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, 2017
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)
953 AMERICAN LANE, 3RD FLOOR
Schaumburg, IL
(Address of principal executive offices)
27-5466079
(I.R.S. Employer
Identification No.)
60173
(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
6.625% Senior Unsecured Notes due 2022
NAME OF EACH EXCHANGE ON WHICH REGISTERED:
Nasdaq Stock Market
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 Section 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, a smaller reporting
company, or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and
“emerging growth company” in Rule 12b-2 of the Exchange Act.
No
No
No
No
Large Accelerated Filer
Non-Accelerated Filer
(Do not check if a smaller reporting company)
Accelerated Filer
Smaller Reporting Company
Emerging Growth Company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes
No
There were 11,936,970 shares of the Registrant’s common stock outstanding as of March 29, 2018, all of which are ordinary voting common
shares. There are no outstanding 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 $153.0 million (based upon the closing sale price of the Registrant’s common shares on June 30, 2017).
1
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 2018 Annual Meeting of Stockholders are incorporated by reference into Part
III of this report.
2
ATLAS FINANCIAL HOLDINGS, INC.
INDEX TO ANNUAL REPORT ON FORM 10-K
December 31, 2017
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
3
4
4
6
6
7
9
9
9
10
11
11
12
27
27
27
27
28
31
32
68
70
110
110
110
111
111
111
111
111
112
113
114
115
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. The expanding segment of commercially licensed drivers operating through transportation network companies
(“TNC”) are included in the livery product. Our goal is to be the preferred specialty insurance business 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.
4
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 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 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 that was 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 a period of five years from the date of acquisition.
5
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 insurance products and services to meet our customers' needs with a focus on innovation
and the effective use of technology and analytics to deliver consistent operating profit for the insurance businesses we own.
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. Our understanding of the markets we serve remains current through
regular interaction with our independent retail agents. 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 experience. Atlas has extensive experience 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 experience 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 experience 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
To always be the preferred specialty insurance business in any geographic areas where our value proposition delivers benefit to
all stakeholders.
Mission
To develop and deliver superior specialty insurance products and services to meet our customers’ needs with a focus on innovation
and the effective use of technology and analytics to deliver consistent operating profit for the insurance businesses we own.
We seek to achieve our vision and mission through the design, sophisticated pricing and efficient delivery of specialty insurance
products and services. Our understanding of the markets we serve will remain current through interaction with our retail producers.
Analysis of the substantial data available through our operating companies will drive product and pricing decisions. We will focus
on our key strengths and expand our geographic footprint, products and services only to the extent that these activities support
our Vision and Mission. We will target niche markets that support adequate pricing and will be best able to adapt to changing
market needs ahead of our competitors due to our scale and strategic commitment.
6
Outlook
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. We have aligned the organization’s infrastructure cost base to our expected revenue stream going forward.
We integrated the core functions of our insurance businesses into a common, best practice based, operating platform. Management
believes that our insurance businesses are well-positioned to 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 businesses have a long
heritage with respect to our core 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 2017 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 businesses are licensed, but not active prior to Atlas’ acquisition of these businesses, 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 intend to 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:
Maintain legacy distribution relationships. We continue to build upon relationships with independent retail agents that
have been our Insurance Subsidiaries’ distribution partners for several years. We 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.
Expand our market presence. We are committed to diversification by leveraging our experience, historical data and
market research to expand our business into previously untapped markets to the extent incremental markets meet our
criteria. Utilizing our established brands and market relationships, we have grown 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
Our primary target market is made up of small to mid-size taxi, limousine, other livery (including 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.
Gross premiums written from commercial automobile was $274.7 million, $223.8 million, and $207.8 million for the years ended
December 31, 2017, 2016, and 2015, respectively. As a percentage of the Insurance Subsidiaries’ overall book of business,
commercial auto gross premiums written represented 99.5%, 99.4%, and 99.3% of gross premiums written for the years ended
December 31, 2017, 2016, and 2015, respectively.
7
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 2016 the total market for commercial automobile liability insurance was approximately $33.1 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 underwriting 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 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, 2017. No other jurisdiction accounted for
more than 5%.
Distribution of Gross Premiums Written by Jurisdiction
New York
California
Illinois
36.0%
15.3%
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).
8
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.
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 insurance businesses, and provides our customers with better service. We leverage 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 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; strives
for cost containment through economies of scale where deemed appropriate; and, provide services and competitive commissions
to our independent agents.
9
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 that establish standards and requirements for conducting the business
of insurance and that delegate regulatory authority to state insurance regulatory agencies. Insurance companies can also be subject
to so-called “desk drawer rules” of state insurance regulators, which are regulatory rules or best practices that have not been
codified or formally adopted through regulatory proceedings. In general, such regulation is intended for the protection of those
who purchase or use insurance products issued by our Insurance Subsidiaries, not the holders of securities issued by us. These
laws and regulations have a significant impact on our business and relate to a wide variety of matters including accounting methods,
agent and company licensure, claims procedures, corporate governance, examinations, investing practices, policy forms, pricing,
trade practices, reserve adequacy and underwriting standards.
In recent years, the state insurance regulatory framework has come under increased federal scrutiny. Most recently, pursuant to
the Dodd-Frank Regulatory Reform Act of 2010, the Federal Insurance Office was formed for the purpose of, among other things,
examining and evaluating the effectiveness of the current insurance and reinsurance regulatory framework. In addition, state
legislators and insurance regulators continue to examine the appropriate nature and scope of state insurance regulation.
Many state laws require insurers to file insurance policy forms and/or insurance premium rates and underwriting rules with state
insurance regulators. In some states, such rates, forms and/or rules must be approved prior to use. While these requirements vary
from state to state, generally speaking, regulators review premium rates to ensure they are not excessive, inadequate or unfairly
discriminatory.
As a result, the speed with which an insurer can change prices in response to competition or increased costs depends, in part, on
whether the premium rate laws and regulations (i) require prior approval of the premium rates to be charged, (ii) permit the insurer
to file and use the forms, rates and rules immediately, subject to further review, or (iii) permit the insurer to immediately use the
forms, rates and/or rules and to subsequently file them with the regulator. When state laws and regulations significantly restrict
both underwriting and pricing, it can become more difficult for an insurer to make adjustments quickly in response to changes,
which could affect profitability. 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, 2017, 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.
10
Employees
As of December 31, 2017, we had 264 full-time employees, 173 of whom work at the corporate headquarters in Schaumburg,
Illinois, 8 of whom work in St. Louis, 70 of whom work in New York, 6 of whom work in Arizona and 7 of whom work remotely.
The Corporate and Other category includes executive, information technology, business analytics and actuarial, finance and human
resources. The Claims category includes in-house legal.
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 953 American Lane, 3rd Floor, Schaumburg, Illinois 60173, 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 third party actuarial
firms to assist us in estimating the provision for unpaid claims and claims adjustment expenses. These estimates are based upon
various factors, including:
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•
•
•
•
•
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•
actuarial and statistical projections of the cost of settlement and administration of claims reflecting facts and
circumstances then known;
historical claims information;
assessments of currently available data;
estimates of future trends in claims severity and frequency;
judicial theories of liability;
economic factors such as inflation;
estimates and assumptions regarding judicial and legislative trends, and actions such as class action lawsuits
and judicial interpretation of coverages or policy exclusions; and
the level of insurance fraud.
Most or all of these factors are not directly quantifiable, particularly on a prospective basis, and the effects of these and unforeseen
factors could negatively impact our ability to accurately assess the risks of the policies that we write. In addition, there may be
significant reporting lags between the occurrence of the insured event and the time it is actually reported to the insurer and additional
lags between the time of reporting and final settlement of claims. Unfavorable development in any of these factors could cause
the level of reserves to be inadequate. The following factors may have a substantial impact on future claims incurred:
•
•
•
•
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:
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•
•
•
•
the availability of sufficient reliable data and our ability to properly analyze available data;
the uncertainties that inherently characterize estimates and assumptions;
underlying trends or changes affecting risk and loss costs;
our selection and application of appropriate pricing techniques; and
changes in applicable legal liability standards and in the civil litigation system generally.
Consequently, we could 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.
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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, 2017, we had ceded premiums written of $44.8 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, 2017, we had an aggregate of $61.4 million of reinsurance recoverables,
of which $60.9 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.
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.
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.
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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.
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.
15
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.
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.
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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 have accrued or 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, 2017. 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 a period of five years from the date of acquisition.
Risks Related to the Company’s Senior Unsecured Notes
If Atlas incurs additional debt or liabilities, or if we are unable to maintain a level of cash flows from operating activities, Atlas’
ability to pay its obligations on its senior unsecured notes (the “Senior Unsecured Notes”) could be adversely affected. Although
the Senior Unsecured Notes are “senior notes,” they would be subordinate to any senior secured indebtedness the Company may
incur and structurally subordinate to all liabilities of Atlas’ subsidiaries, which increases the risk that Atlas will be unable to meet
its obligations on the Senior Unsecured Notes when they mature. Atlas’ ability to pay interest on the Senior Unsecured Notes as
it comes due and the principal of the Senior Unsecured Notes at their maturity may be limited by regulatory constraints, including,
without limitation, state insurance laws that limit the ability of Atlas’ insurance company subsidiaries to pay dividends. Although
the Senior Unsecured Notes are listed on the Nasdaq Global Market, there can be no assurance that an active trading market for
the Senior Unsecured Notes will develop, or if one does develop, that it will be maintained. The price at which holders will be
able to sell their Senior Unsecured Notes prior to maturity will depend on a number of factors and may be substantially less than
the amount originally invested. Holders of the Senior Unsecured Notes will have limited rights if there is an event of default.
Atlas may redeem the Senior Unsecured Notes before maturity, and holders of the redeemed Senior Unsecured Notes may be
unable to reinvest the proceeds at the same or a higher rate of return.
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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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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:
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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, setting of appropriate reserves 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 is no longer considered an ultimate controlling party from a statutory perspective. We can be subject
to regulatory action, restrictions or heightened compliance or reporting requirements in certain states. 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, compliance and litigation,
regulatory investigation and remediation 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. There can be no assurances that our preventative
actions will be sufficient to prevent or mitigate the risk of cyber-attacks.
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, and there can be no assurances that our cyber risk
insurance coverage will be sufficient in the event of a cyber incident.
20
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.
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.
21
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.
In order to maintain and/or increase our current level of earned premiums needed to achieve our targeted levels of profitability,
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;
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expanding our executive management and the infrastructure required to effectively control our growth;
• maintaining ratings of our Insurance Subsidiaries;
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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 common share. Acquisitions entail numerous risks, including the following:
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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;
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.
22
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:
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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, Missouri
and New York 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.
23
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 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.
24
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 19, 2017, A.M. Best affirmed the current financial strength ratings of “B” “Fair” for American Country, American
Service and Gateway and “B+” “Good” 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.
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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 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 generated prior to
the “triggering event” 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 $13.3
million as of December 31, 2017. Book value per common share was unaffected by this event, as the amount of lost net deferred
tax assets were offset by a corresponding decrease in the valuation allowance that was already held against the majority of these
assets.
Atlas has the following total NOLs as of December 31, 2017:
Net Operating Loss Carryforward by Expiry ($ in ‘000s)
Year of Occurrence
2001
2002
2006
2007
2008
2009
2010
2011
2012
2015
2017
Total
Year of Expiration
2021
2022
2026
2027
2028
2029
2030
2031
2032
2035
2037
Amount
5,007
$
4,317
7,825
5,131
1,949
1,949
1,949
4,166
9,236
1
21,864
$ 63,394
NOLs and other carryforwards generated in 2015 and 2017 are not limited by IRC Section 382.
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.
26
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Our corporate headquarters is located at 953 American Lane, Schaumburg, Illinois 60173, USA. The Company-owned facility
consists of one three-story office building with approximately 110,000 square feet. An unaffiliated tenant currently leases one
floor of the building. We believe that the new facility will be sufficient space to support the growth and expansion of our business.
We also lease four additional office spaces. The St. Louis, Missouri lease is 4,375 square feet of office space and effective through
June 2021. This office is mainly used for certain underwriting operations for Gateway. The Manhattan, New York lease is 1,796
square feet of office space. The Manhattan lease was effective through February 2018 but was renewed upon expiration for an
additional two years after year end. This office is mainly used for certain claims operations. 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. This office operates as the Global Liberty headquarters with underwriting, claims, and corporate and other operations. The
Scottsdale, Arizona lease is 2,107 square feet of office space and effective through November 2020. This office is mainly used
for certain underwriting operations.
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.
On March 5, 2018, a complaint was filed in the U.S. District Court for the Northern District of Illinois asserting claims under the
federal securities laws against the Company and two of its executive officers on behalf of a putative class of purchasers of the
Company’s securities, styled Fryman v. Atlas Financial Holdings, Inc., et al., No. 1:18-cv-01640 (N.D. Ill.). In the complaint,
the plaintiff asserts claims on behalf of a putative class consisting of purchasers of the Company’s securities between March 13,
2017 and March 2, 2018. The complaint alleges that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange
Act of 1934 and Rule 10b-5 promulgated thereunder by making allegedly false and misleading statements or failing to disclose
certain information regarding the adequacy of the Company’s reserves. The complaint seeks, among other remedies, unspecified
damages, attorneys’ fees and other costs, equitable and/or injunctive relief, and such other relief as the court may find just and
proper. Under applicable provisions of the federal securities laws, motions for appointment as lead plaintiffs must be filed within
sixty days after a notice announcing the filing of the Fryman complaint. The Company and the other defendants anticipate that
they will file a motion to dismiss the complaint for failure to state a claim upon which relief can be granted. Under the federal
securities laws, discovery and other proceedings automatically will be stayed during the pendency of any such motion to dismiss.
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 15, 2018, there were approximately 1,679 shareholders of record of our ordinary voting common shares. 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 29, 2018, there were 11,936,970 ordinary voting common shares
and no restricted voting common shares outstanding.
Set forth below are the high and low closing prices of the ordinary voting common shares during 2017 and 2016:
Summary of Share Prices
2017
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
2016
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
High
Low
$20.60
$19.00
$15.65
$17.80
$18.05
$17.69
$18.39
$19.21
$18.20
$13.95
$12.50
$12.75
$15.30
$15.54
$16.67
$16.70
During 2017, the 128,191 restricted voting common shares that were beneficially owned or controlled by KFSI (including its
subsidiaries and affiliated companies, “Kingsway”) were sold to non-affiliates of Kingsway. The Kingsway-owned restricted
voting common shares automatically converted to ordinary voting common shares upon their sale to non-affiliates of Kingsway.
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 2016, 2017 or to date in 2018, and we
have no current plans to pay dividends to our common shareholders. See ‘Item 7, Management’s Discussion and Analysis, Liquidity
and Capital Resources’ for further discussion of regulatory dividend restrictions.
During 2016, Kingsway sold 4,672 restricted voting common shares that converted to ordinary voting common shares.
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
Atlas Financial Holdings
Russel 2000 Index
SNL U.S. Insurance P&C Index
2/12/13
12/31/13
12/31/14
12/31/15
12/31/16
12/31/17
100.00
100.00
100.00
247.39
128.42
120.14
274.29
134.70
137.98
334.45
128.76
142.74
303.36
156.19
168.46
345.38
179.07
192.59
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,
2017.
Number of securities to be issued
upon exercise of outstanding
options, warrants and 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
429,390
*
787,014
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 429,390 shares outstanding under the January 18, 2011, 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 fiscal year ended December 31, 2017. No repurchases of equity securities were
made during the three month period ended December 31, 2017.
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.”
2017
2016
2015
2014
2013
($ in ‘000s, except for share and per share data)
Net premiums earned
Total revenue
Net (loss) income attributable to common
shareholders
(Loss) earnings per common share basic
(Loss) earnings per common share diluted
Combined ratio
$
215,771
$
171,058
$
152,064
$
98,124
$
221,975
177,579
156,851
101,618
$
$
(38,810)
(3.22) $
(3.22) $
122.5%
2,365
0.20
0.19
102.9%
$
$
14,154
17,608
1.18
1.13
$
$
88.2%
1.61
1.56
$
$
91.4%
71,344
74,027
7,361
0.92
0.74
94.2%
Cash and invested assets
$
243,483
$
224,779
$
233,304
$
179,994
$
139,888
Total assets
Notes payable
Total liabilities
Mezzanine equity r
Total shareholders’ equity r
Common shares
482,503
24,031
391,858
—
423,577
19,187
296,235
—
90,645
127,342
411,292
17,219
281,670
6,941
122,681
283,911
219,278
—
174,512
2,000
107,399
—
155,580
2,000
61,698
12,164,041
12,023,295
12,015,888
11,771,586
9,424,734
Book value per common share outstanding
$
7.42
$
10.54
$
10.15
$
9.08
$
6.54
r - amounts reclassified for preferred shares
—
—
6,941
2,000
2,000
r - Prior to the year ended December 31, 2017, the Company presented preferred shares issued as contingent consideration within
the permanent equity section of the Consolidated Statements of Financial Position. In accordance with Financial Accounting
Standards Board ASC Topic 480 - Distinguishing Liabilities from Equity, contingent consideration issued as preferred shares
wherein the number of shares to be issued is variable should be classified outside of permanent equity and reflected as mezzanine
equity on the Consolidated Statements of Financial Position. This table has been restated to include the contingent consideration
as a separate line called ‘Mezzanine equity’ and removed from ‘Total shareholders’ equity.’
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, because these costs were incurred as a result of acquiring new businesses. 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.
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.
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
54
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, ordinary voting common shares and participative
restricted stock units 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 (including
certain transportation network companies (“TNC”) drivers/operators) and business auto. Our goal is to always be the preferred
specialty insurance business 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 2017. 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.
Since Atlas’ formation in 2010, 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 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 2016 the total market for commercial automobile liability insurance was approximately $33.1 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 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.
Other lines of business
The other line of business is comprised of our surety program (currently in run off), 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.
Our surety program primarily consisted of U.S. Customs bonds. We engage a former affiliate, Avalon Risk Management, to help
coordinate customer service and claims handling for the surety bonds written as this program runs off. This non-core program is
100% reinsured to an unrelated third party and has been transitioned to another carrier.
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 was 100% reinsured retrospectively and prospectively to an
unrelated third party. The workers’ compensation reinsurance agreement was terminated during 2017.
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
is a relatively small book of business, which is 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. The workers’ compensation program will be non-renewed in 2018 due to limited
demand.
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 and
Basis of Presentation,’ 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, 2017, 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 (loss) and comprehensive income (loss). 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 (loss) and comprehensive income (loss) 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 when establishing policy rates.
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. Atlas performs an assessment of recoverability of its deferred tax assets on a quarterly basis.
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 recognized in income in the period that such determination is made.
As of December 31, 2017, there was no valuation allowance recorded against the Company’s DTA, however there is no guarantee
that a valuation allowance will not be required in the future.
