiliated
entities, Anchor Group Management ("Anchor Management"), Plainview Premium Finance Company, Inc. ("Plainview Delaware")
and Plainview Delaware's wholly owned subsidiary, Plainview Premium Finance Company of California, Inc. ("Plainview
California"), and together with Anchor Holdings, Global Liberty, Anchor Management, and Plainview Delaware, "Anchor," from
an unaffiliated third party for a total purchase price of $23.2 million, consisting of a combination of cash and Atlas preferred
shares, and is estimated at approximately 1.3 times combined U.S. GAAP book value. Consideration consisted of approximately
$19.2 million in cash and $4.0 million of Atlas preferred shares (consisting of a total of 4,000,000 preferred shares at $1.00 per
preferred share). Anchor provides specialized commercial insurance products, including commercial automobile insurance to
niche markets such as taxi, black car and sedan service owners and operators primarily in the New York market. During the fourth
quarter of 2016, the company canceled 4,000,000 preferred shares pursuant to the Anchor stock purchase agreement due to
unfavorable development of Global Liberty's pre-acquisition claims reserves. Although the re-issuance of preferred shares to the
former owner of Anchor may be highly unlikely, the contingent consideration terms of the Anchor stock purchase agreement will
remain in effect for period of five years from the date of acquisition.
4
Our core business is the underwriting of commercial automobile insurance policies, focusing on the "light" commercial automobile
sector, which is carried out through American Country, American Service, Gateway and Global Liberty (collectively, our "Insurance
Subsidiaries.")
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. We believe that we are
able to adapt to changing market needs well in advance 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. Although reserves were strengthened in connection
with certain specific business segments primarily for older accident years, in more recent years we have experienced a favorable
trend in loss ratios 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 and manage claims effectively.
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.
Strong market presence with recognized brands and long-standing distribution relationships. Our Insurance Subsidiaries 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 independent retail agents, we
strive to thoroughly understand each of the markets we serve in order to deliver strategically priced products to attractive market
share 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 all markets to assess future potential opportunities and risks. There are also
a relatively limited number of agents who specialize in these lines of business. As a result, strategic relationships with independent
retail agents are important to ensure efficient distribution.
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 claims costs. We are committed to maintaining this underwriting and claims handling expertise as a core competency
as our volume of business increases. In recent years, we invested significantly in the use of machine learning based predictive
analytics in both our underwriting and claims areas to further leverage this heritage.
Scalable operations positioned for growth. Significant progress has been made in aligning our organization's infrastructure 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 continue approaching proportionate market
share of approximately 20% in all of the markets in which we operate with better than industry level profitability from the efficient
operating infrastructure established subsequent to Atlas' acquisition of the companies. We are committed to evaluating, and where
beneficial, deploy new technologies and analytics to maximize efficiency and scalability.
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 more than 25 years and with the Insurance Subsidiaries, directly or indirectly, for an average of 15 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.
5
We seek to achieve our vision and mission through the design, sophisticated pricing and efficient delivery of specialty transportation
insurance and risk management 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 six years, through infrastructure re-organization, dispositions and by placing certain lines of business into run-off,
our Insurance Subsidiaries have streamlined operations to focus on the lines of business we believe will leverage our core
competencies and produce favorable underwriting results. Significant progress has been made in aligning the organization's
infrastructure 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 and continue to grow to proportionate market share
of approximately 20% in all of the markets in which we operate 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 42 states and the District of
Columbia during 2016 utilizing our well-developed underwriting and claims methodology.
We believe that the most significant opportunities going forward are: (i) continually managing our independent retail agency and
customer relationships, (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 active prior to Atlas' acquisition of these subsidiaries, 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 appropriate 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 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.
We intend to continue to grow profitably by undertaking the following:
Re-establish legacy distribution relationships. We continue to build upon relationships with independent retail 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 retail 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. In the
alternative, we will endeavor to quickly adjust our pricing and underwriting or reduce our exposure to potentially
underperforming products.
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 acquisitions of Gateway and Anchor are consistent with this aspect of our strategy.
Market
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.
6
Gross premium written from commercial automobile was $223.8 million, $207.8 million, and $119.5 million for the years ended
December 31, 2016, 2015, and 2014, respectively. As a percentage of the Insurance Subsidiaries’ overall book of business,
commercial auto gross premium written represented 99.4%, 99.3%, and 97.6% of gross premium written for the years ended
December 31, 2016, 2015, and 2014, respectively.
The “light” commercial automobile sector is a subset of the historically profitable commercial automobile insurance industry
segment. In more recent years the commercial automobile insurance industry has seen profitability pressure within certain segments,
underperforming the broader property & casualty ("P&C") industry. Over the longer-term however, commercial auto has
outperformed the P&C industry generally over the past fifteen years based on data compiled by A.M. Best Aggregates & Averages.
Data compiled by SNL Financial also indicates that for 2015 the total market for commercial automobile liability insurance was
approximately $31.3 billion. The size of the commercial automobile insurance market can be affected significantly by many factors,
such as the total number of vehicles insured, 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
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.
The significant expansion of transportation network companies ("TNC") has resulted in a reduction in taxi vehicles available to
insure; however, we believe that the aforementioned factor relating to medallion values has mitigated the overall decline. Market
research also suggests that the combined addressable markets between traditional taxi, livery and TNC companies expanded during
this period.
Currently, we distribute our products 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, 2016. No other jurisdiction accounted for
more than 5%.
Distribution of Gross Premium Written by Jurisdiction
New York
California
Illinois
31.0%
13.2%
5.5%
7
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
(the blue states in the below diagram).
Agency Relationships
Independent retail agents are recruited by us directly utilizing 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 approximately one out of every ten agents seeking an agency contract. We do not provide exclusive
territories to our independent retail agents, nor do we expect to be their only insurance market. We are generally interested in
acting as one of a relatively small number of insurance partners with whom our independent retail 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%) 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 retail 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 retail agents
for distribution and customer support, underwriting and claims handling responsibilities are retained by us. Many of our agents
have had direct relationships with our Insurance Subsidiaries for a number of years.
8
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 has an annual renewal date in the third quarter. Net underwriting income is driven mainly by the
timing and nature of claims, which can vary widely.
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 underpriced risks.
Our Company competes on a number of factors such as brand and distribution strength, pricing, agency relationships, policy
support, claims 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 our customers with better service. In more recent
years, we have also been leveraging machine learning based predictive analytics and other technologies, such as telematics, to
further differentiate ourselves from our competitors.
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 effective claims management; reserve appropriately for unpaid claims and claims adjustment expenses; 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.
9
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. Historical results and actuarial work related thereto are often required to support rate changes
and may limit the magnitude of such changes in a given period.
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
(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 accounting principles generally accepted
in the United States of America ("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. As of December 31, 2016, 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, 2016, we had 230 full-time employees, 153 of whom work at the corporate headquarters in Elk Grove Village,
Illinois, 10 of whom work in St. Louis, 62 of whom work in New York and 5 of whom work remotely. The Corporate and Other
category includes executive, information technology, data integrity, finance and human resources. The Claims category includes
in-house legal.
10
Available Information about Atlas
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. Atlas files with the Securities and Exchange Commission (the "SEC") and makes available free of charge
on its website the Annual Report on Form 10-K, Quarterly Reports on Form10-Q, Current Reports on Form 8-K and amendments
to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act (15 U.S.C. 78m(a) or 78o(d)) as soon
as reasonably practicable after those reports are electronically filed with, or furnished to, the SEC. To access these filings, go to
the company website, using the "Investor Relations" heading. These reports are also available on the SEC's website at http://
www.sec.gov.
11
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.
Reserve and Exposure Risks
The Insurance Subsidiaries’ provisions for unpaid claims and claims adjustment expenses 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 claims 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 and claims adjustment expenses 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 and
claims adjustment expenses 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 and claims adjustment expenses. These estimates are based upon
various factors, including:
•
•
•
•
•
•
•
•
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:
•
•
•
•
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 claim costs and the original provision for unpaid claims and claims adjustment expenses. The
development of the provision for unpaid claims and claims adjustment expenses is shown by the difference between estimates of
claims liabilities 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.
12
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 and claims adjustment expenses 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.
For the companies that we acquired or will acquire, the provisions for unpaid claims and claims adjustment expenses may be
inadequate at the time of purchase, which would result in a reduction in our net income and might adversely affect our financial
condition.
We cannot guarantee that the provisions for unpaid claims and claims adjustment expenses of the companies that we acquired are
or will be adequate. We became or will become responsible for the historical claims reserves established by the acquired company's
management upon completion of acquisitions. While the stock purchase agreement provides for certain protections in this regard,
there can be no assurances they will be sufficient to offset any adverse development to the acquired company's historical claims
reserves. Any unfavorable development in an acquired company's claims 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 each 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 claims, claims adjustment 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 claims 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:
•
•
•
•
•
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 underprice risks, which would adversely affect our profit margins, or we could overprice 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.
Our Insurance Subsidiaries market and distribute automobile insurance products through a network of independent agents and
other producers in the United States. 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 claims 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.
13
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, 2016, we had ceded premium written of $45.0 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, 2016, we had an aggregate of $43.2 million of reinsurance recoverables,
of which $36.3 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, that covers all in-force premium and claims 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 claims 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
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 claims 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 claims and claims adjustment 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.
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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 claims. 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 claims from catastrophes
could be substantial. In addition, it is possible that we may experience an unusual frequency of smaller claims 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 claims 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 claims from catastrophic events in recent years, and we expect that those factors
will increase the severity of catastrophe claims in the future. It is also possible that catastrophic claims 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 them 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 the states of domicile of our Insurance Subsidiaries, 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. 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.
Our Insurance Subsidiaries are subject to minimum capital and surplus requirements. Failure to meet these requirements may
subject us to regulatory action.
Atlas' Insurance Subsidiaries are subject to minimum capital and surplus requirements imposed under laws of the states in which
the companies are domiciled as well as in the states where we conduct business. 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 Subsidiaries, which we may not be able to do.
15
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 claims handling
expenses and the unfunded amount of “covered” claims and unearned premium obligations of impaired or insolvent insurance
companies, either up to the policy's limit, the applicable guaranty fund covered claims 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 claims 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 investment grade fixed income securities. Despite
the Company’s best efforts, we cannot predict which industry sectors or specific investments in which we maintain investments
may suffer losses as a result of potential declines in commercial and economic activity. 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. In addition, certain of our investments, including our investments in limited partnerships
owning income producing properties, are illiquid and difficult to value.
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 liquidity in such markets, the
level and volatility of interest rates and, consequently, the value of fixed maturity securities. U.S. and global markets have
experienced periods of 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. 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.
Current market conditions and the potential for 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.
Since 2007, the market has experienced the severe downturn associated with mortgage backed securities, and the follow-on impact
to the broader financial sector. This environment created significant unrealized losses in our securities portfolio at certain stages
in 2009. Since then, there have been periods of uncertainty for many reasons, including concerns about the credit-worthiness of
countries within the European Union, uncertainty about the strength of the Chinese economy, the United Kingdom European
Union membership referendum (the "Brexit vote") and the recent rapid rise in U.S. Treasury yields.
Risks from these events, or other currently unknown events could lead to worsening economic conditions, widening of credit
spreads or bankruptcies which could negatively impact the financial position of the company.
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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 unaffiliated 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.
We do not anticipate paying any cash dividends on our common stock 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 voting common shares. As a result, capital appreciation
in the price of our ordinary voting common shares, if any, will be the only source of gain on an investment in our ordinary voting
common shares. We have never declared or paid cash dividends on our common stock since Atlas' inception in 2010. 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 Atlas, which may limit Atlas'
ability to pay dividends to its common shareholders.
Unlike the holders of our ordinary voting common shares, 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 voting common shares. We paid $409,000 of preferred
dividends during 2016 on the preferred shares held by the former owner of Gateway. All of the preferred shares held by the former
owner of Gateway were repurchased on September 30, 2016, and therefore, no additional dividends will accrue on those preferred
shares. During the fourth quarter of 2016, Atlas canceled the 4,000,000 preferred shares held by the former owner of Anchor. The
cumulative amount of accrued and unpaid dividends to the former owner of Anchor was $333,000 as of December 31, 2016. As
of December 31, 2016, the paid claims development on Global Liberty's pre-acquisition claims reserves was in excess of $4,000,000,
and as a result, pursuant to the terms of the Anchor stock purchase agreement, dividends will no longer accrue to the former owner
of Anchor. As of December 31, 2016, there were no preferred shares outstanding. Although the re-issuance of preferred shares to
the former owner of Anchor may be highly unlikely, the contingent consideration terms of the Anchor stock purchase agreement
will remain in effect for period of five years from the date of acquisition.
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Compliance Risks
We are subject to comprehensive regulation, and our results may be unfavorably impacted by these regulations.
As a holding company that 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
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;
• 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;
• marketing practices;
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•
•
•
•
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•
•
•
•
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 and
American Country's transportation workers' compensation business;
underwriting requirements related to Global Liberty's run-off property insurance program;
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.
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. 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.
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.
18
As a result of our administration of Gateway's run-off and American Country's transportation workers' compensation business,
we are required to comply with state and federal laws governing the collection, transmission, security and privacy of health
information that result in 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 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.
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, our Insurance Subsidiaries can be subjected
to regulatory requirements in connection with any 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 our Insurance Subsidiaries to comply with and satisfy these regulatory requirements in connection with any withdrawals
could lead to regulatory fines, cause a distraction for management requiring us to continue to administer withdrawn business for
longer than anticipated and could result in our Insurance Subsidiaries continuing to write undesirable business, 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 claims 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.
19
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 accounted for 3.9%, 5.0% and 6.0% of our net premiums earned for the
years ended December 31, 2016, 2015, and 2014, respectively. 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, Global Liberty is our only insurance subsidiary that can write any business in Connecticut,
but we may seek approval for our other Insurance Subsidiaries to write business in this state at some point in the future. In 2009,
the Texas Department of Insurance indicated to American Country and American Service 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, these 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.
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.
Failure to maintain the security of personal data and the availability of critical systems may result in lost business, reputational
damage, legal costs and regulatory fines.
Our Insurance Subsidiaries obtain and store vast amounts of personal data that can present significant risks to the Company and
its customers and employees. Various laws and regulations govern the use and storage of such data, including, but not limited to,
social security numbers, credit card and banking data. The Company's data systems are vulnerable to security breaches due to the
sophistication of cyber-attacks, viruses, malware, hackers and other external hazards, as well as inadvertent errors, equipment and
system failures, and employee misconduct. The Company also relies on the ability of its business partners to maintain secure
systems and processes that comply with legal requirements and protect personal data. These risks and regulatory requirements
related to personal data security expose the Company to potential data loss, damage to our reputation and cause us to incur
compliance and litigation costs. In the event of non-compliance with the Payment Card Industry Data Security Standard, an
information security standard for organizations that handle cardholder information for the major debit, credit, prepaid, e-purse,
ATM and point-of-sale cards, such organizations could prevent our subsidiaries from collecting premium payments from customers
by way of such cards and impose significant fines on our subsidiaries.
The Company's business operations rely on the continuous availability of its computer systems. In addition to disruptions caused
by cyber-attacks or other data breaches, such systems may be adversely affected by natural and man-made catastrophes. The
Company's failure to maintain business continuity in the wake of such events may prevent the timely completion of critical
processes across its operations, including, but not limited to, insurance policy administration, claims processing, billing and payroll.
These failures could result in significant loss of business, fines and litigation.
20
Strategic and Operational Risks
Our geographic concentration ties our performance to the business, economic, regulatory and other conditions of certain
states.
Some jurisdictions 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 $150 million in order to achieve our targeted
levels of profitability. In order to maintain and increase this level of earned premiums, we intend to leverage geographic expansion
and increase our market share via our expanded distribution network. Continued growth could impose significant demands on
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. Incremental merger and acquisition activities could affect our minimum efficient
scale.
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 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.
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 and Global Liberty, 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 and claims
adjustment expenses;
diversion of management’s attention from other business concerns;
21
•
•
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.
Provisions in our organizational documents, corporate laws and the insurance laws of Illinois, Missouri, New York 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 voting common 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.
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.
22
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.
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 we have. 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; claims 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.
Changes in the nature of the markets we serve could impact the size of our market and/or the market share available to us.
The industry we serve is being impacted by the introduction of mobile applications (including but not limited to Transportation
Network Companies, or "TNCs"), on-line dispatch and tracking, in-vehicle technologies and other technology-related changes.
These technologies could change the size of the overall addressable market we serve and may also impact the nature of the risks
we insure.
23
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 September 22, 2016, A.M. Best affirmed the current financial strength ratings of "B" "Stable" for American Country, American
Service and Gateway and "B+" "Negative" for Global Liberty. 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
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 has an annual renewal date in the third quarter. 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 ("IRC"), 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 was 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 carryforwards ("NOLs") that could have
otherwise been utilized.
24
Our use of losses may be subject to limitations, and the tax liability of our company may be increased.
Our ability to utilize the NOLs is subject to the rules of Section 382 of the IRC. 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 NOLs. 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 existed as to whether we may
have undergone an ownership change in the past or will undergo one as a result of our 2013 U.S. public offering. Based upon
management's assessment, it was determined that at the date of the U.S. public offering there was not an "ownership change" as
defined by Section 382. However, 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 NOLs 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 NOLs of approximately $14.5
million as of December 31, 2016. Book value per common share was unaffected by this event, as the amount of lost net deferred
tax assets were offset by a corresponding decrease in the valuation allowance that was already held against the majority of these
assets.
Atlas has the following total NOLs as of December 31, 2016:
Net Operating Loss Carryforward by Expiry ($ in ‘000s)
Year of Occurrence
2001
2002
2006
2007
2008
2009
2010
2011
2012
2015
Total
Year of Expiration
2021
2022
2026
2027
2028
2029
2030
2031
2032
2035
Amount
5,007
$
4,317
7,825
5,131
1,949
1,949
1,949
4,166
9,235
1
$ 41,529
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.
25
Risks Related to Our 2013 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 are 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
increases our legal and financial compliance costs, makes some activities more difficult, time-consuming or costly and increases
demand on our systems and resources, which may increase 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 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.” We will remain an “emerging growth company”
for up to five years from our U.S. initial public offering, although we will cease to be an “emerging growth company” before that
time if we meet certain criteria.
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.
As a result of disclosure of information in this Annual Report on 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.
26
Item 1B. Unresolved Staff Comments
None.
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 through November 2017 at $66,000 per month and an additional 2,500 square feet through May 2017 at $4,000
per month with a month to month extension option. Atlas purchased a building in the fourth quarter of 2016 to serve as the new
corporate headquarters. This building is located at 953 American Lane, Schaumburg, Illinois 60173, USA and is three stories with
approximately 110,000 square feet. An unaffiliated tenant currently leases one floor of the building. Atlas plans to move to the
new location once the necessary renovations are completed in the late second or early third quarter of 2017. We believe that the
new facility will be sufficient space to support the growth and expansion of our business.
We are leasing three additional office spaces. The St. Louis, Missouri lease is 4,375 square feet of office space and effective
through June 2021. We currently pay a monthly rent equal to approximately $10,000. The Manhattan, New York lease is 1,796
square feet of office space and effective through February 2018. We currently pay a monthly rent equal to approximately $6,000.
Upon completion of the Anchor acquisition, we assumed a lease for 25,396 square feet of office space in Melville, New York,
which is effective through February 2022. We currently pay a monthly rent equal to approximately $60,000.
We own one property in Alabama, which comprises approximately 13.6 acres of land and is currently held for sale.
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. The Company does not believe there
is any litigation pending or threatened against it that, individually or in aggregate, may reasonably be expected to have a material
adverse effect on the Company.
Item 4. Mine Safety Disclosures
Not applicable.
27
Part II.
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
As of February 1, 2017, there were approximately 1,790 shareholders of record of our ordinary voting common shares and one
shareholder of record of our restricted voting common shares (all of which convert to ordinary voting common shares upon the
sale of such shares by the sole shareholder, KAI, or its subsidiaries). Our ordinary voting common 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 10, 2017, there were 11,902,512 ordinary voting common shares and 128,191 restricted voting common shares outstanding.
Set forth below are the high and low closing prices of the ordinary voting common shares during 2016 and 2015:
Summary of Share Prices
2016
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
2015
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
High
Low
$18.05
$17.69
$18.39
$19.21
$20.97
$19.83
$20.31
$18.10
$15.30
$15.54
$16.67
$16.70
$18.22
$16.00
$17.79
$15.87
During 2016, we repurchased 2,538,560 of preferred shares from the former owner of Gateway and paid all accrued dividends on
these shares prior to the repurchase date. On December 31, 2016, we canceled 4,000,000 of preferred shares from the former
owner of Anchor pursuant to the terms of the Anchor stock purchase agreement as described in Note 3, 'Acquisitions,' to the
Consolidated Financial Statements. The cumulative amount of accrued and unpaid dividends as of December 31, 2016 was
$333,000. As of December 31, 2016, the paid claims development on Global Liberty's pre-acquisition reserves was in excess of
$4,000,000, and as a result, dividends will no longer accrue to the former owner of Anchor. As of December 31, 2016, there were
no preferred shares outstanding. Although the re-issuance of preferred shares to the former owner of Anchor may be highly unlikely,
the contingent consideration terms of the Anchor stock purchase agreement will remain in effect for period of five years from the
date of acquisition.
Due to insurance regulations there are restrictions on our Insurance Subsidiaries that currently materially limit the Company's
ability to pay dividends. We did not pay any dividends to our common shareholders during 2015, 2016 or to date in 2017, and
we have no current plans to pay dividends to our common shareholders.
During 2016, KAI sold 4,672 restricted voting common shares that converted to ordinary voting common shares.
On May 13, 2014, an aggregate of 2,000,000 Atlas ordinary voting common shares were offered in a subsequent public offering
in the United States at a price of $12.50 per share. Atlas also granted the underwriters an option to purchase up to an aggregate of
300,000 additional shares at the public offering price of $12.50 per share to cover over-allotments, if any. On May 27, 2014, the
underwriters exercised this option and purchased an additional 161,000 shares. After underwriting and other expenses, total
proceeds of $25.0 million were realized on the issuance of the shares. A portion of the net proceeds from the offering was used to
support the acquisition of Anchor.
28
Performance Graph
The following stock performance graph shows a comparison of cumulative total shareholder return of Atlas' ordinary voting
common shares for the period beginning with the first day Atlas traded on the NASDAQ exchange, with the cumulative total
return of the Russell 2000 Index and the SNL U.S. Insurance P&C Index. The graph assumes a $100 investment on February 12,
2013, the first day Atlas traded on the NASDAQ exchange, in Atlas common stock and for each index listed, and all dividends
are assumed to be reinvested.
Company/Index
2/12/13
6/30/13
12/31/13
6/30/14
12/31/14
6/30/15
12/31/15
6/30/16
12/31/16
Atlas Financial Holdings
Russel 2000 Index
SNL U.S. Insurance
P&C Index
100.00
100.00
150.42
107.17
247.39
128.42
254.79
132.51
274.29
134.70
333.28
141.11
334.45
128.76
289.41
131.61
303.36
156.19
100.00
108.38
120.14
124.16
137.98
136.58
142.74
149.81
168.46
29
Equity Compensation Plan Information
The following table provides information regarding the number of shares of ordinary voting common shares 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,
2016.
Number of securities to be issued
upon exercise of outstanding
options, warrants & rights
(a) 2
Weighted average exercise price of
outstanding options, warrants and
Number of securities remaining
available for future issuance under
equity compensation plans
rights
(b) 3
(excluding securities reflected in
column (a)) 4
562,728
*
626,782
Equity compensation plans
approved by security
holders 1
1
The Company has no equity compensation plans that were not approved by its security holders.
2
Summation of 562,728 shares outstanding under the January 18, 2011, January 11, 2013, March 6, 2014 and the March 12, 2015 equity compensation plans
3
Average price not computed due to currency differences
4
Equal to the remainder allowable according to the 2013 Equity Incentive Plan (10% of issued and outstanding ordinary voting common shares)
Purchases of Equity Securities
No unregistered securities were sold during the three month period ended December 31, 2016. No repurchases of equity
securities were made during the three month period ended December 31, 2016.
30
Item 6. Selected Financial Data
The following table has selected financial information for the periods ended and as of the dates indicated. These historical results
are not necessarily indicative of the results to be expected from any future period and should be read in conjunction with our
consolidated financial statements and the related notes and the section of this Annual Report on Form 10-K entitled “Management’s
Discussion and Analysis of Financial Condition and Results of Operations.”
2016
2015
2014
2013
2012
($ in '000s, except for share and per share data)
Net premiums earned
Total revenue
Net income attributable to common shareholders
Earnings per common share basic
Earnings per common share diluted
Combined ratio
$
171,058
$
152,064
$
98,124
$
71,344
$
177,579
2,365
0.20
0.19
102.9%
$
$
$
$
156,851
14,154
101,618
17,608
74,027
7,361
1.18
1.13
$
$
88.2%
1.61
1.56
$
$
91.4%
0.92
0.74
$
$
94.2%
38,709
42,791
2,356
0.38
0.38
102.4%
Cash and invested assets
$
224,779
$
233,304
$
179,994
$
139,888
$
120,824
Total assets
Notes payable
Total liabilities
Total shareholders' equity
Common shares
423,577
19,187
296,235
127,342
411,292
17,219
281,670
129,622
283,911
219,278
163,067
—
174,512
109,399
—
155,580
63,698
—
103,203
59,864
12,023,295
12,015,888
11,771,586
9,424,734
6,144,392
Book value per participative share outstanding
$
10.54
$
10.15
$
9.08
$
6.54
$
6.55
For 2015 and 2014, we reclassified our presentation for costs related to acquisition and stock purchase agreements from non-
operating expenses to other underwriting expenses. The reclassification increased the combined ratio by 1.2% and 0.7% for the
years ended December 31, 2015 and 2014, respectively.
For 2015, total assets, notes payable and total liabilities were restated according to the adoption of Accounting Standards Update
2015-03. See Note 20, 'Change in Accounting Principle,' to the Consolidated Financial Statements for further discussion of the
impact.
For 2013, we reclassified our presentation for interest expense from other underwriting expenses to non-operating expenses. The
reclassification reduced the combined ratio by 0.2% for the year ended December 31, 2013.
These results include the acquisitions of Gateway on January 2, 2013 and Anchor on March 11, 2015, which will affect the
comparability of the data. See Note 3, 'Acquisitions,' to the Consolidated Financial Statements for further discussion of the impact
of these acquisitions.
Common shares for 2012 have been restated for the one-for-three stock split on January 29, 2013, and per share data has been
restated to reflect the common share restatement.
31
Item 7. Management’s Discussion and Analysis (MD&A) of Financial Condition and Results of
Operations
Section
I.
