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, 2018
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
Trading Symbol(s)
AFH
AFHBL
Name of each exchange on which registered
Nasdaq Capital Market
OTC Markets - Pink Sheets
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
No
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
No
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
No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes
No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting
company, or an 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.
Large Accelerated Filer
Non-Accelerated Filer
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
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at
which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the
registrant’s most recently completed second fiscal quarter.
There were 11,942,812 shares of the Registrant’s common stock outstanding as of March 8, 2019, 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 $90.7 million (based upon the closing sale price of the Registrant’s common shares on June 30, 2018).
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.
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Explanatory Note:
This Annual Report on Form 10-K for Atlas Financial Holdings, Inc. (the “Company”) relates to the fiscal year ended December
31, 2018. As previously disclosed, the Company has been unable to previously file this annual report due to delays in the year
end audit process. Unless otherwise noted, disclosures in this annual report, including disclosures regarding the Company’s
financial and operating condition, are as of December 31, 2018. An overview of certain developments that occurred since December
31, 2018 is included in ‘Item 1, 2019 Developments’ and “Risk Factors - Risks Related to 2019 Developments.” We expect to
file our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2019, June 30, 2019 and September 30, 2019, as well
as our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, as soon as practicable.
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Atlas Financial Holdings, Inc.
Index to Annual Report on Form 10-K
December 31, 2018
Part I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Part II
Item 5.
Item 6.
Item 7.
Business
Overview
Competitive Strengths
Strategic Focus
Market
Agency Relationships
Seasonality
Competition
Regulation
Employees
Available Information about Atlas
2019 Developments
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Selected Financial Data
Management's Discussion and Analysis of Financial Condition and Results of Operations
Overview
Application of Critical Accounting Estimates
Operating Results
Financial Condition
Item 7A.
Item 8.
Quantitative and Qualitative Disclosures about Market Risk
Financial Statements and Supplemental Schedules
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Financial Position
Consolidated Statements of (Loss) Income and Comprehensive (Loss) Income
Consolidated Statements of Shareholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Exhibits and Financial Statement Schedules
Form 10-K Summary
Signatures
Financial Statement Schedules
Item 9.
Item 9A.
Item 9B.
Part III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Part IV
Item 15.
Item 16.
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Item 1. Business
Part I
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 (“U.S.”). This
heritage 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 (“TNCs”) 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”). 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) JJR VI, sponsored by JJR Capital, a Toronto based merchant bank;
(b) American Insurance Acquisition Inc. (“American Acquisition”), a corporation formed under the laws of Delaware as a
wholly owned subsidiary of KAI; and
(c) 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 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
U.S. 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. 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 strategic focus has been the underwriting of specialty commercial insurance
for users of “light” vehicles in the U.S.
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 Stock Market.
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Unless otherwise noted, all historical share and per share values in this Annual Report on Form 10-K reflect the one-for-three
reverse stock split.
On 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 U.S. 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 U.S. were to create a public market in the U.S. for
Atlas’ ordinary voting common shares and thereby enable future access to the public equity markets in the U.S. 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 U.S. 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. (“AGMI”), 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, AGMI, 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,
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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.
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 and Gateway (collectively, the “ASI Pool Companies”)
and Global Liberty (together with the ASI Pool Companies, our “Insurance Subsidiaries”), along with our wholly owned managing
general agency, AGMI. As previously announced, certain Insurance Subsidiaries have been in rehabilitation since July 8, 2019.
See ‘Item 1, 2019 Developments’ for certain developments with respect to the Company and the Insurance Subsidiaries subsequent
to December 31, 2018.
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 pricing deemed to be adequate based on historical results and subsequent estimations of
future outcomes. While the commercial automobile insurance market has generally faced loss related challenges in recent years,
we believe that we are able to adapt to changing market needs through our strategic commitment, the use of technology, analytics
and operating scale. We endeavor to develop and deliver superior specialty insurance products and services to meet our customers'
needs with a focus on innovation.
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 between AGMI and 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. AGMI’s policy system enables point of sale interface with our distribution channel providing operating
efficiency and customer service benefits.
Underwriting and claims handling experience.
Atlas has extensive experience with respect to underwriting and claims management in our specialty area of insurance. Our
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 informs our
product and pricing decisions. The Company’s recent results include a re-estimation of claim related reserves primarily for older
accident years. We believe our underwriting and claims handling activities will result in enhanced risk selection, high quality
service to our customers and greater control over claims costs. We are committed to continuous improvement related to this
underwriting and claims handling experience as a core competency, especially in light of the challenges facing the commercial
automobile insurance industry in general. 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.
Significant changes have been made in aligning our organization’s infrastructure cost base to our expected revenue and strategic
direction going forward. The core functions of our Insurance Subsidiaries were integrated into a common operating platform. We
believe that our business is well positioned to support proportionate market share of approximately 20% in all of the markets in
which we operate. As a result of our shift to a Managing General Agency (“MGA”) focused strategy, our business model is
dependent on support from unrelated insurance underwriting partners. Our business can also operate efficiently at smaller scale.
Commercial automobile insurance is a cyclical business and our priority will always be to increase or decrease market share based
on expected underwriting results rather than top line revenue. We plan to continue to evaluate, and where beneficial, deploy, new
technologies and analytics to maximize efficiency and scalability.
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Experienced management team.
We have a talented and experienced management team who have decades of experience in the property and casualty (“P&C”)
insurance industry. Our senior management team has worked in the P&C industry for an average of more than 25 years and with
the Insurance Subsidiaries, directly or indirectly, for an average of 15 years. We believe our team has the necessary experience
and commitment to address current challenges and produce improved results going forward.
Strategic Focus
Vision
Mission
To always be the preferred specialty insurance business in any geographic areas where our
value proposition delivers benefit to all stakeholders.
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 underwriting 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 intend to focus on our key strengths and leverage our geographic footprint, products and services only to the extent that these
activities support our vision and mission. We will target niche markets that are expected to support adequate pricing and will be
best able to adapt to changing market needs ahead of our competitors due to our scale, business partnerships and strategic
commitment.
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 going forward. We have aligned the organization’s infrastructure cost base to our expected revenue stream.
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 support proportionate market share of approximately 20% in all of
the markets in which we operate with better than industry level profitability. Based on current market conditions, coupled with
underwriting and claim related initiatives implemented in recent years, we believe future underwriting results should improve.
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 and AGMI, Atlas actively wrote business in 42 states and the
District of Columbia during 2018.
We believe that the most significant opportunities going forward are: (i) continually managing our independent retail agency and
customer relationships, (ii) increasing or decreasing premium volume in business segments and geographic markets based on
underwriting results and anticipated future outcomes and (iii) evaluating and implementing strategic activities to optimize the
value of our infrastructure and experience. Primary potential risks related to these activities include: (a) the impact of prior year
reserve strengthening on our Insurance Subsidiaries, (b) not being able to achieve the expected support from reinsurance or
distribution partners, and (c) insurance market conditions becoming or remaining “soft” for a sustained period of time.
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 improve profitability by undertaking the following:
Focus on most profitable business.
In the past, we have identified and exited segments that are under-performing on our overall book of business. We are committed
to continuing to make this a high priority with a focus on geographic, line of business level and competitive analysis. As the
market environment evolves, our objective is to react as quickly as possible to address under performing segments and focus on
more profitable ones.
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.
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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. A significant portion of the Company’s business
in recent years relates to the expansion and evolution of TNC operators. 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 or
business line. Such potential expansion is also subject to availability of capital or reinsurance support. In the alternative, we will
endeavor to quickly adjust our pricing and underwriting or reduce our exposure to potentially under-performing products.
Develop and maintain new or existing strategic partnerships.
We plan to continue to leverage our relationships with reinsurers and other existing or new business partners. The combination of
Insurance Subsidiaries and our wholly owned managing general agency provide flexibility in terms of both capital support as well
as partnership structures and revenue streams.
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.
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. Data compiled by S&P Global also indicates that in 2018 the total market for commercial automobile liability
insurance was approximately $40.4 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 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.
Our target market has changed in recent years as a result of TNC and other trends related to mobility. The significant expansion
of TNC has resulted in a reduction in taxi vehicles available to insure; however, it has increased the number of livery operators.
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 U.S. Through our Insurance Subsidiaries, we are licensed to write P&C insurance
in 49 states plus the District of Columbia. The following table reflects, in percentages, the principal geographic distribution of
gross premiums written in 2018. No other jurisdiction accounted for more than 5%. AGMI is also licensed on a nationwide basis.
Distribution of Gross Premiums Written by Jurisdiction
New York
California
38.4%
16.2
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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 will provide
favorable results going forward (the blue states in the below diagram).
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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. Our independent agent
partners contract with AGMI through which business can be written with our Insurance Subsidiaries or strategic partners. 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. The re-estimation of claims related reserves
impacts the evaluation of underwriting results and profit sharing commissions. While we rely on our independent retail agents for
distribution and customer support, underwriting and claims handling responsibilities are retained by us. As shown in the charts
below, 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. Changes in the amount of quota share or other reinsurance that we may use will also impact net earned premiums
period over period. 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. Our New York “excess taxi program” has an annual renewal date in the
third quarter. Net underwriting income is driven mainly by the timing and nature of claims, coupled with actuarial estimation of
future claim liabilities, which can vary widely.
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Competition
The insurance industry is competitive in all markets in which the Insurance Subsidiaries operate. Our Company strives to generate
better than industry underwriting profit. While historic results have been challenging, we have implemented rate changes, analytics
based underwriting and claim processes and shifted our business mix significantly. We believe these activities are important to
produce more profitable business, especially in a changing environment.
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.
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 estimation 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
(“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
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operations. The NAIC RBC formula generates the regulatory minimum amount of capital that a company is required to maintain
to avoid regulatory action. There are four levels of action that a company can trigger under the formula: company action, regulatory
action, authorized control and mandatory control levels. Each RBC level requires some particular action on the part of the regulator,
the company, or both. For example, an insurer that breaches the Company Action Level must produce a plan to restore its RBC
levels. As of December 31, 2018, the total adjusted capital of three of our Insurance Subsidiaries exceeded the minimum levels
required under RBC requirements, while one subsidiary breached the Company Action Level. We are working with the appropriate
regulators to address this RBC breach. We do not expect that this situation will impede our ability to execute on strategic plans.
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. See “Risk Factors - Risks Related to 2019 Developments - Regulatory Developments”
for certain developments with respect to the Insurance Subsidiaries subsequent to December 31, 2018.