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 statements of income and comprehensive income 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
2017 Full Year Financial Performance Summary (comparisons to 2016 unless otherwise noted):
• Gross premiums written increased by 22.6% to $276.0 million
•
In-force premium as of December 31, 2017 increased $43.9 million to $268.5 million
• Total revenue for the year ended December 31, 2017 increased by 25.0% to $222.0 million
• Underwriting loss for the year ended December 31, 2017 was $48.5 million, compared to an underwriting loss of
$5.0 million, primarily due to the claims reserve strengthening related to prior accident years
• The combined ratio increased by 19.6% to 122.5%, primarily as a result of a 34.9% impact from claims reserve
strengthening related to prior accident years
• Net loss was $38.8 million, or $3.22 loss per common share diluted, compared to net income of $2.6 million, or
$0.19 earnings per common share diluted, representing a decrease in earnings per common share of $3.41
• Book value per common share as of December 31, 2017 decreased $3.12 to $7.42
• Return on equity was a negative 35.6% as compared to a positive 2.1%
38
The following financial data is derived from Atlas’ consolidated financial statements for the years ended December 31, 2017,
December 31, 2016, and December 31, 2015. Ratios are calculated as a percentage of net premiums earned.
Selected Financial Information ($ in ‘000s, except for per share data)
Gross premiums written
Net premiums earned
Net claims incurred
Underwriting expense:
Acquisition costs
Share-based compensation
Expenses (recovered) incurred related to acquisitions and
stock purchase agreements1
DPAC amortization
Other underwriting expenses2
Total underwriting expenses
Underwriting (loss) income
Net investment income
(Loss) income from operating activities, before income
taxes
Interest expense2
Realized gains and other income
Net (loss) income before income taxes
Income tax (benefit) expense
Net (loss) 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
DPAC amortization ratio
Other underwriting expense ratio
Total underwriting expense ratio1
Combined ratio1
(Loss) earnings per common share diluted
Book value per common share
Return on equity3
$
$
Year Ended
December 31, 2017 December 31, 2016 December 31, 2015
$
$
275,961
215,771
203,873
$
225,095
171,058
134,746
209,286
152,064
89,994
27,885
1,176
—
806
30,548
60,415
(48,517)
4,897
(43,620)
(1,840)
1,307
(44,153)
(5,343)
18,803
1,552
(6,297)
(746)
27,983
41,295
(4,983)
4,824
(159)
(1,026)
1,697
512
(2,134)
$
(38,810)
$
2,646
$
18,592
1,613
1,941
(385)
22,356
44,117
17,953
3,976
21,929
(694)
811
22,046
7,616
14,430
94.5 %
78.8 %
59.2 %
12.9 %
0.5 %
— %
0.4 %
14.2 %
28.0 %
122.5 %
(3.22)
7.42
$
$
(35.6) %
11.0 %
0.9 %
(3.7) %
(0.4) %
16.3 %
24.1 %
102.9 %
0.19
10.54
$
$
2.1 %
12.2 %
1.1 %
1.3 %
(0.3) %
14.7 %
29.0 %
88.2 %
1.13
10.15
12.5 %
1 - For 2015, we reclassified our presentation for costs related to acquisition and stock purchase agreements from non-operating
expenses to other underwriting expenses, because these costs were incurred as a result of acquiring new businesses. The
reclassification increased the total underwriting expense ratio and the combined ratio by 1.3% for the year ended December
31, 2015. The reclassification increased total underwriting expenses and decreased underwriting income and income from
operating activities, before income taxes by $1.9 million for the year ended December 31, 2015.
39
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 income taxes 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.
3 - For 2015, we restated our presentation for preferred shares from within the permanent equity section to be included within the
mezzanine equity section in accordance with Financial Accounting Standards Board (“FASB”) ASC Topic 480 - Distinguishing
Liabilities from Equity. As a result, return on equity increased 0.4% as a result of this decrease in shareholders’ equity from the
reclassification of preferred shares.
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, 2017 compared to year ended December 31, 2016:
Gross Premiums Written
The following table summarizes gross premiums written by line of business.
Gross Premiums Written by Line of Business ($ in ‘000s)
Year Ended December 31,
Commercial automobile
Other
Total
2017
2016
$
$
274,705 $
1,256
275,961 $
223,801
1,294
225,095
% Change
22.7 %
(3.0)%
22.6 %
40
For the year ended December 31, 2017, gross premiums written was $276.0 million compared to $225.1 million for the year ended
December 31, 2016, representing a 22.6% increase. This increase primarily resulted from growth in livery/limousine and para-
transit gross premiums written primarily in New York, California, and New Jersey offset by a decrease in taxi gross premiums
written in Louisiana and Nevada and in all lines in Minnesota and Michigan. New premium business represented approximately
40.7% of the total gross premiums written on our core lines for the year ended December 31, 2017, as compared to 33.9% for the
year ended December 31, 2016.
In-force premium was $268.5 million and $224.6 million as of December 31, 2017 and December 31, 2016, respectively. The
Company’s gross unearned premium reserves were $128.0 million and $113.2 million as of December 31, 2017 and December 31,
2016, respectively. The increase in gross unearned premium reserves and in-force premium since December 31, 2016 primarily
resulted from growth in the states of California, New Jersey, and New York offset by a reduction in business in the states of
Louisiana, Michigan and Minnesota.
We continued our disciplined underwriting practices in the state of Michigan. We have raised prices incrementally, subject to
regulatory rules, based on the challenging results seen in that state. As a result, we have seen fewer renewals of our Michigan
business. Michigan insured vehicles represented approximately 1.4% and 3.9% of total insured vehicles in force as of December 31,
2017 and December 31, 2016, respectively.
Geographic Concentration
Gross Premiums Written by State ($ in ‘000s)
Year Ended December 31,
New York
California
Illinois
New Jersey
Virginia
Texas
Ohio
Washington
Minnesota
Nevada
Other
Total
2017
2016
$
99,374
42,165
15,664
11,090
8,704
8,511
7,204
7,186
6,453
6,449
63,161
$ 275,961
69,737
36.0% $
29,784
15.3%
12,398
5.7%
4,881
4.0%
7,940
3.2%
7,881
3.1%
5,942
2.6%
4,975
2.6%
9,542
2.3%
7,966
2.3%
22.9%
64,049
100.0% $ 225,095
31.0%
13.2%
5.5%
2.2%
3.5%
3.5%
2.6%
2.2%
4.3%
3.5%
28.5%
100.0%
As illustrated by the table above, 36.0% of Atlas’ gross premiums written for the year ended December 31, 2017 came from New
York and 64.2% came from the five states currently producing the most premium volume, as compared to 58.6% for the year
ended December 31, 2016. Approximately 62.5% of the increase in New York gross premiums written for the year ended December
31, 2017 came from one new large limousine fleet account.
Ceded Premiums Written
Ceded premiums written is equal to premium ceded under the terms of Atlas’ in force reinsurance treaties. Atlas generally purchases
reinsurance in an effort to limit net exposure on any one claim to a maximum amount of $500,000 with respect to commercial
automobile liability claims. Atlas also purchases reinsurance in an effort to protect against awards in excess of its policy limits.
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”). The cession rate of the Quota Share and Global Quota Share remained the same for
2017.
Ceded premiums written decreased 0.5% to $44.8 million for the year ended December 31, 2017, compared with $45.0 million
for the year ended December 31, 2016, primarily due to reductions in the cession rates of the Quota Share agreement and Global
Liberty’s commercial automobile excess of loss reinsurance contracts offset by premium growth as compared to the prior year
period. As our limousine and para-transit business grows, we expect ceded premiums written to increase, because, under the current
market conditions, the reinsurance costs are more expensive for these products.
41
Net Premiums Written
Net premiums written is equal to gross premiums written less the ceded premiums written under the terms of Atlas’ in-force
reinsurance treaties. Net premiums written increased 28.4% to $231.1 million for the year ended December 31, 2017 compared
with $180.1 million for the year ended December 31, 2016. These changes are attributed to the combined effects of the reasons
cited in the ‘Gross Premiums Written’ and ‘Ceded Premiums Written’ sections above.
Net Premiums Earned
Premiums are earned ratably over the term of the underlying policy. Net premiums earned increased by $44.7 million to $215.8
million for the year ended December 31, 2017, a 26.1% increase compared with $171.1 million for the year ended December 31,
2016. The increase in net premiums earned is attributable to the combined effects of the reasons cited in the ‘Gross Premiums
Written’ and ‘Ceded Premiums Written’ sections above.
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 TNC 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 TNC 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 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, 2017 was 94.5% compared to 78.8% for the
year ended December 31, 2016. 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 15.7% increase in loss ratio for the year ended December 31, 2017. Atlas
experienced $75.4 million in unfavorable prior accident year development for the year ended December 31, 2017. The unfavorable
development is primarily from our core commercial automobile liability line in the states of Louisiana, Michigan and New York,
mostly from accident years 2015 and prior.
Atlas performed a comprehensive review of its reserves, and based on year-end actuarial work coupled with a detailed internal
file audit for claims with reserves not established by the Company’s predictive analytics tools, overall reserves were strengthened.
Facts Surrounding Reserve Changes
•
Atlas identified that claim expenses in Michigan were significantly outpacing other states and took a significant charge for
the year ended December 31, 2016. Although exposure in Michigan was reduced to approximately 1.4% of the Company’s
insured vehicles in force by year end 2017, payments for claims in this state continued to be disproportionate to historic
premiums earned.
Remaining liability for non-New York Global Liberty business written prior to 2016 is expected to settle for greater amounts
than previously expected.
Overall, the actuarially determined liability for remaining claims related to accident years 2015 and prior in general was
indicated to be significantly higher than carried reserves.
Risk selection and pricing precision supported by predictive modeling in underwriting beginning in 2015 appears to have
contributed improvement in expected loss ratio for premiums earned in 2016 and 2017.
Payment activity in calendar year 2017 attributed to the use of predictive modeling in claims was accelerated as expected.
The Company believes that this represents an ultimate reduction in future expected losses, but it appears to be too early
for credit to be given to this potential outcome from an actuarial perspective.
•
•
•
•
• While the Company did see positive trends relating to more recent accident years in which predictive modeling had an impact,
•
based on year-end work, it is clear that the challenges from the past outpaced more recent benefits.
Based on year end 2017 actuarial work, Atlas determined that this significant reserve increase was necessary to ensure
sufficient IBNR levels to extinguish the remaining claims especially for older accident years.
42
Atlas intends to only write its products in states where it believes the Company can generate an above average underwriting profit.
As a specialty insurer, 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 experience 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. Atlas expects to
continue to deliver improvements on more recent accident years by maintaining existing operating efficiency and further improving
loss ratios through appropriate underwriting and pricing, disciplined claims handling as well as further leveraging the investments
it has made in predictive analytics. However, credit for such improvement will not be recognized until it is reflected in future loss
settlements.
The following tables summarize the claims and claims adjustment expenses incurred, net of reinsurance by line of business and
accident year:
Claims and Claims Adjustment Expenses Incurred, Net of Reinsurance ($ in ‘000s)
Year Ended December 31, 2017
Year Ended December 31, 2016
Accident Year
Commercial
Auto
Liability
Other
Total
Accident Year
Commercial
Auto
Liability
Other
Total
2012 and prior
$
3,402 $
(456) $
9,209
23,037
30,025
7,693
30
603
1,020
834
2,946
9,239
23,640
31,045
8,527
114,531
13,945
128,476
2011 and prior
$
3,374 $
1,323 $
2012
2013
2014
2015
2016
4,348
10,764
16,946
(4,930)
90,713
101
131
148
408
11,420
4,697
4,449
10,895
17,094
(4,522)
102,133
2013
2014
2015
2016
2017
Totals
$
187,897 $ 15,976 $
203,873
Totals
$
121,215 $ 13,531 $
134,746
Acquisition Costs and Other Underwriting Expenses
Acquisition costs represent commissions and taxes incurred on net premiums earned offset by ceding commission on business
reinsured. Acquisition costs were $27.9 million for the year ended December 31, 2017, or 12.9% of net premiums earned, as
compared to $18.8 million, or 11.0%, for the year ended December 31, 2016.
The table below indicates the impact of the various components of acquisition costs on the combined ratio for the years ended
December 31, 2017 and 2016:
($ in ‘000s, percentages to net premiums earned)
Year Ended December 31,
Net premiums earned
2017
%
2016
%
$
215,771
100.0 % $
171,058
100.0 %
Gross commissions incurred excluding contingent
28,416
13.2 %
21,993
12.9 %
Gross contingent commissions incurred
Premium and other taxes incurred
3,458
7,315
1.6 %
3.4 %
2,618
6,257
1.5 %
3.6 %
Total gross commissions and taxes incurred
39,189
18.2 %
30,868
18.0 %
Ceded commissions incurred excluding contingent
Ceded contingent commissions incurred
Total ceded commissions incurred
(9,447)
(1,857)
(11,304)
(4.4)%
(0.9)%
(5.3)%
(10,966)
(1,099)
(12,065)
(6.4)%
(0.6)%
(7.0)%
Total
$
27,885
12.9 % $
18,803
11.0 %
Gross commissions incurred excluding contingent commissions increased by $6.4 million over the prior year period. This increase
resulted from premium growth in business where higher commission rates applied. Gross contingent commissions incurred
increased by $840,000 over the prior year period primarily as a result of new agents becoming eligible for contingent commissions
and premium growth. Gross contingent commissions are awarded based on the combination of developed loss experience and
premium growth. Premium and other taxes incurred increased by $1.1 million over the prior year period as a result of premium
growth.
43
Ceded commissions incurred excluding contingent commissions decreased by $1.5 million over the prior year period primarily
due to the decrease in ceded premiums written for the Quota Share. Ceded contingent commissions incurred increased by $758,000
over the prior period. Ceded contingent commissions are based on loss experience. The increase in ceded contingent commissions
resulted from favorable loss ratios on Atlas’ excess of loss reinsurance agreements and the Global Quota Share offset by unfavorable
loss ratios on the Quota Share. As shown in the table in the ‘Combined Ratio’ section, on a pro-forma basis, without the effect of
the Quota Share and Global Quota Share, the acquisition costs would have been 15.4% for the year ended December 31, 2017, as
compared to 15.1% for the year ended December 31, 2016.
The other underwriting expense ratio (including share-based compensation expenses and expenses incurred related to stock
purchase agreements) was 15.1% for the year ended December 31, 2017 compared to 13.1% for the year ended December 31,
2016. Other underwriting expenses increased by approximately $10.0 million over the prior year period. Depreciation, leasehold
improvement amortization and facility costs related to Atlas’ new headquarters building increased by $806,000. Salary, payroll
taxes and employee benefit costs decreased by $581,000. Because salary, payroll taxes and employee benefit costs decreased and
gross premiums written and gross unearned premium reserves increased, DPAC amortization increased by $1.6 million. No
expenses were recovered pursuant to stock purchase agreements during 2017, as compared to $6.3 million during 2016. The
termination of Gateway’s workers’ compensation retroactive reinsurance agreement increased expenses by $1.7 million for year
ended December 31, 2017. Directors fees increased by $30,000 over the prior year period due to the addition of a new board
member during 2017.
Changes in our Quota Share reinsurance during 2017 had an impact on the reported other underwriting expense ratio when
comparing year to year. As shown in the table in the ‘Combined Ratio’ section, on a pro-forma basis, without the effect of the
Quota Share, the other underwriting expense ratio would have been 13.5% for the year ended December 31, 2017 compared to
11.0% for the year ended December 31, 2016. The 2016 ratio includes benefits from expenses recovered relating to acquisitions
and stock purchase agreements, which decreased this ratio by 3.1%.
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 statements of income and comprehensive income. With
this in mind, acquisition costs, and other underwriting expenses should be examined either collectively as total underwriting
expenses or independent of the effects of the Quota Share and Global Quota Share ceding commissions to understand operating
efficiency.
Expenses Related to Stock Purchase Agreements
Atlas did not incur or recover any expenses pursuant to stock purchase agreements for the year ended December 31, 2017. Atlas
recovered $6.3 million of expenses pursuant to the contingent adjustments of the Gateway and Anchor stock purchase agreements
that included the redemption and cancellation of preferred shares for the year ended December 31, 2016.
Combined Ratio
Atlas’ combined ratio for the year ended December 31, 2017 was 122.5%, compared to 102.9% for the year ended December 31,
2016.
Underwriting profitability, as opposed to overall profitability or net earnings, is measured by the combined ratio. The combined
ratio is the sum of the claims and claims adjustment expense ratio, the acquisition cost ratio, and the underwriting expense ratio.
The change in the combined ratio is attributable to the factors described in the ‘Net Premiums Earned’, ‘Net Claims Incurred’,
and ‘Acquisition Costs and Other Underwriting Expenses’ sections above.
44
The table below indicates the impact of the Quota Share and Global Quota Share on the various components of the combined ratio
for the years ended December 31, 2017 and 2016:
($ in ‘000s, percentages to net premiums earned)
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 expenses
DPAC amortization
Expenses recovered related to acquisitions and stock purchase agreements
Share-based compensation expense
2017
2016
Amount
%
Amount
%
$ 240,994
100.0% $ 204,228
100.0 %
224,368
93.1% 151,873
37,028
30,548
806
—
1,176
15.4%
12.7%
0.3%
—%
0.5%
30,827
27,983
(746)
(6,297)
1,552
74.4 %
15.1 %
13.7 %
(0.4)%
(3.1)%
0.8 %
Total underwriting loss and combined ratio
$ (52,932)
122.0% $
(964)
100.5 %
Net of Quota Share and Global Quota Share:
Net premiums earned
Net claims incurred
Acquisition costs
Other insurance general and administrative expenses
DPAC amortization
Expenses recovered related to acquisitions and stock purchase agreements
Share-based compensation expense
Total underwriting loss and combined ratio
$ 215,771
203,873
100.0% $ 171,058
94.5% 134,746
100.0 %
78.8 %
27,885
30,548
806
—
1,176
$ (48,517)
12.9%
14.2%
0.4%
—%
0.5%
122.5% $
18,803
27,983
(746)
(6,297)
1,552
(4,983)
11.0 %
16.3 %
(0.4)%
(3.7)%
0.9 %
102.9 %
1 - For 2017, net claims incurred, gross of the quota share, for the current accident year was $143.3 million with a combined ratio
impact of 59.5%. For the prior accident years net claims incurred, gross of the quota share was $81.0 million with a combined
ratio impact of 33.6%. 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%.
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 1.5% to $4.9 million for the year ended December 31, 2017, compared to $4.8
million for the year ended December 31, 2016. These amounts are primarily comprised of interest income. This increase was
primarily due to an increase in interest income from fixed income securities with higher coupon rates and a decrease in investment
manager costs. The gross yield on our fixed income securities was 2.3% and 2.2% for the years ended December 31, 2017 and
2016, respectively. The gross yield on our cash and cash equivalents was 0.3% and 0.1% for the years ended December 31, 2017
and 2016, respectively. The increase in gross yield on our cash investments was due to higher interest rates on certain new accounts
and higher balances in accounts earning greater interest. Equity method investments and collateral loans generated investment
income of $1.9 million in each of the years ended December 31, 2017 and 2016.