II.
III.
IV.
Description
Overview
Application of Critical Accounting Estimates
Operating Results
Financial Condition
Page
33
35
38
52
32
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 this discussion and analysis, the
term “common share” refers to the summation of restricted voting common shares and ordinary voting common shares when used
to describe earnings (loss) or book value per common share.
Forward-looking statements
In addition to the historical consolidated financial information, 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, cash flows and results of operations;
the availability and terms of additional capital; dependence on key suppliers and other strategic partners; industry trends; the
competitive and regulatory environment; the successful integration of acquisitions; the impact of losing one or more senior
executives or failing to attract additional key personnel; and other factors referenced in this report. Factors that could cause or
contribute to these differences include those discussed below and elsewhere, particularly in “Risk Factors.”
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 ("P&C") insurance in 49 states and
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 42 states and the District of Columbia during 2016. We embrace continuous
improvement, analytics and technology as a means of building on the strong heritage our subsidiary companies cultivated in the
niche markets we serve.
Over the past six 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.
33
Commercial Automobile
Our primary target market is made up of small to mid-size taxi, limousine, other livery (including certain "TNC" drivers/operators)
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 or small fleet operators. In certain jurisdictions like Illinois,
Louisiana, Nevada and New York, we have also been successful working with larger operators who retain a meaningful amount
of their own risk of loss through higher retentions, 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 broader commercial automobile insurance industry segment which
over the long term has been historically profitable. In more recent years the commercial automobile insurance industry has seen
profitability pressure within certain segments, however, it has outperformed the overall P&C industry generally over the past
fifteen years based on data compiled by A.M. Best Aggregates & Averages. Data compiled by SNL Financial also indicates that
for 2015 the total market for commercial automobile liability insurance was approximately $31.3 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. The
significant expansion of transportation network companies ("TNC") has resulted in a reduction in taxi vehicles available to insure;
however, we believe that the aforementioned factor relating to medallion values has mitigated the overall decline. Market research
also suggests that the combined addressable markets between traditional taxi, livery and TNC companies expanded during this
period.
Surety
Our surety program primarily consists of U.S. Customs bonds (currently in run off). We engage a former affiliate, Avalon Risk
Management, to help coordinate customer service and claims handling for the surety bonds written. This non-core program is
100% reinsured to an unrelated third party. For 2016, all policies were not renewed.
Other
The other line of business is comprised of Gateway's truck and workers' compensation programs (currently in run off), American
Services' non-standard personal lines business (currently in run off), Atlas' workers' compensation related to taxi, other liability,
Global Liberty's homeowners program (currently in run off) and assigned risk pool business.
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.
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.
The non-renewal process for Global Liberty's homeowners program began prior to Atlas' acquisition and remains underway. This
book of business is relatively small and substantially reinsured.
Atlas' workers' compensation related to taxi and other liability are ancillary products that are offered only to insureds who purchase
our commercial automobile insurance products.
Assigned risk pools are established by state governments to cover high-risk insureds who cannot purchase insurance through
conventional means.
34
II. 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 of financial assets;
Impairment of financial assets;
Deferred policy acquisition costs;
Claims liabilities;
Valuation of deferred tax assets;
Business combination; and
Reinsurance.
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 Note 1, 'Nature of Operations,' to
the Consolidated Financial Statements.
Fair values of financial instruments - Atlas has used the following methods and assumptions in estimating fair value:
Fair values for 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. 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 prices in active markets (Level 1), third party pricing models using available trade, bid and
market information (Level 2) and internal models without observable market information (Level 3). 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. Typically, transfers from Level 2 to Level 3 occur due to collateral performance.
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. As of
December 31, 2016, 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.
Changes in inflation can influence the interest rates which can impact the fair value of our available-for-sale fixed income portfolio
and yields on new investments. The Investment Committee of the Board of Directors considers inflation when providing guidance
and analyzing the investment portfolio to provide a stable source of income to supplement underwriting income.
35
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.
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 whether 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 prove to 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 prove to 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.
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 an OTTI is identified, the equity security is adjusted to fair value through a charge to earnings. Refer to
Note 5, 'Investments' to the Consolidated Financial Statements for further discussion of the other-than-temporary impairment on
equity securities.
Deferred policy acquisition costs ("DPAC") - Atlas defers brokers’ commissions, premium taxes and other underwriting and
marketing costs directly relating to the successful acquisition of premiums written to the extent they are considered recoverable.
The other underwriting and marketing costs include a percentage of salary and related expense, payroll taxes and travel of our
marketing and underwriting employees. The percentage is derived from an annual persistency rate study using policy and vehicle
counts to compute a hit ratio. The deferred 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.
36
Claims liabilities - The provision for unpaid claims and claims adjustment expenses represent the estimated liabilities for reported
claims, plus those incurred but not yet reported and the related estimated claims adjustment expenses. Unpaid claims expenses
are determined using case-basis evaluations and statistical analyses, including insurance industry claims 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 and claims adjustment expenses 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.
Atlas considers the impact of inflation when establishing adequate rates and estimating the provision for unpaid claims and claims
adjustment expenses. We establish reserves to cover our estimated liability for the payment of claims and expenses related to the
administration of claims incurred on the insurance policies we write. Inflation has a larger impact the longer the time between the
issuance of the policy and the final settlement of claims. Greater than expected claims costs above the established reserves will
require an increase in claims reserves and reduce the earnings in the period the deficiency was established. We consider the impact
of inflation on these reserves to establish policy rates that maintain adequate underwriting income.
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 assets ("DTAs") or deferred tax liabilities ("DTLs").
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, a valuation allowance is recorded.
As of December 31, 2016, there was no valuation allowance recorded against the Company's DTA.
Business combinations - The value of certain assets and liabilities acquired are subject to adjustment from the initial purchase
price allocation as additional information is obtained, including, but not limited to, valuation of separately identifiable intangibles,
the preferred stock issued to the seller, and deferred taxes.
The valuations are finalized within twelve months of the close of the acquisition. The changes upon finalization to the initial
purchase price allocation and valuation of assets and liabilities may result in an adjustment to identifiable intangible assets and
goodwill. Adjustments to the provisional amounts identified during the measurement period are recognized in the reporting period
in which the adjustment amounts are determined. The effect of changes in depreciation, amortization, or other income effects, if
any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition
date, are recorded in the financial statements and presented separately on the income statement in the reporting period in which
the adjustment amounts are determined.
Reinsurance - As part of Atlas' insurance risk management policies, portions of its insurance risk is ceded to reinsurers. Reinsurance
premiums and claims adjustment 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 and claims adjustment expenses ceded to other
companies have been reported as a reduction of premium revenue and incurred claims. Commissions paid to Atlas by reinsurers
on business ceded have been accounted for as a reduction of the related policy acquisition costs. Reinsurance recoverables are
recorded for that portion of paid and unpaid claims and claims adjustment expenses that are ceded to other companies. Prepaid
reinsurance premiums are recorded for unearned premiums that have been ceded to other companies.
37
III. OPERATING RESULTS
CONSOLIDATED PERFORMANCE
2016 Full Year Financial Performance Summary (comparisons to 2015 unless otherwise noted):
• Gross premium written increased by 7.6% to $225.1 million, which included an increase of 7.7% in our core
commercial auto business
•
In-force premium as of December 31, 2016 was $224.6 million, compared to $210.6 million as of December 31,
2015
• The combined ratio increased by 14.7 percentage points to 102.9%, primarily as a result of a 19.1% impact from
previously announced claims reserve strengthening related to prior accident years
• There was an underwriting loss of $5.0 million, compared to underwriting income of $18.0 million, primarily due
to $32.6 million of claims reserve strengthening related to prior accident years
• Net income was $2.6 million, or $0.19 per common share diluted, compared to $14.4 million, or $1.13 per common
share diluted, representing a decrease of 83.2% or $0.94.
• Book value per common share as of December 31, 2016 was $10.54, compared to $10.15 as of December 31, 2015
• Return on equity was 2.1% as compared to 12.1%
38
The following financial data is derived from Atlas’ consolidated financial statements for the years ended December 31, 2016,
December 31, 2015, and December 31, 2014. Ratios are calculated as a percentage of net premium earned.
Selected Financial Information ($ in '000s, except for per share data)
December 31, 2016
December 31, 2015
December 31, 2014
Year Ended
$
209,286
$
Gross premium written
Net premium earned
Net claims incurred
Underwriting expense:
Acquisition costs
Share-based compensation
Expenses (recovered) incurred related to
acquisitions and stock purchase agreements1
Other underwriting expenses2
Total underwriting expenses
Underwriting (loss) income
Net investment income
(Loss) income from operating activities, before
tax
Interest expense2
Realized gains and other income
Net income before tax
Tax benefit from release of valuation allowance
Income tax (benefit) expense
Net income
Key Financial Ratios:
Loss ratio
Underwriting expense ratio:
Acquisition cost ratio
Share-based compensation ratio
Expenses (recovered) incurred related to
acquisitions and stock purchase agreements ratio1
Other underwriting expense ratio
Total underwriting expense ratio1
Combined ratio1
Earnings per common share diluted
Book value per common share
Return on equity
$
$
$
$
225,095
171,058
134,746
18,803
1,552
(6,297)
27,237
41,295
(4,983)
4,824
(159)
(1,026)
1,697
512
—
(2,134)
2,646
$
78.8 %
11.0 %
0.9 %
(3.7)%
15.9 %
24.1 %
102.9 %
0.19
10.54
2.1 %
$
$
152,064
89,994
18,592
1,613
1,941
21,971
44,117
17,953
3,976
21,929
(694)
811
22,046
—
7,616
14,430
$
59.2%
12.2%
1.1%
1.3%
14.4%
29.0%
88.2%
1.13
10.15
$
$
12.1%
122,432
98,124
61,078
14,048
1,470
694
12,393
28,605
8,441
3,110
11,551
—
384
11,935
(9,446)
3,679
17,702
62.3%
14.3%
1.5%
0.7%
12.6%
29.1%
91.4%
1.56
9.08
20.5%
1 - For 2015 and 2014, we reclassified our presentation for costs related to acquisition and stock purchase agreements from non-
operating expenses to other underwriting expenses. The reclassification increased the total underwriting expense ratio and the
combined ratio by 1.3% and 0.7% for the years ended December 31, 2015 and 2014, respectively. The reclassification increased
total underwriting expenses and decreased underwriting income and income from operating activities, before tax by $1.9 million
and $694,000 for the years ended December 31, 2015 and 2014, respectively.
2 - For 2015, we restated our presentation for amortization of loan costs from other underwriting expense to interest expense in
accordance with the Company's adoption of Accounting Standards Update 2015-03. As a result, other underwriting expense
and total underwriting expense decreased and income from operating activities, before tax and interest expense increased by
$56,000. This restatement had a negligible impact on the other underwriting expense ratio, the total underwriting expense ratio
and the combined ratio for the year ended December 31, 2015.
39
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 claims experience
of the underlying risks. We record net claims incurred based on an actuarial analysis of the estimated claims 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 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.
Acquisition costs 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 underwriting expenses consist primarily of personnel related expenses (including salaries, benefits and certain costs
associated with awards under our equity compensation plans, such as share-based compensation expense) and other general
operating expenses. We believe that because a portion of our personnel expenses are relatively fixed in nature, increased writings
may improve our operating scale and may lead to reduced operating expense ratios.
Year ended December 31, 2016 compared to year ended December 31, 2015:
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
Total
2016
2015
$
$
223,801 $
(2)
1,296
225,095 $
207,767
177
1,342
209,286
% Change
7.7 %
(101.1)%
(3.4)%
7.6 %
For the year ended December 31, 2016, gross premium written was $225.1 million compared to $209.3 million for the year ended
December 31, 2015, representing a 7.6% increase. This increase primarily resulted from growth in livery/limousine and para-
transit gross premiums written of approximately $41.1 million offset by a $25.6 million decrease in taxi gross premiums written.
The growth in livery/limousine and para-transit gross premiums written resulted from having a full year's worth of Global Liberty
premium for 2016 as compared to the 9-1/2 months we had in 2015, coupled with market share growth in those products. The
decrease in taxi business included overall reduction in available vehicles to insure, a $4.3 million excess taxi account and a few
larger fleet accounts that were not renewed during 2016 due to our disciplined underwriting practice.
40
For the year ended December 31, 2016, gross premium written from commercial automobile was $223.8 million, representing a
7.7% increase relative to the year ended December 31, 2015. This increase is attributable to Atlas' continued geographic expansion
as a positive response from both new and existing agents and insureds to Atlas' value proposition. We wrote $75.8 million and
$86.8 million of new gross premium written business for the years ended December 31, 2016 and 2015, respectively. Of these
amounts, Global Liberty, our most recent acquisition, contributed $19.3 million and $20.6 million in new premiums written for
the years ended December 31, 2016 and 2015, respectively. With respect to our traditional commercial automobile, which excludes
excess taxi, gross premium written was $215.7 million, an increase of 10.4% versus the year ended December 31, 2015. As a
percentage of the Insurance Subsidiaries’ overall book of business, commercial auto gross premium written represented 99.4% of
gross, and 99.9% of net, premium written for the year ended December 31, 2016 compared to 99.3% and 99.4%, respectively,
during the year ended December 31, 2015.
In-force premium was $224.6 million and $210.6 million as of December 31, 2016 and December 31, 2015, respectively. The
Company's gross unearned premium reserve was $113.2 million and $108.2 million as of December 31, 2016 and December 31,
2015, respectively. The increase in gross unearned premium reserves and in-force premium since December 31, 2015 primarily
resulted from growth in the states of California, Nevada, New Jersey, New York and Washington offset by a reduction in business
in the state of Michigan.
Geographic Concentration
Gross Premium Written by State ($ in '000s)
Year Ended December 31,
New York
California
Illinois
Louisiana
Minnesota
Michigan
Nevada
Virginia
Texas
Ohio
Other
Total
2016
2015
$ 69,737
29,784
12,398
10,337
9,542
9,002
7,966
7,940
7,881
5,942
54,566
$225,095
31.0% $ 61,331
24,592
13.2%
11,741
5.5%
11,884
4.6%
11,178
4.3%
12,178
4.0%
4,536
3.5%
7,134
3.5%
9,462
3.5%
6,124
2.6%
24.3%
49,126
100.0% $209,286
29.3%
11.8%
5.6%
5.7%
5.3%
5.8%
2.2%
3.4%
4.5%
2.9%
23.5%
100.0%
As illustrated by the table above, 31.0% of Atlas’ gross premium written year ended December 31, 2016 came from New York
and 58.6% came from the five states currently producing the most premium volume, as compared to 58.2% for the year ended
December 31, 2015. Global Liberty experienced the highest gross premium written growth among the Insurance Subsidiaries for
the year ended December 31, 2016 in these top five states due to having a full year's worth of premium in 2016.
Ceded Premium Written
Ceded premium written is equal to premium ceded under the terms of Atlas’ in force reinsurance treaties. Effective July 1, 2014,
Atlas implemented a quota share reinsurance agreement with Swiss Reinsurance America Corporation ("Swiss Re") for its
commercial auto and general liability lines of business ("Quota Share") written by American Country, American Service and
Gateway, or collectively "ASI Pool Subsidiaries." This reinsurance agreement had an initial cession rate of 5%, which was increased
to 15% effective April 1, 2015, and then was decreased to 5% effective July 1, 2016. The Quota Share provides the Company with
financial flexibility to manage expected growth and the timing of potential future capital raising activities.
For 2015, Global Liberty had a 20% quota share reinsurance agreement with SCOR Reinsurance Company ("SCOR Re"). In
2016, this contract was replaced by a 25% quota share reinsurance agreement with Swiss Re for its commercial auto and general
liability lines of business ("Global Quota Share").
Ceded premium written increased 13.7% to $45.0 million for the year ended December 31, 2016 compared with $39.6 million for
the year ended December 31, 2015 primarily due to Atlas' participation in the Quota Share and Global Quota Share, product mix
and overall gross premium growth. As our limousine and para-transit business grows, we expect ceded premium written to increase
because, under the current market conditions, the reinsurance costs are more expensive for these products. Excluding the Quota
Share and Global Quota Share, ceded premiums written were $13.4 million and $10.5 million for the years ended December 31,
2016 and 2015, respectively.
41
Net Premium Written
Net premium written is equal to gross premium written less the ceded premium written under the terms of Atlas’ in-force reinsurance
treaties. Net premium written increased 6.1% to $180.1 million for the year ended December 31, 2016 compared with $169.7
million for the year ended December 31, 2015. These changes are attributed to the combined effects of the reasons 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 increased by $19.0 million to $171.1
million for the year ended December 31, 2016, a 12.5% increase compared with $152.1 million for the year ended December 31,
2015. The increase in net premiums earned is attributable to the combined effects of the reasons cited in the ‘Gross Premium
Written’ and ‘Ceded Premium Written’ sections above. Global Liberty accounted for $11.0 million of this increase. The remaining
increase in net earned premiums resulted from organic growth primarily in the states of California, Minnesota, Nevada, New York
and Virginia.
Based on a ongoing analysis of the niche markets on which we focus, we believe that the total number of rides, and accordingly
vehicle count, in these niche markets continues to grow. In 2016 we saw a decline in our taxi business as some passengers and
drivers migrated to a transportation network market. However, this was generally offset by corresponding growth in our limousine
and livery business. Growth in vehicle count in our limousine and livery business is positively influenced by passengers and
drivers increasingly participating in the transportation network market and we anticipate that it may outpace reductions in taxi
business over time. Growth in our para-transit business is correlated with demographic trends in the U.S. We believe that our
Insurance Subsidiaries can continue to grow these specialty products to within a market share of 20% without having a
disproportionate share of the market. Atlas’ focus has been, and continues to be, utilizing our expertise, experience and strong
value proposition to maximize underwriting profit. It is important to note that we continue to see favorable market trends within
our niche and believe that increased opportunity to expand underwriting margin still exists. These projections are subject to change
should the competitive environment reverse from current trends.
Net Claims Incurred
The loss ratio relating to the net claims incurred for the year ended December 31, 2016 was 78.8% compared to 59.2% for the
year ended December 31, 2015. The loss ratio increase was primarily the result of the Company's re-estimation of its unpaid
claims liabilities on prior accident years, creating a 19.6% increase in loss ratio for the year ended December 31, 2016. Atlas
experienced $32.6 million in unfavorable prior accident year development for the year ended December 31, 2016. The unfavorable
development is primarily from our core commercial automobile liability line. Excluding pre-acquisition Global Liberty claims
reserve development, the development of our core lines on prior accident years was $23.2 million for the year ended December
31, 2016. Michigan commercial automobile claims accounted for approximately 62.5% of this development.
As a percentage of the Company’s policy count, business written in the state of Michigan was reduced significantly on a year-
over-year basis beginning in 2013 as a result of relative underperformance. In 2012, Michigan business represented 18.5% of
total policy count; in the past year, policies in that state represented 4.5% of the total. Despite the reduction in relative exposure,
losses paid in connection with Michigan claims have been disproportionate, representing 21% of all loss amounts paid in 2016
for commercial auto liability claims. Claims paid under $25,000 represented 43% of the total paid in the state with average severity
in this cohort increasing 24% on a year over year basis in 2016. In particular, average severity for personal injury protection
(“PIP”) coverage, which is mandatory in Michigan, paid in 2016 increased by 115% as compared to 2015, litigated PIP claim
settlements increased by 25% year over year and PIP claims closing without payment decreased from 50% to 32%. Severity trends
for large claims were more stable. In total, based on claim payment made through year-end 2016, Michigan claims for policy
years 2010 through 2015 exceeded the amount that would have been proportionate by approximately $23 million.
Atlas will only write its products in states where it believes the Company can generate an above average underwriting profit.
Having taken actions to eliminate this exposure, the Company anticipates business in Michigan to be less than 1% of Atlas’ in-
force business by the end of 2017.
As a specialist, Atlas puts a priority on addressing changes in our market in a nimble way. To this end, in recent years Atlas
enhanced and initiated numerous underwriting and claim related processes designed to leverage our expertise in the specialty light
commercial auto sector, including the elevated use of predictive analytics. We have proactively compressed settlement time,
particularly with respect to larger claims, providing earlier visibility into potentially changing claim trends. It is important to
acknowledge our entire claims team’s excellent work, including our Michigan adjusters who are diligently addressing the challenges
in that market. Observations from the year-end 2016 reserve analysis that led to the conclusion that reserve strengthening for
older years appears appropriate also confirm our belief that the changes made in our claim process may yield an overall better
result in our ultimate loss costs going forward. The Company is committed to learn from the factors surrounding our reserve
strengthening to ensure we can react to changes in our industry and niche as quickly as possible in the future.
42
Pre-acquisition Global Liberty claims reserve development was $7.9 million for the year ended December 31, 2016. The remaining
unfavorable prior year development of $1.5 million for the year ended December 31, 2016 is attributable to assigned risk pools
and run-off non-core business.
We expect the loss ratio for our excess taxi program to remain within the range of 45% to 50% of net earned premiums. We believe
that our extensive experience and expertise with respect to underwriting and claims management in all our commercial lines will
allow us to maintain or improve loss ratios going forward. The Company is committed to retain this claims handling expertise as
a core competency as the volume of business increases.
Acquisition Costs and Other Underwriting Expenses
Acquisition costs represent commissions and taxes incurred on net premium earned offset by ceding commission on business
reinsured by the Quota Share and Global Quota Share. Acquisition costs were $18.8 million for the year ended December 31,
2016, or 11.0% of net premium earned, as compared to 12.2% for the year ended December 31, 2015. The decrease in the ratio
is primarily due to the Quota Share's and Global Quota Share's ceding commissions. On a pro-forma basis, without the effect of
the Quota Share and Global Quota Share, the acquisition costs would have been 15.1% for the year ended December 31, 2016, as
compared to 14.7% for the year ended December 31, 2015.
The other underwriting expense ratio (including share-based compensation expenses and expenses incurred related to acquisitions
and stock purchase agreements) was 13.1% for the year ended December 31, 2016 compared to 16.8% for the year ended December
31, 2015. Expenses recovered pursuant to stock purchase agreements lowered the other underwriting expense ratio by 3.7% for
the year ended December 31, 2016. Bad debt expense totaled $2.4 million for the year ended December 31, 2016 compared to
$622,000 for the year ended December 31, 2015. The increase resulted from the re-estimation of the allowance and the reserving
for specific premium receivable accounts past due. Bad debt expense increased the other underwriting expense ratio by 1.4% for
the year ended December 31, 2016. Changes in our Quota Share reinsurance during 2016 had an impact on the reported other
underwriting expense ratio when comparing year to year. On a pro-forma basis, without the effect of the Quota Share, the other
underwriting expense ratio would have been 11.0% for the year ended December 31, 2016 compared to 14.9% for the year ended
December 31, 2015. The growth of our core lines and our increasing operational scale has had a positive impact on this ratio.
Also, while the Quota Share and Global Quota Share provide a ceding commission to offset underwriting expense, this commission
reduces acquisition costs rather than other underwriting expenses on the income statement. With this in mind, acquisition costs
and other underwriting expenses should be examined collectively as total underwriting expenses to understand operating efficiency.
Combined Ratio
Atlas' combined ratio for the year ended December 31, 2016 was 102.9%, compared to 88.2% for the year ended December 31,
2015.
Underwriting profitability, as opposed to overall profitability or net earnings, is measured by the combined ratio. The combined
ratio is the sum of the claims and claims adjustment expense ratio, the acquisition cost ratio, and the underwriting expense ratio.
The change in underwriting profitability is attributable to the factors described in the 'Net Premium Earned', ‘Net Claims Incurred’,
‘Acquisition Costs and Other Underwriting Expenses’ sections above.
43
The table below indicates the impact of the Quota Share and Global Quota Share on the various components of the combined ratio
for the years ended December 31, 2016 and 2015:
($ in '000s, percentages to net earned premiums)
Year Ended December 31,
Gross of Quota Share and Global Quota Share:
Net premiums earned
Net claims incurred1
Acquisition costs
Other insurance general and administrative expenses2
Expenses (recovered) incurred related to acquisitions and stock purchase
agreements3
Share-based compensation expense
2016
2015
Amount
%
Amount
%
$ 204,228
100.0 % $ 170,737
100.0%
151,873
30,827
27,237
(6,297)
1,552
74.4 %
15.1 %
13.3 %
(3.1)%
0.8 %
99,394
25,093
21,971
1,941
1,613
58.2%
14.7%
12.9%
1.1%
0.9%
Total underwriting (loss) profit and combined ratio
$
(964)
100.5 % $
20,725
87.8%
Net of Quota Share and Global Quota Share:
Net premiums earned
Net claims incurred
Acquisition costs
Other insurance general and administrative expenses2
Expenses (recovered) incurred related to acquisitions and stock purchase
agreements3
Share-based compensation expense
Total underwriting (loss) profit and combined ratio
$ 171,058
100.0 % $ 152,064
100.0%
134,746
18,803
27,237
(6,297)
1,552
(4,983)
$
78.8 %
11.0 %
15.9 %
(3.7)%
0.9 %
89,994
18,592
21,971
1,941
1,613
102.9 % $
17,953
59.2%
12.2%
14.4%
1.3%
1.1%
88.2%
1 - For 2016, net claims incurred, gross of the quota share, for the current accident year was $115.2 million with a combined ratio
impact of 56.5%. For the prior accident years net claims incurred, gross of the quota share was $36.7 million with a combined
ratio impact of 17.9%.
2 - For 2015, we restated our presentation for amortization of loan costs from other underwriting expense to interest expense in
accordance with the Company's adoption of Accounting Standards Update 2015-03. The restatement decreased other insurance
general and administrative expense and increased the total underwriting profit by $56,000. The restatement had a negligible
impact on the other insurance general and administrative expense ratio and the combined ratio for the year ended December
31, 2015. For 2015, we combined our presentation of amortization of intangible assets and other insurance general and
administrative expenses.
3 - For 2015, we reclassified our presentation for costs related to acquisition and stock purchase agreements from non-operating
expenses to other underwriting expenses. The reclassification decreased both gross and net total underwriting profit by $1.9
million, increased the gross combined ratio by 1.1% and increased the net combined ratio by 1.3% for the year ended December
31, 2015.
Net Investment Income
Net investment income is primarily comprised of interest income, dividend income, and income from other invested assets, net
of investment expenses, which are comprised of investment management fees, custodial fees, and allocated salaries. Net investment
income, net of investment expenses, increased by 21.3% to $4.8 million for the year ended December 31, 2016, compared to $4.0
million for the year ended December 31, 2015. These amounts are primarily comprised of interest income. This increase was
primarily due to the acquisition of Anchor and change in investment mix with higher yields. The gross yield on our fixed income
securities was 2.2% for each of the years ended December 31, 2016 and 2015. The gross yield on our cash and cash equivalents
was 0.1% for each of the years ended December 31, 2016 and 2015. For the year ended December 31, 2016, equity method
investments and collateral loans generated investment income of $1.9 million, compared to investment income of $1.3 million
for the year ended December 31, 2015. This increase is primarily due to interest income on our collateral loan investments.