Employees
As of December 31, 2018, we had 286 full-time employees working within three main departments: Underwriting, Claims, and
Corporate and Other. The Corporate and Other category includes executive, information technology, finance, facilities management
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 (“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.
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2019 Developments
As previously disclosed, since December 31, 2018, the Company was unable to timely file this Annual Report on Form 10-K for
the fiscal year ended December 31, 2018 and its Quarterly Reports on Form 10-Q for the periods ended March 31, June 30, and
September 30, 2019 due to delays in the year end audit process. As a result, the Company received a number of delinquency
notices from Nasdaq related to these filings as well as other matters. Nasdaq granted the Company’s request to move from the
Nasdaq Global Market to the Nasdaq Capital Market and granted the Company an extension to regain compliance with its listing
obligations. The Company’s ordinary shares continue to trade on the Nasdaq Capital Market, while the Company’s 6.625% Senior
Unsecured Notes due 2022 moved to the OTC Pink Sheets on October 17, 2019. There can be no assurance that the Company
will be able to regain compliance with Nasdaq listing requirements.
On April 29, 2019, RSM US, LLP ("RSM") was dismissed as the Corporation’s independent registered public accounting firm.
At the time RSM was dismissed, the Corporation had not yet engaged a successor independent registered public accounting firm.
On October 31, 2019, Baker Tilly Virchow Krause, LLP (“Baker Tilly”) was engaged as the Company’s independent registered
public accounting firm to audit the Company’s financial statements commencing with the fiscal year ended December 31, 2018.
Throughout 2019, the Company has been exploring strategic alternatives, including, but not limited to, further strengthening its
processes, reviewing its capital allocation and opportunities, a potential sale of the Company or certain assets, and balance sheet
strengthening options with the goal of facilitating shareholder value generation. Atlas concluded that the utilization of its wholly
owned MGA operation to work with strategic external insurance and reinsurance partners will enable the Company to leverage
its focus, experience and infrastructure to create value for stakeholders. A definitive agreement was executed effective June 10,
2019 between Atlas and American Financial Group, Inc. (NYSE: AFG), under which Atlas will act as an underwriting manager
for AFG’s National Interstate (“NATL”) subsidiary and transition new and renewal paratransit business to NATL paper for this
book of business. The Company is working on additional arrangements with the objective of establishing MGA relationships in
connection with the Company’s other lines of business as well. The Company agreed that should it choose to sell its MGA
operations, 49% of the proceeds from any future sale of AGMI would be provided to the ASI Pool Companies to facilitate the
rehabilitation process. There can be no assurance that any portion of the proceeds allocated to the ASI Pool Companies would be
available for distribution to the Company.
During 2019, the Illinois Department of Insurance (the “Department”) placed all three of the ASI Pool Companies (after Gateway
was redomesticated in Illinois) into rehabilitation with the Director of the Department as the statutory rehabilitator. While in
rehabilitation, the operations of such insurance subsidiaries will be overseen by the statutory rehabilitator although Atlas continues
to maintain its legal ownership of the stock of the ASI Pool Companies. Management’s overriding strategic plan continues to
include a transition of business from these insurance companies to alternative markets within a reasonable period of time utilizing
the existing platform of the MGA to work with strategic external insurance and reinsurance partners.
Effective August 15, 2019, no new business was written by the ASI Pool Companies, and only New York area new business was
written by Global Liberty, which is focusing its resources on New York area business to leverage the subsidiary’s heritage in this
large and specific market. The ASI Pool Companies and Global Liberty continued to write renewal business that met their
underwriting standards during 2019. Non-renewals related to ASI Pool Companies’ insurance policies began towards the end of
2019.
On January 22, 2020, the Company announced a non-binding letter of intent with Buckle, a technology-driven financial services
company, to purchase the stock of Atlas’ indirect subsidiary Gateway Insurance Company (“Gateway”) and its corporate charter
and forty-seven (47) state insurance licenses as well as state statutory deposits, subject to regulatory and other necessary approvals,
for $4.7 million plus the value of all purchased deposits, such amount to be paid to the Rehabilitator for the benefit of the
rehabilitation estate of Gateway, with a tentative closing date in March of 2020. The Company anticipates that Buckle will engage
the MGA and certain other subsidiaries of the Company to provide services to Buckle and that Buckle will lease space at the
Company’s headquarters and its Melville, NY office.
The transaction will be subject to court approval and a bid process established by the Rehabilitator and approved by the court, and
there can be no assurance that the transaction will be consummated on the terms described herein or at all.
The Company’s numerous Current Reports on Form 8-K and press releases since December 31, 2018 provide more detailed
disclosures regarding the above events.
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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.
Risks Related to 2019 Developments
Continued delays in the filing of our periodic reports with the SEC could result in the delisting of our
common stock, which would materially and adversely affect our stock price, financial condition and/
or results of operations.
As a result of the need for additional time to complete our year-end audit process for the fiscal year ended December 31, 2018,
we were unable to file this Annual Report on Form 10-K with the SEC on a timely basis. We also have yet to file our Quarterly
Reports on Form 10-Q for the quarters ended March 31, 2019, June 30, 2019 and September 30, 2019, as we could not file such
Quarterly Reports until this Annual Report on Form 10-K was filed. As a result, we remain non-compliant with Nasdaq Listing
Rule 5250(c)(1) requiring the timely filing of periodic reports, which may result in the delisting of our common stock should we
fail to file such reports within a time-frame acceptable to Nasdaq. In addition, the Company is not in compliance with Nasdaq
Listing Rule 5450(a)(1), because the closing bid price of our common stock for the last 30 consecutive business days was below
the minimum bid price of $1 per share, which may result in the delisting of our common stock should we fail to regain compliance
by June 2, 2020 (the deadline set forth in the extension granted by Nasdaq). To regain compliance, the Company’s common stock
must have a closing bid price of at least $1 per share for a minimum of ten consecutive business days during the compliance period,
thus the Company may need to effect a reverse stock split to regain compliance. The Company is also not in compliance with
Nasdaq Listing Rule 5620(a) as a result of the Company’s failure to hold an annual general meeting of shareholders during 2019.
It is the Company’s intent to hold an annual general meeting of shareholders in 2020 and to fully regain compliance with all
applicable Nasdaq listing standards as soon as practicable, although there can be no assurance that it will be able to do so. Delisting
would likely have a material adverse effect on us by, among other things, reducing:
• The liquidity of our common stock;
• The market price of our common stock;
• The number of institutional and other investors that will consider investing in our common stock;
• The number of market makers in our common stock;
• The availability of information concerning the trading prices and volume of our common stock;
• The number of broker-dealers willing to execute trades in shares of our common stock;
• Our ability to access the public markets to raise debt or equity capital;
• Our ability to use our equity as consideration in any merger transaction; and
• The effectiveness of equity-based compensation plans for our employees used to attract and retain individuals important
to our operations.
Regulatory Developments
As previously disclosed, during 2019, the ASI Pool Companies were subject to an agreed order of rehabilitation with the Illinois
insurance regulator following discussions of reserve levels, and the operations of the ASI Pool Companies are currently overseen
by the statutory rehabilitator. In addition, no new business is being written by the ASI Pool Companies, certain of their state
insurance licenses have been revoked, and other states have taken or may take action to suspend or terminate the licenses of the
Insurance Companies. Therefore, the performance and financial results of the Company are more reliant on the results of AGMI.
There are cost sharing and other arrangements in place between AGMI and the Insurance Subsidiaries related to support for the
rehabilitation of the ASI Pool Companies, which are subject to regulatory approval and could be restricted in the future. In addition,
the Company agreed that should it choose to sell its MGA operations, 49% of the proceeds from any future sale of AGMI would
be provided to the ASI Pool Companies to facilitate the rehabilitation process. There can be no assurance that any portion of the
proceeds allocated to the ASI Pool Companies would be available for distribution to the Company.
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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 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 independent 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:
•
•
•
•
•
•
•
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.
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. See “Risk Factors - Risks Related to 2019 Developments - Regulatory Developments”
for certain developments with respect to the Insurance Subsidiaries subsequent to December 31, 2018.
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For the companies that we acquired or will acquire, the provisions for unpaid claims and claims
adjustment expenses may be inadequate at the time of purchase, which would result in a reduction in
our net income and might adversely affect our financial condition.
We cannot guarantee that the provisions for unpaid claims and claims adjustment expenses of the companies that we acquired are
or will be adequate. We became or will become responsible for the historical claims reserves established by the acquired company’s
management upon completion of acquisitions. While the stock purchase agreement provides for certain protections in this regard,
there can be no assurances they will be sufficient to offset any adverse development to the acquired company’s historical claims
reserves. Any unfavorable development in an acquired company’s claims reserves would reduce our net income and have an
adverse effect on our financial position to the extent it exceeds the protections provided for in the stock purchase agreement related
to each acquisition.
Our success depends on our ability to accurately price the risks we underwrite.
Our results of operations and financial condition depend on our ability to underwrite and set premium rates accurately for a wide
variety of risks. Adequate rates are necessary to generate premiums sufficient to pay claims, claims adjustment expenses and
underwriting expenses and to earn a profit. To price our products accurately, we must collect and properly analyze a substantial
amount of data; develop, test and apply appropriate pricing techniques; closely monitor and timely recognize changes in trends;
and project both severity and frequency of claims with reasonable accuracy. Our ability to undertake these efforts successfully,
and as a result price our products accurately, is subject to a number of risks and uncertainties, some of which are outside our
control, including:
•
•
•
•
•
the availability of sufficient reliable data and our ability to properly analyze available data;
the uncertainties that inherently characterize estimates and assumptions;
underlying trends or changes affecting risk and loss costs;
our selection and application of appropriate pricing techniques; and
changes in applicable legal liability standards and in the civil litigation system generally.
Consequently, we could under price 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 U.S. The producers submit business through our wholly owned subsidiary AGMI. 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. Although
underwriting controls and audit procedures are in place with the objective of providing control over this process, such procedures
may not be successful, and 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
2018, we had ceded premiums written of $86.4 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, 2018, we had an aggregate of $81.2 million of reinsurance recoverables,
of which $69.1 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
P&C 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 have a substantially volatile effect on 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
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severity of catastrophe claims in the future. It is also possible that catastrophic claims could have an impact on our investment
portfolio.
The risk models we use to quantify catastrophe exposures and risk accumulations may prove
inadequate in predicting all outcomes from potential catastrophe events.