Interest Expense
On April 26, 2017, Atlas issued $25 million of five-year 6.625% senior unsecured notes and received net proceeds of approximately
$23.9 million after deducting underwriting discounts and commissions and other offering expenses. A portion of the net proceeds
from this issuance, together with cash on hand, were used to repay all outstanding borrowings under the Loan Agreement, as
defined below in the ‘Liquidity and Capital Resources’ section. Interest expense was $1.8 million and $1.0 million for the years
ended December 31, 2017 and 2016, respectively. The increase in interest expense for the year ended December 31, 2017 primarily
resulted from the accelerated amortization of debt issuance costs upon the repayment of outstanding amounts under the Loan
Agreement and the higher interest rate related to the senior unsecured notes.
45
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, 2017 were $872,000 compared to $1.2 million for the year ended December 31, 2016. This
decrease resulted from lower gains from the sale of fixed income securities partially offset by higher gains on the sale of equity
securities and equity method investments.
Other Income
Atlas recorded other income of $435,000 and $467,000 for the years ended December 31, 2017 and 2016, respectively. The decrease
in other income resulted from lower income from premium financing offset by higher rental income.
(Loss) Income before Income Taxes
Atlas generated a pre-tax loss of $44.2 million for the year ended December 31, 2017 compared to pre-tax income of $512,000
for year ended December 31, 2016. The causes of these changes are attributed to the combined effects of the reasons cited in the
‘Net Premiums Earned’, ‘Net Claims Incurred’, ‘Acquisition Costs and Other Underwriting Expenses’, ‘Net Investment Income’,
‘Interest Expense’, ‘Net Realized Investment Gains’, and ‘Other Income’ sections above.
Income Tax Benefit
Atlas recognized a tax benefit of $5.3 million for the year ended December 31, 2017 and $2.1 million for the year ended December
31, 2016. The following table reconciles the U.S. statutory marginal income tax rate of 35.0% to the effective tax rate for the
years ended December 31, 2017 and 2016:
Tax Rate Reconciliation ($ in ‘000s)
Year Ended December 31,
2017
2016
Provision for taxes at U.S. statutory marginal income tax rate
Nondeductible expenses
Tax-exempt income
State tax (net of federal benefit)
Stock compensation
Nondeductible acquisition accounting adjustment
Change in statutory tax rate
Other
Provision for income taxes for continuing operations
Amount
$ (15,453)
51
(23)
(2)
(445)
—
10,542
(13)
$ (5,343)
%
Amount
%
35.0 % $
179
(0.1)%
0.1 %
— %
24
(39)
28
(23.9)%
— %
1.0 %
—
(2,204)
—
(122)
12.1 % $ (2,134)
— %
35.0 %
4.7 %
(7.6)%
5.5 %
— %
(430.5)%
— %
(23.9)%
(416.8)%
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) was signed into law. Among other things, beginning
with the 2018 tax year, the Tax Act reduced the Company’s corporate federal tax rate from a marginal rate of 35% to a flat 21%,
eliminated the corporate Alternative Minimum Tax (“AMT”), changed reserving and other aspects of the computation of taxable
income for insurance companies, and modified the net operating loss carryback and carryforward provisions for all entities in the
group except for those subject to tax as property and casualty companies. The modified net operating loss provisions no longer
allow a carryback to prior years to recover past taxes, but now allow an indefinite carryforward period subject to a yearly utilization
limit. As discussed above, any net operating losses with respect to the insurance entities taxed as property and casualty companies
retain the current net operating loss carryback and carryover provisions, which are two years carryback and 20 years carryforward.
As of December 31, 2016, the Company measured its deferred tax items at the enacted rate in effect of 35%. Due to the Tax Act’s
enactment, the Company’s deferred tax assets and liabilities as of December 31, 2017 have been re-measured at the new enacted
tax rate of 21%. For the year ended December 31, 2017, the Company recognized income tax expense of $10.5 million related
to reduction in the net deferred tax asset a result of this re-measurement.
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.
46
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.
Positive evidence evaluated when considering the need for a valuation allowance includes:
• management’s expectations of future profit with vehicles in-force at their highest levels and steady new and renewal
business;
•
•
•
anticipated ability to increase prices in core lines as the commercial auto market is firming;
predictive modeling in underwriting and claims are generating better priced risks that are expected to create overall
profitability over time; and
positive growth trends in gross premiums written in each year since formation.
Negative evidence evaluated when considering the need for a valuation allowance includes:
•
•
net losses generated in the two most recent years; and
yearly limitation as required by IRC Section 382 on net operating loss carryforwards generated prior to 2013.
Net (Loss) Income and (Loss) Earnings per Common Share
Atlas had a net loss of $38.8 million for the year ended December 31, 2017 compared to net income of $2.6 million for the year
ended December 31, 2016. After taking the impact of the liquidation preference of the preferred shares into consideration, the
loss per common share diluted for the year ended December 31, 2017 was $3.22 versus earnings per common share diluted of
$0.19 for the year ended December 31, 2016.
The following chart illustrates Atlas’ potential dilutive common shares for the years ended December 31, 2017 and 2016:
Year Ended December 31,
Basic weighted average common shares outstanding
Dilutive potential ordinary shares:
Dilutive stock options
Dilutive shares upon preferred share conversion
Diluted weighted average common shares outstanding
2017
2016
12,064,880
12,045,519
—
—
177,364
—
12,064,880
12,222,883
The effects of convertible instruments are excluded from the computation of earnings per common share diluted in periods in
which the effect would be anti-dilutive. Convertible preferred shares are anti-dilutive when the amount of dividend declared or
accumulated in the current period per common share obtainable upon conversion exceeds earnings per common share basic. For
the year ended December 31, 2017, all exercisable stock options were deemed to be anti-dilutive. For the year ended December
31, 2016, all exercisable stock options were deemed to be dilutive and all of the convertible preferred shares were deemed to be
anti-dilutive. The potentially dilutive impact for the convertible preferred stock excluded from the calculation due to anti-dilution
is 441,357 common shares for the year ended December 31, 2016.
Year ended December 31, 2016 compared to year ended December 31, 2015:
Gross Premiums Written
The following table summarizes gross premiums written by line of business.
Gross Premiums Written by Line of Business ($ in ‘000s)
Year Ended December 31,
Commercial automobile
Other
Total
2016
2015
$
$
223,801 $
1,294
225,095 $
207,767
1,519
209,286
% Change
7.7 %
(14.8)%
7.6 %
For the year ended December 31, 2016, gross premiums 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.
47
For the year ended December 31, 2016, gross premiums 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 premiums 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 premiums 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 premiums written represented 99.4%
of gross, and 99.9% of net, premiums 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 reserves were $113.2 million and $108.2 million as of December 31, 2016 and December 31,
2015, respectively. The increase in gross unearned premium reserves and in-force premium since December 31, 2015 primarily
resulted from growth in the states of California, Nevada, New Jersey, New York and Washington offset by a reduction in business
in the state of Michigan.
Geographic Concentration
Gross Premiums Written by State ($ 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 premiums 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 premiums 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 Premiums Written
Ceded premiums 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. 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.
Net Premiums Written
Net premiums 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 Premiums
Written’ and ‘Ceded Premiums Written’ sections above.
Net Premiums Earned
Net premiums 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 Premiums Written’ and ‘Ceded Premiums Written’ sections above. Global
Liberty accounted for $11.0 million of this increase. The remaining increase in net premiums earned resulted from organic growth
primarily in the states of California, Minnesota, Nevada, New York and Virginia.
48
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.
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.
Atlas experienced $166,000 in unfavorable prior accident year development during the year ended December 31, 2015. Prior
accident year unfavorable development on non-core lines and assigned risk pools was $870,000 for the year ended December 31,
2015. The unfavorable development on non-core lines and assigned risk pools was offset by favorable prior accident year
development of $475,000 and $230,000 on our core lines and pre-acquisition Global Liberty claims reserves, respectively. This
favorable development on our core lines was attributable to our traditional taxi and excess taxi products.
The following tables summarize the claims and claims adjustment expenses incurred, net of reinsurance by line of business and
accident year:
Claims and Claims Adjustment Expenses Incurred, Net of Reinsurance ($ in ‘000s)
Year Ended December 31, 2016
Year Ended December 31, 2015
Accident Year
Commercial
Auto
Liability
Other
Total
Accident Year
Commercial
Auto
Liability
Other
Total
2011 and prior
$
3,374 $
1,323 $
4,348
10,764
16,946
(4,930)
101
131
148
408
4,697
4,449
10,895
17,094
(4,522)
90,713
11,420
102,133
2010 and prior
$
2,622 $
156 $
2011
2012
2013
2014
2015
288
1,431
5,908
(10,912)
79,062
305
(16)
(200)
584
10,766
2,778
593
1,415
5,708
(10,328)
89,828
2012
2013
2014
2015
2016
Totals
$
121,215 $ 13,531 $
134,746
Totals
$
78,399 $ 11,595 $
89,994
Acquisition Costs and Other Underwriting Expenses
Acquisition costs were $18.8 million for the year ended December 31, 2016, or 11.0% of net premiums earned, as compared to
12.2% for the year ended December 31, 2015. The decrease in the ratio is primarily due to the Quota Share’s and Global Quota
Share’s ceding commissions.
49
The table below indicates the impact of the various components of acquisition costs on the combined ratio for the years ended
December 31, 2016 and 2015:
($ in ‘000s, percentages to net premiums earned)
Year Ended December 31,
Net premiums earned
2016
%
2015
%
$
171,058
100.0 % $
152,064
100.0 %
Gross commissions incurred excluding contingent
21,993
12.9 %
19,200
12.6 %
Gross contingent commissions incurred
Premium and other taxes incurred
2,618
6,257
1.5 %
3.6 %
2,257
4,933
1.5 %
3.3 %
Total gross commissions and taxes incurred
30,868
18.0 %
26,390
17.4 %
Ceded commissions incurred excluding contingent
Ceded contingent commissions incurred
Total ceded commissions incurred
(10,966)
(1,099)
(12,065)
(6.4)%
(0.6)%
(7.0)%
(6,807)
(991)
(7,798)
(4.5)%
(0.7)%
(5.2)%
Total
$
18,803
11.0 % $
18,592
12.2 %
As discussed above in ‘Gross Premiums Written’, we wrote a full year’s worth of Global Liberty premium for 2016 as compared
to the 9-1/2 months we had in 2015. Due to this increase, coupled with market share growth in our livery/limousine and para-
transit products where higher commission rates applied, gross commissions incurred excluding contingent commissions increased
by $2.8 million over the prior year period. Gross contingent commissions incurred increased by $361,000 over the prior year
period primarily as a result of Global Liberty business being included in the calculations. Premium and other taxes incurred
increased by $1.3 million over the prior year period as a result of premium growth.
Ceded commissions incurred excluding contingent commissions increased by $4.2 million over the prior year period primarily
due to the increase in ceded premiums written for the Quota Share and Global Quota Share. Ceded contingent commissions incurred
increased by $108,000 over the prior period. The increase in ceded contingent commissions resulted from favorable loss ratios on
Atlas’ excess of loss reinsurance agreements offset by unfavorable loss ratios on the Quota Share. As shown in the table in the
‘Combined Ratio’ section, 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. As shown in the table in the ‘Combined Ratio’ section, 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 had a positive impact on this ratio.
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 $942,000 related to the terms of the Gateway stock purchase agreement and the issuance of
preferred shares pursuant to the terms of such agreement.
Combined Ratio
Atlas’ combined ratio for the year ended December 31, 2016 was 102.9%, compared to 88.2% for the year ended December 31,
2015.
50
The change in underwriting profitability is attributable to the factors described in the ‘Net Premiums Earned’, ‘Net Claims Incurred’,
‘Acquisition Costs and Other Underwriting Expenses’ sections above.
The table below indicates the impact of the Quota Share and Global Quota Share on the various components of the combined ratio
for the years ended December 31, 2016 and 2015:
($ in ‘000s, percentages to net premiums earned)
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
DPAC amortization
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
27,983
(746)
(6,297)
1,552
74.4 %
15.1 %
13.7 %
(0.4)%
(3.1)%
0.8 %
99,394
25,093
22,356
(385)
1,941
1,613
58.2 %
14.7 %
13.1 %
(0.2)%
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
DPAC amortization
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
27,983
(746)
(6,297)
1,552
(4,983)
$
78.8 %
11.0 %
16.3 %
(0.4)%
(3.7)%
0.9 %
89,994
18,592
22,356
(385)
1,941
1,613
59.2 %
12.2 %
14.7 %
(0.3)%
1.3 %
1.1 %
102.9 % $
17,953
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, 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.
51
Interest Expense
Interest expense was $1.0 million and $694,000 for the years ended December 31, 2016 and 2015, respectively. The increase in
interest expense for the year ended December 31, 2016 primarily resulted from increased borrowings under the Loan Agreement
and slight increases in the LIBOR.
Net Realized Investment Gains
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.
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 Premiums Earned’, ‘Net Claims Incurred’, ‘Acquisition Costs and Other Underwriting Expenses’, ‘Net Investment Income’,
‘Interest Expense’, ‘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
Net Income and Earnings per Common Share
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 %
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 $1.13 for the year
ended December 31, 2015.
The following chart illustrates Atlas’ potential dilutive common shares for the years ended December 31, 2016 and 2015:
Year Ended December 31,
Basic weighted average common shares outstanding
Dilutive potential ordinary shares:
Dilutive stock options
Dilutive shares upon preferred share conversion
Diluted weighted average common shares outstanding
2016
2015
12,045,519
11,975,579
177,364
—
186,656
573,444
12,222,883
12,735,679
52
For the year ended December 31, 2016, all exercisable stock options were deemed to be dilutive and all of the convertible preferred
shares were deemed to be anti-dilutive. The potentially dilutive impact for the convertible preferred stock excluded from the
calculation due to anti-dilution is 441,357 common shares for the year ended December 31, 2016. For the year ended December
31, 2015, all of the convertible preferred shares and all exercisable stock options were deemed to be dilutive.
53
IV. FINANCIAL CONDITION
Consolidated Statements of Financial Condition
($ in ‘000s, except for share and per share data)
Assets
Investments, available for sale
December 31,
2017
December 31,
2016
Fixed income securities, at fair value (amortized cost $158,411 and $157,451)
$
157,984
$
156,487
Equity securities, at fair value (cost $7,969 and $5,598)
Other investments
Total Investments
Cash and cash equivalents
Accrued investment income
Premiums receivable (net of allowance of $3,418 and $2,366)
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 premium reserves
Due to reinsurers
Notes payable, net
Other liabilities and accrued expenses
Total Liabilities
8,446
31,438
197,868
45,615
1,248
79,664
7,982
53,402
12,878
14,797
16,985
2,726
4,145
24,439
20,754
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
$
$
482,503
$
423,577
211,648
$
128,043
8,411
24,031
19,725
139,004
113,171
8,369
19,187
16,504
$
391,858
$
296,235
Shareholders' Equity
Ordinary voting common shares, $0.003 par value, 266,666,667 shares authorized, shares
issued and outstanding: December 31, 2017 - 12,164,041 and December 31, 2016 -
11,895,104
$
36
$
Restricted voting common shares, $0.003 par value, 33,333,334 shares authorized, shares
issued and outstanding: December 31, 2017 - 0 and December 31, 2016 - 128,191
Additional paid-in capital
Retained deficit
Accumulated other comprehensive income (loss), net of tax
Total Shareholders' Equity
Total Liabilities and Shareholders' Equity
—
201,105
(110,535)
39
$
$
90,645
482,503
$
$
36
—
199,244
(71,718)
(220)
127,342
423,577
54
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 $166.4 million and $162.7 million as of December 31, 2017 and December 31, 2016,
respectively, which were primarily comprised of fixed income securities. The securities held by the Insurance Subsidiaries must
comply with applicable regulations that prescribe the type, quality and concentration of securities. These regulations in the various
jurisdictions in which the Insurance Subsidiaries are domiciled permit investments in government, state, municipal and corporate
bonds, preferred and common equities, and other high quality investments, within specified limits and subject to certain
qualifications.
The fair value for Atlas’ investments in fixed income securities and equities by type and sector are as follows:
Fair Value of securities portfolio ($ 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
2017
2016
$
21,186 $
13,243
21,382
9,679
7,992
7,515
11,215
1,059
58,842
30,613
22,587
53,200
11,513
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
$
$
157,984 $
156,487
8,446
6,223
166,430 $
162,710
For the year ended December 31, 2017, total investment holdings increased to $197.9 million from $194.9 million as of
December 31, 2016. This increase resulted from net purchases of fixed income securities and equities, positive changes in the
market values of fixed income securities and equities and increases in Atlas’ share of the net book value of equity method investments
offset by net sales of equity method investments.
55
Most of the Company’s holdings are impacted by the U.S economy, and we anticipate a very moderate impact from the effect of
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.
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, 2017, the carrying values of these other investments were approximately $31.4 million versus
approximately $32.2 million as of December 31, 2016. The carrying values of the equity method limited partnerships were $25.3
million and $24.9 million as of December 31, 2017 and December 31, 2016, respectively. The increase in the carrying value of
the limited partnerships was primarily due to the purchase of investments and favorable changes in Atlas’ share of 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 $6.2 million and $7.2 million as of December 31, 2017 and December 31, 2016, respectively.
The decrease was due to the partial return of principal of one collateral loan offset by additional loans acquired in 2017.
The following table summarizes investments in equity method investments by investment type as of December 31, 2017 and
December 31, 2016:
($ in ‘000s)
As of December 31,
Real estate1
Insurance linked securities
Activist hedge funds
Venture capital1
Other joint venture
Total Equity Method Investments
Unfunded
Commitments
2017
Carrying Value
2017
2016
$
$
2,842 $
10,660 $
—
—
4,150
—
9,073
4,367
853
325
10,797
9,178
4,336
623
—
6,992 $
25,278 $
24,934
1 - We recategorized the carrying value of one limited partnership that was valued at $283,000 as of December 31, 2016 from
‘Venture capital’ to ‘Real estate’ based on its operations.
Liquidity and Cash Flow Risk
The following table summarizes the amortized cost and fair value by contractual maturities of the fixed income securities portfolio,
excluding cash and cash equivalents, at the dates indicated:
Amortized Cost and Fair Value of Fixed Income Securities by Contractual Maturity Date ($ 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
2017
Fair
Value
$
11,149 $
33,941
41,542
6,614
93,246
65,165
11,141
33,857
41,538
6,735
93,271
64,713
$ 158,411 $ 157,984
%
Amortized
Cost
2016
Fair
Value
8,732
7.0% $
43,808
21.4%
27,263
26.3%
5,168
4.3%
84,971
59.0%
41.0%
71,516
100.0% $ 157,451 $ 156,487
8,729 $
43,772
27,618
5,389
85,508
71,943
%
5.6%
28.0%
17.4%
3.3%
54.3%
45.7%
100.0%
56
As of December 31, 2017, 28.4% 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 33.6% as of December 31, 2016. 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, 2017, the fixed income securities had a weighted average life of 4.9 years and a duration of 3.9 years, compared
to a weighted average life of 4.1 years and a duration of 3.4 years, as of December 31, 2016. The increase in weighted average
life of the fixed income securities portfolio was the result of the reinvestment of proceeds from the maturity and sales of fixed
income securities with longer average lives. 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, 2017 and December 31, 2016 was 26.8% and 15.2%, respectively. The
increase is the result of the increase in notes payable and interest payable and the decrease in shareholders’ equity. Refer to the
‘Shareholders’ Equity’ and ‘Liquidity and Capital Resources’ subsections of the ‘Financial Condition’ section for further
information.