44
Net Realized Investment Gains
Net realized investment gains is comprised of the gains and losses from the sales of investments. Net realized investment gains
for the year ended December 31, 2016 were $1.2 million compared to $455,000 for the year ended December 31, 2015. This
increase resulted primarily from gains on the sale of state/political subdivision and corporate fixed income securities under favorable
market conditions.
Other Income
Atlas recorded other income for the year ended December 31, 2016 of $467,000 compared to other income of $356,000 for the
year ended December 31, 2015. The increase in other income resulted from rental income and the recovery of previously escheated
funds.
Expenses Related to Acquisitions and Stock Purchase Agreements
Atlas recovered $6.3 million of expenses pursuant to the contingent adjustments of the Gateway and Anchor stock purchase
agreements that included the redemption and cancellation of preferred shares for the year ended December 31, 2016. For the year
ended December 31, 2015, Atlas recognized total expenses of $1.9 million related to the acquisition of Anchor and pursuant to
the contingent adjustments relative to the Gateway stock purchase agreement. The Anchor costs of $999,000 were incurred to
effect the business combination and included legal fees, advisory services, accounting fees, and internal general and administrative
costs. The Gateway expense of $942,000 related to the terms of the Gateway stock purchase agreement and the issuance of
preferred shares pursuant to the terms of such agreement.
Income before Income Taxes
Atlas generated pre-tax income of $512,000 for the year ended December 31, 2016 compared to pre-tax income of $22.0 million
for year ended December 31, 2015. The causes of these changes are attributed to the combined effects of the reasons cited in the
'Net Premium Earned', 'Net Claims Incurred', 'Acquisition Costs and Other Underwriting Expenses', 'Net Investment Income', 'Net
Realized Investment Gains', and 'Other Income' sections above.
Income Tax (Benefit) Expense
Atlas recognized $2.1 million of tax benefit for the year ended December 31, 2016 and recognized $7.6 million of tax expense
for the year ended December 31, 2015. The following table reconciles the U.S. statutory marginal income tax rate of 35.0% to
the effective tax rate for the years ended December 31, 2016 and 2015:
Tax Rate Reconciliation ($ in '000s)
Year Ended December 31,
Provision for taxes at U.S. statutory marginal income tax rate
Nondeductible expenses
Tax-exempt income
State tax (net of federal benefit)
Nondeductible acquisition accounting adjustment
Change in statutory tax rate
Other
Provision for income taxes for continuing operations
2016
2015
Amount
179
$
24
(39)
28
(2,204)
—
(122)
$ (2,134)
%
35.0 % $
Amount
7,716
4.7 %
(7.6)%
5.5 %
(430.5)%
— %
(23.9)%
(416.8)% $
124
(89)
118
329
(471)
(111)
7,616
%
35.0 %
0.6 %
(0.4)%
0.5 %
1.5 %
(2.1)%
(0.6)%
34.5 %
Upon the transaction forming Atlas on December 31, 2010, a yearly limitation as required by IRC Section 382 that applies to
changes in ownership on the future utilization of Atlas’ net operating loss carryforwards was calculated. The Insurance Subsidiaries’
prior parent retained those tax assets previously attributed to the Insurance Subsidiaries that 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 have been permanently limited to the amount determined under IRC 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 had net income of $2.6 million for the year ended December 31, 2016 compared to $14.4 million for the year ended December
31, 2015. After taking the impact of the liquidation preference of the preferred shares into consideration, the earnings per common
share diluted for the year ended December 31, 2016 was $0.19 versus earnings per common share diluted of $1.13 for the year
ended December 31, 2015.
45
The following chart illustrates Atlas' potential dilutive common shares for the years ended December 31, 2016 and 2015:
Year Ended December 31,
Basic weighted average common shares outstanding
Dilutive potential ordinary shares:
Dilutive stock options
Dilutive shares upon preferred share conversion
Diluted weighted average common shares outstanding
2016
2015
12,045,519
11,975,579
177,364
—
186,656
573,444
12,222,883
12,735,679
The effects of convertible instruments are excluded from the computation of earnings per common share diluted in periods in
which the effect would be anti-dilutive. Convertible preferred shares are anti-dilutive when the amount of dividend declared or
accumulated in the current period per common share obtainable upon conversion exceeds earnings per common share basic. For
the year ended December 31, 2016, all exercisable stock options were deemed to be dilutive and all of the convertible preferred
shares were deemed to be anti-dilutive. The potentially dilutive impact for the convertible preferred stock excluded from the
calculation due to anti-dilution is 441,357 common shares for the year ended December 31, 2016. For the year ended December
31, 2015, all of the convertible preferred shares and all exercisable stock options were deemed to be dilutive.
46
Year ended December 31, 2015 compared to year ended December 31, 2014:
Gross Premium Written
The following table summarizes gross premium written by line of business.
Gross Premium Written by Line of Business ($ in '000s)
Year Ended December 31,
Commercial automobile
Surety
Other
Total
2015
2014
$
$
207,767 $
177
1,342
209,286 $
119,539
2,959
(66)
122,432
% Change
73.8 %
(94.0)%
(2133.3)%
70.9 %
For the year ended December 31, 2015, gross premium written was $209.3 million compared to $122.4 million for the year ended
December 31, 2014, representing a 70.9% increase. Global Liberty accounted for $39.8 million or 45.6% of this increase of gross
premium written. Total gross premium written related to the excess taxi program was $12.4 million and $13.0 million for the years
ended December 31, 2015 and 2014, respectively, and is included in the "commercial automobile" line of business.
For the year ended December 31, 2015, gross premium written from commercial automobile was $207.8 million, representing a
73.8% increase relative to the year ended December 31, 2014. This substantial increase is primarily the result of the planned
expansion of the commercial auto business. Excluding Global Liberty, we wrote $66.2 million and $44.8 million of new gross
premium written business for the years ended December 31, 2015 and 2014, respectively. With respect to our traditional commercial
automobile, which excludes excess taxi, gross premium written was $195.4 million, an increase of 83.4% versus the year ended
December 31, 2014. As a percentage of the Insurance Subsidiaries’ overall book of business, commercial auto gross premium
written represented 99.3% of gross, and 99.4% of net, premium written for the year ended December 31, 2015 compared to 97.6%
and 99.6%, respectively, during the year ended December 31, 2014.
Geographic Concentration
Gross Premium Written by State ($ in '000s)
Year Ended December 31,
New York
California
Michigan
Louisiana
Illinois
Minnesota
Texas
Virginia
Ohio
Nevada
Other
Total
2015
2014
$ 61,331
24,592
12,178
11,884
11,741
11,178
9,462
7,134
6,124
4,536
49,126
$209,286
29.3% $ 28,977
9,417
11.8%
10,104
5.8%
6,053
5.7%
12,947
5.6%
6,770
5.3%
4,702
4.5%
3,865
3.4%
4,995
2.9%
1,543
2.2%
33,059
23.5%
100.0% $122,432
23.7%
7.7%
8.3%
4.9%
10.6%
5.5%
3.8%
3.2%
4.1%
1.3%
26.9%
100.0%
As illustrated by the table above, 29.3% of Atlas’ gross premium written for the year ended December 31, 2015 came from New
York and 58.2% came from the five states currently producing the most premium volume, as compared to 55.8% for the year
ended December 31, 2014. Our commitment to expanding geographically resulted in 29 states with more than $1 million in written
premium in 2015 compared to 23 in 2014.
Ceded Premium Written
Ceded premium written is equal to premium ceded under the terms of Atlas’ in-force reinsurance treaties. The percentage of
premium ceded is driven by the business mix within our total premium base. From the period of April 1, 2014 to March 31, 2015,
the Quota Share's cession rate was 5%. We increased this percentage to 15% effective April 1, 2015. As a result of the Quota Share,
the acquisition of Global Liberty and overall gross premium growth, we saw our ceded premium written increase 259.7% to $39.6
million for the year ended December 31, 2015 compared with $11.0 million for the year ended December 31, 2014. Excluding
the Quota Share and Global Quota Share, ceded premiums written were $10.5 million and $4.0 million for the years ended December
31, 2015 and 2014, respectively.
47
Net Premium Written
Net premium written is equal to gross premium written less the ceded premium written under the terms of Atlas’ in-force reinsurance
treaties. Net premium written increased 52.3% to $169.7 million for the year ended December 31, 2015 compared with $111.4
million for the year ended December 31, 2014. These changes are attributed to the combined effects of the reasons 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 $152.1 million for the year ended
December 31, 2015, a 55.0% increase compared with $98.1 million for the year ended December 31, 2014. The increase in net
premiums earned is attributable to the combined effects of the reasons cited in the ‘Gross Premium Written’ and ‘Ceded Premium
Written’ sections above.
Net Claims Incurred
The loss ratio relating to the net claims incurred for the year ended December 31, 2015 was 59.2% compared to 62.3% for the
year ended December 31, 2014. The loss ratio improvement relative to the prior year was primarily the result of Atlas' core
commercial auto program, creating a 1.2% decrease in loss ratio for the year ended December 31, 2015. Atlas experienced $166,000
in unfavorable prior year development for the year ended December 31, 2015. Unfavorable prior accident year development on
non-core lines and assigned risk pools was $870,000 for the year ended December 31, 2015. This increase was offset by favorable
prior accident year development of $475,000 and $230,000 on our core lines and pre-acquisition Global Liberty claims reserves,
respectively. This favorable development on our core lines was attributable to our traditional taxi and excess taxi products.
Acquisition Costs and Other Underwriting Expenses
Acquisition costs represent commissions and taxes incurred on net premium earned offset by ceding commission on business
reinsured by the Quota Share. Acquisition costs were $18.6 million for the year ended December 31, 2015, or 12.2% of net
premium earned, as compared to 14.3% for the year ended December 31, 2014. On a pro-forma basis, without the effect of the
Quota Share, the acquisition costs would have been 14.7% for the year ended December 31, 2015, as compared to 14.6% for the
year ended December 31, 2014.
The other underwriting expense ratio (including share-based compensation expenses and expenses incurred related to acquisitions
and stock purchase agreements) was 16.8% for the year ended December 31, 2015 compared to 14.8% for the year ended December
31, 2014. This increase in the ratio was primarily due the effects of the Quota Share. On a pro-forma basis, without the effect of
the Quota Share, the other underwriting costs would have been 14.9% for the year ended December 31, 2015, as compared to
14.7% for the year ended December 31, 2014.
Combined Ratio
Atlas' combined ratio for the year ended December 31, 2015 was 88.2%, compared to 91.4% for the year ended December 31,
2014. The change in underwriting profitability is attributable to the factors described in the 'Net Premium Earned', ‘Net Claims
Incurred’, ‘Acquisition Costs and Other Underwriting Expenses’ sections above.
48
The table below indicates the impact of the Quota Share on various components of the combined ratio for the years ended December
31, 2015 and 2014:
($ in '000s, percentages to net earned premiums)
Year Ended December 31,
Gross of Quota Share:
Net premiums earned
Net claims incurred
Acquisition costs
Other insurance general and administrative expenses1
Expenses incurred related to acquisitions and stock purchase agreements2
Share-based compensation expense
2015
2014
Amount
%
Amount
%
$ 170,737
100.0% $
99,223
100.0%
99,394
25,093
21,971
1,941
1,613
58.2%
14.7%
12.9%
1.1%
0.9%
61,629
14,447
12,393
694
1,470
62.1%
14.6%
12.5%
0.7%
1.5%
91.4%
Total underwriting profit and combined ratio
$
20,725
87.8% $
8,590
Net of Quota Share:
Net premiums earned
$ 152,064
100.0% $
98,124
100.0%
Net claims incurred
Acquisition costs
Other insurance general and administrative expenses1
Expenses incurred related to acquisitions and stock purchase agreements2
Share-based compensation expense
89,994
18,592
21,971
1,941
1,613
59.2%
12.2%
14.4%
1.3%
1.1%
Total underwriting profit and combined ratio
$
17,953
88.2% $
61,078
14,048
12,393
694
1,470
8,441
62.3%
14.3%
12.6%
0.7%
1.5%
91.4%
1 - For 2015, we restated our presentation for amortization of loan costs from other underwriting expense to interest expense in
accordance with the Company's adoption of Accounting Standards Update 2015-03. The restatement decreased other insurance
general and administrative expense and increased the total underwriting profit by $56,000. The restatement had a negligible
impact on the other insurance general and administrative expense ratio and the combined ratio for the year ended December
31, 2015. For 2015, we combined our presentation of amortization of intangible assets and other insurance general and
administrative expenses.
2 - For 2015 and 2014, we reclassified our presentation for costs related to acquisition and stock purchase agreements from non-
operating expenses to other underwriting expenses. The reclassification decreased both gross and net total underwriting profit
by $1.9 million and $694,000, respectively, increased the gross combined ratio by 1.1% and 0.7%, respectively, and increased
the net combined ratio by 1.3% and 0.7%, respectively, for the years ended December 31, 2015 and 2014.
Net Investment Income
Net investment income, net of investment expenses, increased by 27.8% to $4.0 million for the year ended December 31, 2015,
compared to $3.1 million for the year ended December 31, 2014. These amounts are primarily comprised of interest income. This
increase was primarily due to higher return on certain securities in our investment portfolio. The gross yield on our fixed income
securities was 2.2% for each of the years ended December 31, 2015 and 2014. The gross yield on our cash and cash equivalents
was 0.1% for each of the years ended December 31, 2015 and 2014. For the year ended December 31, 2015, equity method
investments and collateral loans generated investment income of $1.3 million, compared to investment income of $693,000 for
the year ended December 31, 2014. The increase resulted from favorable changes to the equity in investees.
Net Realized Investment Gains
Net realized investment gains for the year ended December 31, 2015 were $455,000 compared to $382,000 for the year ended
December 31, 2014. This increase resulted primarily from gains on the sale of fixed income securities under favorable market
conditions offset by losses on common stock and real estate sold in Alabama.
Other Income
Atlas recorded other income for the year ended December 31, 2015 of $356,000 compared to other income of $2,000 for the year
ended December 31, 2014. The increase in other income was mostly fee income generated by our premium finance companies.
49
Expenses Related to Acquisitions and Stock Purchase Agreements
For the year ended December 31, 2015, Atlas recognized total expenses of $1.9 million related to the acquisition of Anchor and
pursuant to the contingent adjustments relative to the Gateway stock purchase agreement. The Anchor costs of $999,000 were
incurred to effect the business combination and included legal fees, advisory services, accounting fees, and internal general and
administrative costs. The Gateway expense of $942,000 related to the terms of the Gateway stock purchase agreement and the
issuance of preferred shares pursuant to the terms of such agreement.
For the year ended year ended December 31, 2014, Atlas recognized $694,000 of expenses related to the acquisition of Anchor.
Income before Income Taxes
Atlas generated pre-tax income of $22.0 million for the year ended December 31, 2015 compared to pre-tax income of $11.9
million for year ended December 31, 2014. The causes of these changes are attributed to the combined effects of the reasons cited
in the 'Net Premium Earned', 'Net Claims Incurred', 'Acquisition Costs and Other Underwriting Expenses', 'Net Investment Income',
'Net Realized Investment Gains', and 'Other Income' sections above.
Income Tax Expense (Benefit)
Atlas recognized $7.6 million of tax expense for the year ended December 31, 2015 and recognized $5.8 million of tax benefit
for the year ended December 31, 2014. The Company was able to reverse its deferred tax asset valuation allowance to offset
substantially all current income tax expense for the year ended December 31, 2014. The following table reconciles the U.S. statutory
marginal income tax rate of 35.0% and 34.0% to the effective tax rate for the years ended December 31, 2015 and 2014, respectively:
Tax Rate Reconciliation ($ in '000s)
Year Ended December 31,
Provision for taxes at U.S. statutory marginal income tax rate
Provision for deferred tax assets deemed unrealizable (valuation allowance)
Nondeductible expenses
Tax-exempt income
State tax (net of federal benefit)
Tax net operating loss limitation write-down (excluding valuation allowance)
Nondeductible acquisition accounting adjustment
Change in statutory tax rate
Other
Provision for income taxes for continuing operations
$
2015
Amount
7,716
$
%
35.0 % $
2014
Amount
4,058
(9,446)
136
—
11
(519)
—
— %
0.6 %
(0.4)%
0.5 %
— %
1.5 %
(2.1)%
—
(7)
(0.6)%
34.5 % $ (5,767)
%
34.0 %
(79.1)%
1.1 %
— %
0.1 %
(4.3)%
— %
— %
(0.1)%
(48.3)%
—
124
(89)
118
—
329
(471)
(111)
7,616
Upon the transaction forming Atlas on December 31, 2010, a yearly limitation as required by IRC Section 382 that applies to
changes in ownership on the future utilization of Atlas’ net operating loss carryforwards was calculated. The Insurance Subsidiaries’
prior parent retained those tax assets previously attributed to the Insurance Subsidiaries that 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 have been permanently limited to the amount determined under IRC 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.
As part of our on-going analysis of deferred tax assets, management has assessed both positive and negative evidence according
to guidance provided by the FASB. Based on this guidance we have determined that it is more likely than not that the Company
will be able to fully utilize its DTAs as a result of the significant positive evidence and the lack of negative evidence. As such we
have evaluated our valuation allowance and determined that all DTAs net of DTLs are available to offset income in all future
periods and no valuation allowance is needed. This conclusion is based upon management’s evaluation of the new information
it has analyzed and not from management’s new evaluation or new interpretation of information that was available in a previous
financial reporting period. Accordingly, the Company recorded a reversal of its deferred tax asset valuation allowance of $9.4
million for the year ended December 31, 2014 commensurate with this conclusion.
50
Net Income and Earnings per Common Share
Atlas' net income was $14.4 million for the year ended December 31, 2015 versus net income of $17.7 million for the year ended
December 31, 2014. After taking the impact of the liquidation preference of the preferred shares into consideration, the earnings
per common share diluted for the year ended December 31, 2015 was $1.13 versus earnings per common share diluted of $1.56
for the year ended December 31, 2014.
The following chart illustrates Atlas' potential dilutive common shares for the years ended December 31, 2015 and 2014:
Year Ended December 31,
Basic weighted average common shares outstanding
Dilutive potential ordinary shares:
Dilutive stock options
Dilutive shares upon preferred share conversion
Diluted weighted average common shares outstanding
2015
2014
11,975,579
10,937,181
186,656
573,444
150,407
254,000
12,735,679
11,341,588
For the years ended December 31, 2015 and 2014, all of the convertible preferred shares and all exercisable stock options were
deemed to be dilutive.
51
IV. FINANCIAL CONDITION
Consolidated Statements of Financial Condition
($ in '000s, except for share and per share data)
Assets
Investments, available for sale
December 31,
2016
December 31,
2015
Fixed income securities, at fair value (amortized cost $157,451and $185,455)
$
156,487
$
183,773
Equity securities, at fair value (cost $5,598 and $4,147)
Other investments
Total Investments
Cash and cash equivalents
Accrued investment income
Premiums receivable (net of allowance of $2,366 and $846)
Reinsurance recoverables on amounts paid
Reinsurance recoverables on amounts unpaid
Prepaid reinsurance premiums
Deferred policy acquisition costs
Deferred tax asset, net
Goodwill
Intangible assets, net
Property and equipment, net
Other assets
Total Assets
Liabilities
Claims liabilities
Unearned premiums
Due to reinsurers
Notes payable, net
Other liabilities and accrued expenses
Total Liabilities
Shareholders’ Equity
Preferred shares, $0.001 par value, 100,000,000 shares authorized, shares issued and
outstanding: December 31, 2016 - 0 and December 31, 2015 - 6,940,500. Liquidation
value $1.00 per share
Ordinary voting common shares, $0.003 par value, 266,666,667 shares authorized, shares
issued and outstanding: December 31, 2016 - 11,895,104 and December 31, 2015 -
11,883,025
Restricted voting common shares, $0.003 par value, 33,333,334 shares authorized, shares
issued and outstanding: December 31, 2016 - 128,191 and December 31, 2015 - 132,863
Additional paid-in capital
Retained deficit
Accumulated other comprehensive loss, net of tax
Total Shareholders’ Equity
Total Liabilities and Shareholders’ Equity
52
6,223
32,181
194,891
29,888
1,228
77,386
7,786
35,370
13,372
13,222
18,498
2,726
4,535
11,770
12,905
4,240
22,937
210,950
22,354
1,036
82,529
3,277
29,399
17,412
10,235
17,166
2,726
4,925
2,589
6,694
$
$
$
$
$
$
423,577
$
411,292
139,004
$
113,171
8,369
19,187
16,504
127,011
108,202
10,781
17,219
18,457
296,235
$
281,670
— $
6,941
36
—
199,244
(71,718)
(220)
127,342
423,577
$
$
36
—
198,041
(74,364)
(1,032)
129,622
411,292
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. Atlas also invests
opportunistically in selective direct investments with favorable return attributes. 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.
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. To the extent that interest rates
increase or decrease, unrealized gains or losses may result. We believe that our investment philosophy and approach significantly
mitigate the likelihood of such gains or losses being realized.
Portfolio Composition
Atlas held securities with a fair value of $162.7 million as of December 31, 2016, which were primarily comprised of fixed income
securities. The securities held by the Insurance Subsidiaries must comply with applicable regulations that prescribe the type, quality
and concentration of securities. These regulations in the various jurisdictions in which the Insurance Subsidiaries are domiciled
permit investments in government, state, municipal and corporate bonds, preferred and common equities, and other high quality
investments, within specified limits and subject to certain qualifications.
The fair value for Atlas’ investments in fixed income securities and equities by type and sector are as follows:
Fair Value of securities portfolio ($ in '000s)
As of December 31,
Fixed Income Securities:
U.S. Treasury and other U.S. government obligations
States, municipalities and political subdivisions
Corporate
Banking/financial services
Consumer goods
Capital goods
Energy
Telecommunications/utilities
Health care
Total Corporate
Mortgage Backed
Mortgage backed - agency
Mortgage backed - commercial
Total Mortgage Backed
Other asset backed
Total Fixed Income Securities
Equities
Totals
2016
2015
$
22,474 $
10,470
22,852
8,593
7,873
3,735
7,617
1,357
52,027
34,014
21,158
55,172
16,344
23,483
22,154
21,914
7,735
15,095
4,406
11,875
3,021
64,046
34,673
19,875
54,548
19,542
$
$
156,487 $
183,773
6,223
4,240
162,710 $
188,013
Total investment holdings declined to $194.9 million due to the sale of investments and the return of capital to support operations
and to purchase the building and land for the Company's new headquarters in Schaumburg, Illinois.
Most of the Company’s holdings are impacted by the U.S economy, and we anticipate a very moderate impact from global economic
conditions on the domestic economy. Global economic conditions may create brief periods of market volatility, but we do not
believe it will alter the fundamental outlook of the Company’s investment holdings.
53
Other Investments
Atlas' other investments are comprised of collateral loans and various limited partnerships that invest in income-producing real
estate, equities, or insurance linked securities. Atlas accounts for these limited partnership investments using the equity method
of accounting. As of December 31, 2016, the carrying values of these other investments were approximately $32.2 million versus
approximately $22.9 million as of December 31, 2015. The carrying values of the equity method limited partnerships were $24.9
million and $22.8 million as of December 31, 2016 and December 31, 2015, respectively. The increase in the carrying value of
the limited partnerships was primarily due to the purchase of investments and favorable changes in the net book value of certain
limited partnerships offset by the return of capital. The carrying value of these investments is Atlas' share of the net book value
for each limited partnership, an amount that approximates fair value. Atlas receives payments on a routine basis that approximate
the income earned on one of the limited partnerships that invest in income-producing real estate. The carrying values of the
collateral loans were $7.2 million and $98,000 as of December 31, 2016 and December 31, 2015, respectively. The increase in
the carrying value of the collateral loans was due to the investment in three additional loans in 2016.
The following table summarizes investments in equity method investments by investment type as of December 31, 2016 and
December 31, 2015:
($ in '000s)
As of December 31,
Real estate
Insurance linked securities
Activist hedge funds
Venture capital
Total Equity Method Investments
Liquidity and Cash Flow Risk
Unfunded
Commitments
2016
Carrying Value
2016
2015
$
$
2,497 $
10,514 $
10,202
—
—
300
9,178
4,336
906
8,747
3,685
205
2,797 $
24,934 $
22,839
The following table summarizes the amortized cost and fair value by contractual maturities of the fixed income securities portfolio,
excluding cash and cash equivalents, at the dates indicated.
Amortized Cost and 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 contractual maturity
Total mortgage and asset backed
Total
Amortized
Cost
2016
Fair
Value
$
8,729 $
43,772
27,618
5,389
85,508
71,943
8,732
43,808
27,263
5,168
84,971
71,516
$ 157,451 $ 156,487
%
Amortized
Cost
2015
Fair
Value
11,518
5.6% $
54,752
28.0%
35,148
17.4%
8,265
3.3%
109,683
54.3%
45.7%
74,090
100.0% $ 185,455 $ 183,773
11,494 $
55,371
35,462
8,645
110,972
74,483
%
6.3%
29.8%
19.1%
4.5%
59.7%
40.3%
100.0%
As of December 31, 2016, 33.6% of the fixed income securities, including treasury bills, bankers’ acceptances, government bonds
and corporate bonds had contractual maturities of five years or less, compared to 36.1% as of December 31, 2015. 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 a high quality securities portfolio provides us with sufficient liquidity. As
of December 31, 2016, the fixed income securities had a weighted average life of 4.1 years and a duration of 3.4 years, compared
to a weighted average life of 4.1 years and a duration of 3.3 years as of December 31, 2015. Changes in interest rates may 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.
The debt-to-equity ratio is the sum of the Company's long-term debt and interest payable divided by total shareholders' equity.
The Company's debt-to-equity ratio as of December 31, 2016 and December 31, 2015 was 15.2% and 14.9%, respectively. The
increase is primarily the result of the redemption and cancellation of preferred shares and additional draws on our line of credit
with Fifth Third Bank. Refer to the 'Shareholders' Equity' and 'Liquidity and Capital Resources' subsections of the 'Financial
Condition' section for further information.
54
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, agents 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 insurance policies,
however, are distributed by agents who may manage cash collection on its behalf pursuant to the terms of their agency agreement.
Atlas has protocols 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.