We rely on widely accepted and industry-recognized catastrophe risk modeling, primarily in conjunction with our reinsurance
partners, to help us quantify our aggregate exposure to any one event. As with any model of physical systems, particularly those
with low frequencies of occurrence and potentially high severity of outcomes, the accuracy of the model’s predictions is largely
dependent on the accuracy and quality of the data provided in the underwriting process and the judgments of our employees and
other industry professionals. These models do not anticipate all potential perils or events that could result in a catastrophic loss to
us. Furthermore, it is often difficult for models to anticipate and incorporate events that have not been experienced during or as a
result of prior catastrophes. Accordingly, it is possible for us to be subject to events or contingencies that have not been anticipated
by our catastrophe risk models and which could have a material adverse effect on our reserves and results of operations.
Financial Risks
We are a holding company dependent on the results of operations of our subsidiaries and their ability
to pay dividends and other distributions to us.
Atlas is a holding company with no significant operations of its own and a legal entity separate and distinct from our Insurance
Subsidiaries. As a result, our only sources of income are dividends and other distributions from our 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. See
“Risk Factors - Risks Related to 2019 Developments - Regulatory Developments” for certain developments with respect to the
Insurance Subsidiaries subsequent to December 31, 2018.
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. See “Risk Factors - Risks
Related to 2019 Developments - Regulatory Developments” for certain developments with respect to the Insurance Subsidiaries
subsequent to December 31, 2018.
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 premiums written”), on all member insurers in the state on the basis of the proportionate share of the
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premiums written by member insurers in certain covered lines of business in which the impaired, insolvent or failed insurer was
engaged. Accordingly, the total amount of assessments levied on us by the states in which we are licensed to write insurance may
increase as we increase our premiums written. In addition, as a condition to the ability to conduct business in certain states (and
within the jurisdiction of some local governments), insurance companies are subject to or required to participate in various premium
or claims based insurance-related assessments, including mandatory (a/k/a “involuntary”) insurance pools, underwriting
associations, workers’ compensation second-injury funds, reinsurance funds and other state insurance facilities. Although we may
be entitled to take premium tax credit (or offsets), recover policy surcharges or include assessments in future premium rate structures
for payments we make under these facilities, the effect of these assessments and insurance-related arrangements, or changes in
them, could reduce our profitability in any given period or limit our ability to grow our business.
Market fluctuations, changes in interest rates or a need to generate liquidity could have significant
and negative effects on our investment portfolio. We may not be able to realize our investment
objectives, which could significantly reduce our net income.
We depend on income from our securities portfolio for a 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. Should the economy experience a
recession in the future, we expect price volatility of our securities to increase.
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.
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.
Sources of economic and market instability include, but are not limited to, the impact of the United Kingdom European Union
membership referendum (“Brexit”), a potential economic slowdown in Europe, China or the U.S., the impact of trade negotiations,
and reduced accommodation from the Federal Reserve and other Central Banks.
Risks from these events, or other currently known or 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 adviser 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 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 market outlook 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.
Our Insurance Subsidiaries may rely on a fronting reinsurance arrangement to market some of its insurance products. Under a
fronting reinsurance arrangement, we generally enter into a 100% quota share reinsurance agreement whereby we assume from
the ceding reinsurer substantially all of its gross liability under the policies issued by them and on behalf of us. We are generally
entitled to 100% of the net premiums received on policies reinsured, less the ceding fee to the ceding reinsurer, the commission
paid to the general agent and premium taxes on the policies. We assume and are liable for substantially all losses incurred in
connection with the risks under the reinsurance agreement, including judgments and settlements. The ceding insurance company
may require us to post substantial collateral to secure the reinsured risks. Certain trust accounts for the benefit of the ceding
insurance company and other 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,
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putting the subsidiary or subsidiaries in breach of the agreement. Effective October 1, 2019, this program started the non-renewal
process and is in run-off.
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 U.S. or globally.
From time to time, we may rely on access to financial markets as a source of liquidity for operations, acquisitions and general
corporate purposes.
The limited public float and trading volume for our shares may have an adverse impact on the share
price or make it difficult to liquidate.
Our securities are held by a relatively small number of shareholders. Future sales of substantial amounts of our shares in the public
market, or the perception that these sales could occur, may adversely impact the market price of our shares, and our shares could
be difficult to liquidate.
We do not anticipate paying any cash dividends on our common stock for the foreseeable future.
We currently intend to retain our future earnings, if any, for the foreseeable future, for working capital and other general corporate
purposes. We do not intend to pay any dividends to holders of our ordinary voting common shares. As a result, capital appreciation
in the price of our ordinary voting common shares, if any, will be the only source of gain on an investment in our ordinary voting
common shares. We have never declared or paid cash dividends on our common stock since Atlas’ inception in 2010. Any future
determination to pay dividends on our common stock will be at the discretion of our board of directors, subject to applicable laws,
and will depend on our financial condition, results of operations, capital requirements, general business conditions and other factors
that our board of directors considers relevant. In addition, the insurance laws and regulations governing our Insurance Subsidiaries
contain restrictions on the ability to pay dividends, or to make other distributions to Atlas, which may limit Atlas’ ability to pay
dividends to its common shareholders.
Unlike the holders of our ordinary voting common shares, holders of our preferred shares are entitled to dividends on a cumulative
basis whether or not declared by our board of directors, at a rate of $0.045 per preferred share per year, which must be paid or
declared and set apart before any dividend may be paid on our ordinary voting common shares. We paid $409,000 of preferred
dividends during 2016 on the preferred shares held by the former owner of Gateway. All of the preferred shares held by the former
owner of Gateway were repurchased on September 30, 2016, and therefore, no additional dividends 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. 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. During 2018, Atlas
paid $333,000 in dividends earned on the preferred shares to the former owner of Anchor, the cumulative amount to which they
were entitled through December 31, 2017, leaving no accrued or unpaid dividends.
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 (“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. Especially
in the context of rehabilitation, certain of our Insurance Subsidiaries are restricted from distributing capital to the holding company,
which could impact the ability to pay debt obligations in the future. See “Item 1A, Risk Factors - Risks Related to 2019 Developments
- Regulatory Developments” for certain developments with respect to the Insurance Subsidiaries subsequent to December 31,
2018. Although the Senior Unsecured Notes are listed on the OTC Pink Sheets, moving from Nasdaq effective October 17, 2019,
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 U.S., 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:
•
rate setting;
• RBC ratio and solvency requirements;
•
•
•
•
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;
•
•
•
•
•
•
•
•
•
•
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
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individual, group and class-action lawsuits by our policyholders and others for alleged violations of certain state laws, regulations
and rules. Each of these regulatory risks could have an adverse effect on our profitability.
As a result of our administration of Gateway’s run-off 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. See “Risk Factors - Risks Related to 2019
Developments - Regulatory Developments” for certain developments with respect to the Insurance Subsidiaries subsequent to
December 31, 2018.
Our business is subject to risks related to litigation and regulatory actions.
We may, from time to time, be subject to a variety of legal and regulatory actions relating to our current and past business operations,
including, but not limited to:
•
•
•
•
•
•
disputes over coverage or claims adjudication, including claims alleging that we or our Insurance Subsidiaries have acted
in bad faith in the administration of claims by our policyholders;
disputes regarding sales practices, disclosure, policy issuance and cancellation, premium refunds, licensing, regulatory
compliance, 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
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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.
From time to time, the Company is subject to governmental or administrative investigations and proceedings. 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 condition 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 U.S. 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, reputation 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.
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The requirements of being a U.S. public company may strain our resources and divert management’s
attention.
As a U.S. 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 now that 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 U.S. 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.
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
U.S., 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.
The level of earned premiums generated by our business impacts profitability, especially in the near-
term. We may experience difficulty in managing historic and future growth, which could adversely
affect our results of operations and financial condition.
Maintaining and/or increasing our current level of earned premiums would require geographic expansion and increased 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. Alternatively,
a reduction in earned premiums creates potential challenges in terms of expense ratios and other factors that impact profit.
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The integration and management of acquired books of business, acquired businesses and other growth initiatives involve numerous
risks that could adversely affect our profitability, and are contingent on many factors, including:
•
expanding our financial, operational and management information systems;
• managing our relationships with independent agents, brokers and legacy program managers, including maintaining
adequate controls;
•
expanding our executive management and the infrastructure required to effectively control our growth;
• maintaining ratings of our Insurance Subsidiaries;
•
•
•
•
increasing the statutory capital of our Insurance Subsidiaries to support growth in written premiums;
accurately setting claims provisions for new business where historical underwriting experience may not be available;
obtaining regulatory approval for appropriate premium rates where applicable; and
obtaining the required regulatory approvals to offer additional insurance products or to expand into additional states or
other jurisdictions.
Our failure to grow our earned premiums or to manage our growth effectively could have a material adverse effect on our business,
financial condition or results of operations.
Engaging in acquisitions involves risks, and if we are unable to effectively manage these risks, our
business may be materially harmed.
Acquisitions of similar insurance providers have been a material component of our growth strategy. From time to time, subject to
availability of suitable opportunities, market conditions and capital needs or support, we have and, in the future, 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 or other type of business combination, 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:
•
•
•
•
•
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.
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Provisions in our organizational documents, corporate laws and the insurance laws of Illinois, New
York and other states could impede an attempt to replace or remove management or directors or
prevent or delay a merger or sale, which could diminish the value of our shares.
Our Memorandum of Association, Articles of Association and Code of Regulations and the corporate laws and the insurance laws
of various states contain provisions that could impede an attempt to replace or remove management or directors or prevent the
sale of the Insurance Subsidiaries that shareholders might consider to be in their best interests. These provisions include, among
others:
•
•
•
•
requiring a vote of holders of 5% of the ordinary voting common shares to call a special meeting of shareholders;
requiring a two-thirds vote to amend the Articles of Association;
requiring the affirmative vote of a majority of the voting power of shares represented at a special meeting of shareholders;
and
statutory requirements prohibiting a merger, consolidation, combination or majority share acquisition between Insurance
Subsidiaries and an interested shareholder or an affiliate of an interested shareholder without regulatory approval.
These provisions may prevent shareholders from receiving the benefit of any premium over the market price of our shares offered
by a bidder in a potential takeover and may adversely affect the prevailing market price of our shares if they are viewed as
discouraging takeover attempts.
In addition, insurance regulatory provisions may delay, defer or prevent a takeover attempt that shareholders may consider in their
best interest. For example, under applicable state statutes, subject to limited exceptions, no person or entity may, directly or
indirectly, acquire control of a domestic insurer without the prior approval of the state insurance regulator. Under the insurance
laws, “control” (including the terms “controlling,” “controlled by” and “under common control with”) is generally defined to
include acquisition of a certain percentage or more of an insurer’s voting securities (such as 10% or more under Illinois, 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.