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, 2017, Atlas’ allowance for bad debt was $3.4 million, compared to $2.4 million as of December 31, 2016.
This increase in the allowance for bad debt was related to the re-estimation of the allowance, which is based on premium growth.
The following table summarizes the composition of the fair value of the fixed income securities portfolio, excluding cash and cash
equivalents, as of the dates indicated, by ratings assigned by Fitch, S&P or Moody’s Investors Service. The fixed income securities
portfolio consists of predominantly investment grade securities in corporate and government bonds with 99.3% rated ‘BBB’ or
better as of December 31, 2017 compared to 99.2% as of December 31, 2016.
Credit Ratings of Fixed Income Securities Portfolio ($ in ‘000s)
As of December 31,
AAA/Aaa
AA/Aa
A/A
BBB/Baa
BB
B
Total Fixed Income Securities
Other-than-temporary impairment
2017
Fair
Value
% of
Total
2016
Fair
Value
% of
Total
$
42,978
58,173
27,384
28,348
875
226
$ 157,984
27.2% $
36.8%
17.3%
18.0%
0.6%
0.1%
44,521
64,324
23,427
22,886
1,114
215
100.0% $ 156,487
28.5%
41.1%
15.0%
14.6%
0.7%
0.1%
100.0%
Atlas recognizes losses on securities for which a decline in market value was deemed to be other than temporary. Management
performs a quarterly analysis of the securities holdings to determine if declines in market value are other than temporary. Atlas
did not recognize any charges for securities impairments that were considered other than temporary for the years ended December
31, 2017, 2016, and 2015.
57
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, 2017 was $108.1 million compared to $91.9
million as of December 31, 2016. Unrealized losses as of December 31, 2017 were $1.4 million compared to $1.6 million as of
December 31, 2016. This decrease in unrealized losses resulted primarily from increases in market values of our fixed income
securities (see Note 5, ‘Investments’). 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
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.
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 and the Global Quota Share with Swiss Re
for Global Liberty. Under these contracts, cessions can be increased at our election should we want to utilize it as a means of
deleveraging. This gives us flexibility in terms of the timing and approach to potential future capital raising activities in light of
anticipated increased operating leverage. Prior to 2016, 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 $61.4 million recoverable from third party
reinsurers (exclusive of amounts prepaid) and other insurers as of December 31, 2017 as compared to $43.2 million as of
December 31, 2016. The increase in the amount recoverable from third party reinsurers resulted from an increase in case and
incurred but not reported (“IBNR”) reserves and a slight increase in amounts recoverable on paid claims.
Estimating amounts of reinsurance recoverables is also impacted by the uncertainties involved in the establishment of provisions
for unpaid claims and claims adjustment expenses. As underlying reserves potentially develop, the amounts ultimately recoverable
may vary from amounts currently recorded. Atlas’ reinsurance recoverables are generally unsecured. Atlas regularly evaluates its
reinsurers, and the respective amounts recoverable, and an allowance for uncollectible reinsurance is provided for, if needed.
Atlas’ largest reinsurance partners are Great American Insurance Company (“Great American”), a subsidiary of American Financial
Group, Inc., General Reinsurance Corporation (“Gen Re”), a subsidiary of Berkshire Hathaway, Inc., SCOR Re, a subsidiary of
SCOR U.S. Corporation, Swiss Re, a subsidiary of Swiss Reinsurance Company Ltd. and White Rock Insurance (SAC) Ltd.
(“White Rock”). Great American has a financial strength rating of A1 from Moody’s, Gen Re has a financial strength rating of
AA+ from Fitch, SCOR Re has a financial strength rating of AA- from Fitch, Swiss Re has a financial strength rating of Aa3 from
Moody’s, and White Rock is unrated. Gateway’s run-off workers’ compensation program was reinsured with White Rock. This
reinsurance agreement was terminated during 2017.
58
Deferred Tax Asset
Components of Deferred Tax ($ in ‘000s)
As of December 31,
Gross deferred tax assets:
Losses carried forward
Claims liabilities and unearned premium reserves
Tax credits
Commissions
Stock compensation
Other
Total gross deferred tax assets
Gross deferred tax liabilities:
Deferred policy acquisition costs
Investments
Fixed assets
Intangible assets
Other
Total gross deferred tax liabilities
Net deferred tax assets
2017
2016
13,313 $
6,171
1,172
623
602
1,094
22,975
3,107
213
847
715
1,108
5,990
16,985 $
14,535
8,546
662
1,269
1,157
1,027
27,196
4,628
475
559
1,328
1,708
8,698
18,498
$
$
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.
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 generated prior to the “triggering
event” 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 $13.3 million as of December 31, 2017.
Atlas has the following total net operating loss carryforwards as of December 31, 2017:
Net Operating Loss Carryforward by Expiry ($ in ‘000s)
Year of Occurrence
Year of Expiration
2001
2002
2006
2007
2008
2009
2010
2011
2012
2015
2017
2021
2022
2026
2027
2028
2029
2030
2031
2032
2035
2037
Total
NOLs and other carryforwards generated in 2015 and 2017 are not limited by IRC Section 382.
Amount
$
5,007
4,317
7,825
5,131
1,949
1,949
1,949
4,166
9,236
1
21,864
$ 63,394
59
Buildings and Land
In the fourth quarter of 2016, Atlas purchased a property in Schaumburg, Illinois to serve as the new corporate headquarters in
2017. The building and land were purchased for $9.3 million. During the year ended December 31, 2017, the Company purchased
furnishings and made improvements to this building. The total cost of furnishings and improvements was approximately $11.3
million. See MD&A,‘Contractual Obligations’ section below, Note 8, ‘Commitments and Contingencies’ and Note 9 ‘Property
and Equipment’ for further discussion of the new corporate headquarters.
Claims Liabilities
The table below shows the amounts of total case reserves and IBNR reserves as of December 31, 2017 and as of December 31,
2016. The other line of business is comprised of our surety program (currently in run off), Gateway’s truck and workers’
compensation programs (currently in run off), American Service’s non-standard personal lines business (currently in run off),
Atlas’ workers’ compensation related to taxi, other liability, Global Liberty’s homeowners program (currently in run off) and
assigned risk pool business. See MD&A, ‘Overview’ section for further information regarding these lines of business.
Provision for Unpaid Claims by Type - Gross of Reinsurance ($ in ‘000s)
As of December 31,
Case reserves
IBNR
Total
2017
2016
YTD% Change
$
$
62,769 $
148,879
52,132
86,872
211,648 $
139,004
20.4%
71.4%
52.3%
Provision for Unpaid Claims by Line of Business – Gross of Reinsurance ($ in ‘000s)
As of December 31,
Commercial automobile liability
Other
Total
2017
2016
YTD% Change
$
$
204,654 $
132,732
6,994
6,272
211,648 $
139,004
54.2%
11.5%
52.3%
Provision for Unpaid Claims by Line of Business - Net of Reinsurance Recoverables ($ in ‘000s)
As of December 31,
Commercial automobile liability
Other
Total
2017
2016
YTD% Change
$
$
153,319 $
4,927
158,246 $
101,220
2,414
103,634
51.5%
104.1%
52.7%
The provision for unpaid claims and claims adjustment expenses increased by 52.3% to $211.6 million as of December 31, 2017
compared to $139.0 million as of December 31, 2016. During the year ended December 31, 2017, case reserves increased by
20.4% compared to December 31, 2016, while IBNR reserves increased by 71.4%. The increase in case reserves resulted from
the increase in current accident year claims due to business growth offset by a decrease in claims in older accident years due to
the acceleration of claim payments for those years. Based on year end 2017 actuarial work Atlas determined that a significant
IBNR increase was necessary to ensure levels are sufficient to extinguish the remaining claims, especially for older accident years.
60
The following tables summarize the provision for unpaid claims, gross of reinsurance by type and line of business and accident
year:
Provision for Unpaid Claims, Gross of Reinsurance ($ in ‘000s)
As of December 31, 2017
Case Reserves
Accident Year
2016 and prior
2017
Totals
Commercial
Auto
Liability
$
$
30,393 $
30,619
61,012 $
Other
Total
IBNR
Commercial
Auto
Liability
Other
Total
2,219 $
(462)
1,757 $
32,612
30,157
62,769
$
$
65,017 $
4,057 $
78,625
1,180
69,074
79,805
143,642 $
5,237 $
148,879
Provision for Unpaid Claims, Gross of Reinsurance ($ in ‘000s)
As of December 31, 2016
Case Reserves
IBNR
Accident Year
2015 and prior
2016
Totals
Commercial
Auto
Liability
$
$
25,295 $
24,222
49,517 $
Other
Total
Commercial
Auto
Liability
Other
Total
3,129 $
(514)
2,615 $
28,424
23,708
52,132
$
$
24,558 $
2,553 $
58,657
1,104
83,215 $
3,657 $
27,111
59,761
86,872
The following tables summarize the provision for unpaid claims, net of reinsurance by type and line of business and accident year:
Provision for Unpaid Claims, Net of Reinsurance Recoverables ($ in ‘000s)
As of December 31, 2017
Case Reserves
IBNR
Accident Year
2016 and prior
2017
Totals
Commercial
Auto
Liability
$
$
25,701 $
27,421
53,122 $
Other
Total
Commercial
Auto
Liability
Other
Total
1,303 $
(309)
994 $
27,004
27,112
54,116
$
$
50,309 $
3,089 $
49,888
844
53,398
50,732
100,197 $
3,933 $
104,130
Provision for Unpaid Claims, Net of Reinsurance Recoverables ($ in ‘000s)
As of December 31, 2016
Case Reserves
IBNR
Accident Year
2015 and prior
2016
Totals
Commercial
Auto
Liability
$
$
21,909 $
20,461
42,370 $
Other
Total
Commercial
Auto
Liability
Other
Total
1,350 $
(338)
1,012 $
23,259
20,123
43,382
$
$
16,869 $
1,023 $
41,981
379
58,850 $
1,402 $
17,892
42,360
60,252
61
The changes in the provision for unpaid claims and claims adjustment expenses, net of amounts recoverable from reinsurers, for
the years ended December 31, 2017, 2016, and 2015 were as follows ($ in ‘000s):
For the year ended December 31,
2017
2016
2015
Unpaid claims and claims adjustment expenses, beginning of period
$
139,004
$
127,011
$
102,430
Less: reinsurance recoverable
Net unpaid claims and claims adjustment expenses, beginning of period
35,370
103,634
29,399
97,612
18,421
84,009
Net reserves acquired
—
—
19,396
Change in retroactive reinsurance ceded
1,361
107
2,037
Incurred related to:
Current year
Prior years
Paid related to:
Current year
Prior years
128,476
75,397
203,873
50,626
99,996
102,133
32,613
134,746
39,652
89,179
150,622
128,831
89,828
166
89,994
32,402
65,422
97,824
Net unpaid claims and claims adjustment expenses, end of period
Add: reinsurance recoverable
Unpaid claims and claims adjustment expenses, end of period
$
$
158,246
53,402
211,648
$
$
103,634
$
35,370
97,612
29,399
139,004
$
127,011
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.
Atlas experienced $75.4 million in unfavorable prior accident year development for the year ended December 31, 2017 as reflected
as incurred related to prior years in the table above. The unfavorable development is primarily from our core commercial automobile
liability line. Atlas previously identified that claim expenses in Michigan were significantly outpacing other states and took a
significant charge. Although exposure in Michigan was reduced to approximately 1.4% of the Company’s insured vehicles inforce
by year end 2017, payments for claims in this state continued to be disproportionate to historic premiums earned. In addition, the
remaining liability for non-New York Global Liberty business written prior to 2016 is expected to settle for greater amounts than
previously expected. Overall, the actuarially determined liability for remaining claims related to accident year 2015 and prior in
general, across all jurisdictions, was indicated to be significantly higher than carried reserves.
62
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 accident year development during 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 $230,000 on our core lines and pre-acquisition Global Liberty claims reserves, respectively. This favorable
development on our core lines was attributable to our traditional taxi and excess taxi products.
Contractual Obligations
The table below summarizes future payments under contractual obligations and estimated claims settlements for the year ended
December 31, 2017:
($ in ‘000s)
Notes payable, including interest payments
Operating leases
Estimated claims liabilities, net of reinsurance
Other contractual obligations
Total
$
Total
33,281
4,269
158,246
1,150
Less than
1 year
1-3 years
3-5 years
More than
5 years
$
$
1,656
1,053
76,671
1,150
$
3,312
2,122
60,658
—
28,313
1,094
14,484
—
$
—
—
6,433
—
$ 196,946
$
80,530
$
66,092
$
43,891
$
6,433
On April 26, 2017, Atlas issued $25 million of five-year 6.625% senior unsecured notes. Total interest expense over the five years
is expected to be $8.3 million. Interest on the senior unsecured notes is payable quarterly on each January 26, April 26, July 26
and October 26.
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.
The Company entered into various contracts to renovate and furnish the building that was purchased in 2016 to serve as the
Company’s new headquarters (see Note 8, ‘Commitments and Contingencies’ and Note 9, ‘Property and Equipment’). The
remaining contractual obligations related to the renovation and furnishing of Atlas’ new headquarters building are included under
‘Other contractual obligations’.
As of December 31, 2017, we had contractual obligations to provide additional funds for investments in limited liability investments
included in other investments for up to $7.0 million not included in the table above. There is no certainty of when these amounts
will be required to be provided.
Off-Balance Sheet Arrangements
As of December 31, 2017, we did not have any material off-balance sheet arrangements as defined by SEC rules.
63
Shareholders’ Equity
The table below identifies changes in shareholders’ equity for the years ended years ended December 31, 2017, 2016, and 2015:
Changes in Shareholders’ Equity
107,399
14,430
(1,112)
145
1,819
122,681
2,646
(409)
812
1,612
127,342
—
(38,810)
252
655
1,176
30
90,645
($ in ‘000s)
Balance December 31, 2014 r
Net income
Other comprehensive loss
Options exercised
Share-based compensation
Balance December 31, 2015 r
Net income
Preferred dividends paid
Other comprehensive income
Share-based compensation
Balance December 31, 2016
Ordinary
Voting
Common
Shares
Restricted
Voting
Common
Shares
Additional
Paid-In
Capital
Retained
Deficit
Accumulated
Other
Comprehensive
Income (Loss)
Total
Shareholders'
Equity
$
34 $
— $
196,079 $ (88,794) $
—
—
—
2
—
—
—
—
—
145
1,817
14,430
—
—
—
80 $
—
(1,112)
—
—
$
36 $
— $
198,041 $ (74,364) $
(1,032) $
—
—
—
—
—
—
—
—
—
(409)
—
1,612
2,646
—
—
—
—
—
812
—
$
36 $
— $
199,244 $ (71,718) $
(220) $
ASU 2018-02, reclassification of certain tax
effects
Net loss
Other comprehensive income
Options exercised
Share-based compensation
Other
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
655
1,176
30
(7)
(38,810)
—
—
—
—
7
—
252
—
—
—
Balance December 31, 2017
$
36 $
— $
201,105 $ (110,535) $
39 $
r - Prior to the year ended December 31, 2017, the Company presented preferred shares issued as contingent consideration within
the permanent equity section of the Consolidated Statements of Financial Position. In accordance with Financial Accounting
Standards Board (“FASB”) ASC Topic 480 - Distinguishing Liabilities from Equity, contingent consideration issued as preferred
shares wherein the number of shares to be issued is variable should be classified outside of permanent equity and reflected as
mezzanine equity on the Consolidated Statements of Financial Position.
For the year ended December 31, 2017, the Company has restated the Consolidated Statements of Shareholders’ Equity to remove
the preferred shares and related activity as previously stated for the periods as of January 1, 2015 and for the years ended December
31, 2015 and 2016. Although this impacted total equity for 2015, it had no impact on total equity as of December 31, 2016 due
to the redemption and clawback of preferred shares previously issued. In addition, this change did not impact the Consolidated
Statements of Financial Position, Consolidated Statements of Income (Loss) and Comprehensive Income (Loss), earnings per
common share or the Consolidated Statements of Cash Flows. The Company has evaluated the effect of the incorrect presentation
in the prior period, both qualitatively and quantitatively, and concluded that it did not have a material impact on, nor did it require
amendment of, any previously filed annual or quarterly consolidated financial statements. See Note 20, ‘Change in Accounting
Principle and Error Corrections’ for additional information regarding preferred shares.
As of December 31, 2017, there were 12,164,041 ordinary voting common shares outstanding and no preferred shares outstanding.
During 2017, the 128,191 restricted voting common shares that were beneficially owned or controlled by Kingsway were sold to
non-affiliates of 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
Kingsway-owned restricted voting common shares automatically converted to ordinary voting common shares upon their sale to
non-affiliates of Kingsway. There are no restricted voting common shares outstanding as of December 31, 2017.
There were 14,816 and 22,224 non-vested restricted stock units (“RSUs”) issued as of December 31, 2017 and December 31,
2016, respectively. These RSUs are participative and are included in the computations of earnings per common share and book
value per common share for these periods.
64
During the year ended December 31, 2017, the Company issued 7,408 ordinary voting common shares as a result of the vesting
of RSUs. During the year ended December 31, 2017, the Company issued 133,338 ordinary voting common shares as a result of
the exercise of options. During the year ended December 31, 2016, the Company issued 7,407 ordinary voting common shares as
a result of the vesting of RSUs.
Mezzanine Equity
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 the remaining 4,000,000 preferred shares pursuant to the
Anchor stock purchase agreement. As of December 31, 2017 and 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 statements of income
and comprehensive income 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.
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, 2017 and December 31, 2016, Atlas has accrued $333,000 in dividends on the
preferred shares for the former owner of Anchor, which remains unpaid. The paid claims development on Global Liberty’s pre-
acquisition claims reserves was in excess of $4.0 million, and as a result, pursuant to the terms of the Anchor stock purchase
agreement, dividends will no longer accrue to the former owner of Anchor. Although the re-issuance of preferred shares to the
former owner of Anchor may be highly unlikely, the contingent consideration terms of the Anchor stock purchase agreement will
remain in effect for a period of five years from the date of acquisition.
Book Value per Common Share
Book value per common share was as follows:
($ in ‘000s, except for shares and per share data)
December 31, 2017
December 31, 2016
Shareholders’ equity
Less: Accumulated dividends on preferred stock
Common equity
Participative shares:
Common shares outstanding
Restricted stock units (RSUs)
Total common shares
Book value per common share outstanding
$
$
$
90,645 $
333
90,312 $
12,164,041
14,816
12,178,857
7.42 $
127,342
333
127,009
12,023,295
22,224
12,045,519
10.54
Book value per common share decreased by $3.12 relative to December 31, 2016 as follows: a decrease of $2.35 related to net
loss after tax (excluding expenses recovered pursuant to stock purchase agreements), a decrease of $0.87 related to the change in
statutory tax rate due to the Tax Act, an increase of $0.05 related to realized investment gains after tax, an increase of $0.02 related
to the change in unrealized gains/losses after tax, and a net increase of $0.03 related to share-based compensation impacts. These
changes are attributed to the combined effects of the reasons cited in the ‘Net Premiums Earned’, ‘Net Claims Incurred’, ‘Acquisition
Costs and Other Underwriting Expenses’, ‘Net Investment Income’, ‘Interest Expense’, ‘Net Realized Investment Gains’, and
‘Other Income’ subsections of the ‘Operating Results’ section.