As of December 31, 2016, Atlas' allowance for bad debt was $2.4 million, compared to $846,000 as of December 31, 2015. This
increase in the allowance for bad debt was related to the re-estimation of the allowance and the reserving for specific premium
receivable accounts past due.
The following table summarizes the composition of the fair value of the fixed income securities portfolio, excluding cash and cash
equivalents, as of the dates indicated, by ratings assigned by Fitch, S&P or Moody’s Investors Service. The fixed income securities
portfolio consists of predominantly investment grade securities in corporate and government bonds with 99.2% rated ‘BBB’ or
better as of December 31, 2016 compared to 99.3% as of December 31, 2015.
Credit Ratings of Fixed Income Securities Portfolio ($ in '000s)
As of December 31,
2016
2015
AAA/Aaa1
AA/Aa1
A/A
BBB/Baa
BB
B
Total Fixed Income Securities
Amount
44,521
$
64,324
23,427
22,886
1,114
215
$ 156,487
% of
Total
Amount1
44,110
83,116
28,765
26,512
1,270
—
100.0% $ 183,773
28.5% $
41.1%
15.0%
14.6%
0.7%
0.1%
% of
Total
24.0%
45.2%
15.7%
14.4%
0.7%
—%
100.0%
1 - In 2016, our external investment portfolio manager switched rating agencies for U.S. Treasury, agency and mortgage backed
securities from Fitch or Moody's 'AAA' to S&P 'AA.' As a result, we have restated fair values of these fixed income securities as
of December 31, 2015 using the S&P rating for comparative purposes.
Other-than-temporary impairment
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
did not recognize any charges for securities impairments that were considered other-than-temporary for the years ended December
31, 2016, 2015, and 2014.
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.
The total fair value of the securities in an unrealized loss position as of December 31, 2016 was $91.9 million compared to $123.6
million as of December 31, 2015. This decrease was primarily driven by the positive changes in market value during 2016. Atlas
has the ability and intent to hold the securities in an unrealized loss position until their fair value is recovered. Therefore, Atlas
does not expect the market value loss position of these investments to be realized in the near term.
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 claims.
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 claims 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.
55
Atlas generally purchases reinsurance to limit net exposure to a maximum amount on any one claim 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. As a result, the
Company has entered into the Quota Share with Swiss Re for ASI Pool Subsidiaries. Under this contract, cessions can be increased
at our election should we want to utilize it as a means of deleveraging. This facility gives us flexibility in terms of the timing and
approach to potential future capital raising activities in light of anticipated increased operating leverage. Global Liberty historically
maintained lower reinsurance retention limits. For 2015, Global Liberty had a 20% quota share reinsurance with SCOR Re. In
2016, this contract was replaced by the Global Quota Share.
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 claims
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 $43.2 million recoverable from third party
reinsurers (exclusive of amounts prepaid) and other insurers as of December 31, 2016 as compared to $32.7 million as of
December 31, 2015. The increase in the recoverable from third party reinsurers resulted from an increase in incurred but not
reported (“IBNR”) reserves and an increase in amounts recoverable on paid claims. The increase in amounts recoverable on paid
claims is related to the timing of the settlement of the Quota Share balances.
Estimating amounts of reinsurance recoverables is also impacted by the uncertainties involved in the establishment of provisions
for unpaid claims and claims adjustment expenses. As underlying reserves potentially develop, the amounts ultimately recoverable
may vary from amounts currently recorded. Atlas’ reinsurance recoverables are generally unsecured, with the exception of the
new reinsurance agreement established as a condition to close the Gateway acquisition, which is secured by a letter of credit valued
at 150% of the claims and claims adjustment expense reserves. Atlas regularly evaluates its reinsurers, and the respective amounts
recoverable, and an allowance for uncollectible reinsurance is provided for, if needed.
Atlas’ largest reinsurance partners are Great American Insurance Company (“Great American”), a subsidiary of American Financial
Group, Inc., General Reinsurance Corporation ("Gen Re"), a subsidiary of Berkshire Hathaway, Inc., SCOR Re, a subsidiary of
SCOR U.S. Corporation, Swiss Re, a subsidiary of Swiss Reinsurance Company Ltd. and White Rock Insurance (SAC) Ltd.
("White Rock"). Great American has a financial strength rating of A1 from Moody's, Gen Re has a financial strength rating of
AA+ from Standard & Poor's, SCOR Re has a financial strength rating of Aa3 from Moody's, Swiss Re has a financial strength
rating of Aa3 from Moody's, and White Rock is unrated. The White Rock balances are specifically related to the Gateway workers'
compensation program that was exited during 2013 and are fully secured by a letter of credit and funds held on deposit.
Deferred Tax Asset
Components of Deferred Tax ($ in '000s)
As of December 31,
Deferred tax assets:
Losses carried forward
Unpaid claims liabilities and unearned premiums
Tax credits
Investments
Commissions
All other
Total gross deferred tax assets
Deferred tax liabilities:
Deferred policy acquisition costs
Investments
Fixed assets
Intangible assets
All other
Total gross deferred tax liabilities
Net deferred tax assets
56
2016
2015
$
$
14,535 $
8,546
662
—
1,269
2,184
27,196
4,628
475
559
1,328
1,708
8,698
18,498 $
12,656
8,122
662
36
1,306
1,457
24,239
3,582
—
401
1,465
1,625
7,073
17,166
Based on Atlas’ expectations of future taxable income, its ability to change its investment strategy, as well as reversing gross future
tax liabilities, management believes it is more likely than not that Atlas will fully realize the net future tax assets. The Company,
therefore, released its remaining valuation allowance as of December 31, 2014.
On July 22, 2013, as a result of shareholder activity, a "triggering event" as determined under IRC Section 382 occurred. As a
result, under IRC Section 382, the use of the Company's net operating loss and other carry-forwards 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 owning 5% or greater portions of the Company's shares.
Due to this triggering event, the Company estimates that it will retain total tax effected federal net operating loss carryforwards
of approximately $14.5 million as of December 31, 2016.
Atlas has the following total net operating loss carryforwards as of December 31, 2016:
Net Operating Loss Carryforward by Expiry ($ in '000s)
Year of Occurrence
Year of Expiration
2001
2002
2006
2007
2008
2009
2010
2011
2012
2015
Total
Buildings and Land
2021
2022
2026
2027
2028
2029
2030
2031
2032
2035
Amount
$
5,007
4,317
7,825
5,131
1,949
1,949
1,949
4,166
9,235
1
$ 41,529
In the fourth quarter of 2016, Atlas purchased a property in Schaumburg, Illinois to serve as the new corporate headquarters to
replace the current headquarters when our current office space lease expires in 2017. The building and land were purchased for
$9.3 million.
On November 13, 2015, Atlas sold one of its two properties located in Alabama and recognized a loss of $20,000. The remaining
property is listed for sale for an amount greater than its carried value.
Claims Liabilities
The table below shows the amounts of total case reserves and IBNR reserves as of December 31, 2016 and as of December 31,
2015. The provision for unpaid claims and claims adjustment expenses increased by 9.4% to $139.0 million as of December 31,
2016 compared to $127.0 million as of December 31, 2015. During the year ended December 31, 2016, case reserves increased
by 5.4% compared to December 31, 2015, while IBNR reserves increased by 12.0%. The increase in case reserves resulted from
management's review of outstanding unpaid personal injury protection claims, particularly in the state of Michigan. The increase
in IBNR related primarily to premium growth and updates in the estimated costs on outstanding unpaid claims.
Provision for Unpaid Claims by Type - Gross of Reinsurance ($ in '000s)
As of December 31,
Case reserves
IBNR
Total
2016
2015
YTD% Change
$
$
52,132 $
86,872
49,441
77,570
139,004 $
127,011
5.4%
12.0%
9.4%
Provision for Unpaid Claims by Line of Business – Gross of Reinsurance ($ in '000s)
As of December 31,
Commercial automobile liability
Other
Total
2016
2015
YTD% Change
$
$
132,732 $
6,272
139,004 $
115,950
11,061
127,011
14.5 %
(43.3)%
9.4 %
57
Provision for Unpaid Claims by Line of Business - Net of Reinsurance Recoverables ($ in '000s)
As of December 31,
Commercial automobile liability
Other
Total
2016
2015
YTD% Change
$
$
101,220 $
2,414
103,634 $
95,173
2,439
97,612
6.4 %
(1.0)%
6.2 %
The other line of business is comprised of Gateway's truck and workers' compensation programs (currently in run off), American
Service's non-standard personal lines business (currently in run off), Atlas' workers' compensation related to taxi, other liability,
Global Liberty's homeowners program (currently in run off) and assigned risk pool business. See MD&A, 'Overview' section for
further information regarding these lines of business.
The changes in the provision for unpaid claims and claims adjustment expenses, net of amounts recoverable from reinsurers, for
the years ended December 31, 2016, 2015, and 2014 were as follows ($ in '000s):
For the year ended December 31,
2016
2015
2014
Unpaid claims and claims adjustment expenses, beginning of period
$
127,011
$
102,430
$
101,385
Less: reinsurance recoverable
Net unpaid claims and claims adjustment expenses, beginning of period
29,399
97,612
18,421
84,009
18,144
83,241
Net reserves acquired
—
19,396
—
Change in retroactive reinsurance ceded
107
2,037
2,415
Incurred related to:
Current year
Prior years
Paid related to:
Current year
Prior years
102,133
32,613
134,746
39,652
89,179
128,831
89,828
166
89,994
32,402
65,422
97,824
61,680
(602)
61,078
19,427
43,298
62,725
Net unpaid claims and claims adjustment expenses, end of period
Add: reinsurance recoverable
Unpaid claims and claims adjustment expenses, end of period
$
$
103,634
35,370
139,004
$
$
97,612
$
29,399
84,009
18,421
127,011
$
102,430
The process of establishing the estimated provision for unpaid claims and claims adjustment expenses 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 may deviate, perhaps substantially, from the best estimates made. The change to
the provision for unpaid claims and claims adjustment expenses is consistent with the changes in written premium. However,
because the establishment of reserves is an inherently uncertain process involving 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 claims 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 claims 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 claims change due to
payments and reserve changes for all accidents that occurred during that period.
58
Atlas experienced $32.6 million in unfavorable prior accident year development for the year ended December 31, 2016 as reflected
as incurred related to prior years in the table above. The unfavorable development is primarily from our core commercial automobile
liability line. In the fourth quarter, the Company performed a comprehensive review of its reserves as a result of changing loss
payment trends identified through year-end actuarial work, and ultimately decided that it was appropriate to strengthen reserves.
Excluding pre-acquisition Global Liberty reserve development, the development of our core lines on prior accident years was
$23.2 million for the year ended December 31, 2016. Michigan commercial automobile claims accounted for approximately 62.5%
of this development. Pre-acquisition Global Liberty reserve development was $7.9 million for the year ended December 31, 2016.
The remaining unfavorable prior year development of $1.5 million for the year ended December 31, 2016 is attributable to assigned
risk pools and run-off non-core business. See MD&A, 'Results of Operations,' '2016 vs 2015,' 'Net Claims Incurred' for further
information on the development reported in the Consolidated Financial Statements for the year ended December 31, 2016.
Atlas experienced $166,000 in unfavorable prior year development for the year ended December 31, 2015 as reflected as incurred
related to prior years in the table above. Prior accident year development on non-core lines and assigned risk pools was $870,000
for the year ended December 31, 2015. This increase was offset by favorable prior accident year development of $475,000 and
$230,000 on our core lines and pre-acquisition Global Liberty claims reserves, respectively. This favorable development on our
core lines was attributable to our traditional taxi and excess taxi products.
Atlas experienced favorable prior year development during the year ended December 31, 2014 of $352,000 on its core lines and
$250,000 on its non-core lines as reflected as incurred related to prior years in the table above. The favorable development on our
core lines was primarily related to pre-acquisition Gateway claims reserves.
Contractual Obligations
The table below summarizes future payments under contractual obligations and estimated claims settlements for the year ended
December 31, 2016:
($ in '000s)
Notes payable
Operating leases
Estimated claims liabilities, net of reinsurance
Total
Total
Less than
1 year
1-3 years
3-5 years
More than
5 years
$
19,400
$
— $
3,900
$
15,500
$
5,778
103,634
1,703
48,515
1,993
39,984
1,936
11,033
$ 128,812
$
50,218
$
45,877
$
28,469
$
—
146
4,102
4,248
Notes payable does not include the interest payments and non-utilization fees related to the balance outstanding as of December 31,
2016. The interest rate is variable based on the one-month LIBOR rate and non-utilization fees are variable based on the level of
borrowing. The notes payable require interest-only payments until the principal is due. Refer to 'Liquidity and Capital Resource'
section below for further discussion of the notes payable.
The operating leases do not include the future sublease income related to Atlas' New York lease due to the uncertain timing of the
commencement of the sublease.
Estimated claims liabilities are calculated based on actuarial assumptions and may differ from actual future claims settlements.
The amounts in the table above have been presented net of reinsurance.
As of December 31, 2016, we had contractual obligations to provide additional funds for investments in limited liability investments
included in other investments for up to $2.8 million not included in the table above. There is no certainty of when these amounts
will be required to be provided.
Off-Balance Sheet Arrangements
As of December 31, 2016, we did not have any material off-balance sheet arrangements as defined by SEC rules.
59
Shareholders’ Equity
The table below identifies changes in shareholders’ equity for the years ended years ended December 31, 2016, 2015, and 2014:
Changes in Shareholders' Equity
($ in '000s)
Ordinary
Voting
Common
Shares
Restricted
Voting
Common
Shares
Additional
Paid-in
Capital
Retained
Deficit
Accumulated
Other
Comprehensive
(Loss) Income
Total
Share-
holders'
Equity
Preferred
Shares
Balance December 31, 2013
$
2,000 $
28 $
— $
169,595 $ (106,496) $
(1,429) $
Net income
Proceeds from U.S. public offering, net
of offering costs
Other comprehensive income
Share-based compensation
Balance December 31, 2014
Net income
Issuance of preferred shares
Other comprehensive loss
Options exercised
Share-based compensation
Balance December 31, 2015
Net income
Preferred dividends paid
Retirement of preferred shares
Other comprehensive income
Share-based compensation
Balance December 31, 2016
—
—
—
—
—
6
—
—
—
—
—
—
—
17,702
25,015
—
1,469
—
—
—
—
—
1,509
—
63,698
17,702
25,021
1,509
1,469
$
2,000 $
34 $
— $
196,079 $ (88,794) $
80 $
109,399
—
4,941
—
—
—
—
—
—
—
2
—
—
—
—
—
—
—
145
1,817
14,430
—
—
—
—
—
—
14,430
4,941
(1,112)
(1,112)
—
—
145
1,819
$
6,941 $
36 $
— $
198,041 $ (74,364) $
(1,032) $
129,622
—
—
(6,941)
—
—
—
—
—
—
—
—
—
—
—
—
—
(409)
—
—
1,612
2,646
—
—
—
—
—
—
—
812
—
2,646
(409)
(6,941)
812
1,612
$
— $
36 $
— $
199,244 $ (71,718) $
(220) $
127,342
As of March 10, 2017, there were 11,902,512 ordinary voting common shares outstanding and 128,191 restricted voting common
shares outstanding.
The holders of 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. All of the issued and
outstanding restricted voting common shares are beneficially owned or controlled by Kingsway Financial Services, Inc. (including
its subsidiaries and affiliated companies, "Kingsway"). 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 Kingsway. During 2016, 4,672 restricted
voting common shares were converted to ordinary voting common shares due to the sale by Kingsway of the shares to a non-
affiliate.
There were 22,224 and 29,631 non-vested restricted stock units ("RSUs") as of December 31, 2016 and December 31, 2015,
respectively. These RSUs are participative and are included in the computations of earnings per share and book value per share
for these periods.
During the year ended December 31, 2016, the Company issued 7,407 ordinary voting common shares as a result of the vesting
of RSUs. During the year ended December 31, 2015, the Company issued 7,407 ordinary voting common shares as a result of the
vesting of RSUs and 200,000 non-vested restricted voting common shares to a director and the officers, respectively. During the
year ended December 31, 2015, the Company issued 36,895 ordinary voting common shares to a director as a result of exercising
options. These shares were granted and issued under the Company's Equity Incentive Plan.
60
During the first quarter of 2015, the Company issued 4,000,000 preferred shares as a portion of the consideration related to the
Anchor acquisition and an additional 940,500 preferred shares pursuant to the Gateway stock purchase agreement. During the
first quarter of 2016, the company canceled 401,940 preferred shares pursuant to the Gateway stock purchase agreement. During
the third quarter of 2016, the Company redeemed all 2,538,560 of the remaining preferred shares issued to the former owner of
Gateway. During the fourth quarter of 2016, Atlas canceled 4,000,000 preferred shares held by the former owner of Anchor
pursuant to the terms of the Anchor stock purchase agreement. As of December 31, 2016, there were no outstanding preferred
shares. The Gateway preferred shares redeemed and canceled during 2016 and the preferred shares issued during the first quarter
of 2015 have been recorded as a recovery of acquisition expense and additional acquisition expense, respectively, and not as an
adjustment to goodwill, because the fair value of the contingent consideration was determined to be zero at the date of the Gateway
acquisition. In accordance with U.S. GAAP, such adjustments are reflected in the income statement in the period that the contingency
is re-estimated. The Anchor cancellation was recorded as a recovery of acquisition expense.
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 they 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 shareholders are not entitled to
vote.
The former owners of Gateway and Anchor earned $94,000 and $187,000, respectively, in dividends on the preferred shares during
the year ended December 31, 2016. On September 30, 2016, Atlas paid $409,000 in dividends earned on the preferred shares to
the former owner of Gateway, the cumulative amount to which they were entitled through September 15, 2016, leaving no accrued
and unpaid dividends owed to the former owner of Gateway. The cumulative amount of accrued and unpaid dividends to the former
owner of Anchor was $333,000 as of December 31, 2016. As of December 31, 2016, the paid claims development on Global
Liberty's pre-acquisition reserves was in excess of $4.0 million, and as a result, pursuant to the terms of Anchor stock purchase
agreement, dividends will no longer accrue to the former owner of Anchor. As of December 31, 2016, there were no preferred
shares outstanding. Although the re-issuance of preferred shares to the former owner of Anchor may be highly unlikely, the
contingent consideration terms of the Anchor stock purchase agreement will remain in effect for period of five years from the date
of acquisition.
On May 13, 2014, an aggregate of 2,000,000 Atlas ordinary voting common shares were offered in a subsequent public offering
in the United States at a price of $12.50 per share. Atlas also granted the underwriters an option to purchase up to an aggregate of
300,000 additional shares at the public offering price of $12.50 per share to cover over-allotments, if any. On May 27, 2014, the
underwriters exercised this option and purchased an additional 161,000 shares. After underwriting and other expenses, total
proceeds of $25.0 million were realized on the issuance of the shares. A portion of the net proceeds from the offering was used to
support the acquisition of Anchor Holdings Group, Inc. and its affiliated entities.
Book Value per Ordinary Share
Book value per ordinary share was as follows:
($ in '000s, except for shares and per share data)
December 31, 2016
December 31, 2015
Shareholders' equity
Less: Preferred stock in equity
Less: Accumulated dividends on preferred stock
Common equity
Participative shares:
Common shares outstanding
Restricted stock units (RSUs)
Total participative shares
Book value per participative share outstanding
$
$
$
127,342 $
—
333
127,009 $
12,023,295
22,224
12,045,519
10.54 $
129,622
6,941
460
122,221
12,015,888
29,631
12,045,519
10.15
Book value per common share increased by $0.39 relative to December 31, 2015 as follows: a decrease of $0.38 related to net
income after tax (excluding expenses recovered pursuant to stock purchase agreements), an increase of $0.07 related to realized
investment gains after tax, an increase of $0.07 related to the change in unrealized gains/losses after tax, a net increase of $0.13
related to share-based compensation impacts, a $0.02 decrease related to preferred dividends and an increase of $0.52 related to
expenses recovered pursuant to stock purchase agreements. The causes of these changes are attributed to the combined effects of
the reasons cited in the 'Net Premium Earned', 'Net Claims Incurred', 'Acquisition Costs and Other Underwriting Expenses', 'Net
Investment Income', 'Net Realized Investment Gains', and 'Other Income' subsections of the 'Operating Results' section.
61
Liquidity and Capital Resources
Liquidity Management - 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.
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 in the MD&A's 'Investments Overview and Strategy' section. 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.
On May 7, 2014, American Insurance Acquisition, Inc. (“American Acquisition”), a subsidiary of Atlas, entered into a loan and
security agreement (“Former Loan Agreement”) for a $10.0 million revolving loan facility with Fifth Third Bank. Under the
Former Loan Agreement, funds could be borrowed and re-borrowed on a revolving basis by American Acquisition, from the
closing date until (but not including) May 7, 2015, the loan maturity date. The interest rate on the advances under the revolving
loan facility was generally LIBOR plus 2.75%, provided that, during a default, interest would accrue at a rate equal to LIBOR
plus 5%. In addition, there was a non-utilization fee equal to 0.25% per annum of an amount equal to $10.0 million less the daily
average of the aggregate principal amount of the revolving loans outstanding plus the aggregate amount of the letter of credit
obligations outstanding.
On March 9, 2015, American Acquisition entered into a loan and security agreement (“Loan Agreement”) for a $35.0 million loan
facility with Fifth Third Bank. On May 7, 2016, American Acquisition entered into a Modification of Loan Documents with Fifth
Third Bank to amend its Loan Agreement. The Loan Agreement, as modified, includes a $30.0 million line of credit ("Draw
Amount"), which can be drawn in increments at any time until December 31, 2016. The $30.0 million line of credit has a five
year term and bears interest at one-month LIBOR plus 4.5%, effectively 5.27% as of December 31, 2016. The Loan Agreement
also includes a $5.0 million revolving line of credit ("Revolver") that bears interest at one month LIBOR plus 2.75%, effectively
3.52% as of December 31, 2016. This $5.0 million revolving line of credit may be drawn upon until May 7, 2018 and replaces
the $10.0 million revolving line of credit American Acquisition previously had in place with Fifth Third Bank under the Former
Loan Agreement.
The Loan Agreement also provides for the issuance of letters of credit in an amount up to $2.0 million outstanding at any time.
In addition, there is a non-utilization fee for each of the $30.0 million line of credit and $5.0 million revolving line of credit equal
to 0.50% per annum of an amount equal to $30.0 million and $5.0 million, respectively, less the daily average of the aggregate
principal amount outstanding under such credit lines (plus, in the case of the $30.0 million line of credit, the aggregate amount of
the letter of credit obligations outstanding).
The Loan Agreement requires American Acquisition to comply with customary affirmative and negative covenants, including
those governing indebtedness, liens, investments, sales of assets, issuance of securities, and distributions. The Loan Agreement
also requires American Acquisition to make mandatory prepayments under certain conditions and to comply with certain financial
covenants, including the ASI Pool Subsidiaries maintaining a combined statutory net worth in an amount not less than $60 million
(subject to adjustment) and maintaining a minimum funded debt to Earnings Before Interest, Taxes, Depreciation and Amortization
ratio (the "EBITDA Ratio"). The Loan Agreement is secured by substantially all of the property of American Acquisition, including
all of the outstanding shares of the ASI Pool Subsidiaries.
At December 31, 2016, American Acquisition was in compliance with the covenants of the Loan Agreement. In February 2017,
American Acquisition filed its statutorily required financial statements for the year ended December 31, 2016, which are used to
determine on-going compliance with the covenants contained in the Loan Agreement. As a result of the reserve strengthening
described in this annual report on Form 10-K and its effect on American Acquisition’s December 31, 2016 financial statements,
American Acquisition is not in compliance with the Loan Agreements’ EBITDA Ratio covenant as of March 13, 2017. American
Acquisition has a thirty day period to cure this covenant non-compliance and the Company and American Acquisition have been
in discussions with the lender regarding a modification to the loan covenants to more specifically address the effects of reserve
modifications and/or obtaining a waiver with respect to the existing non-compliance.
As of December 31, 2016, $3.9 million in funds were accessed from the Revolver, of which $2,000,000 was accessed during 2016,
including a portion that was used to repurchase preferred shares from the former owner of Gateway while $100,000 was repaid
during 2016. $15.5 million in funds were accessed against the Draw Amount as of December 31, 2016. All $15.5 million of the
Draw Amount was accessed in 2015 and contributed to the ASI Pool Subsidiaries in exchange for surplus notes that carry a variable
interest rate of prime plus 2% with a maturity date of April 30, 2020. No letters of credit were issued under the terms of this Loan
62
Agreement as of December 31, 2016. As of December 31, 2016, the unused funds for the Revolver and the Draw Amount were
$1.1 million and $14.5 million, respectively. The unused funds for the Draw Amount can no longer be drawn.
For the year ended December 31, 2016, American Acquisition incurred interest expense, including amortized loan costs, of $1.0
million in connection with the Loan Agreement. For the year ended December 31, 2015, interest expense, including amortized
loan costs, was $694,000. As of December 31, 2016, unamortized bank fees associated with the Loan Agreement were $213,000.
These bank fees will be amortized over the next 38 months.
The following table summarizes consolidated cash flow activities:
Summary of Cash Flows ($ in ‘000s)
For the years ended December 31,
Net cash flows provided by operating activities
Net cash flows provided by (used in) investing activities
Net cash flows (used in) provided by financing activities
Net increase (decrease) in cash
2016
2015
2014
$
$
170
$
8,412
(1,048)
7,534
$
$
8,814
(40,354)
17,308
(14,232) $
13,716
(11,963)
25,022
26,775
Cash provided by operations during the years ended December 31, 2016, 2015, and 2014 was primarily as a result of net income.
We receive most premiums in advance of the payment of claims. Our ability to generate positive operating cash flows depends
on the frequency and severity of claims and the timing of collection of premiums receivable and reinsurance recoverables on paid
claims.
Cash provided by investing activities during the year ended December 31, 2016 was due to the net sale of invested assets offset
by the purchase of a building and land to be used for the Company's future headquarters. Cash used by investing activities during
the years ended December 31, 2015 and 2014 was due to the net purchase of invested assets and the acquisition of Anchor. For
the year ended December 31, 2015, investing activities included $11.0 million in cash used in the Anchor acquisition net of the
cash received.
Cash used in financing activities during the year ended December 31, 2016 resulted from the buyback of preferred shares pursuant
to the Gateway stock purchase agreement partially offset by the proceeds from the Revolver and Draw Amount. Cash provided
by financing activities during the year ended December 31, 2015 resulted from proceeds from the Revolver and Draw Amount
and the exercise of options. Cash provided by financing activities during the year ended December 31, 2014 was the result of the
capital raise in the second quarter of 2014.