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
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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.
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.
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If we are unable to maintain our claims-paying ratings or negotiate fronting reinsurance arrangements,
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 June 15, 2018, A.M. Best downgraded the financial strength ratings of American Country, American Service and Gateway to
“C” and Global Liberty to “C++.” On March 20, 2019, A.M. Best affirmed rating of the ASI Pool Companies and downgraded
Global Liberty to “C+”. Concurrently A.M. Best withdrew these ratings as the Insurance Subsidiaries requested to no longer
participate in A.M. Best’s interactive rating process. Most of our business is not sensitive to the A.M. Best rating. However, there
is a limited amount of business that, due to airport or port authority requirements, require an A.M. Best rating in excess of those
assigned to our companies. We have endeavored to mitigate the impact of those requirements through arrangements with unaffiliated
insurance and reinsurance companies with a higher rating, but there can be no assurance that this will be successful. If our companies
fail to maintain the existing or negotiate a new fronting reinsurance arrangement, it could result in a substantial loss of business
to other competitors with higher ratings, causing premiums and earnings to decrease. Futhermore, our withdrawal from A.M.
Best’s rating process may inhibit our ability to secure new business if potential customers do not want to engage an insurance
company without an A.M. Best rating.
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. Our New York “excess taxi program” 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.
Our ability to manage our exposure to underwriting risks depends on the availability and cost of
reinsurance coverage.
Reinsurance is the practice of transferring part of an insurance company’s liability and premium under an insurance policy to
another insurance company. We use reinsurance arrangements to limit and manage the amount of risk we retain, to stabilize our
underwriting results and to increase our underwriting capacity. The availability and cost of reinsurance are subject to current
market conditions and may vary significantly over time. Any decrease in the amount of our reinsurance will increase our risk of
loss. We may be unable to maintain our desired reinsurance coverage or to obtain other reinsurance coverage in adequate amounts
and at favorable rates. If we are unable to renew our expiring coverage or obtain new coverage, it will be more difficult for us to
manage our underwriting risks and operate our business profitably.
It is also possible that the losses we experience on risks that we have reinsured will exceed the coverage limits on the reinsurance.
If the amount of our reinsurance coverage is insufficient, our insurance losses could increase substantially.
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
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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.
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.
Net Operating Loss Carryforward as of December 31, 2018 by Expiry
($ in ‘000s)
Year of Occurrence
2001
2002
2006
2007
2008
2009
2010
2011
2012
2015
2017
2018
2018
Total
Year of Expiration
2021
2022
2026
2027
2028
2029
2030
2031
2032
2035
2037
2038
Indefinite
Amount
5,007
4,317
7,825
5,131
1,949
1,949
1,949
4,166
9,236
1
27,313
47,653
4,106
120,602
$
$
NOLs and other carryforwards generated in 2017 and 2018 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.
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Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Our corporate headquarters is located at 953 American Lane, 3rd Floor, 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 Schaumburg facility will be sufficient space to support the growth and expansion of
our business.
We also lease four additional office spaces to support regional underwriting, claims, and corporate and other operations. The St.
Louis, Missouri lease is 4,375 square feet of office space and effective through June 2021. The Manhattan, New York lease is
1,796 square feet of office space and effective through February 2020. 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 March 2022. The Scottsdale,
Arizona lease is 2,107 square feet of office space and effective through November 2020.
We own one property in Alabama, which comprises approximately 13.6 acres of land and is currently held for sale.
Item 3. Legal Proceedings
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.). Plaintiffs filed an
amended complaint on July 30, 2018. Defendants filed a motion to dismiss, which was fully briefed as of December 12, 2018.
On April 1, 2019, before the Court had addressed defendants’ pending motion to dismiss, the plaintiffs filed a motion for leave to
amend their complaint to include allegations relating to the Company’s press release dated March 4, 2019 disclosing a further
increase in its loss reserves. The Court subsequently granted plaintiffs leave to file a second amended complaint, which plaintiffs
filed on April 9, 2019. On June 5, 2019, before the defendants had responded to the second amended complaint, plaintiffs filed
a motion for leave to file a third amended complaint to add allegations relating to developments occurring after the Company’s
March 4, 2019 press release. The Court subsequently granted the motion for leave, and plaintiffs filed the third amended complaint
on June 12, 2019. In the third amended complaint, the plaintiffs asserts claims on behalf of a putative class consisting of purchasers
of the Company’s securities between February 22, 2017 and April 30, 2019. 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. Defendants filed a motion to dismiss the amended complaint on July
17, 2019, and briefing on that motion was completed on October 31, 2019. The motion remains pending before the Court. Under
the federal securities laws, discovery and other proceedings automatically will be stayed during the pendency of the motion to
dismiss.
In addition, in connection with our operations, we are, from time to time, named as defendants in actions for damages and costs
allegedly sustained by plaintiffs in connection with claims against the insurance policies we underwrite. 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 the Company does not believe that it will incur any significant additional loss or
expense in connection with such actions.
Item 4. Mine Safety Disclosures
Not applicable.
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Part II
Item 5. Market for Registrant’s Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity Securities
As of March 8, 2019, there were approximately 1755 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 8, 2019, there were 11,942,812 ordinary voting common shares and no restricted
voting common shares outstanding.
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 could have been 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 Share Repurchase Program was not extended. The Company’s decisions around the timing, volume, and nature of share
repurchases, and the ultimate amount of shares repurchased, was dependent on market conditions, applicable securities laws, and
other factors. The share repurchase program and the Board’s authorization of the program could have been modified, suspended,
or discontinued at any time. During 2018, 255,505 shares were repurchased under this Share Repurchase Program.
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 (American Country, American Service, Gateway
and Global Liberty) that limit the Company’s ability to pay dividends. We did not pay any dividends to our common shareholders
during 2017, 2018, 2019, or to date in 2020 and we have no current plans to pay dividends to our common shareholders. See ‘Part
II, Item 7, Management’s Discussion and Analysis, Liquidity and Capital Resources’ for further discussion of regulatory dividend
restrictions.
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Performance Graph
The following graph shows the cumulative five-year total return on $100 invested on December 31, 2013 in (i) Atlas common
stock, (ii) the Russell 2000 Index and (iii) the S&P Global Financial U.S. Insurance P&C Index, in each case with dividends
reinvested. The comparisons in the graph below are based on historical data and are not intended to forecast the possible future
performance of Atlas common stock.
Company/Index
Atlas Financial Holdings
Russel 2000 Index
S&P Global U.S. Insurance P&C Index
12/31/13
12/31/14
12/31/15
12/31/16
12/31/17
12/31/18
$
$
$
100.00 $
100.00 $
100.00 $
110.87 $
104.89 $
114.85 $
135.19 $
100.26 $
118.80 $
122.62 $
121.63 $
140.21 $
139.61 $
139.44 $
160.30 $
54.96
124.09
154.12
Equity Compensation Plan Information
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
rights (b)3
Number of securities remaining
available for future issuance
under equity compensation plans
(excluding securities reflected in
column (a))4 (c)
402,195
—
791,502
Equity compensation
plans approved by
security holders1
1 The Company has no equity compensation plans that were not approved by its security holders.
2 Sum of 402,195 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 2018. No repurchases of equity securities were made during the three month period
ended December 31, 2018.
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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.”
($ 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
Cash and invested assets
Total assets
Notes payable
Total liabilities
Mezzanine equity
$
$
$
$
2018
218,218
221,766
$
2017
215,771
221,975
$
2016
171,058
177,579
(80,012)
(38,810)
2,365
(6.67) $
(3.22) $
0.20
(6.67) $
129.0%
(3.22) $
122.5%
0.19
102.9%
$
200,610
470,338
24,255
464,639
—
$
243,483
482,503
24,031
391,858
—
224,779
423,577
19,187
296,235
—
$
$
$
$
$
$
$
$
2015
152,064
156,851
14,154
1.18
1.13
88.2%
233,304
411,292
17,219
281,670
6,941
2014
98,124
101,618
17,608
1.61
1.56
91.4%
179,994
283,911
—
174,512
2,000
Total shareholders’ equity
Common and restricted shares issued
Common and restricted shares outstanding
5,699
12,192,475
11,936,970
90,645
12,164,041
12,164,041
127,342
12,023,295
12,023,295
122,681
12,015,888
12,015,888
107,399
11,771,586
11,771,586
Book value per common share outstanding
$
0.48
$
7.42
$
10.54
$
10.15
$
9.08
These results include the acquisition of Anchor on March 11, 2015, which will affect the comparability of the data. See ‘Part II,
Item 8, Note 3, Goodwill and Intangible Assets,’ in the Notes to Consolidated Financial Statements for further discussion of the
impact of this acquisition.
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Item 7. Management’s Discussion and Analysis (“MD&A”) of
Results of Operations and Financial Condition
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 report. 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. All amounts are in U.S. dollars,
except for amounts preceded by “C” as Canadian dollars, share and per share amounts.
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 ‘Part I, Item 1A, 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,” “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 (American Country, American Service, Gateway and Global Liberty) in conjunction with
our wholly owned managing general agency, AGMI. This sector includes taxi cabs, non-emergency para-transit, limousine, livery,
including certain transportation network companies (“TNCs”) 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.
During 2018, our Insurance Subsidiaries were licensed to write property and casualty (“P&C”) insurance in 49 states and the
District of Columbia in the United States (“U.S.”). During the 2018 fiscal year, the Insurance Subsidiaries distributed their products
through a network of independent retail agents, and actively wrote insurance in 42 states and the District of Columbia. 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 our 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. See ‘Item 1, 2019 Developments’ and “Risk Factors - Risk Related to 2019 Developments - Regulatory
Developments” for certain developments with respect to the Company and the Insurance Subsidiaries subsequent to December
31, 2018.
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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.
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. Data compiled by S&P Global also indicates that in 2018 the total market for commercial automobile liability
insurance was approximately $40.4 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 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.
Our target market has changed in recent years as a result of TNC and other trends related to mobility. The significant expansion
of TNC has resulted in a reduction in taxi vehicles available to insure; however, it has increased the number of livery operators.
Market research also suggests that the combined addressable markets between traditional taxi, livery and TNC companies expanded
during this period.
Other Lines of Business
Other lines of business is comprised of our surety program, Gateway’s truck and workers’ compensation programs, American
Service’s non-standard personal lines business, Atlas’ workers’ compensation related to taxi, other liability, Global Liberty’s
homeowners program and assigned risk pool business. All of the other lines of business are currently in run-off except for other
liability 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 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.