65
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. Atlas may also use cash provided from these sources to repurchase
common shares in open market transactions under the new Share Repurchase Program.
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 April 26, 2017, Atlas issued $25 million of five-year 6.625% senior unsecured notes and received net proceeds of approximately
$23.9 million after deducting underwriting discounts and commissions and other estimated offering expenses. Interest on the senior
unsecured notes is payable quarterly on each January 26, April 26, July 26 and October 26. Atlas may, at its option, beginning
with the interest payment date of April 26, 2020, and on any scheduled interest payment date thereafter, redeem the senior unsecured
notes, in whole or in part, at a redemption price equal to 100% of the principal amount plus accrued and unpaid interest to, but
excluding, the date of redemption. The senior unsecured notes will rank senior in right of payment to any of Atlas’ existing and
future indebtedness that is by its terms expressly subordinated or junior in right of payment to the senior unsecured notes. The
senior unsecured notes will rank equally in right of payment to all of Atlas’ existing and future senior indebtedness, but will be
effectively subordinated to any secured indebtedness to the extent of the value of the collateral securing such secured indebtedness.
In addition, the senior unsecured notes will be structurally subordinated to the indebtedness and other obligations of Atlas’
subsidiaries.
The senior unsecured notes were issued under an indenture and supplemental indenture that contain covenants that, among other
things, limit: (i) the ability of Atlas to merge or consolidate, or lease, sell, assign or transfer all or substantially all of its assets;
(ii) the ability of Atlas to sell or otherwise dispose of the equity securities of certain of its subsidiaries; (iii) the ability of certain
of Atlas’ subsidiaries to issue equity securities; (iv) the ability of Atlas to permit certain of its subsidiaries to merge or consolidate,
or lease, sell, assign or transfer all or substantially all of their respective assets; and (v) the ability of Atlas and its subsidiaries to
incur debt secured by equity securities of certain of its subsidiaries.
On March 9, 2015, American Insurance Acquisition, Inc. (“American Acquisition”), a wholly-owned direct subsidiary of Atlas,
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, included a $30.0 million line of credit (“Draw Amount”), which could have been drawn in
increments at any time until December 31, 2016. The $30.0 million line of credit had a five year term and bore interest at one-
month LIBOR plus 4.5%. The Loan Agreement also included a $5.0 million revolving line of credit (“Revolver”), which could
have been drawn upon until May 7, 2018, that bore interest at one month LIBOR plus 2.75%.
The Loan Agreement also provided for the issuance of letters of credit in an amount up to $2.0 million outstanding at any time.
In addition, there was 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 was terminated in April 2017. Atlas used a portion of the net proceeds of the senior unsecured notes offering,
together with cash on hand, for the repayment of all outstanding balances under the Draw Amount and Revolver, $15.5 million
and $3.9 million, respectively.
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 and
its effect on American Acquisition’s December 31, 2016 financial statements, American Acquisition was not in compliance with
the Loan Agreements’ EBITDA Ratio covenant as of March 13, 2017. American Acquisition had a thirty day period to cure this
covenant non-compliance, and the Company and American Acquisition agreed with the lender to 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.
Interest expense on notes payable was $1.8 million, $1.0 million, and $694,000 for the years ended December 31, 2017, 2016,
and 2015, respectively.
66
The following table summarizes consolidated cash flow activities:
Summary of Cash Flows ($ in ‘000s)
For the years ended December 31,
Net cash flows provided by operating activities
Net cash flows (used in) provided by investing activities
Net cash flows provided by (used in) financing activities
Net increase (decrease) in cash
2017
2016
2015
$
26,472
(15,909)
5,164
$
15,727
$
$
170
$
8,412
(1,048)
7,534
$
8,814
(40,354)
17,308
(14,232)
Cash provided by operations during the years ended December 31, 2017, 2016, and 2015 was primarily as a result of net income
and increases in unpaid claims liabilities and unearned premium reserves. 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 used in investing activities during the year ended December 31, 2017 was due to the net purchases of fixed income and
equity securities and the furnishings and improvements for the Company’s new headquarters offset by the net sales of other
investments. 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 used for the Company’s headquarters. Cash used in investing activities during
the year ended December 31, 2015 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 provided by financing activities during the year ended December 31, 2017 resulted from the proceeds of the issuance of the
Company’s senior unsecured notes and options exercised partially offset by the repayment of the Revolver and Draw Amount.
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.
On March 21, 2017, the Company’s Board of Directors approved a Share Repurchase Program of up to 650,000 shares of ordinary
voting common shares. The repurchases may be made from time to time in open market transactions, privately-negotiated
transactions, block purchases, or otherwise in accordance with securities laws at the discretion of the Company’s management
until March 21, 2018. The Company’s decisions around the timing, volume, and nature of share repurchases, and the ultimate
amount of shares repurchased, will be dependent on market conditions, applicable securities laws, and other factors. The Share
Repurchase Program and the Board’s authorization of the program may be modified, suspended, or discontinued at any time.
During the year ended December 31, 2017, no shares were repurchased under this Share Repurchase Program.
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 $9.1 million, $15.2 million, $5.9 million, and $5.1 million for American
Country, American Service, Gateway and Global Liberty, respectively, for the year ended December 31, 2017. Net loss for the
year ended December 31, 2016 was $1.3 million, $1.2 million, $1.1 million, and $49,000 for American Country, American Service,
Gateway and Global Liberty, respectively. The combined statutory capital and surplus of the Insurance Subsidiaries was $87.8
million and $113.9 million as of December 31, 2017 and December 31, 2016, respectively.
Atlas did not declare or pay any dividends to its common shareholders during the years ended December 31, 2017 and 2016.
67
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 3.9 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 4.3% 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, 2017 were $158.0 million. A 100 basis point increase in
interest rates on such held fixed income securities would have increased net investment income and income before income taxes
by approximately $131,000. Conversely, a 100 basis point decrease in interest rates on such held fixed income securities would
decrease net investment income and income before income taxes by $163,000. 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 $6.6 million due to “mark-
to-market” requirements; however, holding investments to maturity would be expected to 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 has five-year 6.625% senior unsecured notes as of December 31, 2017 with an outstanding balance of $24.0 million. For
the sensitivity analysis, an instantaneous 100 basis point increase and decrease are assumed on the market discount rate and the
change in net present value from these hypothetical changes in the market discount rate are measured. An instantaneous 100 basis
point decrease would increase the fair market value on notes payable by $988,000. Conversely, an instantaneous 100 basis point
increase would decrease the fair market value on notes payable by $945,000.
68
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 and/or single large loss claims are inherently
unpredictable and may create increased liquidity requirements. We purchase reinsurance coverage in an effort to mitigate the risk
of an unexpected rise in claims severity or frequency from catastrophe and/or single large loss claims. The availability, amount
and cost of the reinsurance depend on market conditions and may fluctuate significantly.
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.
69
Item 8. Financial Statements and Supplemental Schedules
Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
Atlas Financial Holdings, Inc.
Schaumburg, Illinois
Opinion on Internal Control over Financial Reporting
We have audited Atlas Financial Holdings, Inc.’s (the “Company’s”) internal control over financial reporting as of December 31,
2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the “COSO criteria”). In our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as of December 31, 2017, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(“PCAOB”), the consolidated statements of financial position of the Company and subsidiaries as of December 31, 2017 and 2016,
the related consolidated statements of income (loss) and comprehensive income (loss), shareholders’ equity, and cash flows for
each of the three years in the period ended December 31, 2017, and the related notes and financial statement schedules listed in
the accompanying index, and our report dated April 2, 2018 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’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 are a public accounting firm registered with the PCAOB and are required to be independent
with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities
and Exchange Commission and the PCAOB.
We conducted our audit of internal control over financial reporting in accordance with the standards of the PCAOB. 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.
Definition and Limitations of Internal Control over Financial Reporting
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.
/s/ BDO USA, LLP
Grand Rapids, MI
April 2, 2018
70
Report of Independent Registered Public Accounting Firm
Shareholders and Board of Directors
Atlas Financial Holdings, Inc.
Schaumburg, Illinois
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated statements of financial position of Atlas Financial Holdings, Inc. (the “Company”)
and subsidiaries as of December 31, 2017 and 2016, the related consolidated statements of income (loss) and comprehensive
income (loss), shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2017, and the
related notes and financial statement schedules listed in the accompanying index (collectively referred to as the “consolidated
financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial
position of the Company and subsidiaries at December 31, 2017 and 2016, and the results of their operations and their cash flows
for each of the three years in the period ended December 31, 2017, in conformity with accounting principles generally accepted
in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(“PCAOB”), the Company's internal control over financial reporting as of December 31, 2017, 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 April 2, 2018 expressed an unqualified opinion thereon.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with
the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws
and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether
due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements,
whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a
test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included
evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall
presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ BDO USA, LLP
We have served as the Company's auditor since 2014.
Grand Rapids, MI
April 2, 2018
71
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 $158,411 and $157,451)
$
157,984
$
156,487
December 31,
2017
December 31,
2016
Equity securities, at fair value (cost $7,969 and $5,598)
Other investments
Total Investments
Cash and cash equivalents
Accrued investment income
Premiums receivable (net of allowance of $3,418 and $2,366)
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 premium reserves
Due to reinsurers
Notes payable, net
Other liabilities and accrued expenses
Total Liabilities
Commitments and contingencies (see Note 8)
Shareholders’ Equity
Ordinary voting common shares, $0.003 par value, 266,666,667 shares authorized,
shares issued and outstanding: December 31, 2017 - 12,164,041 and December 31, 2016
- 11,895,104
Restricted voting common shares, $0.003 par value, 33,333,334 shares authorized, shares
issued and outstanding: December 31, 2017 - 0 and December 31, 2016 - 128,191
Additional paid-in capital
Retained deficit
Accumulated other comprehensive income (loss), net of tax
Total Shareholders' Equity
Total Liabilities and Shareholders' Equity
8,446
31,438
197,868
45,615
1,248
79,664
7,982
53,402
12,878
14,797
16,985
2,726
4,145
24,439
20,754
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
$
$
$
$
$
$
482,503
$
423,577
211,648
$
128,043
8,411
24,031
19,725
139,004
113,171
8,369
19,187
16,504
391,858
$
296,235
36
$
—
201,105
(110,535)
39
90,645
482,503
$
$
36
—
199,244
(71,718)
(220)
127,342
423,577
See accompanying Notes to Consolidated Financial Statements.
72
ATLAS FINANCIAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS)
($ in ‘000s, except for share and per share data)
Consolidated Statements of Income (Loss)
Net premiums earned
Net investment income
Net realized 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
(Loss) income from operations before income taxes
Income tax (benefit) expense
Net (loss) income
Less: Preferred share dividends
Net (loss) income attributable to common shareholders
Basic weighted average common shares outstanding
(Loss) earnings per common share basic
Diluted weighted average common shares outstanding
(Loss) earnings per common share diluted
Consolidated Statements of Comprehensive Income (Loss)
Net (loss) income
Other comprehensive income (loss):
Changes in net unrealized investment gains (losses)
Reclassification to net (loss) income
Effect of income taxes
Other comprehensive income (loss)
Total comprehensive (loss) income
Year Ended December 31,
2016
2015
2017
$
215,771
$
171,058
$
152,064
4,897
872
435
221,975
203,873
27,885
32,140
390
1,840
—
—
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
266,128
(44,153)
(5,343)
(38,810)
—
(38,810) $
177,067
134,805
512
(2,134)
2,646
281
22,046
7,616
14,430
276
2,365
$
14,154
12,064,880
12,045,519
11,975,579
(3.22) $
0.20
12,064,880
12,222,883
(3.22) $
0.19
$
$
1.18
12,735,679
1.13
(38,810) $
2,646
$
14,430
437
(49)
(136)
252
(38,558) $
855
394
(437)
812
3,458
$
(1,912)
203
597
(1,112)
13,318
$
$
$
$
$
See accompanying Notes to Consolidated Financial Statements.
73
ATLAS FINANCIAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
($ in ‘000s)
Balance December 31, 2014 r
Net income
Other comprehensive loss
Options exercised
Share-based compensation
Balance December 31, 2015 r
Net income
Preferred dividends paid
Other comprehensive income
Share-based compensation
Balance December 31, 2016
Ordinary
Voting
Common
Shares
Restricted
Voting
Common
Shares
Additional
Paid-In
Capital
Retained
Deficit
Accumulated
Other
Comprehensive
Income (Loss)
Total
Shareholders'
Equity
$
34 $
— $
196,079 $
(88,794) $
80 $
107,399
—
—
—
2
—
—
—
—
—
—
145
1,817
14,430
—
—
—
—
(1,112)
—
—
14,430
(1,112)
145
1,819
$
36 $
— $
198,041 $
(74,364) $
(1,032) $
122,681
—
—
—
—
—
—
—
—
—
(409)
—
1,612
2,646
—
—
—
—
—
812
—
2,646
(409)
812
1,612
$
36 $
— $
199,244 $
(71,718) $
(220) $
127,342
ASU 2018-02, reclassification of certain tax
effects
Net loss
Other comprehensive income
Options exercised
Share-based compensation
Other
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
655
1,176
30
(7)
(38,810)
—
—
—
—
7
—
252
—
—
—
—
(38,810)
252
655
1,176
30
Balance December 31, 2017
$
36 $
— $
201,105 $ (110,535) $
39 $
90,645
r - Prior to the year ended December 31, 2017, the Company presented preferred shares issued as contingent consideration within
the permanent equity section of the Consolidated Statements of Financial Position. In accordance with Financial Accounting
Standards Board (“FASB”) ASC Topic 480 - Distinguishing Liabilities from Equity, contingent consideration issued as preferred
shares wherein the number of shares to be issued is variable should be classified outside of permanent equity and reflected as
mezzanine equity on the Consolidated Statements of Financial Position.
For the year ended December 31, 2017, the Company has restated the Consolidated Statements of Shareholders’ Equity to remove
the preferred shares and related activity as previously stated for the periods as of January 1, 2015 and for the years ended December
31, 2015 and 2016. Although this impacted total equity for 2015, it had no impact on total equity as of December 31, 2016 due
to the redemption and clawback of preferred shares previously issued. In addition, this change did not impact the Consolidated
Statements of Financial Position, Consolidated Statements of Income (Loss) and Comprehensive Income (Loss), earnings per
common share or the Consolidated Statements of Cash Flows. The Company has evaluated the effect of the incorrect presentation
in the prior period, both qualitatively and quantitatively, and concluded that it did not have a material impact on, nor did it require
amendment of, any previously filed annual or quarterly consolidated financial statements. See Note 20, ‘Change in Accounting
Principle and Error Corrections’ for additional information regarding the preferred shares restatement.
See accompanying Notes to Consolidated Financial Statements.
74
ATLAS FINANCIAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in ‘000s)
Year Ended December 31,
2016
2017
2015
Operating activities:
Net (loss) income
Adjustments to reconcile net (loss) income to net cash flows provided by operating
activities:
$ (38,810) $
2,646
$
14,430
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:
Accrued investment income
Premiums receivable, net
Due from reinsurers and prepaid reinsurance premiums
Deferred policy acquisition costs
Other assets
Claims liabilities
Unearned premium reserves
Due to reinsurers
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
Property, equipment and other
Assets held for sale
Net cash flows (used in) provided by investing activities
Financing activities:
Preferred share buyback
Capital contributions
Proceeds from notes payable, net of issuance costs
Repayment of notes payable
Preferred dividends paid
Options exercised
Net cash flows provided by (used in) financing activities
Net change in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
$
75
1,372
1,176
(17)
390
1,376
(872)
(810)
961
365
—
(20)
(2,278)
(17,735)
(1,575)
(7,847)
72,644
14,872
42
3,238
26,472
1,000
1,612
(43)
390
452
(1,230)
(1,271)
1,217
67
(6,623)
(192)
5,143
(6,440)
(2,987)
(6,210)
11,993
4,969
(2,412)
(1,911)
170
966
1,819
(43)
315
(174)
(455)
(1,238)
1,525
56
941
(13)
(35,144)
(7,931)
(240)
8,956
(6,150)
26,276
3,542
1,376
8,814
—
—
(10,956)
(48,529)
(7,900)
(3,615)
(14,055)
46,853
6,161
5,174
2
—
(15,909)
—
30
23,879
(19,400)
—
655
5,164
15,727
29,888
45,615
(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
7,534
(14,232)
22,354
29,888
$
36,586
22,354
$
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,
2016
2015
2017
$
$
$
744
1,338
$
7,015
885
8,636
567
— $
—
—
—
— $
—
(2,297)
(4,000)
4,000
941
—
—
See accompanying Notes to Consolidated Financial Statements.
76
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”),
Plainview Delaware’s wholly owned subsidiary, Plainview Premium Finance Company of California, Inc. (“Plainview California”
and together with Plainview Delaware, “Plainview”), UBI Holdings Inc. (“UBI Holdings”) and UBI Holdings’ wholly-owned
subsidiary, DriveOn Digital IP Inc. (“DOIP” and together with UBI Holdings, “UBI”).
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 (loss) and comprehensive income (loss) 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.
77
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 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)
UBI Holdings Inc. (Delaware)
DriveOn Digital IP Inc. (Delaware)
Prior to the year ended December 31, 2017, the Company presented preferred shares issued as contingent consideration within
the permanent equity section of the Consolidated Statements of Financial Position. In accordance with Financial Accounting
Standards Board (“FASB”) ASC Topic 480 - Distinguishing Liabilities from Equity, contingent consideration issued as preferred
shares wherein the number of shares to be issued is variable should be classified outside of permanent equity and reflected as
mezzanine equity on the Consolidated Statements of Financial Position.
For the year ended December 31, 2017, the Company has restated the Consolidated Statements of Shareholders’ Equity to remove
the preferred shares and related activity as previously stated for the periods as of January 1, 2015 and for the years ended December
31, 2015 and 2016. Although this impacted total equity for 2015, it had no impact on total equity as of December 31, 2016 due
to the redemption and clawback of preferred shares previously issued. In addition, this change did not impact the Consolidated
Statements of Financial Position, Consolidated Statements of Income (Loss) and Comprehensive Income (Loss), earnings per
common share or the Consolidated Statements of Cash Flows. The Company has evaluated the effect of the incorrect presentation
in the prior period, both qualitatively and quantitatively, and concluded that it did not have a material impact on, nor did it require
amendment of, any previously filed annual or quarterly consolidated financial statements. See Note 20, ‘Change in Accounting
Principle and Error Corrections’ for additional information regarding the preferred shares restatement.