Capital resources - 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 and debt 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 and debt payments,
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, $2.4 million, and $3.5
million under the provisions of the Illinois Insurance Code, the Missouri Insurance Code, and New York 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 for the ASI Pool Subsidiaries is the greater of statutory net income or 10%
of total statutory capital and surplus. The dividend restriction for Global Liberty is the lower of 10% of statutory surplus or 100%
of adjusted net investment income for the preceding twelve month period.
Net loss computed under statutory-basis accounting was $1.3 million, $1.2 million, $1.1 million, and $49,000 for American
Country, American Service, Gateway and Global Liberty, respectively, for the year ended December 31, 2016. Net income for the
year ended December 31, 2015 was $3.4 million, $6.1 million, $2.0 million, and $1.2 million for American Country, American
Service, Gateway and Global Liberty, respectively. The combined statutory capital and surplus of the Insurance Subsidiaries was
$113.9 million and $118.5 million as of December 31, 2016 and December 31, 2015, respectively.
Atlas did not declare or pay any dividends to its common shareholders during the years ended December 31, 2016 and 2015.
63
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
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 increased our mortgage and asset backed securities holdings, our primary market risk exposures in the fixed income
securities portfolio are to changes in interest rates, inflation and the uncertainty of prepayment assumptions. Because Atlas’
securities portfolio is comprised of primarily fixed income securities, 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. Changes in inflation can
influence the interest rates, which can impact the fair value of our available-for-sale fixed income portfolio and yields on new
investments.
Although mortgages can have a contractual term of a certain number of years, quite often mortgages are paid off much sooner.
Because of these unscheduled prepayments, predicting the maturity of mortgage backed securities can be problematic. In addition,
mortgage backed securities are marketable and can trade at premiums, discounts or par value, depending upon changes in current
market rates. A current-coupon pass through trades at par value, while high-coupon pass throughs trade at premiums and low-
coupon securities trade at discounts. Prepayment speed can affect premium and discount pass-throughs adversely. Prepayments
at par value result in cash flows that can only be reinvested at the lower, current rate. Consequently, faster-than-anticipated
prepayments deny the investor the high cash flows that justified the premium price in the first place. On the other hand, slower
prepayments offer the investor more time to earn the higher coupon rate. For mortgage backed securities trading at a discount
pass-through, faster-than-expected prepayments can allow the investor to reinvest in securities with higher coupon rates. The
reverse happens when prepayments are slower than expected. The investor can be forced to hold on to the lower coupons for a
longer period of time, thereby reducing realized yield.
With a weighted average contractual duration of 3.4 years, changes in interest rates will have a modest market value impact on
the Atlas fixed income portfolio relative to longer duration portfolios. Atlas can, and typically does, hold bonds to maturity by
matching duration with the anticipated liquidity needs.
Atlas' available-for-sale equity securities are primarily subject to equity price risk. Equity price risk is the risk of loss in the fair
value of equity securities due to the adverse changes in equity prices. The available-for-sale equity securities portfolio is
approximately 3.2% of Atlas' total investment portfolio, and any adverse impact from equity price risk would not be material to
Atlas' investment portfolio.
Interest Rate Risk
Sensitivity analysis expresses the potential loss in future earnings, fair values, or cash flows of market sensitive instruments
resulting from one or more selected hypothetical changes in interest rates, foreign currency exchange rates, commodity prices,
and other relevant market rates or prices over a select period of time. The actual results may differ from the hypothetical results
below, since the analysis does not include any action that would be taken by the company to reduce the negative impact of changes
in the interest rate.
Atlas’ available-for-sale fixed income securities held as of December 31, 2016 were $156.5 million. 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 $137,000. 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 $194,000. Atlas uses a 1 year time period with a 100 basis point
increase and decrease to determine the impact on the fixed income security portfolio.
A 100 basis point increase would have also decreased other comprehensive income by approximately $5.6 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. Atlas uses the duration of the portfolio to determine the impact on other comprehensive income
from 100 basis point changes in the interest rate.
Atlas' notes payable have variable interest components subject to interest rate risk. As of December 31, 2016, Atlas has a $15.5
million line of credit outstanding with interest at one-month LIBOR plus 4.5% and a $3.9 million revolving line of credit outstanding
that bears interest at one-month LIBOR plus 2.75%. Total notes payable subject to interest rate risk as of December 31, 2016 was
$19.4 million. For the sensitivity analysis, an instantaneous 100 basis point increase and decrease are assumed on the outstanding
balance as of December 31, 2016. An instantaneous 100 basis point increase in the one-month LIBOR rate would increase interest
payments on notes payable by $194,000. Conversely, an instantaneous 100 basis point decrease would decrease interest payments
on notes payable by $194,000.
64
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.
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 claims adjustment
expense payments and operating expenses. The timing and amount of catastrophe claims are inherently unpredictable and may
create increased liquidity requirements.
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 claims risk, reinsurance coverage risk and the risk that
claims and claims adjustment expense reserves are not sufficient.
65
Item 8. Financial Statements and Supplemental Schedules
Report of Independent Registered Public Accounting Firm
on Internal Controls over Financial Reporting
Board of Directors and Shareholders
Atlas Financial Holdings, Inc.
We have audited Atlas Financial Holdings, Inc.’s internal control over financial reporting as of December 31, 2016, based on
criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of
the Treadway Commission (the COSO criteria). Atlas Financial Holdings, Inc.’s management is responsible for maintaining
effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial
reporting, included in the accompanying Item 9A, Management’s Report on Internal Control Over Financial Reporting. Our
responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control
over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control
over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets
of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that
could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Atlas Financial Holdings, Inc. maintained, in all material respects, effective internal control over financial reporting
as of December 31, 2016, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
consolidated statements of financial position of Atlas Financial Holdings, Inc. as of December 31, 2016 and 2015, and the related
consolidated statements of income and comprehensive income, shareholders’ equity, and cash flows for each of the three years in
the period ended December 31, 2016, and our report dated March 13, 2017 expressed an unqualified opinion thereon.
/s/ BDO USA, LLP
Grand Rapids, Michigan
March 13, 2017
66
Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
Atlas Financial Holdings, Inc.
We have audited the accompanying consolidated statements of financial position of Atlas Financial Holdings, Inc. as of December
31, 2016 and 2015 and the related consolidated statements of income and comprehensive income, shareholders’ equity, and cash
flows for each of the three years in the period ended December 31, 2016. In connection with our audits of the consolidated financial
statements, we have also audited the financial statements schedules listed in the accompanying index. 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 financial statements and schedules based on our audits.
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 audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as
evaluating the overall presentation of the financial statements and schedules. 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 financial position
of Atlas Financial Holdings, Inc. as of December 31, 2016 and 2015, and the results of its operations and its cash flows for the
each of the three years in the period ended December 31, 2016, in conformity with accounting principles generally accepted in
the United States of America.
Also, in our opinion, the financial statement schedules, when considered in relation to the consolidated financial statements taken
as a whole, present fairly, in all material respects, the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Atlas
Financial Holdings, Inc.’s internal control over financial reporting as of December 31, 2016, based on criteria established in Internal
Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO) and our report dated March 13, 2017 expressed an unqualified opinion thereon.
/s/ BDO USA, LLP
Grand Rapids, Michigan
March 13, 2017
67
ATLAS FINANCIAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
($ in '000s, except for share and per share data)
Investments, available for sale
Assets
Fixed income securities, at fair value (amortized cost $157,451and $185,455)
$
156,487
$
183,773
December 31,
2016
December 31,
2015
Equity securities, at fair value (cost $5,598 and $4,147)
Other investments
Total Investments
Cash and cash equivalents
Accrued investment income
Premiums receivable (net of allowance of $2,366 and $846)
Reinsurance recoverables on amounts paid
Reinsurance recoverables on amounts unpaid
Prepaid reinsurance premiums
Deferred policy acquisition costs
Deferred tax asset, net
Goodwill
Intangible assets, net
Property and equipment, net
Other assets
Total Assets
Claims liabilities
Unearned premiums
Due to reinsurers
Notes payable, net
Liabilities
Other liabilities and accrued expenses
Total Liabilities
Commitments and contingencies (see Note 8)
Shareholders’ Equity
Preferred shares, $0.001 par value, 100,000,000 shares authorized, shares issued and
outstanding: December 31, 2016 - 0 and December 31, 2015 - 6,940,500. Liquidation
value $1.00 per share
Ordinary voting common shares, $0.003 par value, 266,666,667 shares authorized,
shares issued and outstanding: December 31, 2016 - 11,895,104 and December 31, 2015
- 11,883,025
Restricted voting common shares, $0.003 par value, 33,333,334 shares authorized, shares
issued and outstanding: December 31, 2016 - 128,191 and December 31, 2015 - 132,863
Additional paid-in capital
Retained deficit
Accumulated other comprehensive loss, net of tax
Total Shareholders’ Equity
Total Liabilities and Shareholders’ Equity
6,223
32,181
194,891
29,888
1,228
77,386
7,786
35,370
13,372
13,222
18,498
2,726
4,535
11,770
12,905
4,240
22,937
210,950
22,354
1,036
82,529
3,277
29,399
17,412
10,235
17,166
2,726
4,925
2,589
6,694
$
$
$
$
$
$
423,577
$
411,292
139,004
$
113,171
8,369
19,187
16,504
127,011
108,202
10,781
17,219
18,457
296,235
$
281,670
— $
6,941
36
—
199,244
(71,718)
(220)
127,342
423,577
$
$
36
—
198,041
(74,364)
(1,032)
129,622
411,292
See accompanying Notes to Consolidated Financial Statements.
68
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 realized investment gains
Other income
Total revenue
Net claims incurred
Acquisition costs
Other underwriting expenses
Amortization of intangible assets
Interest expense
Expenses (recovered) incurred pursuant to stock purchase agreements
Expenses incurred related to acquisition of subsidiaries
Total expenses
Income from operations before income tax expense
Income tax (benefit) expense
Net income
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
Other comprehensive income (loss):
Changes in net unrealized investment gains (losses)
Reclassification to income of net realized investment gains
Effect of income tax
Other comprehensive income (loss)
Total comprehensive income
Year Ended December 31,
2015
2014
2016
$
171,058
$
152,064
$
4,824
1,230
467
177,579
134,746
18,803
28,399
390
1,026
(6,297)
—
3,976
455
356
156,851
89,994
18,592
23,269
315
694
942
999
177,067
134,805
512
(2,134)
2,646
281
22,046
7,616
14,430
276
98,124
3,110
382
2
101,618
61,078
14,048
13,863
—
—
—
694
89,683
11,935
(5,767)
17,702
94
$
$
$
$
2,365
$
14,154
$
17,608
12,045,519
11,975,579
10,937,181
0.20
12,222,883
0.19
$
$
1.18
12,735,679
1.13
$
$
1.61
11,341,588
1.56
2,646
$
14,430
$
17,702
855
394
(437)
812
$
3,458
$
(1,912)
203
597
(1,112)
13,318
2,029
257
(777)
1,509
$
19,211
See accompanying Notes to Consolidated Financial Statements.
69
ATLAS FINANCIAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
($ in '000s)
Ordinary
Voting
Common
Shares
Restricted
Voting
Common
Shares
Preferred
Shares
Additional
Paid-in
Capital
Retained
Deficit
Accumulated
Other
Comprehensive
(Loss) Income
Total Share-
holders'
Equity
Balance December 31, 2013
$
2,000 $
28 $
— $
169,595 $ (106,496) $
(1,429) $
Net income
Proceeds from U.S. public
offering, net of offering costs
Other comprehensive income
Share-based compensation
—
—
—
—
—
6
—
—
—
—
—
—
—
17,702
25,015
—
1,469
—
—
—
—
—
1,509
—
63,698
17,702
25,021
1,509
1,469
Balance December 31, 2014
$
2,000 $
34 $
— $
196,079 $
(88,794) $
80 $
109,399
Net income
Issuance of preferred shares
Other comprehensive loss
Options exercised
Share-based compensation
—
4,941
—
—
—
—
—
—
—
2
—
—
—
—
—
—
—
—
145
1,817
14,430
—
—
—
—
—
—
(1,112)
—
—
14,430
4,941
(1,112)
145
1,819
Balance December 31, 2015
$
6,941 $
36 $
— $
198,041 $
(74,364) $
(1,032) $
129,622
Net income
Preferred dividends paid
—
—
Retirement of preferred shares
(6,941)
Other comprehensive income
Share-based compensation
—
—
—
—
—
—
—
—
—
—
—
—
—
(409)
—
—
1,612
2,646
—
—
—
—
—
—
—
812
—
2,646
(409)
(6,941)
812
1,612
Balance December 31, 2016
$
— $
36 $
— $
199,244 $
(71,718) $
(220) $
127,342
See accompanying Notes to Consolidated Financial Statements.
70
ATLAS FINANCIAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in '000s)
Year Ended December 31,
2015
2014
2016
Operating activities:
Net income
$
2,646
$
14,430
$
17,702
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of property and equipment
Share-based compensation expense
Amortization of deferred gain on sale of headquarters building
Amortization of intangible assets
Deferred income taxes
Net realized gains
Gain in equity of investees
Amortization of bond premiums and discounts
Amortization of financing costs
Expenses (recovered) incurred pursuant to stock purchase agreements
Net changes in operating assets and liabilities (net of acquisition):
Premiums receivable and other assets, net
Due from reinsurers and other insurers
Deferred policy acquisition costs
Accrued investment income
Claims liabilities
Unearned premiums
Due to reinsurers and other insurers
Other liabilities and accrued expenses
Net cash flows provided by operating activities
Investing activities:
Purchase of subsidiary (net of cash acquired)
Purchases of:
Fixed income securities
Equity securities
Other investments
Property, equipment and other
Proceeds from sale and maturity of:
Fixed income securities
Equity securities
Other investments
Assets held for sale
Net cash flows provided by (used in) investing activities
Financing activities:
Preferred share buyback
Proceeds from U.S. public offering, net of offering costs
Proceeds from notes payable, net of financing costs
Repayment of notes payable
Preferred dividends paid
Options exercised
Net cash flows (used in) provided by financing activities
1,000
1,612
(43)
390
452
(1,230)
(1,271)
1,217
67
(6,623)
(1,067)
(6,440)
(2,987)
(192)
11,993
4,969
(2,412)
(1,911)
170
966
1,819
(43)
315
(174)
(455)
(1,238)
1,525
56
941
(26,188)
(7,931)
(240)
(13)
(6,150)
26,276
3,542
1,376
8,814
856
1,469
(43)
—
(8,776)
(382)
(632)
756
—
—
(11,826)
(2,925)
(1,492)
34
1,045
14,718
(157)
3,369
13,716
—
(10,956)
—
(58,061)
(2,000)
(11,404)
(10,181)
86,013
615
3,430
—
8,412
(2,539)
—
2,000
(100)
(409)
—
(1,048)
(78,921)
(3,340)
(7,332)
(713)
59,395
1,402
—
111
(40,354)
—
—
17,663
(500)
—
145
17,308
(31,671)
(1,969)
(12,500)
(1,167)
35,332
12
—
—
(11,963)
—
25,021
—
—
—
1
25,022
Net change in cash and cash equivalents
7,534
(14,232)
26,775
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
22,354
29,888
$
36,586
22,354
$
9,811
36,586
$
71
Supplemental disclosure of cash information:
Cash paid for:
Income taxes
Interest
Supplemental disclosure of noncash investing and financing activities:
Issuance of preferred shares related to purchase of subsidiary
Issuance of preferred shares pursuant to Gateway stock purchase agreement
Redemption of preferred shares related to Gateway stock purchase agreement
Cancellation of preferred shares pursuant to Anchor stock purchase agreement
Year Ended December 31,
2015
2014
2016
$
$
$
7,015
885
8,636
567
— $
—
(2,297)
(4,000)
4,000
941
—
—
$
$
3,308
—
—
—
—
—
See accompanying Notes to Consolidated Financial Statements.
72
ATLAS FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Atlas Financial Holdings, Inc. ("Atlas" or "We" 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”), Gateway Insurance Company ("Gateway"), and as of March
11, 2015, Global Liberty Insurance Company of New York ("Global Liberty"); and other non-insurance company subsidiaries:
Anchor Group Management, Inc. ("Anchor Management"), Plainview Premium Finance Company, Inc. ("Plainview Delaware")
and Plainview Delaware's wholly-owned subsidiary, Plainview Premium Finance Company of California, Inc. ("Plainview
California" and together with Plainview Delaware, "Plainview").
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. Atlas' core products are actively distributed in 42 of those states plus the District of Columbia. The Insurance Subsidiaries
share common management and operating infrastructure.
Atlas' ordinary voting common shares are listed on the NASDAQ stock exchange under the symbol "AFH."
Basis of presentation - These statements have been prepared in conformity with accounting principles generally accepted in the
United States of America ("U.S. GAAP"). The consolidated financial statements include the accounts of Atlas and the entities it
controls. Equity investments in entities that we do not consolidate, including corporate entities in which we have significant
influence and partnership and partnership-like entities in which we have more than minor influence over operating and financial
policies, are accounted for under the equity method unless we have elected the fair value option. All significant intercompany
accounts and transactions have been eliminated.
Seasonality - The property and casualty ("P&C") insurance business is seasonal in nature. While Atlas' net premiums earned are
generally stable from quarter to quarter, Atlas' gross premiums written follow the common renewal dates for the "light" commercial
risks that represent its core lines of business. For example, January 1 and March 1 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 has an annual renewal date in the third quarter. Net underwriting income is driven mainly by the timing and nature of claims,
which can vary widely.
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.
73
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) - merged into American Insurance Acquisition Inc. during the fourth quarter of 2014
Gateway Insurance Company (Missouri)
Anchor Holdings Group, Inc. (New York)
Global Liberty Insurance Company of New York (New York)
Plainview Premium Finance Company, Inc. (Delaware)
Plainview Premium Finance Company of California, Inc. (California)
Anchor Group Management, Inc. (New York)
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 claims and claims adjustment expenses and related amounts recoverable from reinsurers represents the most significant
estimate in the accompanying financial statements, such changes could be material. Significant estimates in the accompanying
financial statements also include the fair values of investments, deferred policy acquisition cost recoverability, deferred tax asset
valuation and business combinations.
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 - For securities other than mortgage backed and asset backed, Atlas utilizes the effective interest method
to calculate the amortized cost of the financial asset and to amortize or accrete the discount or premium over the remaining life.
The effective interest rate is the rate that discounts the estimated future cash flows through the expected life of the financial
instrument. Mortgage backed and asset backed securities are valued using the retrospective adjustment method, which uses the
effective interest method and includes anticipated prepayments. 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.
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 - Investments in fixed income and equity 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
shareholders' 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.
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 whether declines in market value are other than temporary for debt security holdings based on credit ratings
from third party security rating agencies; and
74
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 prove to 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 prove to 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.
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 an OTTI is identified, the equity security is adjusted to fair value through a charge to earnings.
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. As of
December 31, 2016, 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 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 that 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.
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 prices in active markets (Level 1), third party pricing models using available trade, bid and market
information (Level 2) and internal models without observable market information (Level 3). 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.
75
Premiums receivable - Premiums 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 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 claims, claims 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 any of the years ended December
31, 2016, 2015, and 2014.
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 based on the differences in the tax basis of assets, liabilities and items recognized directly in equity
and the financial reporting basis of such items.
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. U.S. 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.
Atlas accounts for uncertain tax positions in accordance with the income taxes accounting guidance. Atlas analyzes 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
would recognize interest and penalties related to unrecognized tax benefits as a component of the provision for federal income
taxes.
Goodwill – Atlas recognized goodwill as part of the acquisition of Anchor Holdings Group, Inc. The amounts recognized represent
the cost of the acquisition above the fair value of the net assets acquired. Atlas reviews goodwill at least annually for impairment.
Atlas concluded that there was no goodwill impairment in either of the years ended December 31, 2016 and 2015.
Intangible assets – Atlas recognized intangible assets as part of the acquisitions of Gateway and Anchor Holdings Group, Inc.
The intangible assets are classified as either indefinite-lived or definite-lived depending on whether the useful lives can be identified.
Atlas indefinite-lived intangible assets consist of state insurance licenses, and these intangible assets are reviewed for impairment
at least annually. Atlas concluded that there was no indefinite-lived intangible asset impairment in any of the years ended December
31, 2016, 2015, and 2014. Definite-lived intangible assets are amortized over their useful lives on a straight-line basis except for
customer related intangibles, which are on an accelerated basis. Atlas definite-lived intangible assets consist of trade names and
trademarks with useful lives of 15 years and customer relationships with useful lives of 10 years.
Business combinations - The value of certain assets and liabilities acquired are subject to adjustment from the initial purchase
price allocation as additional information is obtained, including, but not limited to, valuation of separately identifiable intangibles,
the preferred stock issued to the seller, and deferred taxes.
76
The valuations are finalized within 12 months of the close of the acquisition (not including claims reserve development
consideration, if applicable). The changes upon finalization to the initial purchase price allocation and valuation of assets and
liabilities may result in an adjustment to identifiable intangible assets and goodwill. Adjustments to the provisional amounts
identified during the measurement period are recognized in the reporting period in which the adjustment amounts are determined.
The effect of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional
amounts, calculated as if the accounting had been completed at the acquisition date, are recorded in the financial statements and
presented separately on the income statement in the reporting period in which the adjustment amounts are determined.
Property and equipment – Buildings, office equipment, and internal use software are stated at historical cost less depreciation.
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. Land is stated at historical cost. Repairs and maintenance are recognized as an expense during
the period incurred. Depreciation on buildings and building improvements are provided on a straight-line basis over the estimated
useful life of 33 years. Depreciation on equipment is provided on a straight-line basis over the estimated useful lives which range
from 5 years for vehicles, 5 years for furniture, 5 years for enterprise software and 3 years for all other software and computer
equipment and the term of the lease for leased equipment.
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 claims adjustment expenses, such as legal fees. Unpaid claims adjustment expenses are
determined using case-basis evaluations and statistical analyses, including insurance industry claims 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 and claims adjustment expenses 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. Commissions paid to Atlas by reinsurers on business ceded have been accounted for as a
reduction of the related policy acquisition costs. Reinsurance recoverables are recorded for that portion of paid and unpaid claims
and claims 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 compensation - Atlas has a share-based compensation plan that is described in Note 12, 'Share-Based Compensation,'
to the Consolidated Financial Statements. Atlas uses the fair-value method of accounting to determine and account for equity
settled transactions and to determine stock-based compensation for awards granted to employees and non-employees. For stock-
based compensation for awards granted to employees and non-employees that include a performance provision, the Monte-Carlo
simulation model is utilized to determine fair value. Stock-based compensation prior to 2015 was valued 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 operates in one business segment, the property and casualty insurance business.
Reclassifications - Certain accounts in the prior years' consolidated financial statement have been reclassified for comparative
purposes to conform to the current year's presentation.
2. NEW ACCOUNTING STANDARDS
Pertinent Accounting Standard Updates ("ASUs") are issued from time to time by the Financial Accounting Standards Board
("FASB") and are adopted by the Company as they become effective. All recently issued accounting pronouncements with effective
dates prior to January 1, 2017 have been adopted by the company.
77
In January 2017, the FASB issued ASU 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill
Impairment. The provisions of this update simplify the subsequent measurement of goodwill by eliminating Step 2 from the
quantitative analysis. For public entities, this guidance is effective for years beginning after December 15, 2019, including interim
periods within those years. Early adoption is permitted after January 1, 2017. Atlas has goodwill associated with one of the insurance
subsidiaries and is subject to annual goodwill impairment testing. The adoption of this ASU is not expected to have an impact on
the consolidated financial statements. Atlas is planning on early adoption beginning with the 2017 goodwill impairment testing.
In January 2017, the FASB issued ASU 2017-03, Accounting Changes and Error Corrections (Topic 250) and Investments—Equity
Method and Joint Ventures (Topic 323): Amendments to SEC Paragraphs Pursuant to Staff Announcements at the September 22,
2016 and November 17, 2016 EITF Meetings (SEC Update). This update adds references to the SEC Staff comments on how a
company should evaluate ASUs that will be adopted in the future to ASU 2014-09, ASU 2016-02 and ASU 2016-13. This ASU
was effective upon issuance and has been adopted by Atlas. As such, Atlas has reviewed these disclosures and all disclosures
pertaining to ASUs that will be adopted to provide additional qualitative information.
In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory.
The provisions of this update modify the income tax consequences for intra entity transaction not involving inventory. For public
entities, this guidance is effective for years beginning after December 15, 2017, including interim periods within those years. Early
adoption is permitted. The Company plans on adopting the update on the required effective date using the prescribed modified
retrospective approach. Atlas has a number of fixed income securities that were transferred between companies owned by Atlas
creating temporary tax differences that will be reversed upon adoption as an adjustment to retained earnings. The current balance
of this adjustment is not considered material to the consolidated financial statement results. The amount of the adjustment may
decline as certain of these securities mature or are sold.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230). The provisions of this update address the
diversity in practice of eight issues on the cash flow statement. For public entities, this guidance is effective for years beginning
after December 15, 2017, including interim periods within those years. Early adoption is permitted. The Company plans on adopting
the update on the required effective date by retrospectively restating all required amounts for the periods presented in the
consolidated financial statements. Atlas' current presentation of the cash flows statement is not expected to change as a result of
this ASU. Atlas is planning on electing the cumulative earnings approach for distributions from equity method investees upon
adoption, which is consistent with current practice.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326). The provisions of this update
require an entity to broaden the information that it considers in developing its allowance for credit losses for assets. For public
entities, this guidance is effective for years beginning after December 15, 2019, including interim periods within those years. Early
adoption is permitted. The Company plans on adopting the update on the required effective date. Atlas does not currently have
any investments with credit losses recorded therefore the provisions of this update are not expected to have a material impact on
the consolidated financial statements. Atlas will continue to monitor the investment portfolio and other financial instruments until
adoption for any changes.
In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718). The provisions of this update
simplify certain areas around share-based compensation transactions including income taxes and cash flow classifications. Each
amendment within this update has specific guidance on the method of application, which includes prospective, retrospective, and
modified retrospective applications. For public entities, this guidance is effective for years beginning after December 15, 2016,
including interim periods within those years. Early adoption is permitted. The Company plans on adopting the update on the
required effective date. Atlas did not have any tax "windfall" net operating loss carryforwards as of January 1, 2017, therefore no
cumulative effect adjustment is needed. All tax related cash flows will be included in the operating section of the Consolidated
Statements of Cash Flows with other taxes retrospectively. Reclassifications will be made between the "Share-based compensation
expense" and "Premiums receivable and other assets, net" lines of "Operating activities" for all prior periods. Atlas is making the
election to estimate future forfeitures, which is consistent with current accounting treatment.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The provisions of this update impact the classification
criteria, disclosure requirements, and other specific transactions in lease accounting. The update requires the use of a modified
retrospective approach, which requires leases to be measured at the beginning of the earliest period presented. For public entities,
this guidance is effective for years beginning after December 15, 2018, including interim periods within those years. Early adoption
is permitted. The Company plans on adopting the update on the required effective date using the modified retrospective approach
to restate beginning with the earliest period presented. See Note 8, 'Commitments and Contingencies,' to the Consolidated Financial
Statements for further discussion of the future lease commitments. The adoption of this update is expected to increase both assets
and liabilities, equally, on the Consolidated Statements of Financial Positions by the present value of the leases at each reporting
date. There is no expected impact to any of Atlas' current financial covenants as a result of the increase to reported liabilities.