Global Liberty’s homeowners program, which is substantially reinsured, was placed into run-off prior to Atlas’ acquisition.There
is a relatively small book of business, which is substantially reinsured, that is still in run-off.
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 was 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.
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Table of Contents
II. Application of Critical Accounting Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America
(“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; 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 ‘Part II, Item 8, Note 1, Nature of
Operations and Basis of Presentation,’ in the Notes to Consolidated Financial Statements.
Fair Value of Financial Assets
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 Securities and Exchange Commission (“SEC”) registered investment adviser
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 adviser 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 and 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, 2018, 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.
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Table of Contents
Impairment of Financial Assets
Atlas assesses, on a quarterly basis, whether there is objective evidence that a financial asset or group of financial assets is impaired.
An investment is considered impaired when the fair value of the investment is less than its cost or amortized cost. When an
investment is impaired, the Company must make a determination as to whether the impairment is other-than-temporary.
Under U.S. GAAP, with respect to an investment in an impaired debt security, other-than-temporary impairment (“OTTI”) occurs
if (a) there is intent to sell the debt security, (b) it is more likely than not it will be required to sell the debt security before its
anticipated recovery, or (c) it is probable that all amounts due will be unable to be collected such that the entire cost basis of the
security will not be recovered. If Atlas intends to sell the debt security, or will more likely than not be required to sell the debt
security before the anticipated recovery, a loss in the entire amount of the impairment is reflected in net realized gains (losses) on
investments in the consolidated statements of (loss) income and comprehensive (loss) income. If Atlas determines that it is probable
it will be unable to collect all amounts and Atlas has no intent to sell the debt security, a credit loss is recognized in net realized
gains (losses) on investments in the consolidated statements of (loss) income and comprehensive (loss) income to the extent that
the fair value is less than the amortized cost basis; any difference between fair value and the new amortized cost basis (net of the
credit loss) is reflected in accumulated other comprehensive (loss) income, 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.
See ‘Part II, Item 8, Note 5, Investments’ in the Notes to Consolidated Financial Statements for further discussion of OTTI.
Deferred Policy Acquisition Costs
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 (“DPAC”)
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 DPAC. Atlas’ DPAC are reported net of deferred ceding commissions.
Claims Liabilities
The provision for unpaid claim and claim adjustment expenses represent the estimated liabilities for reported claims, plus those
incurred but not yet reported (“IBNR”), and the related estimated claim adjustment expenses. Unpaid claim 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 claim and claim 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 claim and claim
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.
Management utilizes independent actuaries to provide guidance for the establishment of the Company’s liabilities for unpaid claim,
claim adjustment expenses, and IBNR. In establishing the ultimate claims liability, actuarial judgment is relied upon in order to
make appropriate assumptions to determine a best estimate of ultimate claim liabilities. There are inherent uncertainties associated
with this estimation process, especially when a company is undergoing changes in its claim settlement practices or when behaviors
of policyholders are influenced by external factors and/or market dynamics. As an example, during calendar year 2016, the
Company introduced predictive analytics in addition to making significant efforts to reduce claim tail risk by accelerating claim
closure rates. These changes have had a material impact on claim development as described further in ‘Part II, Item 8, Note 11,
Claims Liabilities’ in the Notes to Consolidated Financial Statements.
At any given point in time, the recorded claim liabilities represent our best estimate of the ultimate settlement and administration
cost of insured claims incurred and unpaid. Since the process of estimating claim and claim adjustment liabilities requires significant
judgment due to a number of variables, such as fluctuations in inflation, judicial decisions, legislative changes and changes in
34
Table of Contents
claim handling procedures, the ultimate liability may exceed or be less than these estimates. Claim liabilities are revised as
additional information becomes available, and adjustments, if any, are reflected in earnings in the periods in which they are
determined.
In selecting development factors and averages described in ‘Part II, Item 8, Note 11, Claims Liabilities’ in the Notes to Consolidated
Financial Statements, due consideration is given to how the historical experience patterns change from one year to the next over
the course of several consecutive years of recent history. Predictions surrounding these patterns drive the estimates that are
produced by each method and are based on statistical techniques that follow standard actuarial practices.
In compliance with annual statutory reporting requirements, our appointed independent actuaries provide a Statement of Actuarial
Opinion (“SAO”) indicating that carried claim liabilities recorded at each annual balance sheet date make a reasonable provision
for the Insurance Subsidiaries’ claim liabilities obligations under the term of contracts and agreements with our policyholders.
Recorded claim liabilities are compared to the indicated range provided in the actuary’s report accompanying the SAO. At
December 31, 2018, the recorded amount for claim liabilities falls within the range determined by the appointed independent
actuaries.
The methods employed by actuaries include a range of estimated claim liabilities, each reflecting a level of uncertainty. Projections
of claim liabilities are subject to potentially large variability in the estimation process since the ultimate disposition of claims
incurred prior to the financial statement date, whether reported or not, is subject to the outcome of events that have not yet occurred.
Examples of these events include jury decisions, court interpretations, legislative changes, and economic conditions. Any estimate
of future costs is subject to the inherent limitation on one’s ability to predict the aggregate course of future events. It should
therefore be expected that the actual emergence of claim liabilities will vary, perhaps materially, from any estimate.
We believe our claim liability reserves are appropriately established based on available methodology, facts, technology, laws and
regulations. We calculate and record a single best reserve estimate, in conformance with generally accepted actuarial standards,
for reported and unreported claim liabilities.
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”).
DTAs 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. DTAs and
DTLs 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 DTAs. Atlas performs an assessment of recoverability of its DTAs on a quarterly basis. If, based on the weight
of available evidence, it is more likely than not the DTAs will not be realized, a valuation allowance is recognized in income in
the period that such determination is made. As of December 31, 2018, Atlas has a valuation allowance of $29.4 million recorded
against the Company’s DTAs. The Company had no valuation allowance as of December 31, 2017.
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.
35
Table of Contents
III. Operating Results
Highlights
• Gross premiums written were $286.6 million in 2018, an increase of 3.9% from $276.0 million in 2017.
•
In-force premium was $286.1 million as of December 31, 2018, an increase of $17.6 million from $268.5 million as
of December 31, 2017.
• Total revenue was $221.8 million in 2018 compared to $222.0 million in 2017.
• Underwriting loss was $63.2 million in 2018 compared to an underwriting loss of $48.5 million in 2017.
• The combined ratio was 129.0% in 2018, an increase of 6.5 points, compared to 122.5% in 2017.
• Net loss was $80.0 million, or $6.67 loss per common share diluted, in 2018 compared to a net loss of $38.8 million,
or $3.22 loss per common share diluted, in 2017, representing a decrease in earnings per common share diluted of
$3.45.
• Book value per common share decreased $6.94 to $0.48 as of December 31, 2018 from $7.42 as of December 31,
2017.
• Return on equity was a negative 166.1% in 2018 as compared to a negative 35.6% in 2017.
36
Year ended December 31,
2017
275,961
215,771
203,873
$
$
2018
286,614
218,218
220,662
26,115
1,201
(520)
(225)
34,139
60,710
(63,154)
2,647
(2,726)
(63,233)
(1,869)
(198)
1,099
(64,201)
15,811
(80,012)
$
27,885
1,176
—
806
30,548
60,415
(48,517)
4,897
—
(43,620)
(1,840)
—
1,307
(44,153)
(5,343)
(38,810)
$
2016
225,095
171,058
134,746
18,803
1,552
(6,297)
(746)
27,983
41,295
(4,983)
4,824
—
(159)
(1,026)
—
1,697
512
(2,134)
2,646
101.1 %
94.5 %
78.8 %
12.0
0.6
12.9
0.5
(0.2)
(0.1)
15.6
27.9
129.0 %
(6.67)
0.48
(166.1) %
$
$
—
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 %
Table of Contents
Consolidated Performance
($ in ‘000s, except per share data)
Gross premiums written
Net premiums earned
Net claims incurred
Underwriting expense:
Acquisition costs
Share-based compensation
Expenses recovered related to acquisitions and stock purchase
agreements
DPAC amortization
Other underwriting expenses
Total underwriting expenses
Underwriting loss
Net investment income
Goodwill impairment loss
Loss from operating activities, before income taxes
Interest expense
Loss from change in fair value of equity securities
Realized gains and other income
Net (loss) income before income taxes
Income tax expense (benefit)
Net (loss) income
Key Financial Ratios1
Loss ratio
Underwriting expense ratio:
Acquisition cost ratio
Share-based compensation ratio
Expenses recovered related to acquisitions and stock purchase
agreements ratio
DPAC amortization ratio
Other underwriting expense ratio
Total underwriting expense ratio
Combined ratio
(Loss) earnings per common share diluted
Book value per common share
Return on equity
1 Ratios are calculated as a percentage of net premiums earned.
$
$
$
$
37
Table of Contents
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 with the objective of generating underwriting profit for the insurance companies
we own. The Company’s philosophy is to prioritize improvement in underwriting margin over top line growth. As with all P&C
insurance companies, the impact of price changes and other underwriting activities is reflected in our financial results over time.
Underwriting 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 to maintain 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 and, beginning in 2016, the use of claim related predictive analytics. 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, as well as estimation of potential future trends or changes. While the Company relies on
independent actuarial professionals and internal controls in this regard, the estimation of reserves is inherently uncertain. We are
committed to continuous improvement in this area of our business.
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, changes in premium writings may impact
our operating scale and operating expense ratios.
Gross Premiums Written
Gross Premiums Written by Line of Business
($ in ‘000s)
Year ended December 31,
2017
2016
2018 vs. 2017
2017 vs. 2016
% Change
2018
Commercial automobile
Other
Total
$
$
283,907 $
2,707
286,614 $
274,705 $
1,256
275,961 $
223,801
1,294
225,095
3.3 %
115.5
3.9%
22.7 %
(3.0)
22.6%
Gross premiums written were $286.6 million in 2018 compared to $276.0 million in 2017, representing an increase of 3.9%. The
increase is primarily due to growth in our para-transit and livery/TNC lines, primarily in New York and California, partially offset
by a decrease in taxi gross premiums written. The decrease in taxi business resulted from the non-renewal of one large Illinois
account and the loss of airport business in certain states due to the lowering of the A.M. Best ratings of American Country, American
Service and Gateway, or collectively, the “ASI Pool Subsidiaries.”