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, and differences between such estimates and actual results 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 unrecognized 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 the premium or accrete the discount 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.
78
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 taxes, 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
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 (loss). 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 (loss) 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.
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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, 2017, 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.
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, 2017, 2016, and 2015.
Income taxes - Income taxes expense (benefit) includes all taxes based on taxable income (loss) of Atlas and its subsidiaries, and
are recognized in the statements 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.
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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 any of the years ended December 31, 2017, 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, 2017, 2016, and 2015. 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.
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 statements of income and comprehensive income 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 premium reserves 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.
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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 FASB and are adopted by the Company as
they become effective. All recently issued accounting pronouncements with effective dates prior to January 1, 2018 have been
adopted by the Company.
Recently Adopted
In February 2018, the FASB issued ASU 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220):
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. This update provides guidance on the
reclassification of stranded tax effects in accumulated other comprehensive income (“AOCI”) resulting from the Tax Cuts and
Jobs Act of 2017 (the “Tax Act”). Companies will have the option to reclassify the effect of the change in the federal corporate
tax rate on gross deferred tax items and related valuation allowances for item in AOCI. For public entities, this guidance is effective
for years beginning after December 15, 2018, including interim periods within those years. Early adoption is permitted. This update
can be applied retrospectively or at the beginning of the period of adoption. The Company elected to early adopt and will apply
the change at the beginning of the period of adoption within the Consolidated Statements of Financial Position and Consolidated
Statements of Shareholders’ Equity. The adoption of this ASU resulted in a increase to AOCI and an decrease in retained earnings
of $7,000 for the year ended December 31, 2017 with no net effect on total shareholders’ equity.
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. Atlas early adopted this ASU beginning with the 2017 goodwill
impairment testing. The adoption of this ASU did not have any required prior period adjustments and did not have an impact on
the consolidated financial statements.
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 adopted this ASU in the first quarter of
2017. 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 are included in the operating section of the Consolidated Statements of Cash Flows
with other income taxes retrospectively. Atlas has made the election to estimate future forfeitures, which is consistent with current
accounting treatment.
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Not Yet Adopted
In May 2017, the FASB issued ASU 2017-09, Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting.
This update provides guidance on when an entity should apply modification accounting when changes are made to a share-based
compensation award. 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 prospective approach. The adoption of this ASU is not expected to have a material impact on the consolidated
financial statements.
In March 2017, the FASB issued ASU 2017-08, Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium
Amortization on Purchased Callable Debt Securities. This update shortens the amortization period for certain callable fixed income
securities held at a premium to the earliest possible call date. 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 prescribed modified retrospective approach. Atlas has a number of fixed income
securities that are callable and held at a premium. The amount of the difference in amortization from current accounting treatment
to the change prescribed in this ASU will be recorded upon adoption as an adjustment to retained earnings and treated as a change
in accounting principle. Atlas is currently evaluating the potential impact of the ASU on these certain securities, which will change
as securities mature, are sold, or are purchased.
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. Although Atlas has a number of fixed income securities that were transferred between companies owned
by Atlas, this ASU will not affect the consolidated financial statements, because the transactions are between two U.S. entities
that are part of the same consolidated group, the transactions were elected to be deferred for U.S. tax purposes until the items leave
the group, which is consistent with the pre-tax GAAP treatment, and the Company already reports as part of its computational
approach, the State tax results (which are zero) under the new ASU. If the sales were between a U.S. company and a foreign
affiliate or between non-consolidated U.S. affiliates this would be applicable. However, the investment sales did not fall under
either of these two fact patterns.
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 statement of cash flows. 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 its Consolidated Statements of Cash Flows is not expected to
change as a result of this ASU. Atlas plans to elect 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 or other significant credit allowances, therefore the provisions of this update are not
expected to have a material impact on the consolidated financial statements upon adoption. Atlas will continue to monitor the
investment portfolio and other financial instruments until adoption for any changes.
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’ 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 Position 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.
83
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. The adoption of this ASU will result in the recognition of $377,000 of net after-tax unrealized gains on equity
investments as a cumulative-effect adjustment to increase retained earnings and decrease AOCI.
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. 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, the majority of Atlas’ revenue is derived from transactions that do not fall within
the scope of Topic 606, namely insurance contracts, investment income, and lease income. The adoption of these ASUs will not
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, 2017 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 was 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 $1.00 per preferred share), subject to the future development of Global Liberty’s actual claims reserves for certain lines
of business during the five year period after the acquisition. During the fourth quarter of 2016, Atlas canceled all 4,000,000 of the
preferred shares pursuant to the terms of the Anchor stock purchase agreement due to the adverse development of Global Liberty’s
pre-acquisition claims reserves.
The Anchor acquisition was accounted for using the acquisition method. Atlas began consolidating Anchor on March 11, 2015,
therefore their financial results are included in Atlas’ consolidated financial results starting with the three month period ended
March 31, 2015. However, the following unaudited pro forma summary presents Atlas’ consolidated financial information for
the year ended December 31, 2015 as if Anchor had been acquired on January 1, 2014. These amounts have been calculated after
applying the Company’s accounting policies had the acquisition been completed on January 1, 2014. These results were prepared
for comparative purposes only and do not purport to be indicative of the results of operations that may have actually resulted had
the acquisition occurred on the indicated dates, nor are they indicative of potential future operating results of the Company.
($ in ‘000s, except per share information)
Revenue
Income from operations before income taxes1
Net income1
Earnings per common share basic 1
Earnings per common share diluted 1
1 - Excludes expenses incurred in the connection with the Anchor acquisition
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Year Ended
December 31, 2015
$
$
$
162,311
23,601
15,420
1.26
1.21
From the date of acquisition through December 31, 2015, Anchor earned revenue of $27.5 million and net income of $2.4 million.
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, $390,000 and $315,000
for the years ended December 31, 2017, 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 years ended December 31, 2017 and 2016, and
$999,000 in transaction expenses for the year ended December 31, 2015.
Intangible Assets
The following table presents a summary of definite-lived intangible assets by major asset class as of December 31, 2017 and
December 31, 2016:
($ in ‘000s)
As of December 31, 2017
Trade name and trademark
Customer relationship
State insurance licenses
As of December 31, 2016
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
337 $
758
—
5,240 $
1,095 $
Economic
Useful Life
Gross Carrying
Amount
Accumulated
Amortization
Net
15 years
10 years
Indefinite
$
$
1,800 $
2,700
740
5,240 $
217 $
488
—
705 $
1,463
1,942
740
4,145
1,583
2,212
740
4,535
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.
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 $740,000. The state insurance licenses are considered to have an indefinite life and will not be amortized, but will be evaluated
for impairment at least annually. Thus, Atlas recognized no amortization expense during the years ended December 31, 2017,
2016, and 2015 related to intangible assets acquired in the Gateway transaction.
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4. EARNINGS PER SHARE
Earnings per ordinary voting common share, restricted voting common share, and participative restricted stock unit (“RSU”)
(collectively, the “common shares”) for the years ended December 31, 2017, December 31, 2016, and December 31, 2015 are as
follows ($ in ‘000s, except share and per share amounts):
Year Ended December 31,
Basic:
(Loss) income from operations before income taxes
Income tax (benefit) expense
Net (loss) income
Less: Preferred share dividends
Net (loss) income attributable to common shareholders
Basic weighted average common shares outstanding
(Loss) 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
(Loss) earnings per common share diluted
2017
2016
2015
$
$
(44,153) $
(5,343)
(38,810) $
—
(38,810) $
$
12,064,880
$
(3.22) $
512 $
(2,134)
2,646 $
281
2,365 $
22,046
7,616
14,430
276
14,154
11,975,579
1.18
12,045,519
0.20 $
12,064,880
12,045,519
11,975,579
—
—
12,064,880
$
(3.22) $
177,364
—
12,222,883
0.19 $
186,656
573,444
12,735,679
1.13
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, for the 2016 and 2015 computation, 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 and Mezzanine Equity,’ 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 dividends 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, 2017, all exercisable stock options were deemed to be anti-dilutive. 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.
86
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, 2017
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, 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
Cost or
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
$
21,488 $
13,265
— $
78
(302) $
(100)
21,186
13,243
21,246
9,674
7,822
7,460
11,179
1,112
58,493
189
70
181
81
109
1
631
(53)
(65)
(11)
(26)
(73)
(54)
(282)
30,920
22,689
53,609
11,556
158,411 $
7,969
166,380 $
$
$
57
153
210
8
927 $
503
1,430 $
(364)
(255)
(619)
(51)
(1,354) $
(26)
(1,380) $
21,382
9,679
7,992
7,515
11,215
1,059
58,842
30,613
22,587
53,200
11,513
157,984
8,446
166,430
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
87
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
2017
Amortized
Cost
Fair Value
$
11,149 $
33,941
41,542
6,614
93,246
65,165
11,141
33,857
41,538
6,735
93,271
64,713
$
158,411 $
157,984
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, 2017, 2016, and 2015 as a result of
the above analysis performed by management.
88
The aging of unrealized losses on the Company’s investments in fixed income securities and equities is presented as follows ($ in
‘000s):
As of December 31, 2017
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
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
Total Fixed Income Securities
Less Than 12 Months
Fair Value
Unrealized
Losses
More Than 12 Months
Unrealized
Losses
Fair Value
Total
Fair Value
Unrealized
Losses
$
11,179 $
(110) $
10,007 $
(192) $
21,186 $
(302)
5,355
(36)
2,818
(64)
8,173
(100)
6,021
5,835
2,611
3,368
4,488
607
22,930
13,203
10,360
23,563
9,817
$
$
72,844 $
1,007
73,851 $
(26)
(47)
(10)
(26)
(23)
(7)
(139)
(136)
(53)
(189)
(44)
(518) $
(26)
(544) $
1,931
710
101
—
938
322
4,002
9,786
6,553
16,339
1,087
34,253 $
—
34,253 $
(27)
(18)
(1)
—
(50)
(47)
(143)
(228)
(202)
(430)
(7)
(836) $
—
(836) $
7,952
6,545
2,712
3,368
5,426
929
26,932
22,989
16,913
39,902
10,904
107,097 $
1,007
108,104 $
(53)
(65)
(11)
(26)
(73)
(54)
(282)
(364)
(255)
(619)
(51)
(1,354)
(26)
(1,380)
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)
12,429
5,453
3,224
229
2,620
476
24,431
21,818
10,235
32,053
977
81,252 $
$
(143)
(83)
(37)
(1)
(73)
(22)
(359)
(372)
(205)
(577)
(2)
(1,397) $
89
—
132
222
100
959
962
—
2,375
2,092
2,053
4,145
4,118
10,638 $
—
7,604
(202)
—
(6)
(6)
(41)
(78)
—
(131)
(44)
(46)
(90)
(27)
(248) $
12,561
5,675
3,324
1,188
3,582
476
26,806
23,910
12,288
36,198
5,095
91,890 $
(143)
(89)
(43)
(42)
(151)
(22)
(490)
(416)
(251)
(667)
(29)
(1,645)
As of December 31, 2017, we held 346 and 2 individual fixed income and equity securities, respectively, that were in an unrealized
loss position, of which 103 individual fixed income securities were in a continuous loss position for longer than 12 months. 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. We did not recognize the unrealized
losses in earnings on these fixed income securities for the years ended December 31, 2017 and 2016, 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, 2017, 2016, and
2015 ($ in ‘000s):
Year Ended December 31,
Total investment income
Interest income
Dividends
Income from other investments
Investment expenses
Net investment income
2017
2016
2015
$
$
3,834 $
—
1,911
(848)
4,897 $
3,747 $
—
1,942
(865)
4,824 $
3,371
43
1,344
(782)
3,976
The following table presents the aggregate proceeds, gross realized investment gains and gross realized investment losses from
sales and calls of fixed income securities and equities for the years ended December 31, 2017, 2016, and 2015 ($ in ‘000s):
Year Ended December 31,
Fixed income securities1:
Proceeds from sales and calls
Gross realized investment gains
Gross realized investment losses
Equities:
Proceeds from sales
Gross realized investment gains
Gross realized investment losses
Total:
Proceeds from sales and calls
Gross realized investment gains
Gross realized investment losses
2017
2016
2015
$
24,274 $
59,161 $
32,089
300
(55)
1,296
(131)
6,161
635
(2)
662
65
—
686
(199)
1,402
69
(81)
$
30,435 $
59,823 $
33,491
935
(57)
1,361
(131)
755
(280)
1 - The proceeds from sales and calls, gross realized investment gains and gross realized investment losses on fixed income
securities for the years ended December 31, 2016 and 2015 were restated to include both voluntary and involuntary calls.
The following table summarizes the components of net realized gains (losses) for the years ended December 31, 2017, 2016,
and 2015 ($ in ‘000s):
Year Ended December 31,
Fixed income securities
Equities
Other
Net realized gains
Other Investments:
2017
2016
2015
$
$
245 $
633
(6)
872 $
1,165 $
65
—
1,230 $
487
(12)
(20)
455
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, 2017, the carrying values of these other investments were approximately $31.4 million versus
approximately $32.2 million as of December 31, 2016. The carrying values of the equity method limited partnerships were $25.3
million and $24.9 million as of December 31, 2017 and December 31, 2016, respectively. The carrying value of these investments
is Atlas’ share of the net book value for each limited partnership. The carrying value of the collateral loans was $6.2 million and
$7.2 million as of December 31, 2017 and December 31, 2016, respectively.
90
Net realized investment gains were $6,000 for the year ended December 31, 2017 and resulted from the sale of one equity method
investment. There were no net realized investment gains or losses for the years ended December 31, 2016 and 2015.
The following table summarizes investments in equity method investments by investment type as of December 31, 2017 and
December 31, 2016 ($ in ‘000s):
As of December 31,
Real estate1
Insurance linked securities
Activist hedge funds
Venture capital1
Other joint venture
Total Equity Method Investments
Unfunded
Commitments
2017
Carrying Value
2017
2016
$
$
2,842 $
10,660 $
—
—
4,150
—
9,073
4,367
853
325
10,797
9,178
4,336
623
—
6,992 $
25,278 $
24,934
1 - We recategorized the carrying value of one limited partnership that was valued at $283,000 as of December 31, 2016 from
‘Venture capital’ to ‘Real estate’ based on its operations.
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, 2017 and as of December 31, 2016, the Company had no valuation allowances
established for impaired loans.
Collateral pledged:
As of December 31, 2017 and 2016, bonds, cash and cash equivalents with a fair value of $15.0 million and $15.1 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, 2017 and 2016, the amounts of such pledged securities were $12.2
million and $5.6 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.
91
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.
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, 2017 and December 31, 2016 ($ in ‘000s):
December 31, 2017
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
Level 1
Level 2
Level 3
Total
$
21,186 $
—
— $
13,243
— $
—
21,186
13,243
—
—
—
—
—
—
—
—
—
—
—
21,382
9,679
7,992
7,515
11,215
1,059
58,842
30,613
22,587
53,200
11,513
$
$
21,186 $ 136,798 $
8,446
29,632 $ 136,798 $
—
—
—
—
—
—
—
—
21,382
9,679
7,992
7,515
11,215
1,059
58,842
30,613
—
22,587
—
53,200
—
—
11,513
— $ 157,984
8,446
—
— $ 166,430
92
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
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
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, 2017. 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, 2017 and December 31, 2016. There were
no transfers in or out of Level 2 or Level 3 during the years ended December 31, 2017 and 2016.
7. INCOME TAXES
On December 22, 2017, the Tax Act was signed into law. Among other things, beginning with the 2018 tax year, the Tax Act
reduced the Company’s corporate federal tax rate from a marginal rate of 35% to a flat 21%, eliminated the corporate Alternative
Minimum Tax (“AMT”), changed reserving and other aspects of the computation of taxable income for insurance companies, and
modified the net operating loss carryback and carryforward provisions for all entities in the group except for those subject to tax
as property and casualty companies. The modified net operating loss provisions no longer allow a carryback to prior years to
recover past taxes, but now allow an indefinite carryforward period subject to a yearly utilization limit. As discussed above, any
net operating losses with respect to the insurance entities taxed as property and casualty companies retain the current net operating
loss carryback and carryover provisions, which are two years carryback and 20 years carryforward. As of December 31, 2016, the
Company measured its deferred tax items at the enacted rate in effect of 35%. Due to the Tax Act’s enactment, the Company’s
deferred tax assets and liabilities as of December 31, 2017 have been re-measured at the new enacted tax rate of 21%. For the
year ended December 31, 2017, the Company recognized income tax expense of $10.5 million related to reduction in the net
deferred tax asset a result of this re-measurement.
93
Atlas’ effective tax rate was 12.1%, (416.8)%, and 34.5% for the years ended December 31, 2017, 2016, and 2015, respectively.
The table below reconciles the U.S. statutory marginal income tax rate to the effective tax rate ($ in ‘000s):
Year Ended December 31,
2017
2016
2015
Amount
%
Amount
%
Amount
%
Provision for taxes at U.S. statutory marginal income
tax rate
Nondeductible expenses
Tax-exempt income
State tax (net of federal benefit)
Stock compensation
Nondeductible acquisition accounting adjustment
Change in statutory tax rate
Other
Provision for income taxes for continuing operations
$ (15,453)
51
(23)
(2)
(445)
—
10,542
(13)
$ (5,343)
35.0 % $
(0.1)%
0.1 %
— %
1.0 %
— %
(23.9)%
— %
179
24
(39)
28
—
(2,204)
—
(122)
12.1 % $ (2,134)
35.0 % $
4.7 %
(7.6)%
5.5 %
— %
(430.5)%
— %
(23.9)%
(416.8)% $
7,716
124
(89)
118
—
329
(471)
(111)
7,616
35.0 %
0.6 %
(0.4)%
0.5 %
— %
1.5 %
(2.1)%
(0.6)%
34.5 %
Income tax (benefit) expense consists of the following for the years ended December 31, 2017, 2016, and 2015 ($ in ‘000s):
Year Ended December 31,
Current tax (benefit) expense
Deferred tax expense (benefit)
Total
2017
2016
2015
$ (6,719) $ (2,586) $
1,376
452
$ (5,343) $ (2,134) $
7,790
(174)
7,616
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 generated prior to the “triggering
event” 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
$13.3 million as of December 31, 2017.
94
The components of net deferred income tax assets and liabilities as of December 31, 2017 and December 31, 2016 are as follows
($ in ‘000s):
Gross deferred tax assets:
Losses carried forward
Claims liabilities and unearned premium reserves
Tax credits
Commissions
Stock compensation
Other
Total gross deferred tax assets
Gross deferred tax liabilities:
Deferred policy acquisition costs
Investments
Fixed assets
Intangible assets
Other
Total gross deferred tax liabilities
Net deferred tax assets
December 31,
2017
December 31,
2016
$
$
13,313 $
6,171
1,172
623
602
1,094
22,975
3,107
213
847
715
1,108
5,990
16,985 $
14,535
8,546
662
1,269
1,157
1,027
27,196
4,628
475
559
1,328
1,708
8,698
18,498
Amounts and expiration dates of the operating loss carryforwards as of December 31, 2017 are as follows ($ in ‘000s):
Year of Occurrence
2001
2002
2006
2007
2008
2009
2010
2011
2012
2015
2017
Total
Year of Expiration
2021
2022
2026
2027
2028
2029
2030
2031
2032
2035
2037
Amount
5,007
4,317
7,825
5,131
1,949
1,949
1,949
4,166
9,236
1
21,864
63,394
$
$
NOLs and other carryforwards generated in 2015 and 2017 are not limited by IRC Section 382.