78
In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement
of Financial Assets and Financial Liabilities. One provision of this update requires that equity investments, except those accounted
for under the equity method, be measured at fair value and changes in fair value recognized in net income. The provisions of this
update are recognized as a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption.
For public entities, this guidance is effective for years beginning after December 15, 2017, including interim periods within those
years. Early adoption is not permitted, except for certain provisions. The Company plans on adopting the update on the required
effective date. Atlas has a small portion of its investment portfolio invested in equities covered within the scope of this ASU that
will require an adjustment to retained earnings upon adoption. The amount of the adjustment is not expected to be material to the
consolidated financial statements. While the current impact of adoption is not expected to be material, the impact of this ASU
could potentially add volatility to the company's earnings as a result of market risk.
In May 2015, the FASB issued ASU 2015-09, Financial Services - Insurance (Topic 944): Disclosures about Short-Duration
Contracts. The new disclosures, which are required for annual periods beginning after December 31, 2015 and for interim periods
beginning after December 31, 2016, are intended to provide additional information about insurance liabilities including the nature,
amount, timing, and uncertainty of future cash flows related to those liabilities. The Company adopted this new disclosure in the
fourth quarter of 2016. See Note 11, 'Claims Liabilities,' to the Consolidated Financial Statements for the additional disclosures
required under this ASU.
In April 2015, the FASB issued ASU 2015-03, Interest - Imputation of Interest (Topic 835-30): Simplifying the Presentation of
Debt Issuance Costs. The new disclosures require debt issuance costs related to a recognized debt liability be presented in the
balance sheet as a direct deduction from the carrying amount of that debt liability. The amendments in this disclosure are effective
for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years.
The Company adopted this new disclosure in the first quarter of 2016. See Note 20, 'Change in Accounting Principle,' to the
Consolidated Financial Statements for further discussion.
The FASB issued ASU 2014-09, ASU 2015-14, ASU 2016-10, ASU 2016-12, ASU 2016-20 and ASU 2017-05, Revenue from
Contracts with Customers (Topic 606). This update is a comprehensive revenue recognition standard that applies to all entities
that have contracts with customers, except for those that fall within the scope of other standards, such as insurance contracts.
Updates may be applied retrospectively to each period presented or retrospectively with the cumulative effect recognized at the
date of initial application. The update is now effective for interim and annual reporting periods beginning after December 15,
2017. Early adoption is permitted, but only for interim and annual periods beginning after December 15, 2016. The Company
plans to adopt the update on the required effective date. While these updates to Topic 606 are expected to have a significant impact
on many companies, most of Atlas' revenue is derived from transactions that do not fall within the scope of Topic 606, namely
insurance contracts and lease income. The adoption of these ASUs are not expected to have a material impact on the consolidated
financial statements. Atlas will continue to monitor and examine transactions that could potentially fall within the scope of Topic
606.
All other recently issued pronouncements with effective dates after December 31, 2016 are not expected to have a material impact
on the Consolidated Financial Statements.
3. ACQUISITIONS
Acquisition of Anchor Holdings Group, Inc. et. al.
On March 11, 2015, Atlas acquired Anchor Holdings Group, Inc., a privately owned insurance holding company, and its wholly
owned subsidiary, Global Liberty, along with its affiliated entities, Anchor Management, and Plainview (collectively, "Anchor"),
from an unaffiliated third party. Anchor provides specialized commercial insurance products, including commercial automobile
insurance to niche markets such as taxi, black car and sedan service owners and operators primarily in the New York market.
Atlas' acquisition of Anchor expands our distribution channel for core commercial automobile lines and provides incremental
licensure as well as important infrastructure in the large New York market. Global Liberty also wrote homeowners insurance in
the northeast, which was put into runoff, subject to applicable regulatory requirements, prior to the transaction.
Under the terms of the stock purchase agreement, the purchase price was based on the combined U.S. GAAP book value of Anchor
as of December 31, 2014. The total purchase price for the combined entities of Anchor was $23.2 million, consisting of a combination
of cash and Atlas preferred shares, and is estimated at approximately 1.3 times combined U.S. GAAP book value. Consideration
consisted of approximately $19.2 million in cash and $4.0 million of Atlas preferred shares (consisting of a total of 4,000,000
preferred shares at $1.00 per preferred share), subject to the future development of Global Liberty’s actual claims reserves for
certain lines of business during the five year period after the acquisition. During the fourth quarter of 2016, Atlas canceled all
4,000,000 of the preferred shares pursuant to the terms of the Anchor stock purchase agreement due to the adverse development
of Global Liberty’s pre-acquisition claims reserves.
79
The Anchor acquisition was accounted for using the acquisition method. Atlas began consolidating Anchor on March 11, 2015,
therefore their financial results are included in Atlas' consolidated financial results starting with the three month period ended
March 31, 2015. However, the following unaudited pro forma summary presents Atlas' consolidated financial information for the
years ended December 31, 2015 and 2014 as if Anchor had been acquired on January 1, 2014. These amounts have been calculated
after applying the Company's accounting policies had the acquisition been completed on January 1, 2014. These results were
prepared for comparative purposes only and do not purport to be indicative of the results of operations that may have actually
resulted had the acquisition occurred on the indicated dates, nor are they indicative of potential future operating results of the
Company.
($ in '000s, except per share information)
Year Ended
Revenue
Income from operations before income tax expense1
Net income1
Earnings per common share basic 1
Earnings per common share diluted 1
December 31, 2015 December 31, 2014
$
$
$
162,311 $
23,601
15,420
1.26 $
1.21 $
134,883
16,212
20,370
1.84
1.77
1 - Excludes expenses incurred in the connection with the Anchor acquisition
From the date of acquisition through December 31, 2015, Anchor earned revenue of $27.5 million and net income of $2.4 million.
The value of certain assets and liabilities acquired are subject to adjustment as additional information is obtained, including, but
not limited to, valuation of separately identifiable intangibles, the preferred stock issued to the seller, and deferred taxes. The
valuations were finalized during the year ended December 31, 2015 (not including claims reserve development consideration).
The changes upon finalization to the preliminary valuation of assets and liabilities resulted in an adjustment to identifiable intangible
assets, goodwill, deferred tax and other liabilities. The following table presents the adjusted values of assets acquired and liabilities
assumed for the Anchor acquisition based on its estimated fair value on March 11, 2015.
($ in '000s)
Purchase Consideration
Cash
Preferred stock
Total
Allocation of Purchase Price
Cash and investments
Other current assets
Property and equipment
Goodwill
Intangible assets
Total Assets
Claims liabilities
Unearned premiums
Accounts payable and other liabilities
Deferred tax liabilities, net
Total Liabilities
Net assets acquired
80
$
$
$
$
$
$
$
19,199
4,000
23,199
48,508
33,303
22
2,726
4,500
89,059
30,731
22,976
11,231
922
65,860
23,199
The acquisition of Anchor resulted in the recognition of intangible assets and goodwill valued at $4.5 million and $2.7 million,
respectively. The Company recorded an adjustment to the purchase price allocation and amortization related to the identified
intangible assets during the fourth quarter of 2015. Atlas recognized amortization expense of $390,000 and $315,000 for the years
ended December 31, 2016 and 2015, respectively, related to intangible assets acquired in the Anchor transaction. Atlas incurred
no transaction expenses related to the Anchor acquisition for the year ended December 31, 2016, $999,000 in transaction expenses
for the year ended December 31, 2015 and $694,000 in transaction expenses for the year ended December 31, 2014.
Intangible Assets
The following table presents a summary of definite-lived intangible assets by major asset class as of December 31, 2016 and
December 31, 2015:
($ in '000s)
As of December 31, 2016
Trade name and trademark
Customer relationship
State insurance licenses
As of December 31, 2015
Trade name and trademark
Customer relationship
State insurance licenses
Economic
Useful Life
Gross Carrying
Amount
Accumulated
Amortization
Net
15 years
10 years
Indefinite
$
$
1,800 $
2,700
740
5,240 $
217 $
488
—
705 $
Economic
Useful Life
Gross Carrying
Amount
Accumulated
Amortization
Net
15 years
10 years
Indefinite
$
$
1,800 $
2,700
740
5,240 $
97 $
218
—
315 $
1,583
2,212
740
4,535
1,703
2,482
740
4,925
Estimated future amortization expense for definite-lived intangible assets is $390,000 for each of the next five years.
Acquisition of Gateway Insurance Company
In 2013 we acquired Camelot Services, Inc. ("Camelot Services"), a privately owned insurance holding company, and its sole
subsidiary Gateway from 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, 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 claims reserves for certain lines of business and
the utilization of certain deferred tax assets over time. During the third quarter of 2016, the Company and the former owner of
Camelot Services agreed to settle the additional consideration related to future claim development and the utilization of certain
tax assets. Atlas redeemed all 2,538,560 of the remaining preferred shares issued as additional consideration and paid all accrued
dividends.
The acquisition of Gateway resulted in the recognition of intangible assets, comprised entirely of state insurance licenses valued
at $740,000. The state insurance licenses are considered to have an indefinite life and will not be amortized, but will be evaluated
for impairment at least annually. Thus, Atlas recognized no amortization expense during the years ended December 31, 2016,
2015, and 2014 related to intangible assets acquired in the Gateway transaction.
81
4. EARNINGS PER SHARE
Earnings per ordinary voting common share, restricted voting common share, and participative restricted stock unit ("RSU")
(collectively, the "common shares") for the years ended December 31, 2016, December 31, 2015, and December 31, 2014 are as
follows ($ in '000s, except share and per share amounts):
Year Ended December 31,
Basic:
Income from operations before income tax expense
Income tax (benefit) expense
Net income
Less: Preferred share dividends
Net income attributable to common shareholders for earnings per common share basic $
Basic weighted average common shares outstanding
Earnings per common share basic
Diluted:
Basic weighted average common shares outstanding
Dilutive potential ordinary shares:
Dilutive stock options outstanding
Dilutive shares upon preferred share conversion
Diluted weighted average common shares outstanding
Earnings per common share diluted
2016
2015
2014
$
$
512 $
(2,134)
2,646 $
281
2,365 $
22,046 $
7,616
14,430 $
276
14,154 $
11,935
(5,767)
17,702
94
17,608
12,045,519 11,975,579 10,937,181
1.61
$
1.18 $
0.20 $
12,045,519 11,975,579 10,937,181
186,656
573,444
177,364
—
150,407
254,000
12,222,883 12,735,679 11,341,588
1.56
$
1.13 $
0.19 $
Earnings per common share diluted is computed by dividing net income 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 voting
common shares, calculated using the treasury stock method (or, in the case of the convertible preferred shares, using the "if-
converted" method).
Atlas’ dilutive potential ordinary voting common shares consist of outstanding stock options to purchase ordinary voting common
shares and preferred shares potentially convertible to ordinary voting common shares at the option of the holder at any date after
December 31, 2018 (2,538,560 preferred shares at the rate of 0.1270 ordinary voting common shares for each preferred share
related to the Gateway acquisition, all of which were redeemed during the third quarter of 2016, are considered to have been
redeemed on the last day of the third quarter of 2016) and after March 11, 2020 (4,000,000 preferred shares at the rate of 0.0500
ordinary voting common shares for each preferred share related to the Anchor acquisition, all of which were canceled as of
December 31, 2016). Refer to Note 14, 'Share Capital,' to the Consolidated Financial Statements for further discussion regarding
the redemption and cancellation of the preferred shares.
The effects of these convertible instruments are excluded from the computation of earnings per common share diluted 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 earnings per common share basic. For
the year ended December 31, 2016, all exercisable stock options were deemed to be dilutive and all of the convertible preferred
shares were deemed to be anti-dilutive. The potentially dilutive impact for the convertible preferred stock excluded from the
calculation due to anti-dilution is 441,357 common shares for the year ended December 31, 2016. For the years ended December
31, 2015 and 2014, all of the convertible preferred shares and all exercisable stock options were deemed to be dilutive.
82
5. INVESTMENTS
The cost or amortized cost, gross unrealized gains and losses and fair value for Atlas’ investments in fixed income securities and
equities are as follows as of ($ in '000s):
December 31, 2016
Fixed Income Securities:
U.S. Treasury and other U.S. government obligations
States, municipalities and political subdivisions
Corporate
Banking/financial services
Consumer goods
Capital goods
Energy
Telecommunications/utilities
Health care
Total Corporate
Mortgage Backed
Mortgage backed - agency
Mortgage backed - commercial
Total Mortgage Backed
Other asset backed
Total Fixed Income Securities
Equities
Totals
December 31, 2015
Fixed Income Securities:
U.S. Treasury and other U.S. government obligations
States, municipalities and political subdivisions
Corporate
Banking/financial services
Consumer goods
Capital goods
Energy
Telecommunications/utilities
Health care
Total Corporate
Mortgage Backed
Mortgage backed - agency
Mortgage backed - commercial
Total Mortgage Backed
Other asset backed
Total Fixed Income Securities
Equities
Totals
Cost or
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
$
22,716 $
10,647
15 $
25
(257) $
(202)
22,474
10,470
22,890
8,637
7,807
3,689
7,746
1,376
52,145
105
45
109
88
22
3
372
(143)
(89)
(43)
(42)
(151)
(22)
(490)
34,332
21,277
55,609
16,334
157,451 $
5,598
163,049 $
$
$
98
132
230
39
681 $
625
1,306 $
(416)
(251)
(667)
(29)
(1,645) $
—
(1,645) $
22,852
8,593
7,873
3,735
7,617
1,357
52,027
34,014
21,158
55,172
16,344
156,487
6,223
162,710
Cost or
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
$
23,555 $
21,974
12 $
232
(84) $
(52)
23,483
22,154
21,963
7,813
15,524
4,807
12,298
3,038
65,443
34,874
19,961
54,835
19,648
185,455 $
4,147
189,602 $
$
$
117
43
127
—
27
—
314
112
158
270
14
842 $
139
981 $
(166)
(121)
(556)
(401)
(450)
(17)
(1,711)
(313)
(244)
(557)
(120)
(2,524) $
(46)
(2,570) $
21,914
7,735
15,095
4,406
11,875
3,021
64,046
34,673
19,875
54,548
19,542
183,773
4,240
188,013
83
The following table summarizes the amortized cost and fair value of fixed income securities by contractual maturity ($ in '000s).
As certain securities and debentures have the right to call or prepay obligations, the actual settlement dates may differ from
contractual maturity.
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 contractual maturity
Total mortgage and asset backed
Total
2016
Amortized
Cost
Fair Value
$
8,729 $
43,772
27,618
5,389
85,508
71,943
8,732
43,808
27,263
5,168
84,971
71,516
$
157,451 $
156,487
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 whether 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 prove to 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 prove to 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.
There were no other-than-temporary impairments recorded for the years ended December 31, 2016, 2015, and 2014 as a result of
the above analysis performed by management.
84
The aging of unrealized losses on the Company's investments in fixed income securities and equities is presented as follows ($ in
'000s):
Total Fixed Income Securities
$
81,252 $
As of December 31, 2016
Fixed Income Securities:
U.S. Treasury and other U.S.
government obligations
States, municipalities and
political subdivisions
Corporate
Banking/financial services
Consumer goods
Capital goods
Energy
Telecommunications/utilities
Health care
Total Corporate
Mortgage Backed
Mortgage backed - agency
Mortgage backed - commercial
Total Mortgage Backed
Other asset backed
As of December 31, 2015
Fixed Income Securities:
U.S. Treasury and other U.S.
government obligations
States, municipalities and
political subdivisions
Corporate
Banking/financial services
Consumer goods
Capital goods
Energy
Telecommunications/utilities
Health care
Total Corporate
Mortgage Backed
Mortgage backed - agency
Mortgage backed - commercial
Total Mortgage Backed
Other asset backed
Total Fixed Income Securities
Equities
Totals
Less Than 12 Months
Fair Value
Unrealized
Losses
More Than 12 Months
Unrealized
Losses
Fair Value
Total
Fair Value
Unrealized
Losses
$
16,187 $
(257) $
— $
— $
16,187 $
(257)
7,604
(202)
—
7,604
(202)
12,429
5,453
3,224
229
2,620
476
24,431
21,818
10,235
32,053
977
—
132
222
100
959
962
—
2,375
2,092
2,053
4,145
4,118
10,638 $
(143)
(83)
(37)
(1)
(73)
(22)
(359)
(372)
(205)
(577)
(2)
(1,397) $
—
(6)
(6)
(41)
(78)
—
(131)
(44)
(46)
(90)
(27)
(248) $
(143)
(89)
(43)
(42)
(151)
(22)
(490)
(416)
(251)
(667)
(29)
(1,645)
12,561
5,675
3,324
1,188
3,582
476
26,806
23,910
12,288
36,198
5,095
91,890 $
Total
Less Than 12 Months
Fair Value
Unrealized
Losses
More Than 12 Months
Unrealized
Losses
Fair Value
Fair Value
Unrealized
Losses
$
9,712 $
(49) $
3,256 $
(35) $
12,968 $
5,870
(46)
12,216
6,044
9,425
3,862
8,811
3,021
43,379
25,168
10,022
35,190
16,203
$
$
110,354 $
1,062
111,416 $
(161)
(121)
(428)
(337)
(450)
(17)
(1,514)
(255)
(129)
(384)
(113)
(2,106) $
(46)
(2,152) $
85
553
595
—
755
544
—
—
1,894
1,921
3,445
5,366
1,084
12,153 $
—
12,153 $
(6)
6,423
(5)
—
(128)
(64)
—
—
(197)
(58)
(115)
(173)
(7)
(418) $
—
(418) $
12,811
6,044
10,180
4,406
8,811
3,021
45,273
27,089
13,467
40,556
17,287
122,507 $
1,062
123,569 $
(84)
(52)
(166)
(121)
(556)
(401)
(450)
(17)
(1,711)
(313)
(244)
(557)
(120)
(2,524)
(46)
(2,570)
As of December 31, 2016, we held 316 individual fixed income securities that were in an unrealized loss position, of which 39
individual fixed income securities were in a continuous loss position for longer than 12 months. As of December 31, 2015, we
held 435 and 1 individual fixed income and equity securities, respectively, that were in an unrealized loss position, of which 35
individual fixed income securities were in a continuous loss position for longer than 12 months. We did not recognize the unrealized
losses in earnings on these fixed income securities for the years ended December 31, 2016 and 2015, because we neither intend
to sell the securities nor do we believe that it is more likely than not that we will be required to sell these securities before recovery
of their amortized costs.
The following table summarizes the components of net investment income for the years ended December 31, 2016, 2015, and
2014 ($ in '000s):
Year Ended December 31,
Total investment income
Interest income
Dividends
Income from other investments
Investment expenses
Net investment income
2016
2015
2014
$
$
3,747 $
—
1,942
(865)
4,824 $
3,371 $
43
1,344
(782)
3,976 $
2,848
20
693
(451)
3,110
The following table presents the aggregate proceeds, gross realized gains and gross realized losses from sales of fixed income
securities and equities for the years ended December 31, 2016, 2015, and 2014 ($ in '000s):
2016
2015
2014
Proceeds
from
Sales
Gains
on Sales
Losses
on Sales
Proceeds
from
Sales
Gains
on Sales
Losses
on Sales
Proceeds
from
Sales
Gains
on Sales
Losses
on Sales
Fixed income securities $ 57,938 $
Equities
662
1,284 $
(119) $ 38,401 $
574 $
65
—
1,402
69
Total
$ 58,600 $
1,349 $
(119) $ 39,803 $
643 $
(86) $ 24,942 $
(81)
(167) $ 24,955 $
13
425 $
6
431 $
(59)
—
(59)
The following table summarizes the components of net investment realized gains (losses) for the years ended December 31,
2016, 2015, and 2014 ($ in '000s):
Year Ended December 31,
Fixed income securities
Equities
Other
Net investment realized gains
Other Investments:
2016
2015
2014
$
$
1,165 $
65
—
1,230 $
487 $
(12)
(20)
455 $
366
6
10
382
Atlas' other investments are comprised of collateral loans and various limited partnerships that invest in income-producing real
estate, equities, or catastrophe bonds. Atlas accounts for these limited partnership investments using the equity method of
accounting. As of December 31, 2016, the carrying values of these other investments were approximately $32.2 million versus
approximately $22.9 million as of December 31, 2015. The carrying values of the equity method limited partnerships were $24.9
million and $22.8 million as of December 31, 2016 and December 31, 2015, respectively. The carrying value of these investments
is Atlas' share of the net book value for each limited partnership, an amount that approximates fair value. Atlas receives payments
on a routine basis that approximate the income earned on one of the limited partnerships that invest in income-producing real
estate. The carrying values of the collateral loans were $7.2 million and $98,000 as of December 31, 2016 and December 31,
2015, respectively.
86
The following table summarizes investments in equity method investments by investment type as of December 31, 2016 and
December 31, 2015 ($ in '000s):
As of December 31,
Real estate
Insurance linked securities
Activist hedge funds
Venture capital
Total Equity Method Investments
Unfunded
Commitments
2016
Carrying Value
2016
2015
$
$
2,497 $
10,514 $
10,202
—
—
300
9,178
4,336
906
8,747
3,685
205
2,797 $
24,934 $
22,839
The Company recognizes an impairment loss for equity method limited partnerships when evidence demonstrates that the loss is
other-than-temporary. To determine if an other-than-temporary impairment has occurred, the Company evaluates whether or not
the investee could sustain a level of earnings that would justify the carrying amount of the investment. Collateral loans are
considered impaired when it is probable that the Company will not collect the contractual principal and interest. Valuation
allowances are established for impaired loans equal to the fair value of the collateral less costs to sell or the present value of the
loan's expected future repayment cash flows discounted at the loan's original effective interest rate. Valuation allowances are
adjusted for subsequent changes in the fair value of the collateral less costs to sell or the present value of the loan's expected future
repayment cash flows. As of December 31, 2016 and as of December 31, 2015, the Company had no valuation allowances
established for impaired loans.
Collateral pledged:
As of December 31, 2016 and 2015, bonds and term deposits with a fair value of $15.1 million and $15.8 million, respectively,
were on deposit with state and provincial regulatory authorities. Also, from time to time, the Company pledges securities to and
deposits cash with third parties to collateralize liabilities incurred under its policies of reinsurance assumed and other commitments
made by the Company. As of December 31, 2016 and as of December 31, 2015, the amounts of such pledged securities were $5.6
million and $3.6 million, respectively. 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. FAIR VALUE OF FINANCIAL INSTRUMENTS
U.S. GAAP requires certain assets and liabilities to be reported at fair value in the financial statements and provides a framework
for establishing that fair value. Level 1 inputs are given the highest priority in the hierarchy while Level 3 inputs are given the
lowest priority. Assets and liabilities carried at fair value are classified in one of the following three categories based on the nature
of the inputs to the valuation technique used:
Level 1 - Observable inputs that reflect unadjusted quoted prices for identical assets or liabilities in active markets as of the
reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume
to provide pricing information on an ongoing basis.
Level 2 - Observable market-based inputs or unobservable inputs that are corroborated by market data.
Level 3 - Unobservable inputs that are not corroborated by market data. These inputs reflect management's best estimate of fair
value using its own assumptions about the assumptions a market participant would use in pricing the asset or liability.
Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
Atlas' assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the
placement of the asset or liability within the fair value hierarchy levels.
The following is a summary of significant valuation techniques for assets measured at fair value on a recurring basis:
Level 1
Equities: Comprised of publicly-traded common stocks. Valuation is based on unadjusted quoted prices for identical assets in
active markets that Atlas can access.
Fixed Income: Comprised of certain U.S. Treasury fixed income securities. Valuation is based on unadjusted quoted prices for
identical assets in active markets that Atlas can access.
87
Level 2
States, Municipalities and Political Subdivisions: Comprised of U.S. States, Territories and Possessions, U.S. Political Subdivisions
of States, Territories and Possessions, U.S. Special Revenue and Special Assessment Obligations. The primary inputs to the
valuation include quoted prices for identical assets in inactive markets or similar assets in active or inactive markets, contractual
cash flows, benchmark yields and credit spreads.
Corporate Bonds: Comprised of investment-grade fixed income securities. The primary inputs to the valuation include quoted
prices for identical assets in inactive markets or similar assets in active or inactive markets, contractual cash flows, benchmark
yields and credit spreads.
Mortgage-backed and Other asset-backed: Comprised of securities that are collateralized by mortgage obligations and other
assets. The primary inputs to the valuation include quoted prices for identical assets in inactive markets or similar assets in active
or inactive markets, contractual cash flows, benchmark yields, collateral performance and credit spreads.
The following table summarizes Atlas' investments at fair value as of December 31, 2016 and December 31, 2015 ($ in '000s):
December 31, 2016
Fixed Income Securities:
U.S. Treasury and other U.S. government obligations
States, municipalities and political subdivisions
Corporate
Banking/financial services
Consumer goods
Capital goods
Energy
Telecommunications/utilities
Health care
Total Corporate
Mortgage Backed
Mortgage backed - agency
Mortgage backed - commercial
Total Mortgage Backed
Other asset backed
Total Fixed Income Securities
Equities
Totals
December 31, 2015
Fixed Income Securities:
U.S. Treasury and other U.S. government obligations
States, municipalities and political subdivisions
Corporate
Banking/financial services
Consumer goods
Capital goods
Energy
Telecommunications/utilities
Health care
Total Corporate
Mortgage Backed
Mortgage backed - agency
Mortgage backed - commercial
Total Mortgage Backed
Other asset backed
Total Fixed Income Securities
Equities
Totals
88
Level 1
Level 2
Level 3
Total
$
22,474 $
—
— $
10,470
— $
—
22,474
10,470
—
—
—
—
—
—
—
—
—
—
—
22,852
8,593
7,873
3,735
7,617
1,357
52,027
34,014
21,158
55,172
16,344
22,474 $ 134,013 $
6,223
28,697 $ 134,013 $
—
—
—
—
—
—
—
—
22,852
8,593
7,873
3,735
7,617
1,357
52,027
34,014
—
21,158
—
55,172
—
—
16,344
— $ 156,487
—
6,223
— $ 162,710
Level 1
Level 2
Level 3
Total
23,483 $
—
— $
22,154
— $
—
23,483
22,154
$
$
$
—
—
—
—
—
—
—
—
—
—
—
21,914
7,735
15,095
4,406
11,875
3,021
64,046
34,673
19,875
54,548
19,542
$
$
23,483 $ 160,290 $
4,240
27,723 $ 160,290 $
—
—
—
—
—
—
—
—
21,914
7,735
15,095
4,406
11,875
3,021
64,046
34,673
—
19,875
—
54,548
—
—
19,542
— $ 183,773
—
4,240
— $ 188,013
Atlas primarily uses the services of external securities pricing vendors to obtain these values. Atlas then reviews these valuations
to ensure that the values are accurately recorded and that the data inputs and valuation techniques utilized are appropriate,
consistently applied, and that the assumptions are reasonable and consistent with the objective of determining fair value.