Gross premiums written were $276.0 million in 2017 compared to $225.1 million in 2016, representing a 22.6% increase. The
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 on our core lines represented approximately 31.6%, 40.7% and 33.9% of the total gross premiums written
in 2018, 2017 and 2016, respectively. The decrease in new business premium growth from 2017 to 2018 occurred due to smaller
fleet size in our livery/TNC business and less taxi business. The increase in new business growth from 2016 to 2017 primarily
resulted from one large New York livery/TNC account written and growth in all products in the states of California and New Jersey.
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Table of Contents
In-force premium was $286.1 million, $268.5 million and $224.6 million as of December 31, 2018, 2017 and 2016, respectively.
Gross unearned premium reserves were $134.0 million and $128.0 million as of December 31, 2018 and 2017, respectively. The
increase in gross unearned premium reserves and in-force premium since December, 31, 2017 primarily resulted from growth in
our para-transit and livery/TNC lines during the second half of 2018. Gross unearned premium reserves were $128.0 million and
$113.2 million as of December 31, 2017 and 2016, respectively. The increase in gross unearned premium reserves and in-force
premium since December 31, 2016 primarily resulted from growth in the states of California, New Jersey and New York, offset
by a reduction in business in the states of Louisiana, Michigan and Minnesota.
Geographic Concentration
Gross Premiums Written by State
($ in ‘000s)
New York
California
New Jersey
Illinois
Virginia
Louisiana
Ohio
Texas
Nevada
Minnesota
Other
Total
2018
Year ended December 31,
2017
2016
$
$
110,031
46,566
12,465
11,599
10,009
7,526
7,335
7,045
5,947
5,862
62,229
286,614
38.4 % $
16.2
4.3
4.0
3.5
2.6
2.6
2.5
2.1
2.0
21.8
100.0% $
99,374
42,165
11,090
15,664
8,704
6,140
7,204
8,511
6,449
6,453
64,207
275,961
36.0 % $
15.3
4.0
5.7
3.2
2.2
2.6
3.1
2.3
2.3
23.3
100.0% $
69,737
29,784
4,881
12,398
7,940
10,337
5,942
7,881
7,966
9,542
58,687
225,095
31.0 %
13.2
2.2
5.5
3.5
4.6
2.6
3.5
3.5
4.3
26.1
100.0%
As illustrated by the table above, 38.4%, 36.0% and 31.0% of Atlas’ gross premiums written in 2018, 2017 and 2016, respectively,
came from New York. The five states currently producing the most premium volume accounted for 66.4% of gross premiums
written in 2018, as compared to 64.2% and 55.4% in 2017 and 2016, respectively. In 2018, the increase in New York gross premiums
written came from growth in the livery/TNC line, and the increase in California gross premiums written resulted from growth in
all products. In 2017, approximately 62.5% of the increase in New York gross premiums written came from one new large limousine
fleet account.
Ceded Premiums Written
Ceded premiums written is equal to premiums 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. This Excess of Loss reinsurance is primarily secured through General Reinsurance Corporation (“Gen
Re”), a subsidiary of Berkshire Hathaway, Inc. Atlas also purchases reinsurance from Gen Re 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 the
ASI Pool Subsidiaries. The Quota Share 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. Effective April 1, 2018, the Quota Share cession rate was increased
to 30%. The Quota Share provides the Company with financial flexibility to manage expected growth and the timing of potential
future capital raising activities. Global Liberty has 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 Global Quota Share remained at 25%
for 2018, 2017 and 2016.
Ceded premiums written increased 92.8% to $86.4 million in 2018 compared to $44.8 million in 2017, primarily due to the increase
in the Quota Share cession rate. Ceded premiums written decreased 0.5% to $44.8 million in 2017 compared to $45.0 million in
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.
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Table of Contents
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 totaled $200.2 million in 2018, a decrease of 13.4% from $231.1 million in 2017,
following an increase of 28.4% in 2017 from $180.1 million in 2016. The 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 totaled $218.2 million in 2018, an
increase of 1.1% compared to $215.8 million in 2017, following an increase of 26.1% in 2017 compared to $171.1 million in 2016.
The changes are attributed to the combined effects of the reasons cited in the ‘Gross Premiums Written’ and ‘Ceded Premiums
Written’ sections above.
Net Claims Incurred
The loss ratio relating to the net claims incurred was 101.1%, 94.5% and 78.8 % in 2018, 2017 and 2016, respectively. The loss
ratio increase in 2018 was primarily the result of the reserve strengthening on prior accident years between 2013 and 2017, which
created a 6.6% increase in the loss ratio for 2018. The loss ratio increase in 2017 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 the loss ratio in 2017.
We experienced unfavorable reserve development of $82.7 million, $75.4 million and $32.6 million in 2018, 2017 and 2016,
respectively, which is reported by accident year and line of business in the tables below.
Reserve Development for the Years Ended December 31,
2018:
Year-end 2018 reserve estimates for the Insurance Subsidiaries were strengthened to the high point of the actuarial range established
by the outside independent actuaries for each entity based on December 31, 2018 data, claim settlement activities, and other factors
evaluated subsequent to the receipt of the 2018 actuarial opinions. While the Company believes that the changes made to its claim
process will result in better outcomes than would have otherwise been the case, uncertainty regarding the ultimate outcome exists,
and it cannot be assumed that reserve estimates will be adequate. Primarily as a result of regulatory concerns regarding reserve
levels, the ASI Pool Companies were placed into rehabilitation in 2019. See ‘Item 1, 2019 Developments’ and “Item 1A, Risk
Factors - Risks Related to 2019 Developments - Regulatory Developments” for certain developments with respect to the Company
and the Insurance Subsidiaries subsequent to December 31, 2018. Incremental claim outcomes and other factors could result in
future adjustments to reserves and reserve estimates.
2017:
• Atlas identified that claim expenses in Michigan were significantly outpacing other states and took a significant charge
in 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 was 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, 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.
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2016:
• The unfavorable development was 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 in 2016.
• Michigan commercial automobile claims accounted for approximately 62.5% of this $23.2 million development.
•
Pre-acquisition Global Liberty claims reserve development was $7.9 million in 2016.
• The remaining unfavorable prior year development of $1.5 million in 2016 is attributable to assigned risk pools and run-
off of non-core business.
Atlas intends to only write its products in areas where it believes the Company can generate an above average underwriting profit.
As a specialty insurer, Atlas puts a priority on addressing changes in our market in a nimble way. Despite industry challenges that
have impacted our results in recent years, Atlas enhanced and initiated numerous underwriting and claim related processes designed
to leverage our experience in the specialty light commercial auto sector, including the elevated use of predictive analytics. We
have proactively compressed settlement time, particularly with respect to larger claims, providing earlier visibility into potentially
changing claim trends. Atlas endeavored to maintain operating efficiency and improve loss ratios through appropriate underwriting
and pricing, disciplined claims handling, as well as further leveraging the investments it has made in predictive analytics. However,
the impact of such improvement will only be recognized if positive results are reflected in future loss settlements. In the meantime,
overall reserve levels are being set based on the estimates provided by the Insurance Subsidiaries’ outside independent actuaries
and include strengthening related to prior accident years. Under the MGA focused strategy implemented in 2019, the Company
expects to create value for its stakeholders through partnerships with unrelated risk bearing insurers and reinsurers.
Claims and Claims Adjustment Expenses Incurred, Net of Reinsurance
($ in ‘000s)
Accident Year
Commercial Auto Liability
Other
Year ended December 31, 2018
Total
2013 and prior
2014
2015
2016
2017
2018
Total
2012 and prior
2013
2014
2015
2016
2017
Total
2011 and prior
2012
2013
2014
2015
2016
Total
$
$
$
$
$
$
7,390 $
8,349
26,642
17,594
21,572
123,017
204,564 $
(69) $
352
(600)
32
1,484
14,899
16,098 $
Year ended December 31, 2017
3,402 $
9,209
23,037
30,025
7,693
114,531
187,897 $
(456) $
30
603
1,020
834
13,945
15,976 $
Year ended December 31, 2016
1,323 $
101
131
148
408
11,420
13,531 $
3,374 $
4,348
10,764
16,946
(4,930)
90,713
121,215 $
41
7,321
8,701
26,042
17,626
23,056
137,916
220,662
2,946
9,239
23,640
31,045
8,527
128,476
203,873
4,697
4,449
10,895
17,094
(4,522)
102,133
134,746
Table of Contents
Acquisition Costs
Acquisition costs represent commissions and taxes incurred on net premiums earned, offset by ceding commission on business
reinsured. Acquisition costs were $26.1 million, $27.9 million and $18.8 million in 2018, 2017 and 2016, respectively, representing
12.0%, 12.9% and 11.0% of net premiums earned, respectively.
Acquisition Cost Impact on the Combined Ratio
($ in ‘000s, percentages to net premiums earned)
2018
Year ended December 31,
2017
2016
Net premiums earned
Gross commissions incurred excluding
profit sharing
Gross profit sharing commissions incurred
Premium and other taxes incurred
Total gross commissions and taxes
incurred
Ceded commissions incurred excluding
profit sharing
Ceded profit sharing commissions incurred
Total ceded commissions incurred
Total
$
218,218
100.0 % $
215,771
100.0 % $
171,058
100.0 %
30,599
1,917
8,117
40,633
14.0
0.9
3.7
18.6
28,416
3,458
7,315
39,189
13.2
1.6
3.4
18.2
21,993
2,618
6,257
30,868
(14,976)
458
(14,518)
26,115
$
(6.8)
0.2
(6.6)
12.0% $
(9,447)
(1,857)
(11,304)
27,885
(4.4)
(0.9)
(5.3)
12.9% $
(10,966)
(1,099)
(12,065)
18,803
12.9
1.5
3.6
18.0
(6.4)
(0.6)
(7.0)
11.0%
Gross commissions incurred excluding profit sharing commissions increased by $2.2 million in 2018 compared to 2017. The
increase resulted from higher than average acquisition costs on reinsurance business assumed, partially offset by certain TNC
business underwritten at zero commissions. Gross profit sharing commissions incurred decreased by $1.5 million in 2018 compared
to 2017, primarily as a result of fewer agents being eligible for profit sharing commissions. Gross profit sharing commissions are
awarded based on the combination of developed loss experience and premium growth. Premium and other taxes incurred increased
by $802,000 in 2018 compared to 2017 as a result of premium growth in jurisdictions with higher premium tax rates, offset by
attrition in states with lower rates.
Gross commissions incurred excluding profit sharing commissions increased by $6.4 million in 2017 compared to 2016. The
increase resulted from premium growth in business where higher commission rates applied. Gross profit sharing commissions
incurred increased by $840,000 in 2017 compared to 2016 primarily as a result of new agents becoming eligible for profit sharing
commissions and premium growth. Premium and other taxes incurred increased by $1.1 million in 2017 compared to 2016 as a
result of premium growth.