Atlas has not established a valuation allowance for its gross future deferred tax assets as of December 31, 2017 or as of December 31,
2016. 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.
However, there can be no guarantee that a valuation allowance will not be required in the future.
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, 2017, 2016, and 2015. The Internal Revenue Service (“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 2014 and years thereafter are subject to examination by the IRS.
95
8. COMMITMENTS AND CONTINGENCIES
On May 22, 2012, Atlas closed the sale and leaseback of the former 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 was deferred and recognized
over the initial five year lease term, which ended in May 2017. The deferred gain was completely recognized at the end of the
second quarter. Atlas recognized $17,000 as an offset to rent expense for the year ended December 31, 2017 and $43,000 for each
of the years ended December 31, 2016 and 2015. Total rental expense recognized on the former headquarters building was $740,000,
$743,000 and $704,000 for the years ended December 31, 2017, 2016, and 2015, respectively.
As of December 31, 2017, Atlas has the following future minimum rentals, related principally to office space, required under
operating leases having initial or remaining noncancelable lease terms in excess of one year ($ in ‘000s):
Year
2018
2019
2020
2021
2022
2023 &
Beyond
Total
Amount
$
1,053 $
1,066 $
1,056 $
937 $
157 $
— $
4,269
The Company has entered into various contracts to renovate and furnish the building that was purchased in 2016 to serve as the
Company’s new headquarters, which the Company moved into on October 27, 2017. As of December 31, 2017, the remaining
contractual obligations related to the renovation and furnishing of Atlas’ new headquarters building are $1.2 million.
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, 2017, the unfunded
commitments are $7.0 million.
In the ordinary course of its business, Atlas is involved in legal proceedings, including lawsuits, regulatory examinations and
inquiries.
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 expected to be material.
96
9. PROPERTY AND EQUIPMENT
Atlas held the following property and equipment, including internal use software, as of December 31, 2017 and December 31,
2016 (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
2017
2016
7,425
1,840
7,900
140
9,567
1,465
2,582
30,919
(6,480)
24,439
$
$
$
7,425
1,840
139
527
8,078
2,464
586
21,059
(9,289)
11,770
$
$
$
Depreciation expense and amortization was $1.4 million, $1.0 million, and $966,000 for the years ended December 31, 2017,
2016, and 2015, 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 its former leased office space. Atlas’ Chicago area staff moved into this space in late October 2017 and
occupies approximately 70,000 square feet on the second and third floors of the building. An unrelated tenant occupies the remaining
office space on the first floor of the building. Rental income related to this lease agreement for the years ended December 31,
2017 and 2016, was $415,000 and $69,000, respectively. Depreciation expense related to the building and its improvements was
$171,000 for the year ended December 31, 2017. There was no depreciation expense related to the building and its improvements
recorded for the year ended December 31, 2016.
Net realized losses on the disposal and sales of equipment were $12,000 for the year ended December 31, 2017. There were no
realized gains or losses on the disposal of property or equipment for the year ended December 31, 2016. For the year ended
December 31, 2015, the Company sold property in Alabama and recognized a loss of $20,000.
10. REINSURANCE CEDED
As is customary in the insurance industry, Atlas reinsures portions of certain insurance policies it writes, thereby providing a
greater diversification of risk and minimizing exposure on larger risks. Atlas remains contingently at risk with respect to any
reinsurance ceded and would incur an additional loss if an assuming company were unable to meet its obligation under the
reinsurance treaty.
Atlas monitors the financial condition of its reinsurers to minimize its exposure to significant losses from reinsurer insolvencies.
Letters of credit are maintained for any unauthorized reinsurer to cover ceded unearned premium reserves, ceded claims and claims
adjustment expense reserve balances and ceded paid claims. These policies mitigate the risk of credit quality or dispute from
becoming a danger to financial strength. To date, the Company has not experienced any material difficulties in collecting reinsurance
recoverables.
97
Premiums written, premiums earned and amounts related to reinsurance as of and for the years ended December 31, 2017, 2016,
and 2015 are as follows ($ 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
2015
2017
2016
$ 261,276 $ 221,723 $ 208,570
716
(39,609)
$ 231,136 $ 180,067 $ 169,677
3,372
(45,028)
14,685
(44,825)
$ 251,293 $ 217,053 $ 182,376
634
(30,946)
$ 215,771 $ 171,058 $ 152,064
3,074
(49,069)
9,796
(45,318)
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
46,643
11,304
53,402
12,878
7,982
32,496
12,065
35,370
13,372
7,786
19,113
7,798
29,399
17,412
3,277
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, 2017, 2016, and 2015 were as follows ($ in ‘000s):
As of the year ended December 31,
2017
2016
2015
Unpaid claims and claims adjustment expenses, beginning of period
$ 139,004
$ 127,011
$ 102,430
Less: reinsurance recoverable
Net unpaid claims and claims adjustment expenses, beginning of period
35,370
103,634
29,399
97,612
18,421
84,009
Net reserves acquired
—
—
19,396
Change in retroactive reinsurance ceded
1,361
107
2,037
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
128,476
75,397
203,873
102,133
32,613
134,746
50,626
99,996
39,652
89,179
150,622
128,831
158,246
53,402
103,634
35,370
89,828
166
89,994
32,402
65,422
97,824
97,612
29,399
Unpaid claims and claims adjustment expenses, end of period
$ 211,648
$ 139,004
$ 127,011
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.
98
Atlas experienced $75.4 million in unfavorable prior accident year development for the year ended December 31, 2017 as reflected
as incurred related to prior years in the table above. The unfavorable development is primarily from our core commercial automobile
liability line. Atlas previously identified that claim expenses in Michigan were significantly outpacing other states and took a
significant charge. Although exposure in Michigan was reduced to approximately 1.4% of the Company’s insured vehicles inforce
by year end 2017, payments for claims in this state continued to be disproportionate to historic premiums earned. In addition, the
remaining liability for non-New York Global Liberty business written prior to 2016 is expected to settle for greater amounts than
previously expected. Overall, the actuarially determined liability for remaining claims related to accident year 2015 and prior in
general, across all jurisdictions, was indicated to be higher than carried reserves.
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 accident year development during the year ended December 31, 2015 as reflected
as incurred related to prior years in the table above. Prior accident year unfavorable development on non-core lines and assigned
risk pools was $870,000 for the year ended December 31, 2015. The unfavorable development on non-core lines and assigned risk
pools 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.
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.
99
The following is information about incurred and paid claims and claims adjustment expenses development for the year ended
December 31, 2017, 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, 2008 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
2008
unaudited
2009
unaudited
2010
unaudited
2011
unaudited
2012
unaudited
2013
unaudited
2014
unaudited
2015
unaudited
2016
2017
As of the year ended
December 31, 2017
Incurred but
Not
Reported
Liabilities,
Net of
Reinsurance
Cumulative
Number of
Reported
Claims
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Total
$ 29,391 $ 29,434 $ 29,225 $ 29,543 $ 27,922 $ 28,015 $ 27,474 $ 28,005 $ 28,496 $ 28,789 $
37,394
40,309
43,889
43,604
42,909
42,326
42,987
43,728
43,902
35,877
34,677
35,711
37,026
37,205
38,002
38,841
39,246
31,044
38,822
34,887
34,720
35,136
36,080
36,472
35,948
37,839
38,972
40,429
44,627
46,755
48,449
48,636
53,656
64,687
73,749
61,145
53,005
69,555
92,245
69,060
67,184
96,521
80,824
87,516
101,983
Total
$ 647,178
31
61
122
149
804
3,446
8,432
14,255
20,274
46,580
15,764
13,238
8,575
7,833
9,376
11,725
14,659
19,021
19,373
18,516
Cumulative Paid Claims and Allocated Claims Adjustment Expenses, Net of Reinsurance ($ in ‘000s)
Accident
Year
2008
unaudited
20091
unaudited
2010
unaudited
2011
unaudited
2012
unaudited
2013
unaudited
2014
unaudited
2015
unaudited
2016
2017
For the Years Ended December 31,
$
6,201 $ (6,438) $
7,256 $ 16,010 $ 20,234 $ 23,282 $ 25,060 $ 27,039 $ 28,136 $ 28,601
(3,218)
10,711
24,468
31,784
36,385
39,664
42,030
43,287
43,707
10,097
20,483
26,654
31,300
34,831
37,051
38,187
38,930
8,725
18,980
24,978
29,660
33,217
35,324
36,058
8,385
18,230
26,995
35,563
41,587
44,835
10,358
27,198
43,117
59,973
68,612
15,404
38,257
60,486
81,141
18,597
49,556
76,398
21,850
53,812
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Total
27,977
$ 500,071
200
$ 147,307
All outstanding liabilities before 2008, net of reinsurance
Liabilities for claims and allocated claims adjustment expenses, net of reinsurance
1 - year 2009 - negative amounts resulted from the termination of reinsurance agreements
100
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
2008
unaudited
2009
unaudited
2010
unaudited
2011
unaudited
2012
unaudited
2013
unaudited
2014
unaudited
2015
unaudited
2016
2017
As of the year ended
December 31, 2017
Incurred but
Not
Reported
Liabilities,
Net of
Reinsurance
Cumulative
Number of
Reported
Claims
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Total
$ 34,673 $ 38,502 $ 36,796 $ 36,489 $ 36,580 $ 36,576 $ 36,222 $ 36,254 $ 36,260 $ 36,233 $
35,688
34,764
34,626
35,453
36,343
36,202
36,736
37,061
37,070
26,884
27,729
24,714
24,922
24,392
24,456
24,477
24,478
20,315
22,176
22,310
21,782
22,122
22,941
22,414
13,054
12,723
13,634
13,854
13,934
14,109
5,897
4,754
6,645
4,556
6,849
8,320
4,687
6,978
8,616
9,357
4,711
7,580
9,591
9,960
11,086
Total
$ 177,232
4
54
4
22
308
90
571
1,148
428
775
47,047
27,847
14,330
10,002
3,615
2,149
2,945
3,968
4,686
5,013
Cumulative Paid Claims and Allocated Claims Adjustment Expenses, Net of Reinsurance ($ in ‘000s)
For the Years Ended December 31,
Accident
Year
2008
unaudited
2009
unaudited
2010
unaudited
2011
unaudited
2012
unaudited
2013
unaudited
2014
unaudited
2015
unaudited
2016
2017
$ 21,304 $ 23,263 $ 30,657 $ 33,915 $ 35,442 $ 36,112 $ 36,149 $ 36,222 $ 36,224 $ 36,224
11,296
25,422
30,343
33,186
34,375
35,785
36,164
36,499
36,714
14,182
20,420
22,596
23,812
24,225
24,368
24,414
24,452
11,517
17,419
19,696
20,939
21,600
22,235
22,326
6,446
9,789
4,195
11,554
12,782
13,343
13,317
4,602
6,154
4,603
6,677
7,886
4,612
6,728
8,154
9,413
4,641
6,820
8,291
9,802
10,619
$ 173,206
699
$
4,725
All outstanding liabilities before 2008, 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.
101
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
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, 2017 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
2017
$
147,307
4,725
152,032
51,335
2,067
53,402
6,214
Unpaid claims and claims adjustment expenses, gross of reinsurance
$
211,648
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, 2017 (amounts are unaudited).
Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance
Years
1
2
3
4
5
6
7
8
9
10
Commercial automobile liability
18.4% 20.0% 25.4% 19.3% 11.4% 7.3% 4.1% 3.9% 2.4% 1.6%
Other short-duration lines
68.7% 15.7% 8.4% 5.3% 2.8% 1.8% 0.4% 0.4% 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.
102
Stock options - Stock option activity for the years ended December 31, 2017 and 2016 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
2017
2016
Number of
Shares
187,728
—
(133,338)
54,390
Average
Exercise Price
C$6.22
—
C$6.31
C$6.00
Number of
Shares
187,728
—
—
187,728
Average
Exercise Price
C$6.22
—
—
C$6.22
US$ Denominated:
2017
2016
Number of
Shares
Average
Exercise Price
Number of
Shares
Average
Exercise Price
Outstanding, beginning of period
375,000
US$17.01
375,000
US$17.01
Granted
Exercised
—
—
—
—
—
—
—
—
Outstanding, end of period
375,000
US$17.01
375,000
US$17.01
Information about options outstanding as of December 31, 2017 is as follows:
Grant Date
January 18, 2011
March 6, 2014
March 12, 2015
Total
Expiration Date
January 18, 2021
March 6, 2024
March 12, 2025
Number Outstanding
54,390
175,000
200,000
429,390
Number Exercisable
54,390
175,000
—
229,390
There are 229,390 stock options that are exercisable as of December 31, 2017. The stock option grants outstanding have a weighted
average remaining life of 6.26 years and have an intrinsic value of $2.2 million as of December 31, 2017.
Under the Equity Incentive Plan, a director who either directly or indirectly purchases up to $100,000 of Atlas ordinary voting
common stock on the open market, through the employee stock purchase plan, or via other means acceptable under this plan (see
Note 13, ‘Other Employee Benefit Plans’) will receive a 3 to 1 matching grant of restricted stock grants for ordinary voting common
shares (or for Canadian taxpayers, restricted stock units) based on the aggregate purchase price of ordinary voting common shares
the director purchases during the six month period that began on June 18, 2013 and ended on December 31, 2013, or for new
directors within 6 months of their initial appointment date (the “Purchase Period”). Matching share grants of 148,152 restricted
stock grants for ordinary voting common shares and 37,038 restricted stock units were made on February 28, 2014 (the “Grant
Date”). The number of ordinary voting common shares issued on the Grant Date were determined by dividing (A) the dollar
amount of the Company matching contribution due based on purchases during the Purchase Period by (B) the closing common
share price of one share of Company ordinary voting common stock at close of market on June 17, 2013 (the “Closing Price”)
which was $8.10 per share. The restricted stock grants for ordinary voting common shares will vest 20% on each anniversary of
the Grant Date, subject to the terms of the Guidelines. The matching grant will be subject to all of the terms and conditions of the
Equity Incentive Plan and applicable grant agreements.
On March 12, 2015, the Board of Directors of Atlas granted equity awards of (i) 200,000 restricted stock grants for ordinary 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 is met. 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. For the year ended December 31, 2017, 40,000 shares of each of the restricted stock
grants for ordinary voting common shares and the options to acquire ordinary voting common shares vested. For the year ended
December 31, 2016, performance targets linked to these awards were not achieved, and therefore no vesting occurred.
103
The Monte-Carlo simulation model was used, for both the options and restricted stock grants for ordinary voting common shares,
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 stock grants for
ordinary voting common shares, respectively. This expense will be amortized over the anticipated vesting period.
Restricted shares - The activity for the restricted voting common shares and restricted share units for the years ended December
31, 2017 and 2016 are as follows:
Non-vested, beginning of period
Granted
Vested
Non-vested, end of period
2017
2016
Number of
Shares
Weighted
Average Fair
Value at Grant
Date
Number of
Shares
Weighted
Average Fair
Value at Grant
Date
311,120 $
—
(77,040)
234,080 $
15.92
—
15.21
16.15
348,155 $
—
(37,035)
311,120 $
15.53
—
12.20
15.92
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 statements of income and comprehensive income. Atlas recognized $1.2
million, $1.6 million and $1.8 million in share-based compensation expense, including income tax expense, for the years ended
December 31, 2017, 2016, and 2015, respectively. Total unearned share-based compensation expense was $660,000 related to all
stock option grants and $1.4 million related to restricted stock grants for ordinary voting common shares and restricted share units
as of December 31, 2017. This unearned share-based compensation expense will be amortized over the next 26 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 $441,000, $424,000, and $300,000 for the years ended December 31, 2017, 2016, and 2015,
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, 2017, 2016, and 2015, Atlas’ costs incurred related to the matching portion of the ESPP were $212,000, $199,000, and $151,000,
respectively. Share purchases pursuant to this plan are made in the open market.
14. SHARE CAPITAL AND MEZZANINE EQUITY
Share Capital
The share capital is as follows:
As of December 31,
Ordinary voting common shares
Restricted voting common shares
Total common shares
2017
2016
Shares
Authorized
Shares Issued
and
Outstanding
Amount
($ in ‘000s)
Shares
Issued and
Outstanding
Amount
($ in
‘000s)
266,666,667
12,164,041 $
33,333,334
—
300,000,001
12,164,041 $
36
—
36
11,895,104 $
128,191
12,023,295 $
36
—
36
104
During 2017, the 128,191 restricted voting common shares that were beneficially owned or controlled by Kingsway Financial
Services, Inc. (including its subsidiaries and affiliated companies, “Kingsway”) were sold to non-affiliates of 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 Kingsway-owned restricted voting
common shares automatically converted to ordinary voting common shares upon their sale to non-affiliates of Kingsway. There
are no restricted voting common shares outstanding as of December 31, 2017.
There were 14,816 and 22,224 non-vested restricted stock units (“RSUs”) as of December 31, 2017 and December 31, 2016,
respectively. These RSUs are participative and are included in the computations of earnings per common share and book value
per common share for these periods.
During the year ended December 31, 2017, the Company issued 7,408 ordinary voting common shares as a result of the vesting
of RSUs. During the year ended December 31, 2017, the Company issued 133,338 ordinary voting common shares as a result of
the exercise of options. During the year ended December 31, 2016, the Company issued 7,407 ordinary voting common shares as
a result of the vesting of RSUs.
On March 21, 2017, the Company’s Board of Directors approved a Share Repurchase Program of up to 650,000 shares of common
stock. The repurchases may be made from time to time in open market transactions, privately-negotiated transactions, block
purchases, or otherwise in accordance with securities laws at the discretion of the Company’s management until March 21, 2018.
The Company’s decisions around the timing, volume, and nature of share repurchases, and the ultimate amount of shares
repurchased, will be dependent on market conditions, applicable securities laws, and other factors. The share repurchase program
and the Board’s authorization of the program may be modified, suspended, or discontinued at any time. During 2017, no shares
were repurchased under this Share Repurchase Program.
Mezzanine Equity
Prior to the year ended December 31, 2017, the Company presented preferred shares issued as contingent consideration within
the permanent equity section of the Consolidated Statements of Financial Position. In accordance with FASB ASC Topic 480 -
Distinguishing Liabilities from Equity, contingent consideration issued as preferred shares wherein the number of shares to be
issued is variable should be classified outside of permanent equity and reflected as mezzanine equity on the Consolidated Statements
of Financial Position.