Though Atlas believes the valuation methods used in determining fair value are appropriate, different methodologies or assumptions
could result in a different fair value as of December 31, 2016. 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.
The Company had no fair value investments classified as Level 3 as of December 31, 2016 and December 31, 2015. There were
no transfers in or out of Level 2 or Level 3 during the years ended December 31, 2016 and 2015.
7. INCOME TAXES
Atlas' effective tax rate was (416.8)%, 34.5%, and (48.3)% for the years ended December 31, 2016, 2015, and 2014, respectively.
The table below reconciles the U.S. statutory marginal income tax rate to the effective tax rate ($ in '000s):
Year Ended December 31,
2016
2015
2014
Amount
%
Amount
%
Amount
%
Provision for taxes at U.S. statutory marginal income
tax rate
Provision for deferred tax assets deemed unrealizable
(valuation allowance)
Nondeductible expenses
Tax-exempt income
State tax (net of federal benefit)
Tax net operating loss limitation write-down
(excluding valuation allowance)
Nondeductible acquisition accounting adjustment
Change in statutory tax rate
Other
Provision for income taxes for continuing operations
$
179
35.0 % $
7,716
35.0 % $
4,058
34.0 %
—
24
(39)
28
— %
4.7 %
(7.6)%
5.5 %
—
124
(89)
118
— %
0.6 %
(0.4)%
0.5 %
(9,446)
136
—
11
—
(2,204)
—
(122)
$ (2,134)
— %
(430.5)%
— %
(23.9)%
(416.8)% $
—
329
(471)
(111)
7,616
(519)
— %
—
1.5 %
—
(2.1)%
(7)
(0.6)%
34.5 % $ (5,767)
(79.1)%
1.1 %
— %
0.1 %
(4.3)%
— %
— %
(0.1)%
(48.3)%
Income tax (benefit) expense consists of the following for the years ended December 31, 2016, 2015, and 2014 ($ in '000s):
Year Ended December 31,
Current tax (benefit) expense
Deferred tax expense (benefit), net of change in valuation allowance
Total
2016
2015
2014
$ (2,586) $
452
$ (2,134) $
3,009
7,790 $
(174)
(8,776)
7,616 $ (5,767)
Upon the transaction forming Atlas on December 31, 2010, a yearly limitation as required by U.S. Internal Revenue Code of 1986
(as amended, "IRC") Section 382 that applies to changes in ownership on the future utilization of Atlas’ net operating loss
carryforwards 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 has been permanently limited
to the amount determined under IRC Section 382. The result is a maximum expected net deferred tax asset that 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, due to shareholder activity, a "triggering event" as determined under IRC Section 382 occurred. 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 owning 5% or greater portions of the Company's shares. Due to this triggering event, the Company estimates that it
will retain total tax effected federal net operating loss carryforwards of approximately $14.5 million as of December 31, 2016.
89
The components of deferred income tax assets and liabilities as of December 31, 2016 and December 31, 2015 are as follows ($
in '000s):
Deferred tax assets:
Losses carried forward
Unpaid claims liabilities and unearned premiums
Tax credits
Investments
Commissions
All other
Total gross deferred tax assets
Deferred tax liabilities:
Deferred policy acquisition costs
Investments
Fixed assets
Intangible assets
All other
Total gross deferred tax liabilities
Net deferred tax assets
December 31,
2016
December 31,
2015
$
$
14,535 $
8,546
662
—
1,269
2,184
27,196
4,628
475
559
1,328
1,708
8,698
18,498 $
12,656
8,122
662
36
1,306
1,457
24,239
3,582
—
401
1,465
1,625
7,073
17,166
Amounts and expiration dates of the operating loss carryforwards as of December 31, 2016 are as follows ($ in '000s):
Year of Occurrence
2001
2002
2006
2007
2008
2009
2010
2011
2012
2015
Total
Year of Expiration
2021
2022
2026
2027
2028
2029
2030
2031
2032
2035
Amount
5,007
4,317
7,825
5,131
1,949
1,949
1,949
4,166
9,235
1
41,529
$
$
Atlas has not established a valuation allowance for its gross future deferred tax assets as of December 31, 2016 or as of December 31,
2015. Based on Atlas’ expectations of future taxable income, its ability to change its investment strategy, as well as reversing
gross future tax liabilities, management believes it is more likely than not that Atlas will fully realize the net future tax assets. The
Company, therefore, released its remaining valuation allowance as of December 31, 2014.
Atlas accounts for uncertain tax positions in accordance with the income taxes accounting guidance. Atlas has analyzed filing
positions in the federal and state jurisdictions 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, 2016, 2015, and 2014. The IRS completed its audit of tax year 2012 during
the three month period ended March 31, 2016. No changes to tax year 2012 were made to our reported tax. Tax years 2013 and
years thereafter are subject to examination by the Internal Revenue Service ("IRS").
90
8. COMMITMENTS AND CONTINGENCIES
On May 22, 2012, Atlas closed the sale and leaseback of the headquarters building to 150 Northwest Point, LLC, a Delaware
limited liability company. Atlas recognized a gain on the sale of this property of $213,000, which will be deferred and recognized
over the five year lease term, which ends in May 2017. Atlas recognized $43,000 as an offset to rent expense for the years ended
December 31, 2016, 2015, and 2014. Total rental expense recognized on the headquarters building was $743,000, $704,000 and
$707,000 for the years ended December 31, 2016, 2015, and 2014, respectively. The increase in rental expense on the headquarters
building for the year ended December 31, 2016 was primarily due to the leasing of additional space.
As of December 31, 2016, Atlas has the following future minimum rentals, related principally to office space, required under
operating leases having initial or remaining noncancelable lease terms in excess of one year ($ in '000s):
Year
2017
2018
2019
2020
2021
2022 &
Beyond
Total
Amount
$
1,033 $
997 $
996 $
990 $
946 $
146 $
5,108
Excluded from the table above is the remaining amount for the headquarter building due to a remaining noncancelable lease
term of less than one year and future sublease income related to an existing lease due to the uncertain timing of the beginning
of the sublease. Total rental expense for the headquarter building in 2017 will be approximately $661,000.
The Company has entered into subscription agreements to allow for participation by the Company in limited liability investments,
which invest in income-producing real estate, equities and insurance linked securities. As of December 31, 2016, the unfunded
commitments are $2.8 million.
In the ordinary course of its business, Atlas is involved in legal proceedings, including lawsuits, regulatory examinations and
inquiries. Based on currently available information, the Company does not believe that it is reasonably possible that any of its
pending legal proceedings will have a material effect on the Company's Consolidated Financial Statements.
Atlas is exposed to credit risk on balances receivable from policyholders, agents and reinsurers. 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 procedures to monitor and minimize its exposure to
delinquent agent balances, including, but not limited to, reviewing account current statements, processing policy cancellations for
non-payment and other collection efforts deemed appropriate. Atlas also has procedures 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.
Virtually all states require insurers licensed to do business therein to bear a portion of contingent and incurred claims handling
expenses and the unfunded amount of “covered” claims and unearned premium obligations of impaired or insolvent insurance
companies, either up to the policy's limit, the applicable guaranty fund covered claims 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.
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 claims based insurance-related assessments,
including non-voluntary assigned risk pools, underwriting associations, workers' compensation second-injury funds, reinsurance
funds and other state insurance facilities. Atlas' proportionate share of these various premium or claims based insurance-related
assessments, including non-voluntary assigned risk pools, underwriting associations, workers' compensation second-injury funds,
reinsurance funds and other state insurance facilities is not material.
91
9. PROPERTY AND EQUIPMENT
Atlas held the following property and equipment, including internal use software, as of December 31, 2016 and December 31,
2015 (excluding assets held for sale) ($ in '000s):
As of December 31,
Buildings
Land
Building improvements
Leasehold improvements
Internal use software
Computer equipment
Furniture and other office equipment
Total
Accumulated depreciation
Total property and equipment, net
2016
2015
$
$
$
7,425
1,840
139
527
8,078
2,464
586
21,059
(9,289)
11,770
$
$
$
—
—
—
507
7,611
2,225
593
10,936
(8,347)
2,589
Depreciation expense and amortization was $1.0 million, $966,000, and $856,000 for the years ended December 31, 2016, 2015,
and 2014, respectively.
During the year ended December 31, 2016, Atlas purchased a building and land for $9.3 million to serve as its new corporate
headquarters to replace the current leased office space in the late second or early third quarter of 2017. Atlas plans to move into
the new location after the necessary renovations are completed. There is currently an unaffiliated tenant leasing one of the three
floors of the new building. There was no depreciation expense related to the building recorded for the year ended December 31,
2016.
Effective July 1, 2015, the Company implemented a new policy management software and began amortizing the cost of the
software. Total capitalized cost of the software was approximately $2.1 million. Amortization expense for the new software for
the years ended December 31, 2016 and 2015 were $401,000 and $186,000, respectively.
10. REINSURANCE CEDED
As is customary in the insurance industry, Atlas reinsures portions of certain insurance policies it writes, thereby providing a
greater diversification of risk and minimizing exposure on larger risks. Atlas remains contingently at risk with respect to any
reinsurance ceded and would incur an additional loss if an assuming company were unable to meet its obligation under the
reinsurance treaty.
Atlas monitors the financial condition of its reinsurers to minimize its exposure to significant losses from reinsurer insolvencies.
Letters of credit are maintained for any unauthorized reinsurer to cover ceded unearned premium, ceded claims and claims
adjustment expense reserve balances and ceded paid claims. These policies mitigate the risk of credit quality or dispute from
becoming a danger to financial strength. To date, the Company has not experienced any material difficulties in collecting reinsurance
recoverables.
92
Premiums written, premiums earned and amounts related to reinsurance as of and for the years ended December 31, 2016, 2015,
and 2014 are as follows ($ in '000s):
Direct premiums written
Assumed premiums written
Ceded premiums written
Net premiums written
Direct premiums earned
Assumed premiums earned
Ceded premiums earned
Net premiums earned
2014
2016
2015
$ 221,723 $ 208,570 $ 122,339
93
(11,011)
$ 180,067 $ 169,677 $ 111,421
716
(39,609)
3,372
(45,028)
$ 217,053 $ 182,376 $ 107,587
126
(9,589)
$ 171,058 $ 152,064 $ 98,124
634
(30,946)
3,074
(49,069)
Ceded claims and claims adjustment expenses
Ceding commissions
Reinsurance recoverables on unpaid claims and claims adjustment expenses
Prepaid reinsurance premiums
Reinsurance recoverables on paid claims and claims adjustment expenses
32,496
12,065
35,370
13,372
7,786
19,113
7,798
29,399
17,412
3,277
8,783
2,374
18,421
3,628
2,230
11. CLAIMS LIABILITIES
Unpaid claims and claims adjustment expenses
The changes in the provision for unpaid claims and claims adjustment expenses, net of amounts recoverable from reinsurers, for
the years ended December 31, 2016, 2015, and 2014 were as follows ($ in '000s):
As of the year ended December 31,
2016
2015
2014
Unpaid claims and claims adjustment expenses, beginning of period
$ 127,011
$ 102,430
$ 101,385
Less: reinsurance recoverable
Net unpaid claims and claims adjustment expenses, beginning of period
29,399
97,612
18,421
84,009
18,144
83,241
Net reserves acquired
—
19,396
—
Change in retroactive reinsurance ceded
107
2,037
2,415
Incurred related to:
Current year
Prior years
Paid related to:
Current year
Prior years
Net unpaid claims and claims adjustment expenses, end of period
Add: reinsurance recoverable
102,133
32,613
134,746
39,652
89,179
128,831
103,634
35,370
89,828
166
89,994
32,402
65,422
97,824
97,612
29,399
61,680
(602)
61,078
19,427
43,298
62,725
84,009
18,421
Unpaid claims and claims adjustment expenses, end of period
$ 139,004
$ 127,011
$ 102,430
The process of establishing the estimated provision for unpaid claims and claims adjustment expenses 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 may deviate, perhaps substantially, from the best estimates made.
93
Atlas experienced $32.6 million in unfavorable prior accident year development for the year ended December 31, 2016 as reflected
as incurred related to prior years in the table above. The unfavorable development is primarily from our core commercial automobile
liability line. Excluding pre-acquisition Global Liberty reserve development, the development of our core lines on prior accident
years was $23.2 million for the year ended December 31, 2016. Michigan commercial automobile claims accounted for
approximately 62.5% of this development. Pre-acquisition Global Liberty claims reserve development was $7.9 million for the
year ended December 31, 2016. The remaining unfavorable prior year development of $1.5 million for the year ended December
31, 2016 is attributable to assigned risk pools and run-off of non-core business.
Atlas experienced $166,000 in unfavorable prior year development for the year ended December 31, 2015 as reflected as incurred
related to prior years in the table above. Prior accident year development on non-core lines and assigned risk pools was $870,000
for the year ended December 31, 2015. This increase was offset by favorable prior accident year development of $475,000 and
$230,000 on our core lines and pre-acquisition Global Liberty claims reserves, respectively. This favorable development on our
core lines was attributable to our traditional taxi and excess taxi products.
Atlas experienced favorable prior year development during the year ended December 31, 2014 of $352,000 on its core lines and
$250,000 on its non-core lines as reflected as incurred related to prior years in the table above. The favorable development on our
core lines was primarily related to pre-acquisition Gateway claims reserves.
Short-duration insurance contracts
For purposes of this discussion, Atlas will disaggregate data based on the type of coverage into commercial automobile liability,
including personal injury protection, and all other lines. Commercial automobile liability is the main line of business that Atlas
operates. All other lines includes commercial automobile physical damage, taxi workers' compensation, other liability and Atlas'
short duration lines that are currently in run-off. Amounts related to the Gateway and Global Liberty acquisitions have been included
retrospectively for all years presented in the tables below.
Claims payments and changes in reserves may be made on accidents that occurred in prior years, not solely on business that is
currently insured. Calendar year claims 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 claims 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 claims change due to payments and reserve changes for all accidents that occurred during that period.
94
The following is information about incurred and paid claims and claims adjustment expenses development for the year ended
December 31, 2016, net of reinsurance, as well as cumulative claim frequency and the total of incurred but not reported liabilities
plus expected development on reported claims included within the net incurred claims amounts. The information about incurred
and paid claims development for the years ended December 31, 2007 to 2015, is presented as unaudited supplementary information.
Commercial Automobile Liability
Incurred Claims and Allocated Claims Adjustment Expenses, Net of Reinsurance ($ in '000s, except cumulative number of reported claims)
For the Years Ended December 31,
Accident
Year
2007
unaudited
2008
unaudited
2009
unaudited
2010
unaudited
2011
unaudited
2012
unaudited
2013
unaudited
2014
unaudited
2015
unaudited
2016
As of the year ended
December 31, 2016
Incurred but
Not
Reported
Liabilities,
Net of
Reinsurance
Cumulative
Number of
Reported
Claims
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Total
$ 30,198 $ 29,158 $ 29,811 $ 31,068 $ 33,028 $ 33,249 $ 34,160 $ 34,146 $ 34,448 $ 34,644 $
29,391
29,434
29,225
29,543
27,922
28,015
27,474
28,005
28,496
37,394
40,309
43,889
43,604
42,909
42,326
42,987
43,728
35,877
34,677
35,711
37,026
37,205
38,002
38,841
31,044
38,822
34,887
34,720
35,136
36,080
35,948
37,839
38,972
40,429
44,627
48,449
48,636
53,656
64,687
61,145
53,005
69,555
69,060
67,184
19
68
121
251
241
810
617
3,787
9,078
80,824
38,517
Total
$ 508,666
19,853
15,763
13,230
8,562
7,819
9,353
11,658
14,438
18,407
16,457
Cumulative Paid Claims and Allocated Claims Adjustment Expenses, Net of Reinsurance ($ in '000s)
Accident
Year
2007
unaudited
2008
unaudited
20091
unaudited
2010
unaudited
2011
unaudited
2012
unaudited
2013
unaudited
2014
unaudited
2015
unaudited
2016
For the Years Ended December 31,
$
5,392 $ 12,698 $
3,030 $ 13,901 $ 22,937 $ 29,255 $ 31,398 $ 33,134 $ 33,787 $ 34,524
6,201
(6,438)
7,256
16,010
20,234
23,282
25,060
27,039
28,136
(3,218)
10,711
24,468
31,784
36,385
39,664
42,030
43,287
10,097
20,483
26,654
31,300
34,831
37,051
38,187
8,725
18,980
24,978
29,660
33,217
35,324
8,385
18,230
26,995
35,563
41,587
10,358
27,198
43,117
59,973
15,404
38,257
60,486
18,597
49,556
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Total
21,850
$ 412,910
149
$ 95,905
All outstanding liabilities before 2007, net of reinsurance
Liabilities for claims and allocated claims adjustment expenses, net of reinsurance
1 - year 2009 - negative amounts resulted from the commutation of reinsurance agreements
95
Other short-duration lines
Incurred Claims and Allocated Claims Adjustment Expenses, Net of Reinsurance ($ in '000s, except cumulative number of reported claims)
For the Years Ended December 31,
Accident
Year
2007
unaudited
2008
unaudited
2009
unaudited
2010
unaudited
2011
unaudited
2012
unaudited
2013
unaudited
2014
unaudited
2015
unaudited
2016
As of the year ended
December 31, 2016
Incurred but
Not
Reported
Liabilities,
Net of
Reinsurance
Cumulative
Number of
Reported
Claims
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Total
$ 23,699 $ 25,236 $ 26,956 $ 26,184 $ 25,705 $ 25,467 $ 25,601 $ 25,488 $ 25,475 $ 25,513 $
34,673
38,502
36,796
36,489
36,580
36,576
36,222
36,254
36,260
35,688
34,764
34,626
35,453
36,343
36,202
36,736
37,061
26,884
27,729
24,714
24,922
24,392
24,456
24,477
20,315
22,176
22,310
21,782
22,122
22,941
13,054
12,723
13,634
13,854
13,934
5,897
4,754
6,645
4,556
6,849
8,320
4,687
6,978
8,616
9,357
Total
$ 189,824
5
8
93
24
599
129
18
116
277
277
33,296
47,049
27,846
14,330
10,001
3,614
2,148
2,937
3,942
4,397
Cumulative Paid Claims and Allocated Claims Adjustment Expenses, Net of Reinsurance ($ in '000s)
For the Years Ended December 31,
Accident
Year
2007
unaudited
2008
unaudited
2009
unaudited
2010
unaudited
2011
unaudited
2012
unaudited
2013
unaudited
2014
unaudited
2015
unaudited
2016
$ 12,845 $ 20,777 $ 20,384 $ 23,725 $ 24,392 $ 24,769 $ 25,016 $ 25,385 $ 25,410 $ 25,492
21,304
23,263
30,657
33,915
35,442
36,112
36,149
36,222
36,224
11,296
25,422
30,343
33,186
34,375
35,785
36,164
36,499
14,182
20,420
22,596
23,812
24,225
24,368
24,414
11,517
17,419
19,696
20,939
21,600
22,235
6,446
9,789
4,195
11,554
12,782
13,343
4,602
6,154
4,603
6,677
7,886
4,612
6,728
8,154
9,413
$ 187,114
830
$
3,540
All outstanding liabilities before 2007, net of reinsurance
Liabilities for claims and allocated claims adjustment expenses, net of reinsurance
Incurred claims and allocated claim adjustment expenses, net of reinsurance, show how the initial estimate of incurred claims
develop for each of the past 10 accident years. Incurred but not reported liabilities, net of reinsurance, by accident year are estimates
that are based on the difference between the reported claims and the estimate of the ultimate paid claims and claims adjustment
expenses for known and unknown claims. These estimates involve actuarial and statistical projections at a given point in time of
what we expect the cost of the ultimate settlement and administration of known and unknown claims. The process 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 the estimation process.
The cumulative number of reported claims for commercial automobile liability was calculated using actual number of claims at
the feature/coverage level. For the other lines, claim counts were calculated using actual claim counts at the feature/coverage level
for all claims excluding those from assigned risk pools and surety. The actual claim counts for assigned risk pools and surety may
not be available for all years presented and are therefore not included in the reported claims amounts.
96
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Total
The reconciliation of the net incurred and paid claims and claims adjustment expenses development tables to the liability for claims
and claims adjustment expenses in the consolidated statement of financial position as of December 31, 2016 is as follows ($ in
'000s):
As of December 31,
Net outstanding liabilities:
Commercial automobile liability
Other short-duration lines
Unpaid claims and allocated claims adjustment expenses, net of reinsurance
Reinsurance recoverable on unpaid claims and claims adjustment expenses:
Commercial automobile liability
Other short-duration lines
Total reinsurance recoverable on unpaid claims and claims adjustment expenses
Unallocated claims adjustment expenses
Retroactive reinsurance ceded
Total
$
2016
95,905
3,540
99,445
31,511
3,859
35,370
5,550
(1,361)
4,189
Unpaid claims and claims adjustment expenses, gross of reinsurance
$
139,004
The following is supplementary information about the average annual percentage payout of incurred claims by age, net of amounts
recoverable from reinsurers, for the year ended December 31, 2016 (amounts are unaudited).
Years
1
2
3
4
5
6
7
8
9
10
Commercial automobile liability
19.2% 21.2% 20.0% 21.3% 14.0% 9.6% 5.2% 4.9% 2.9% 2.1%
Other short-duration lines
66.4% 18.8% 8.0% 7.0% 3.1% 2.1% 0.6% 0.9% 0.1% 0.3%
12. SHARE-BASED COMPENSATION
On January 6, 2011, Atlas adopted a stock option plan (the “Stock Option Plan”) in order to advance the interests of Atlas by
providing incentives to eligible persons defined in the plan. In the second quarter of 2013, a new equity incentive plan (the “Equity
Incentive Plan”) was approved by the Company's common shareholders at the Annual General Meeting, and Atlas ceased to grant
new stock options under the preceding Stock Option Plan. The Equity Incentive Plan is a securities based compensation plan,
pursuant to which Atlas may issue restricted stock grants for ordinary voting common shares, restricted units, stock grants for
ordinary voting common shares, stock options and other forms of equity incentives to eligible persons as part of their compensation.
The Equity Incentive Plan is considered an amendment and restatement of the Stock Option Plan, although outstanding stock
options issued pursuant to the Stock Option Plan will continue to be governed by the terms of the Stock Option Plan.
97
Stock options - Stock option activity for the years ended December 31, 2016 and 2015 follows (prices in Canadian dollars
designated with "C$" and United States dollars designated with "US$"):
C$ Denominated:
Outstanding, beginning of period
Granted
Exercised
Outstanding, end of period
2016
2015
Number of
Shares
187,728
—
—
187,728
Average
Exercise Price
C$6.22
—
—
C$6.22
Number of
Shares
224,623
—
(36,895)
187,728
Average
Exercise Price
C$6.05
—
C$5.21
C$6.22
US$ Denominated:
2016
2015
Number of
Shares
Average
Exercise Price
Number of
Shares
Average
Exercise Price
Outstanding, beginning of period
375,000
US$17.01
Granted
Exercised
—
—
—
—
175,000
200,000
—
US$13.26
US$20.29
—
Outstanding, end of period
375,000
US$17.01
375,000
US$17.01
Information about options outstanding as of December 31, 2016 is as follows:
Grant Date
January 18, 2011
January 11, 2013
March 6, 2014
March 12, 2015
Total
Expiration Date
January 18, 2021
January 11, 2023
March 6, 2024
March 12, 2025
Number Outstanding
96,060
91,668
175,000
200,000
562,728
Number Exercisable
96,060
91,668
116,667
—
304,395
There are 304,395 stock options that are exercisable as of December 31, 2016. The stock option grants outstanding have a weighted
average remaining life of 6.82 years and have an intrinsic value of $3.4 million as of December 31, 2016. On March 12, 2015,
the Board of Directors of Atlas granted equity awards of (i) 200,000 restricted voting common shares of the Company and (ii)
200,000 options to acquire ordinary voting common shares to the executive officers of the Company as part of the Company’s
annual compensation process. The awards were made under the Company’s Equity Incentive Plan.
The awards vest in 5 equal annual installments of 20%, provided that an installment shall not vest unless an annual performance
target based on specific book value growth rates linked to return on equity goals. In the event the performance target is not met
in any year, the 20% installment for such year shall not vest, but such non-vested installment shall carry forward and can become
vested in future years (up to the fifth year from the date of grant), subject to achievement in a future year of the applicable
performance target for such year. As of December 31, 2016, performance targets linked to these awards were not achieved and
therefore no vesting has occurred.
The Monte-Carlo simulation model was used, for both the options and restricted voting common share grants, to estimate the fair
value of compensation expense as a result of the performance based component of these grants. Utilizing the Monte-Carlo
simulation model, the fair values were $1.5 million and $1.9 million for the options and restricted voting common share grants,
respectively. This expense will be amortized over the anticipated vesting period.
98
Restricted shares - The activity for the restricted voting common shares and restricted share units for the years ended December
31, 2016 and 2015 are as follows:
Non-vested, beginning of period
Granted
Vested
Non-vested, end of period
2016
2015
Number of
Shares
Weighted
Average Fair
Value at Grant
Date
Number of
Shares
Weighted
Average Fair
Value at Grant
Date
348,155 $
—
(37,035)
311,120 $
15.53
—
12.20
15.92
185,190 $
200,000
(37,035)
348,155 $
12.20
17.99
12.20
15.53
In accordance with ASC 718 (Stock-Based Compensation), Atlas has recognized share-based compensation expense on a straight-
line basis over the requisite service period of the last separately vesting portion of the award. Share-based compensation expense
is a component of other underwriting expenses on the income statement. Atlas recognized $1.6 million, $1.8 million and $1.5
million in share-based compensation expense, including income tax expense, for the years ended December 31, 2016, 2015, and
2014, respectively. Total unearned share-based compensation expense was $1.0 million related to all stock option grants and $2.2
million related to restricted voting common shares and restricted share units as of December 31, 2016. This unearned share-based
compensation expense will be amortized over the next 38 months.