Ceded commissions incurred excluding profit sharing commissions increased by $5.5 million in 2018 compared to 2017, primarily
due to the increase in the Quota Share cession rate. Ceded profit sharing commissions incurred decreased by $2.3 million in 2018
compared to 2017. Ceded profit sharing commissions are based on loss experience. The decrease in ceded profit sharing commissions
resulted from unfavorable loss ratios on the Quota Share and Global Quota Share.
Ceded commissions incurred excluding profit sharing commissions decreased by $1.5 million in 2017 compared to 2016 primarily
due to the decrease in ceded premiums written for the Quota Share. Ceded profit sharing commissions incurred increased by
$758,000 in 2017 compared to 2016. The increase in ceded profit sharing 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.
Other Underwriting Expenses
The other underwriting expense ratio (including share-based compensation expenses and expenses incurred related to stock purchase
agreements) was 16.0%, 15.1% and 13.1% in 2018, 2017 and 2016, respectively.
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Table of Contents
2018 vs. 2017:
• Other underwriting expenses increased by approximately $2.1 million over the prior year period.
• Depreciation, leasehold improvement amortization and facility costs increased by $599,000 compared to the prior year
period because Atlas’ new headquarters building operated for a full year in 2018.
•
Salary, payroll taxes and employee benefit costs increased by $0.1 million.
• DPAC amortization decreased by $1.0 million compared to the prior year period due to an increase in the percentage
applied to deferrable expenses.
• Expenses recovered pursuant to stock purchase agreements were $520,000. During 2017, there were no expenses recovered
pursuant to stock purchase agreements.
• Maintenance costs related to Atlas’ enterprise policy management software increased by approximately $1.0 million.
•
Professional fees increased by $1.1 million primarily due to an increase in legal fees.
• Bank fees increased by $952,000 over the prior year period due to an increase in charges related to processing customer
payments.
2017 vs. 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 compared to the prior year period.
•
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.
• There were no expenses recovered pursuant to stock purchase agreements. During 2016, there were $6.3 million in
expenses recovered pursuant to stock purchase agreements.
• The termination of Gateway’s workers’ compensation retroactive reinsurance agreement increased expenses by $1.7
million.
• Directors fees increased by $30,000 over the prior year period due to the addition of a new board member.
Expenses Related to Stock Purchase Agreements
Atlas recovered $520,000 of expenses pursuant to the contingent adjustments of the Anchor stock purchase agreements related to
the claim reserve contingency in 2018. Atlas did not incur or recover any expenses pursuant to stock purchase agreements in 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 in 2016.
Combined Ratio
Atlas’ combined ratio was 129.0%, 122.5% and 102.9% in 2018, 2017 and 2016, respectively.
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,’
‘Acquisition Costs’ and ‘Other Underwriting Expenses’ sections above.
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, was $2.6 million in 2018, a decrease of 45.9%, compared to $4.9 million in 2017, following
an increase of 1.5% in 2017 compared to $4.8 million in 2016. These amounts are primarily comprised of interest income. In 2018,
the decrease resulted from lower returns on equity method investments and less interest income from collateral loans due to loan
pay-offs, partially offset by higher interest income on our fixed income securities portfolio. In 2017, the 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 2.6%, 2.3% and 2.2% in 2018, 2017 and 2016, respectively. The gross
yield on our cash and cash equivalents was 0.7%, 0.3% and 0.1% in 2018, 2017 and 2016, respectively. In 2018, the increase in
the gross yield on our cash investments was due to higher interest rates on certain accounts and higher balances in accounts earning
43
Table of Contents
greater interest. In 2017, 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
losses of $470,000 in 2018 and investment income of $1.9 million in both 2017 and 2016.
Goodwill Impairment Loss
The Company performed an assessment of the recoverability of goodwill related to Anchor Group Holdings, Inc. as of December
31, 2018. As a result of continued poor results driven from reserve development, declining premium base, and its March 2019
withdrawal from the A.M. Best interactive rating process, the Company concluded that it should impair the goodwill associated
with the acquisition of Anchor Group Holdings, Inc. The resulting assessment reduced the carrying value of goodwill to $0, which
resulted in a goodwill impairment loss of $2.7 million for 2018. There were no goodwill impairment losses during 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 $1.9 million, $1.8 million and $1.0 million
in 2018, 2017 and 2016, respectively. The increase in interest expense from 2017 to 2018 was due to a full year’s worth of interest
expense in 2018 on the senior unsecured notes, partially offset by the decrease in amortization of debt issuance costs upon the
repayment of outstanding amounts under the Loan Agreement in 2017. The increase in interest expense from 2016 to 2017 primarily
resulted from the accelerated amortization of debt issuance costs upon the repayment of outstanding amounts under the Loan
Agreement and higher interest rate related to the senior unsecured notes.
Loss from Change in Fair Value of Equity Securities
Beginning January 1, 2018, Atlas adopted Accounting Standards Update 2016-01, which requires changes in the unrealized market
value of equities held at fair value to be recorded through net income. In 2018, Atlas recorded losses of $198,000 through net
income related to the changes in the unrealized amounts on equities held at fair value.
Net Realized Investment Gains
Net realized investment gains is comprised of the gains and losses from the sales of investments. Net realized investment gains
decreased 34.3% to $573,000 in 2018 from $872,000 in 2017, due to losses from the sale of fixed income securities, partially offset
by gains from the sale of equity securities. Net realized investment gains decreased 29.1% to $872,000 in 2017 from $1.2 million
in 2016, due to 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 $526,000, $435,000 and $467,000 in 2018, 2017 and 2016, respectively.
(Loss) Income before Income Taxes
Atlas generated pre-tax loss of $64.2 million and $44.2 million in 2018 and 2017, respectively, and pre-tax income of $512,000
in 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,’ ‘Other Underwriting Expenses,’ ‘Net Investment Income,’ ‘Goodwill Impairment Loss,’
‘Interest Expense,’ ‘Loss from Change in Fair Value of Equity Securities,’ ‘Net Realized Investment Gains’ and ‘Other Income’
sections above.
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Table of Contents
Income Taxes
Atlas recognized tax expense of $15.8 million in 2018 and income tax benefits of $5.3 million and $2.1 million in 2017 and 2016,
respectively.
Tax Rate Reconciliation
($ in ‘000s)
Provision for taxes at U.S. statutory
marginal income tax rate
Provision for deferred tax assets deemed
unrealizable (valuation allowance)
Nondeductible expenses
Tax-exempt income
State tax (net of federal benefit)
Stock compensation
Nondeductible goodwill
Nondeductible acquisition accounting
adjustment
Change in statutory tax rate
Other
Provision for income taxes for continuing
operations
2018
Year ended December 31,
2017
2016
$
(13,482)
21.0 % $
(15,453)
35.0% $
179
35.0 %
28,830
62
(12)
(2)
(42)
572
(109)
—
(6)
(44.9)
(0.1)
—
—
0.1
(0.9)
0.2
—
—
—
51
(23)
(2)
(458)
—
—
10,542
—
—
(0.1)
0.1
—
1.0
—
—
(23.9)
—
—
24
(39)
28
—
—
—
4.7
(7.6)
5.5
—
—
(2,204)
—
(122)
(430.5)
—
(23.9)
$
15,811
(24.6)% $
(5,343)
12.1% $
(2,134)
(416.8)%
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (“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 P&C 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 P&C 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 were re-measured at the new enacted tax rate of 21%. In 2017, the
Company recognized income tax expense of $10.5 million related to reduction in the net deferred tax asset as a result of this re-
measurement.
Upon the transaction forming Atlas on December 31, 2010, a yearly limitation as required by Internal Revenue Code (“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 a valuation allowance.
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, which we believe 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.
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Table of Contents
Negative evidence evaluated when considering the need for a valuation allowance includes:
•
•
net losses generated in the three 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 net loss of $80.0 million and $38.8 million in 2018 and 2017, respectively, and net income of $2.6 million in 2016. Loss
per common share diluted was $6.67 and $3.22 in 2018 and 2017, respectively. After taking the impact of the liquidation preference
of the preferred shares into consideration, earnings per common share diluted were $0.19 in 2016.
Potential Dilutive Common Shares
Basic weighted average common shares outstanding
Dilutive potential ordinary shares:
Dilutive stock options
Diluted weighted average common shares outstanding
Year ended December 31,
2017
12,064,880
2018
11,992,808
2016
12,045,519
—
11,992,808
—
12,064,880
177,364
12,222,883
The effects of convertible instruments are excluded from the computation of earnings per common share diluted in periods in
which the effect would be anti-dilutive. Convertible preferred shares are anti-dilutive when the amount of dividend declared or
accumulated in the current period per common share obtainable upon conversion exceeds earnings per common share basic. In
2018 and 2017, all exercisable stock options were deemed to be anti-dilutive. The potentially dilutive impact for all exercisable
stock options excluded from the calculation due to anti-dilution is 16,372 and 71,475 common shares for 2018 and 2017, respectively.
In 2016, all exercisable stock options were deemed to be dilutive and all of the convertible preferred shares were deemed to be
anti-dilutive. The potentially dilutive impact for the convertible preferred stock excluded from the calculation due to anti-dilution
is 441,357 common shares for 2016.
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Table of Contents
IV. Financial Condition
Consolidated Statements of Financial Condition
($ in ‘000s, except for share and per share data)
Assets
Investments, available for sale
Fixed income securities, available for sale, at fair value (amortized cost $133,213 and
$158,411)
Equity securities, at fair value (cost $5,650 and $7,969)
Short-term investments
Other investments
Total investments
$
Cash and cash equivalents
Accrued investment income
Premiums receivable (net of allowance of $5,115 and $3,418)
Reinsurance recoverables on amounts paid
Reinsurance recoverables on amounts unpaid
Prepaid reinsurance premiums
Deferred policy acquisition costs
Deferred tax asset, net
Goodwill, net
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
Shareholders' equity
Ordinary voting common shares, $0.003 par value, 266,666,667 shares authorized, shares
issued: December 31, 2018 - 12,192,475 and December 31, 2017 - 12,164,041; shares
outstanding: December 31, 2018 - 11,936,970 and December 31, 2017 - 12,164,041
Restricted voting common shares, $0.003 par value, 33,333,334 shares authorized, shares
issued and outstanding: December 31, 2018 and December 31, 2017 - 0
Additional paid-in capital
Treasury stock, at cost: December 31, 2018 - 255,505 and December 31, 2017 - 0 shares of
ordinary voting common shares
Retained deficit
Accumulated other comprehensive (loss) income, net of tax
Total shareholders' equity
Total liabilities and shareholders' equity
47
$
$
$
$
$
$
December 31,
2018
2017
129,991 $
5,929
4,745
25,043
165,708
34,902
749
88,596
12,388
68,771
36,898
7,309
—
—
3,755
31,363
19,899
470,338 $
273,496 $
134,040
15,849
24,255
16,999
464,639 $
157,984
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
482,503
211,648
128,043
8,411
24,031
19,725
391,858
36 $
36
—
202,298
(3,000)
(190,503)
(3,132)
5,699 $
470,338 $
—
201,105
—
(110,535)
39
90,645
482,503
Table of Contents
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.