For the year ended December 31, 2017, the Company has restated the Consolidated Statements of Shareholders’ Equity to remove
the preferred shares and related activity as previously stated for the periods as of January 1, 2015 and for the years ended December
31, 2015 and 2016. Although this impacted total equity for 2015, it had no impact on total equity as of December 31, 2016 due
to the redemption and clawback of preferred shares previously issued. In addition, this change did not impact the Consolidated
Statements of Financial Position, Consolidated Statements of Income (Loss) and Comprehensive Income (Loss), earnings per
common share or the Consolidated Statements of Cash Flows. The Company has evaluated the effect of the incorrect presentation
in the prior period, both qualitatively and quantitatively, and concluded that it did not have a material impact on, nor did it require
amendment of, any previously filed annual or quarterly consolidated financial statements.
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 the remaining 4,000,000 preferred shares pursuant to the
Anchor stock purchase agreement. As of December 31, 2017 and 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 statements of income
and comprehensive income 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.
105
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, 2017 and December 31, 2016, Atlas has accrued $333,000 in dividends on the
preferred shares for the former owner of Anchor, which remains unpaid. The paid claims development on Global Liberty’s pre-
acquisition claims reserves was in excess of $4.0 million, and as a result, pursuant to the terms of the Anchor stock purchase
agreement, dividends will no longer accrue to the former owner of Anchor.
15. DEFERRED POLICY ACQUISITION COSTS
Deferred policy acquisition costs represent those costs that are incremental and directly related to the successful acquisition of
new or renewal written premium. Such deferred policy acquisition costs generally include agent commissions, premium taxes
and a portion of employee compensation and benefits directly related to time spent performing specific acquisition or renewal
activities. The method followed in determining the deferred policy acquisition costs limits the deferral to its realizable value by
giving consideration to estimated future claims and expenses to be incurred as premiums are earned. Changes in estimates, if any,
are recorded in the accounting period in which they are determined. Anticipated investment income is included in determining the
realizable value of the deferred policy acquisition costs. Atlas’ deferred policy acquisition costs are reported net of deferred ceding
commissions.
Policy acquisition costs are deferred and amortized over the period in which the related premiums written are earned, typically
12 months. Deferred policy acquisition costs for the years ended December 31, 2017, 2016, and 2015 ($ in ‘000s) were:
Year Ended December 31,
Balance, beginning of period
Acquisition costs deferred
Amortization charged to income
Balance, end of period
2017
2016
2015
$
$
13,222
$
10,235
$
29,460
(27,885)
14,797
$
21,790
(18,803)
13,222
$
8,166
20,661
(18,592)
10,235
16. RELATED PARTY TRANSACTIONS
During the periods presented, a portion of the Company’s investment portfolio, which is included in “Other Investments” on the
Consolidated Statements of Financial Position, included investment vehicles that are considered related-party transactions. As of
December 31, 2017 and December 31, 2016 these related-party transactions comprised 8.4% of our investment portfolio. In these
transactions, one or more of the Company’s directors or entities affiliated with such directors may invest in and/or manage these
vehicles. 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 premiums written
Net premiums earned
Net (loss) income
Net (loss) income attributable to common shareholders
(Loss) earnings per common share basic
(Loss) earnings per common share diluted
2017
Q4
Q3
Q2
Q1
$ 54,213 $ 65,898 $ 57,354 $ 98,496
57,431
(54,297)
(54,297)
$ (4.48) $
$ (4.48) $
55,865
54,049
48,426
5,125
5,125
5,510
5,510
0.43 $
0.46 $
0.42 $
0.45 $
4,852
4,852
0.40
0.40
106
($ in ‘000s, except per share data)
Gross premiums written
Net premiums earned
Net (loss) income
Net (loss) income attributable to common shareholders
(Loss) earnings per common share basic
(Loss) 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
On April 26, 2017, Atlas issued $25 million of five-year 6.625% senior unsecured notes and received net proceeds of approximately
$23.9 million after deducting underwriting discounts and commissions and other estimated offering expenses. Interest on the senior
unsecured notes is payable quarterly on each January 26, April 26, July 26 and October 26. Atlas may, at its option, beginning
with the interest payment date of April 26, 2020, and on any scheduled interest payment date thereafter, redeem the senior unsecured
notes, in whole or in part, at a redemption price equal to 100% of the principal amount plus accrued and unpaid interest to, but
excluding, the date of redemption. The senior unsecured notes will rank senior in right of payment to any of Atlas’ existing and
future indebtedness that is by its terms expressly subordinated or junior in right of payment to the senior unsecured notes. The
senior unsecured notes will rank equally in right of payment to all of Atlas’ existing and future senior indebtedness, but will be
effectively subordinated to any secured indebtedness to the extent of the value of the collateral securing such secured indebtedness.
In addition, the senior unsecured notes will be structurally subordinated to the indebtedness and other obligations of Atlas’
subsidiaries.
The senior unsecured notes were issued under an indenture and supplemental indenture that contain covenants that, among other
things, limit: (i) the ability of Atlas to merge or consolidate, or lease, sell, assign or transfer all or substantially all of its assets;
(ii) the ability of Atlas to sell or otherwise dispose of the equity securities of certain of its subsidiaries; (iii) the ability of certain
of Atlas’ subsidiaries to issue equity securities; (iv) the ability of Atlas to permit certain of its subsidiaries to merge or consolidate,
or lease, sell, assign or transfer all or substantially all of their respective assets; and (v) the ability of Atlas and its subsidiaries to
incur debt secured by equity securities of certain of its subsidiaries.
On March 9, 2015, American Insurance Acquisition, Inc. (“American Acquisition”), a wholly-owned direct subsidiary of Atlas,
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, included a $30.0 million line of credit (“Draw Amount”), which could have been drawn in
increments at any time until December 31, 2016. The $30.0 million line of credit had a five year term and bore interest at one-
month LIBOR plus 4.5%. The Loan Agreement also included a $5.0 million revolving line of credit (“Revolver”), which could
have been drawn upon until May 7, 2018, that bore interest at one month LIBOR plus 2.75%.
The Loan Agreement also provided for the issuance of letters of credit in an amount up to $2.0 million outstanding at any time.
In addition, there was 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 was terminated in April 2017. Atlas used a portion of the net proceeds of the senior unsecured notes offering,
together with cash on hand, for the repayment of all outstanding balances under the Draw Amount and Revolver, $15.5 million
and $3.9 million, respectively.
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 and
its effect on American Acquisition’s December 31, 2016 financial statements, American Acquisition was not in compliance with
the Loan Agreements’ EBITDA Ratio covenant as of March 13, 2017. American Acquisition had a thirty day period to cure this
covenant non-compliance, and the Company and American Acquisition agreed with the lender to 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.
Interest expense on notes payable was $1.8 million, $1.0 million, and $694,000 for the years ended December 31, 2017, 2016,
and 2015, respectively.
107
Notes payable outstanding as of December 31, 2017 and 2016 ($ in ‘000s) were:
6.625% Senior Unsecured Notes due April 26, 2022
Revolver
Draw Amount
Total outstanding borrowings
Unamortized issuance costs
Total notes payable
19. STATUTORY INFORMATION
December 31, 2017
December 31, 2016
$
$
25,000 $
—
—
25,000
(969)
24,031 $
—
3,900
15,500
19,400
(213)
19,187
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 $9.1 million, $15.2 million, $5.9 million, and $5.1 million for American
Country, American Service, Gateway and Global Liberty, respectively, for the year ended December 31, 2017. Net loss for the
year ended December 31, 2016 was $1.3 million, $1.2 million, $1.1 million, and $49,000 for American Country, American Service,
Gateway and Global Liberty, respectively. The combined statutory capital and surplus of the Insurance Subsidiaries was $87.8
million and $113.9 million as of December 31, 2017 and December 31, 2016, respectively.
Atlas did not declare or pay any dividends to its common shareholders during the years ended December 31, 2017 and 2016.
20. CHANGE IN ACCOUNTING PRINCIPLE AND ERROR CORRECTIONS
Change in Accounting Principle
The Company elected to early adopt ASU 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220):
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, for the year ended December 31, 2017.
This update provides guidance on the reclassification of stranded tax effects in AOCI resulting from the Tax Act. We reclassified
the effect of the change in the federal corporate tax rate on gross deferred tax items and related valuation allowances for item in
AOCI. The adoption of this ASU resulted in a increase to AOCI and an decrease in retained earnings of $7,000 for the year ended
December 31, 2017 with no net effect on total shareholders’ equity.
Error Corrections
Prior to the year ended December 31, 2017, the Company presented preferred shares issued as contingent consideration within
the permanent equity section of the Consolidated Statements of Financial Position. In accordance with FASB ASC Topic 480 -
Distinguishing Liabilities from Equity, contingent consideration issued as preferred shares wherein the number of shares to be
issued is variable should be classified outside of permanent equity and reflected as mezzanine equity on the Consolidated Statements
of Financial Position.
For the year ended December 31, 2017, the Company has restated the Consolidated Statements of Shareholders’ Equity to remove
the preferred shares and related activity as previously stated for the periods as of January 1, 2015 and for the years ended December
31, 2015 and 2016. Although this impacted total equity for 2015, it had no impact on total equity as of December 31, 2016 due
to the redemption and clawback of preferred shares previously issued. In addition, this change did not impact the Consolidated
Statements of Financial Position, Consolidated Statements of Income (Loss) and Comprehensive Income (Loss), earnings per
common share or the Consolidated Statements of Cash Flows. The Company has evaluated the effect of the incorrect presentation
in the prior period, both qualitatively and quantitatively, and concluded that it did not have a material impact on, nor did it require
amendment of, any previously filed annual or quarterly consolidated financial statements.
108
The following line items presented in the Consolidated Statements of Shareholders’ Equity were affected by the restatement:
($ in ‘000s)
Impact on Total Shareholders’ Equity column as of:
December 31, 2014
December 31, 2015
December 31, 2016
21. SUBSEQUENT EVENTS
As
Originally
Reported
As Adjusted
Effect of
Change
109,399
129,622
127,342
107,399
122,681
127,342
(2,000)
(6,941)
—
On March 5, 2018, a complaint was filed in the U.S. District Court for the Northern District of Illinois asserting claims under the
federal securities laws against the Company and two of its executive officers on behalf of a putative class of purchasers of the
Company’s securities, styled Fryman v. Atlas Financial Holdings, Inc., et al., No. 1:18-cv-01640 (N.D. Ill.). In the complaint, the
plaintiff asserts claims on behalf of a putative class consisting of purchasers of the Company’s securities between March 13, 2017
and March 2, 2018. The complaint alleges that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act
of 1934 and Rule 10b-5 promulgated thereunder by making allegedly false and misleading statements or failing to disclose certain
information regarding the adequacy of the Company’s reserves. The complaint seeks, among other remedies, unspecified damages,
attorneys’ fees and other costs, equitable and/or injunctive relief, and such other relief as the court may find just and proper. Under
applicable provisions of the federal securities laws, motions for appointment as lead plaintiffs must be filed within sixty days after
a notice announcing the filing of the Fryman complaint. The Company and the other defendants anticipate that they will file a
motion to dismiss the complaint for failure to state a claim upon which relief can be granted. Under the federal securities laws,
discovery and other proceedings automatically will be stayed during the pendency of any such motion to dismiss.
109
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, 2017, 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, 2017 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, 2017.
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.
110
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 2018 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.
111
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 (Loss) and Comprehensive Income (Loss)
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.
Exhibit
Description
3.1
3.2
4.1(1)
4.2(1)
4.3
4.4
4.5
4.6
4.7
4.8
10.1(1)
10.2(1)
10.3(1)
10.4(1)
10.5
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)
Special Resolution amending Articles 124 and 125(e) of the Articles of Association (incorporated by reference from our registration statement on
Form S-3 file November 30, 2017)
Form of Subordinated Indenture (incorporated by reference from our registration statement on Form S-3 filed April 25, 2014)
Indenture, dated as of April 26, 2017, between Atlas Financial Holdings, Inc. and Wilmington Trust, National Association, as trustee
(incorporated by reference from our current report on Form 8-K filed April 26, 2017)
First Supplemental Indenture, dated as of April 26, 2017, between Atlas Financial Holdings, Inc. and Wilmington Trust, National Association, as
trustee (incorporated by reference from our current report on Form 8-K filed April 26, 2017)
Form of Note representing $25,000,000 aggregate principal amount of 6.625% Senior Unsecured Notes due 2022 (incorporated by reference from
our current report on Form 8-K filed April 26, 2017)
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 4,
2012)
112
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
10.24
14
21
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 2, 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)
Underwriting Agreement, dated April 21, 2017, by and between Atlas Financial Holdings, Inc. and Sandler O'Neill & Partners, L.P. (incorporated
by reference from our current report on form 8-K filed April 27, 2017)
Code of Business Conduct and Ethics (incorporated by reference from our general form for registration of securities on Form 10 filed March 26,
2012)
List of Subsidiaries
23.1
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
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 June 30, 2012, filed on August 13, 2012.
(*) Management contracts and compensatory plans or agreements.
Item 16. Form 10-K Summary
None.
113
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)
April 2, 2018
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
April 2, 2018
Vice President, Chief Financial Officer
and Principal Accounting Officer
April 2, 2018
Gordon G. Pratt
Director, Chairman of the Board
April 2, 2018
/s/ Jordan M. Kupinsky
Jordan M. Kupinsky
/s/ John T. Fitzgerald
John T. Fitzgerald
/s/ Walter F. Walker
Walter F. Walker
Director
April 2, 2018
Director
April 2, 2018
Director
April 2, 2018
114
Schedule II – Condensed Financial Information of Registrant
Statements of Income (Loss) and Comprehensive Income (Loss)
($ in ‘000s)
Net investment (expense) income
Other underwriting expense (income)
Interest expense
(Loss) income from operations before income taxes
Income tax benefit
(Loss) income before equity in net income of subsidiaries
Equity in net (loss) income of subsidiaries
Net (loss) income
Other comprehensive income (loss):
Changes in net unrealized investment gains (losses)
Reclassification to net (loss) income
Effect of income taxes
Other comprehensive income (loss)
Total comprehensive (loss) income
See accompanying Notes to Condensed Financial Information of Registrant
Year ended December 31,
2016
2017
2015
$
$
$
$
(4) $
1,436
1,266
(2,706)
(115)
(2,591) $
(36,219)
(38,810) $
437
(49)
(136)
252
(38,558) $
— $
(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
115
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
Deferred tax asset, net
Investment in subsidiaries
Total Assets
Liabilities
Notes payable, net
Other liabilities and accrued expenses
Total Liabilities
Shareholders’ Equity
Ordinary voting common shares, $0.003 par value, 266,666,667 shares authorized, shares
issued and outstanding: December 31, 2017 - 12,164,041 and December 31, 2016 - 11,895,104
Restricted voting common shares, $0.003 par value, 33,333,334 shares authorized, shares
issued and outstanding: December 31, 2017 - 0 and December 31, 2016 - 128,191
Additional paid-in capital
Retained deficit
Accumulated other comprehensive income (loss), net of tax
Total Shareholders’ Equity
Total Liabilities and Shareholders’ Equity
See accompanying notes to Condensed Financial Information of Registrant
$
$
$
$
$
December 31,
2017
2016
4,233 $
4,116
109,897
118,246 $
271
3,404
126,564
130,239
24,031 $
3,570
27,601 $
—
2,897
2,897
36 $
—
201,105
(110,535)
39
90,645
36
—
199,244
(71,718)
(220)
127,342
$
118,246 $
130,239
116
Schedule II – Condensed Financial Information of Registrant (continued)
Statements of Cash Flow
($ in ‘000s)
Operating Activities:
Net (loss) income
Adjustments to reconcile net (loss) income to net cash flows (used in) provided by operating
activities:
Equity in net loss (income) of subsidiaries
Share-based compensation expense
Deferred income taxes
Amortization of financing costs
Expenses (recovered) incurred pursuant to stock purchase agreements
Net changes in operating assets and liabilities:
Other assets
Other liabilities and accrued expenses
Net cash flows (used in) provided by operating activities
Investing activities:
Capital contributions made to subsidiaries
Net cash flows used in investing activities
Financing activities:
Preferred share buyback
Capital contribution
Proceeds from notes payable, net of issuance costs
Preferred dividends paid
Options exercised
Net cash flows provided by (used in) 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 paid (recovered) for:
Interest
Income taxes
Supplemental disclosure of noncash investing and financing activities:
Issuance of preferred shares related to acquisition of subsidiary
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
See accompanying notes to Condensed Financial Information of Registrant
117
Year Ended December 31,
2015
2016
2017
$ (38,810) $
2,646 $ 14,430
36,219
2,463
1,176
1,612
(712)
(417)
—
152
— (6,623)
(16,412)
1,819
(251)
—
941
—
673
(1,302)
479
2,897
3,057
(476)
(34)
17
(19,300)
(19,300)
— (23,428)
— (23,428)
— (2,539)
—
30
23,879
—
655
24,564
3,962
271
—
(409)
—
(2,948)
109
162
—
—
—
—
145
145
(23,266)
23,428
$
4,233 $
271 $
162
$
$
828 $
(192)
— $
(3,464)
—
85
— $
— $
4,000
—
—
— (2,297)
— (4,000)
941
—
—
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.
On April 26, 2017, Atlas issued $25 million of five-year 6.625% senior unsecured notes and received net proceeds of approximately
$23.9 million after deducting underwriting discounts and commissions and other estimated offering expenses, as described in Note
18, ‘Notes Payable’. Atlas has no other long-term debt obligations.
See Note 21, ‘Subsequent Events’ for the details of potential litigation.
Atlas has no material contingencies or guarantees except as disclosed in Note 21, ‘Subsequent Event’ to the Consolidated Financial
Statements.
Atlas has not received cash dividends from its subsidiaries since its inception on December 31, 2010.
Schedule IV – Reinsurance
($ in ‘000s)
December 31, 2017
Premiums earned
December 31, 2016
Premiums earned
December 31, 2015
Premiums earned
Schedule V – Valuation and qualifying accounts
($ in ‘000s)
December 31, 2017
Allowance for uncollectible receivables
Valuation allowance for deferred tax assets
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
Gross
Amount
Ceded to
Other
Companies
Assumed
from
Other
Companies
Net
Amount
% of
Amount
Assumed
to Net
$ 251,293 $ (45,318) $
9,796 $ 215,771
4.5%
$ 217,053 $ (49,069) $
3,074 $ 171,058
1.8%
$ 182,376 $ (30,946) $
634 $ 152,064
0.4%
Balance at
Beginning
of Period
Charged to
Expenses
Other
Additions Deductions
Balance at
End of
Period
$
$
$
2,366 $
—
2,365 $
—
— $ (1,313) $
—
—
3,418
—
846 $
—
2,397 $
—
12 $
—
(889) $
—
2,366
—
560 $
—
566 $
—
8 $
—
(288) $
—
846
—
118
Schedule VI - Supplemental information concerning property-casualty insurance operations
($ in ‘000s)
Year Ended December 31,
2016
2017
2015
Deferred policy acquisition costs
$
14,797 $
13,222 $
Claims liabilities
Unearned premium reserves
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 premiums written
211,648
128,043
215,771
4,897
128,476
75,397
27,885
150,622
275,961
139,004
113,171
171,058
4,824
102,133
32,613
18,803
128,831
225,095
10,235
127,011
108,202
152,064
3,976
89,828
166
18,592
97,824
209,286
119