13. OTHER EMPLOYEE BENEFIT PLANS
Defined Contribution Plan - Atlas has a defined contribution 401(k) plan covering all qualified employees of Atlas and its
subsidiaries. Contributions to this plan are limited based on IRS guidelines. Atlas matches 100% of the employee contribution up
to 2.5% of annual earnings, plus 50% of additional contributions up to 2.5% of annual earnings, for a total maximum expense of
3.75% of annual earnings per participant. Atlas' matching contributions are discretionary. Employees are 100% vested in their
own contributions and vest in Atlas contributions based on years of service equally over 5 years with 100% vested after 5 years.
Company contributions were $424,000, $300,000, and $204,000 for the years ended December 31, 2016, 2015, and 2014,
respectively.
Employee Stock Purchase Plan - The Atlas Employee Stock Purchase Plan (the “ESPP”) encourages employee interest in the
operation, growth and development of Atlas and provides an additional investment opportunity to employees. Full time and
permanent part time employees working more than 30 hours per week are allowed to invest up to 7.5% of adjusted salary in Atlas
ordinary voting common shares. Atlas matches 100% of the employee contribution up to 2.5% of annual earnings, plus 50% of
additional contributions up to 5% of annual earnings, for a total maximum expense of 5% of annual earnings per participant. Atlas'
matching contributions are discretionary. Atlas also pays all administrative costs related to this plan. For the years ended December
31, 2016, 2015, and 2014, Atlas' costs incurred related to the matching portion of the ESPP were $199,000, $151,000, and $113,000,
respectively. Share purchases pursuant to this plan are made in the open market.
14. SHARE CAPITAL
The share capital is as follows:
As of December 31,
Preferred Shares
Shares
Authorized
100,000,000
Ordinary voting common shares
Restricted voting common shares
Total common shares
266,666,667
11,895,104 $
33,333,334
128,191
300,000,001
12,023,295 $
99
2016
2015
Shares Issued
and
Outstanding
Amount
($ in '000s)
Shares
Issued and
Outstanding
Amount
($ in '000s)
— $
—
36
—
36
6,940,500 $
6,941
11,883,025 $
132,863
12,015,888 $
36
—
36
All of the issued and outstanding restricted voting common shares are beneficially owned or controlled by Kingsway Financial
Services, Inc. (including its subsidiaries and affiliated companies, "Kingsway"). 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 Kingsway. During 2016, 4,672 restricted voting
common shares were converted to ordinary voting common shares due to the sale by Kingsway of the shares to a non-affiliate.
There were 22,224 and 29,631 non-vested restricted stock units ("RSUs") as of December 31, 2016 and December 31, 2015,
respectively. These RSUs are participative and are included in the computations of earnings per share and book value per share
for these periods.
During the year ended December 31, 2016, the Company issued 7,407 ordinary voting common shares as a result of the vesting
of RSUs. During the year ended December 31, 2015, the Company issued 7,407 ordinary voting common shares as a result of the
vesting of RSUs and 200,000 non-vested restricted voting common shares to a director and the officers, respectively. During the
year ended December 31, 2015, the Company issued 36,895 ordinary voting common shares to a director as a result of exercising
options. These shares were granted and issued under the Company's Equity Incentive Plan.
During the first quarter of 2015, the Company issued 4,000,000 preferred shares as a portion of the consideration related to the
Anchor acquisition and an additional 940,500 preferred shares pursuant to the Gateway stock purchase agreement. During the
first quarter of 2016, the company canceled 401,940 preferred shares pursuant to the Gateway stock purchase agreement. During
the third quarter of 2016, the Company redeemed all 2,538,560 of the remaining preferred shares issued to the former owner of
Gateway. During the fourth quarter of 2016, the company canceled 4,000,000 preferred shares pursuant to the Anchor stock
purchase agreement. As of December 31, 2016, there were no outstanding preferred shares. The preferred shares redeemed and
canceled during 2016 and the preferred shares issued during the first quarter of 2015 pursuant to the Gateway stock purchase
agreement have been recorded as a recovery of acquisition expense and additional acquisition expense, respectively, and not as
an adjustment to goodwill, because the fair value of the contingent consideration was determined to be zero at the date of acquisition.
In accordance with U.S. GAAP, such adjustments are reflected in the income statement in the period that the contingency is re-
estimated. The Anchor cancellation was recorded as a recovery of acquisition expense.
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 they 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 shareholders are not entitled to
vote.
The former owners of Gateway and Anchor earned $94,000 and $187,000, respectively, in dividends on the preferred shares during
the year ended December 31, 2016. On September 30, 2016, Atlas paid $409,000 in dividends earned on the preferred shares to
the former owner of Gateway, the cumulative amount to which they were entitled through September 15, 2016, leaving no accrued
and unpaid dividends owed to the former owner of Gateway. As of December 31, 2016, Atlas has accrued $333,000 in dividends
on the preferred shares for the former owner of Anchor, which remains unpaid. As of December 31, 2016, the paid claims
development on Global Liberty's pre-acquisition claims reserves was in excess of $4.0 million, and as a result, pursuant to the
terms of the Anchor stock purchase agreement, dividends will no longer accrue to the former owner of Anchor. As of December
31, 2016, there were no preferred shares outstanding.
On May 13, 2014, an aggregate of 2,000,000 Atlas ordinary voting common shares were offered in a subsequent public offering
in the United States at a price of $12.50 per share. Atlas also granted the underwriters an option to purchase up to an aggregate of
300,000 additional shares at the public offering price of $12.50 per share to cover over-allotments, if any. On May 27, 2014, the
underwriters exercised this option and purchased an additional 161,000 shares. After underwriting and other expenses, total
proceeds of $25.0 million were realized on the issuance of the shares. A portion of the net proceeds from the offering was used to
support the acquisition of Anchor Holdings Group, Inc. and its affiliated entities.
15. DEFERRED POLICY ACQUISITION COSTS
Deferred policy acquisition costs represent those costs that are incremental and directly related to the successful acquisition of
new or renewal written premium. Such deferred policy acquisition costs generally include agent commissions, premium taxes
and a portion of employee compensation and benefits directly related to time spent performing specific acquisition or renewal
activities. The method followed in determining the deferred policy acquisition costs limits the deferral to its realizable value by
giving consideration to estimated future claims and expenses to be incurred as premiums are earned. Changes in estimates, if any,
are recorded in the accounting period in which they are determined. Anticipated investment income is included in determining the
realizable value of the deferred policy acquisition costs. Atlas’ deferred policy acquisition costs are reported net of deferred ceding
commissions.
100
Policy acquisition costs are deferred and amortized over the period in which the related premiums written are earned, typically
12 months. Deferred policy acquisition costs for the years ended December 31, 2016, 2015, and 2014 ($ in '000s) were:
Year Ended December 31,
Balance, beginning of period
Acquisition costs deferred
Amortization charged to income
Balance, end of period
2016
2015
2014
$
$
10,235
$
8,166
$
21,790
(18,803)
13,222
$
20,661
(18,592)
10,235
$
6,674
15,540
(14,048)
8,166
16. RELATED PARTY TRANSACTIONS
During the periods presented, a portion of the Company’s investment portfolio was allocated to other than fixed income (“OTFI”)
investments in investment vehicles which are considered related-party transactions and which represented 8.4% and 3.6% of
invested assets of the Company as of December 31, 2016 and December 31, 2015, respectively. In these transactions, one or more
of the Company’s directors or entities affiliated with such directors may invest in and manage these vehicles. Under the Company’s
current investment guidelines, OTFI investments (including any related party OTFI investments) may not exceed the lesser of a
total of 15% of the Company’s overall invested assets or 50% of the Company’s statutory surplus (“Allowable OTFI Allocation”),
with no new single investment to represent more than 20% of the Company’s Allowable OTFI Allocation assets at the time said
investment is made. These related-party transactions are consistent with the Company’s investment guidelines and have been
reviewed and approved by the Investment Committee of the Company’s Board of Directors. The Company believes that these
transactions leverage investment resources that would otherwise not be available to the Company.
17. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
($ in ‘000s, except per share data)
Gross premium written
Net premium earned
Net (loss) income
Net (loss) income attributable to common shareholders
(Loss) earnings per common share basic
(Loss) earnings per common share diluted
($ in ‘000s, except per share data)
Gross premium written
Net premium earned
Net income
Net income attributable to common shareholders
Earnings per common share basic
Earnings per common share diluted
18. NOTES PAYABLE
2016
Q4
Q3
Q2
Q1
$ 51,984 $ 60,733 $ 48,353 $ 64,025
44,252
(13,561)
(13,608)
$ (1.13) $
$ (1.13) $
43,251
41,802
41,753
6,496
6,423
4,900
4,822
0.53 $
0.40 $
0.51 $
0.38 $
4,811
4,728
0.39
0.38
2015
Q4
Q3
Q2
Q1
$ 52,423 $ 65,315 $ 46,575 $ 44,973
41,927
41,666
38,304
30,167
4,333
4,253
4,024
3,943
3,936
3,856
$
$
0.35 $
0.33 $
0.32 $
0.34 $
0.32 $
0.31 $
2,137
2,102
0.18
0.17
On May 7, 2014, American Insurance Acquisition, Inc. (“American Acquisition”), a subsidiary of Atlas, entered into a loan and
security agreement (“Former Loan Agreement”) for a $10.0 million revolving loan facility with Fifth Third Bank. Under the
Former Loan Agreement, funds could be borrowed and re-borrowed on a revolving basis by American Acquisition, from the
closing date until (but not including) May 7, 2015, the loan maturity date. The interest rate on the advances under the revolving
loan facility was generally LIBOR plus 2.75%, provided that, during a default, interest would accrue at a rate equal to LIBOR
plus 5%. In addition, there was a non-utilization fee equal to 0.25% per annum of an amount equal to $10.0 million less the daily
average of the aggregate principal amount of the revolving loans outstanding plus the aggregate amount of the letter of credit
obligations outstanding.
101
On March 9, 2015, American Acquisition entered into a loan and security agreement (“Loan Agreement”) for a $35.0 million loan
facility with Fifth Third Bank. On May 7, 2016, American Acquisition entered into a Modification of Loan Documents with Fifth
Third Bank to amend its Loan Agreement. The Loan Agreement, as modified, includes a $30.0 million line of credit ("Draw
Amount"), which can be drawn in increments at any time until December 31, 2016. The $30.0 million line of credit has a five
year term and bears interest at one-month LIBOR plus 4.5%, effectively 5.27% as of December 31, 2016. The Loan Agreement
also includes a $5.0 million revolving line of credit ("Revolver") that bears interest at one month LIBOR plus 2.75%, effectively
3.52% as of December 31, 2016. This $5.0 million revolving line of credit may be drawn upon until May 7, 2018 and replaces
the $10.0 million revolving line of credit American Acquisition previously had in place with Fifth Third Bank under the Former
Loan Agreement.
The Loan Agreement also provides for the issuance of letters of credit in an amount up to $2.0 million outstanding at any time.
In addition, there is a non-utilization fee for each of the $30.0 million line of credit and $5.0 million revolving line of credit equal
to 0.50% per annum of an amount equal to $30.0 million and $5.0 million, respectively, less the daily average of the aggregate
principal amount outstanding under such credit lines (plus, in the case of the $30.0 million line of credit, the aggregate amount of
the letter of credit obligations outstanding).
The Loan Agreement requires American Acquisition to comply with customary affirmative and negative covenants, including
those governing indebtedness, liens, investments, sales of assets, issuance of securities, and distributions. The Loan Agreement
also requires American Acquisition to make mandatory prepayments under certain conditions and to comply with certain financial
covenants, including the ASI Pool Subsidiaries (defined below) maintaining a combined statutory net worth in an amount not less
than $60 million (subject to adjustment) and maintaining a minimum funded debt to Earnings Before Interest, Taxes, Depreciation
and Amortization ratio (the "EBITDA Ratio"). The Loan Agreement is secured by substantially all of the property of American
Acquisition, including all of the outstanding shares of American Country, American Service and Gateway, which are wholly-
owned direct subsidiaries of American Acquisition (the “ASI Pool Subsidiaries”).
At December 31, 2016, American Acquisition was in compliance with the covenants of the Loan Agreement. In February 2017,
American Acquisition filed its statutorily required financial statements for the year ended December 31, 2016, which are used to
determine on-going compliance with the covenants contained in the Loan Agreement. As a result of the reserve strengthening
described in this annual report on Form 10-K and its effect on American Acquisition’s December 31, 2016 financial statements,
American Acquisition is not in compliance with the Loan Agreements’ EBITDA Ratio covenant as of March 13, 2017. American
Acquisition has a thirty day period to cure this covenant non-compliance and the Company and American Acquisition have been
in discussions with the lender regarding a modification to the loan covenants to more specifically address the effects of reserve
modifications and/or obtaining a waiver with respect to the existing non-compliance.
As of December 31, 2016, $3.9 million in funds were accessed from the Revolver, of which $2,000,000 was accessed during 2016,
including a portion that was used to repurchase preferred shares from the former owner of Gateway while $100,000 was repaid
during 2016. $15.5 million in funds were accessed against the Draw Amount as of December 31, 2016. All $15.5 million of the
Draw Amount was accessed in 2015 and contributed to the ASI Pool Subsidiaries in exchange for surplus notes that carry a variable
interest rate of prime plus 2% with a maturity date of April 30, 2020. No letters of credit were issued under the terms of this Loan
Agreement as of December 31, 2016. As of December 31, 2016, the unused funds for the Revolver and the Draw Amount were
$1.1 million and $14.5 million, respectively. The unused funds for the Draw Amount can no longer be drawn.
For the year ended December 31, 2016, American Acquisition incurred interest expense, including amortized loan costs, of $1.0
million in connection with the Loan Agreement. For the year ended December 31, 2015, interest expense, including amortized
loan costs, was $694,000. As of December 31, 2016, unamortized bank fees associated with the Loan Agreement were $213,000.
These bank fees will be amortized over the next 38 months.
Notes payable outstanding as of December 31, 2016 and 2015 ($ in '000s) were:
Revolver
Draw Amount
Total outstanding borrowings
Unamortized issuance costs
Total notes payable
December 31, 2016
December 31, 2015
$
$
3,900 $
15,500
19,400
(213)
19,187 $
2,000
15,500
17,500
(281)
17,219
102
19. STATUTORY INFORMATION
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 and debt 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 and debt payments,
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, $2.4 million, and $3.5
million under the provisions of the Illinois Insurance Code, the Missouri Insurance Code, and New York 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 for the ASI Pool Subsidiaries is the greater of statutory net income or 10%
of total statutory capital and surplus. The dividend restriction for Global Liberty is the lower of 10% of statutory surplus or 100%
of adjusted net investment income for the preceding twelve month period.
Net loss computed under statutory-basis accounting was $1.3 million, $1.2 million, $1.1 million, and $49,000 for American
Country, American Service, Gateway and Global Liberty, respectively, for the year ended December 31, 2016. Net income for the
year ended December 31, 2015 was $3.4 million, $6.1 million, $2.0 million, and $1.2 million for American Country, American
Service, Gateway and Global Liberty, respectively. The combined statutory capital and surplus of the Insurance Subsidiaries was
$113.9 million and $118.5 million as of December 31, 2016 and December 31, 2015, respectively.
Atlas did not declare or pay any dividends to its common shareholders during the years ended December 31, 2016 and 2015.
20. CHANGE IN ACCOUNTING PRINCIPLE
In April 2015, the FASB issued ASU 2015-03, Interest - Imputation of Interest (Topic 835-30): Simplifying the Presentation of
Debt Issuance Costs. The Company adopted this new disclosure during the first quarter of 2016 and applied its provisions
retrospectively. Under the new guidance, unamortized debt issuance costs are to be presented in the balance sheet as a direct
deduction from the carrying amount of the debt liability. The adoption of this new disclosure reduced other assets and notes payable
by $281,000.
The following line items presented in the Consolidated Statements of Financial Position as of December 31, 2015 were affected
by the adoption of the new disclosure:
($ in '000s)
Impact on Assets as of December 31, 2015:
Other assets1
Total Assets
Impact on Liabilities and Shareholders' Equity as of December 31, 2015:
Notes payable
Total Liabilities
Total Liabilities and Shareholders' Equity
As
Originally
Reported
As Adjusted
Effect of
Change
$
6,975 $
6,694 $
411,573
411,292
17,500
281,951
411,573
17,219
281,670
411,292
(281)
(281)
(281)
(281)
(281)
1 - Other assets as of December 31, 2015 includes the balance previously reported as Assets held for sale under the column "As
Originally Reported"
103
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, 2016, 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 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 control over financial reporting during the fiscal quarter ended December 31, 2016 that
have materially affected, or are reasonably likely to materially affect, our internal control 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 in 2013 by the Committee of
Sponsoring Organizations of the Treadway Commission. Based on such evaluation, we have concluded that the Company's internal
control over financial reporting is effective as of December 31, 2016.
Our management does not expect that the Company's controls and procedures over financial reporting will prevent all errors and
frauds. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that
the objectives of the control system are met. Further, a control system's design must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the
Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty
and that breakdowns can occur because of simple mistake or error.
Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by
management override of control. The design of any system of controls also is based, in part, upon certain assumptions about the
likelihood of future events, and there can be no assurance that any design will successfully achieve its stated goals under all
potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of
compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system,
misstatements due to error or fraud may occur and not be detected.
The independent registered public accounting firm of BDO USA, LLP, as auditors of the consolidated financial statements of Atlas
and its subsidiaries, has issued an attestation report on the effectiveness of management's internal control over financial reporting
based on criteria established in Internal Control - Integrated Framework issued in 2013 by the Committee of Sponsoring
Organizations of the Treadway Commission. The attestation report is included in Item 8 under the heading "Report of Independent
Registered Public Accounting Firm on Internal Controls over Financial Reporting," and is incorporated herein by reference.
Item 9B. Other Information
None.
104
Part III.
Item 10. Directors, Executive Officers and Corporate Governance
The information required by this Item will be included in our proxy statement relating to our 2017 annual general meeting of
shareholders ("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 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
The information required by this Item will be included in the Proxy Statement, which information is incorporated by reference in
this Annual Report on Form 10-K.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this Item will be included in the Proxy Statement, which information is incorporated by reference in
this Annual Report on Form 10-K.
Item 14. Principal Accounting Fees and Services
The information required by this Item will be included in the Proxy Statement, which information is incorporated by reference in
this Annual Report on Form 10-K.
105
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 Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm on Internal Controls over Financial Reporting
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.
106
Exhibit
Description
3.1
3.2
4.1(1)
4.2(1)
4.3
4.4
4.5
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
10.12
10.13
10.14
10.15
10.16
10.17
10.18
10.19
10.20
10.21
10.22
10.23
21
23.1
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)
Form of Senior Indenture (incorporated by reference from our registration statement on Form S-3 filed April 25, 2014)
Form of Subordinated Indenture (incorporated by reference from our registration statement on Form S-3 filed April 25, 2014)
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")*
First amendment to Equity Incentive Plan (incorporated by reference from our annual report on Form 10-K for the year ended December 31,
2013, filed on March 10, 2014)*
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)
Executed Underwriting Agreement, dated May 20, 2014 (incorporated by reference from our current report on Form 8-K filed May 22, 2014)
Loan and Security Agreement between American Insurance Acquisition Inc. and Fifth Third Bank dated as of May 7, 2014 (incorporated by
reference from our quarterly report on Form 10-Q for the quarter ended June 30, 2014, filed August 5, 2014)
First Amendment to Loan and Security Agreement between American Insurance Acquisition Inc. and Fifth Third Bank dated as of July 3, 2014
(incorporated by reference from our quarterly report on Form 10-Q for the quarter ended June 30, 2014, filed August 5, 2014)
Stock Purchase Agreement, dated as of October 17, 2014, between Mr. Hossni Elhelbawi, Atlas Financial Holdings, Inc. and the other parties
thereto (incorporated by reference from our current report on Form 8-K filed October 21, 2014)
Loan and Security Agreement, dated as of March 9, 2015, by and between American Insurance Acquisition, Inc. and Fifth Third Bank
(incorporated by reference from our quarterly report on Form 10-Q for the quarter ended March 31, 2015, filed May 11, 2015)
Modification of Loan Documents, dated May 7, 2016, by and between American Insurance Acquisition, Inc. and Fifth Third Bank (incorporated
by reference from our current report on Form 8-K filed May 10, 2016)
List of Subsidiaries
Consent of BDO USA, 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
107
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.
Item 16. Form 10-K Summary
None.
108
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 13, 2017
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 13, 2017
Vice President, Chief Financial Officer
and Principal Accounting Officer
March 13, 2017
Gordon G. Pratt
Director, Chairman of the Board
March 13, 2017
/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 13, 2017
Director
March 13, 2017
Director
March 13, 2017
109
Schedule II – Condensed Financial Information of Registrant
Statements of Income and Comprehensive Income
($ in '000s)
Net investment gain
Other underwriting (income) expense
Income (loss) from operations before income tax
Income tax benefit
Income (loss) before equity in net income of subsidiaries
Equity in net (loss) income of subsidiaries
Net income
Other comprehensive income (loss):
Changes in net unrealized gains (losses)
Reclassification to income of net realized gains
Effect of income tax
Other comprehensive income (loss) for the period
Total comprehensive income
See accompanying Notes to Condensed Financial Information of Registrant
Year ended December 31,
2015
2016
2014
— $
(4,550)
4,550
(559)
5,109 $
(2,463)
2,646 $
855
394
(437)
812
3,458 $
7 $
2,566
(2,559)
(577)
(1,982) $
16,412
14,430 $
(1,912)
203
597
(1,112)
13,318 $
16
1,825
(1,809)
(498)
(1,311)
19,013
17,702
2,029
257
(777)
1,509
19,211
$
$
$
$
110
Schedule II – Condensed Financial Information of Registrant (continued)
Statements of Financial Position
($ in '000s, except share and per share data)
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, $0.001 par value, 100,000,000 shares authorized, shares issued and
outstanding: December 31, 2016 - 0 and December 31, 2015 - 6,940,500. Liquidation value
$1.00 per share
Ordinary voting common shares, $0.003 par value, 266,666,667 shares authorized, shares
issued and outstanding: December 31, 2016 - 11,895,104 and December 31, 2015 - 11,883,025
Restricted voting common shares, $0.003 par value, 33,333,334 shares authorized, shares
issued and outstanding: December 31, 2016 - 128,191 and December 31, 2015 - 132,863
Additional paid-in capital
Retained deficit
Accumulated other comprehensive loss, net of tax
Total Shareholders’ Equity
Total Liabilities and Shareholders’ Equity
See accompanying notes to Condensed Financial Information of Registrant
$
$
$
$
$
December 31,
2016
2015
271 $
—
3,404
162
479
766
126,564
130,239 $
128,215
129,622
2,897 $
2,897 $
—
—
— $
6,941
36
—
199,244
(71,718)
(220)
127,342
36
—
198,041
(74,364)
(1,032)
129,622
$
130,239 $
129,622
111
Schedule II – Condensed Financial Information of Registrant (continued)
Statements of Cash Flow
($ in '000s)
Operating Activities:
Net income
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Equity in net loss (income) of subsidiaries
Share-based compensation expense
Deferred income taxes
Expenses (recovered) incurred pursuant to stock purchase agreements
Net changes in operating assets and liabilities:
Accounts receivable and other assets
Other liabilities and accrued expenses
Net cash flows provided by (used in) operating activities
Investing activities:
Capital contributions made to subsidiaries
Net cash flows used in investing activities
Financing activities:
Preferred share buyback
Proceeds from U.S. public offering, net of offering costs
Preferred dividends paid
Options exercised
Net cash flows (used in) 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
Supplemental disclosure of cash information:
Cash (recovered) paid for:
Income taxes
Year Ended December 31,
2014
2015
2016
$
2,646 $ 14,430 $ 17,702
2,463
1,612
(417)
(6,623)
(16,412)
1,819
(251)
941
(19,013)
1,469
(301)
—
479
2,897
3,057
(476)
(34)
17
22
(112)
(233)
— (23,428)
— (23,428)
(1,650)
(1,650)
(2,539)
—
(409)
—
(2,948)
109
162
—
—
— 25,021
—
145
—
1
145
(23,266)
23,428
25,022
23,139
289
$
271 $
162 $ 23,428
$ (3,464) $
85 $
(210)
Supplemental disclosure of noncash investing and financing activities:
Issuance of preferred shares related to acquisition of subsidiary
$
— $
4,000 $
Issuance of preferred shares related to Gateway stock purchase agreement
Redemption of preferred shares related to Gateway stock purchase agreement
Cancellation of preferred shares related to Anchor stock purchase agreement
—
(2,297)
(4,000)
941
—
—
—
—
—
—
See accompanying notes to Condensed Financial Information of Registrant
112
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, 2016
Premiums earned
December 31, 2015
Premiums earned
December 31, 2014
Premiums earned
Schedule V – Valuation and qualifying accounts
($ in '000s)
December 31, 2016
Allowance for uncollectible receivables
Valuation allowance for deferred tax assets
December 31, 2015
Allowance for uncollectible receivables
Valuation allowance for deferred tax assets
December 31, 2014
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
$ 217,053 $ (49,069) $
3,074 $ 171,058
1.8%
$ 182,376 $ (30,946) $
634 $ 152,064
0.4%
$ 107,587 $ (9,589) $
126 $ 98,124
0.1%
Balance at
Beginning
of Period
Charged to
Expenses
Other
Additions Deductions
Balance at
End of
Period
846 $
—
2,397 $
—
12 $
—
(889) $
—
2,366
—
560 $
—
566 $
—
8 $
—
(288) $
—
$
776 $
505 $
9,446
(9,446)
172 $
—
(893) $
—
846
—
560
—
$
$
Schedule VI - Supplemental information concerning property-casualty insurance operations
($ in '000s)
Year Ended December 31,
2015
2016
2014
Deferred policy acquisition costs
$
13,222 $
10,235 $
Claims liabilities
Unearned premiums
Net premiums earned
Net investment income
Claims and claims adjustment expenses incurred
Current year
Prior year
Amortization of deferred policy acquisition costs
Paid claims and claims adjustment expenses
Gross premium written
139,004
113,171
171,058
4,824
102,133
32,613
18,803
128,831
225,095
113
127,011
108,202
152,064
3,976
89,828
166
18,592
97,824
8,166
102,430
58,950
98,124
3,110
61,680
(602)
14,048
62,725
209,286
122,432