Carrying Value of Investments, including Cash and Cash Equivalents
($ in ‘000s)
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
Agency
Commercial
Total mortgage-backed
Other asset-backed
Total fixed income securities
Equities
Short-term investments
Other investments
Total investments
Cash and cash equivalents
Total
Portfolio Composition
As of December 31,
2017
2018
$
20,196 $
8,843
13,124
9,790
3,547
6,812
8,323
755
42,351
25,128
19,622
44,750
13,851
129,991 $
5,929
4,745
25,043
165,708 $
34,902
200,610 $
$
$
$
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
157,984
8,446
—
31,438
197,868
45,615
243,483
Atlas held securities, short-term investments and other investments with a carrying value of $165.7 million and $197.9 million as
of December 31, 2018 and 2017, respectively, which were primarily comprised of fixed income securities. The decrease resulted
from the net sales of fixed income securities and equities, the repayment of two collateral loans, return of capital of certain equity
method investments and negative changes in market values.
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
48
Table of Contents
investments, within specified limits and subject to certain qualifications. The Company’s use of quota share reinsurance can impact
the relationship between invested assets and premiums written over time as well as the desired duration of the portfolio.
Most of the Company’s holdings are impacted by the U.S. economy, and we anticipate a 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 meaningfully alter the fundamental outlook of the Company’s investment holdings.
Short-Term Investments
Atlas’ short-term investments are comprised of bonds and money market funds. As of December 31, 2018, short-term investments
totaled $4.7 million. Atlas had no short-term investments as of December 31, 2017.
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. The carrying values of these other investments were $25.0 million and $31.4 million as of December 31, 2018 and
2017, respectively. The carrying values of the equity method limited partnerships were $24.0 million and $25.3 million as of
December 31, 2018 and 2017, respectively. The decrease in the carrying value of the limited partnerships was primarily due to
the return of capital offset by contributions to other equity method limited partnerships. 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 approximates the income earned on one of the limited partnerships that invest in income-producing real
estate. The carrying values of the collateral loans were $1.0 million and $6.2 million as of December 31, 2018 and 2017, respectively.
The decrease was due to the repayment of two collateral loans.
Equity Method Investments by Type
($ in ‘000s)
Real estate
Insurance linked securities
Activist hedge funds
Venture capital
Other joint venture
Total equity method investments
As of December 31,
2018
2017
2018
Unfunded
Commitments
$
2,887 $
—
—
3,070
—
5,957 $
$
Carrying Value
11,085 $
6,694
3,911
2,015
325
24,030 $
10,660
9,073
4,367
853
325
25,278
Due to the timing of financial information of the Company’s equity method investments, certain investments are recorded on a
financial reporting lag of one to three months.
Liquidity and Cash Flow Risk
As of December 31, 2018, 26.1% 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 28.4% as of December 31, 2017. 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, 2018, the fixed income securities had a weighted average life of 4.8 years and a duration of 3.8 years, compared
to a weighted average life of 4.9 years and a duration of 3.9 years as of December 31, 2017. 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.
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Amortized Cost and Fair Value of Fixed Income Securities by Contractual Maturity Date
($ in ‘000s)
As of December 31,
2018
2017
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
%
Amortized
Cost
Fair Value
5,546
28,324
32,724
4,796
71,390
58,601
129,991
5,573 $
29,000
33,790
5,100
73,463
59,750
133,213 $
4.3% $
21.8
25.2
3.7
55.0
45.0
100.0% $
Fair Value
11,141
33,857
41,538
6,735
93,271
64,713
157,984
11,149 $
33,941
41,542
6,614
93,246
65,165
158,411 $
%
7.0%
21.4
26.3
4.3
59.0
41.0
100.0%
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, 2018 and 2017 was 430.5% and 26.8%, respectively. The increase is the
result of the decrease in shareholders’ equity. See 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. The fixed income securities portfolio consists of predominantly investment grade securities in corporate
and government bonds with 99.5% rated ‘BBB’ or better as of December 31, 2018 compared to 99.3% as of December 31, 2017.
Credit Ratings1 of Fixed Income Securities Portfolio
($ in ‘000s)
As of December 31,
2018
2017
AAA/Aaa
AA/Aa
A/A
BBB/Baa
BB
B
CCC
Total fixed income securities
1 Ratings assigned by Fitch, S&P or Moody’s Investors Service.
Other-Than-Temporary Impairment
Fair Value
% of Total
Fair Value
% of Total
$
$
38,478
50,273
20,729
19,808
557
—
146
129,991
29.6% $
38.7
16.0
15.2
0.4
—
0.1
100.0% $
42,978
58,173
27,384
28,348
875
226
—
157,984
27.2%
36.8
17.3
18.0
0.6
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 in 2018, 2017 or 2016.
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
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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 was $115.4 million as of December 31, 2018 compared to $108.1
million as of December 31, 2017. Unrealized losses were $3.4 million and $1.4 million as of December 31, 2018 and 2017,
respectively. The increase in unrealized losses primarily resulted from negative changes in market values (see ‘Part II, Item 8,
Note 5, Investments’ in the Notes to Consolidated Financial Statements). 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.
Allowance for Bad Debt
As of December 31, 2018, Atlas’ allowance for bad debt was $5.1 million, compared to $3.4 million as of December 31, 2017.
The increase in the allowance for bad debt resulted from an analysis of certain past due balances during 2018.
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 numbers 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 loss of $500,000 with respect to
commercial automobile liability claims. Atlas also purchases reinsurance to protect against awards in excess of its policy limits.
Atlas continually evaluates and adjusts its reinsurance needs based on business volume, mix and supply levels. 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 the Quota Share, 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.
Reinsurance ceded does not relieve Atlas of its ultimate liability to its insureds 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. As shown in the below table, Atlas had $81.2 million
recoverable from third party reinsurers (exclusive of amounts prepaid) as of December 31, 2018 compared to $61.4 million as of
December 31, 2017. The increase in the amount recoverable from third party reinsurers resulted from an increase in ceded case
and IBNR reserves and the timing of the collection of amounts recoverable on paid claims.
Estimating amounts of reinsurance recoverables is also impacted by the uncertainties involved in the establishment of provisions
for unpaid claims and claims adjustment expenses. As underlying reserves potentially develop, the amounts ultimately recoverable
may vary from amounts currently recorded. Atlas’ reinsurance recoverables are generally unsecured. Atlas regularly evaluates its
reinsurers, and the respective amounts recoverable, and an allowance for uncollectible reinsurance is provided for, if needed.
Reinsurance Recoverables on Amounts Paid and Unpaid by Reinsurer
($ in ‘000s)
General Reinsurance Corporation
Swiss Reinsurance America Corporation
Other
Total
A.M. Best
Financial Strength
Rating
A++
A+
As of December 31,
2017
2018
$
$
47,592 $
28,241
5,326
81,159 $
32,505
22,241
6,638
61,384
During 2019, the Company received notice from General Reinsurance Corporation that effective July 31, 2019, the XOL reinsurance
coverage for the ASI Pool Companies would terminate on a cut-off basis. Additionally, effective September 30, 2019, the ASI
Pool Companies Quota Share contract with Swiss Reinsurance America Corporation was terminated on a run-off basis.
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Deferred Tax Asset
Components of Deferred Tax
($ in ‘000s)
Gross deferred tax assets:
Losses carried forward
Claims liabilities and unearned premium reserves
Bad debts
Tax credits
Commissions
Stock compensation
Other
Valuation allowance
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
As of December 31,
2017
2018
$
25,326 $
5,949
1,009
—
—
760
418
(29,416)
4,046
1,535
189
1,371
633
318
4,046
$
— $
13,313
6,171
—
1,172
623
602
1,094
—
22,975
3,107
213
847
715
1,108
5,990
16,985
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. When considering the extent of the valuation allowance on Atlas’ DTA, 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 DTAs. Based on Atlas’
cumulative loss in recent years, Atlas has established a valuation allowance of $29.4 million for its gross future deferred tax assets
as of December 31, 2018. The Company had no valuation allowance as of December 31, 2017.
On July 22, 2013, as a result of shareholder activity, a “triggering event” as determined under IRC Section 382 occurred. As a
result, 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
(“NOLs”) of approximately $25.3 million as of December 31, 2018. NOLs and other carryforwards generated in 2017 and 2018
are not limited by IRC Section 382.
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Net Operating Loss Carryforward as of December 31, 2018 by Expiry
($ in ‘000s)
Year of Occurrence
2001
2002
2006
2007
2008
2009
2010
2011
2012
2015
2017
2018
2018
Total
Year of Expiration
2021
2022
2026
2027
2028
2029
2030
2031
2032
2035
2037
2038
Indefinite
Amount
5,007
4,317
7,825
5,131
1,949
1,949
1,949
4,166
9,236
1
27,313
47,653
4,106
120,602
$
$
Buildings and Land
In the fourth quarter of 2016, Atlas purchased a building and land for $9.3 million to serve as its corporate headquarters. The
Company purchased furnishings and made improvements to this building of $1.1 million, $11.3 million and $139,00 in 2018,
2017 and 2016, respectively. See ‘Part II, Item 8, Note 9, Property and Equipment’ in the Notes to Consolidated Financial Statements
for further discussion of the new corporate headquarters.
Claims Liabilities
Provision for Unpaid Claims by Type, Gross of Reinsurance
($ in ‘000s)
Case reserves
IBNR
Total
As of December 31,
2017
2018
% Change
$
$
78,191 $
195,305
273,496 $
62,769
148,879
211,648
24.6%
31.2
29.2%
Provision for Unpaid Claims by Line of Business, Gross of Reinsurance
($ in ‘000s)
Commercial automobile liability
Other1
Total
As of December 31,
2017
2018
$
$
268,728 $
4,768
273,496 $
204,654
6,994
211,648
% Change
31.3%
(31.8)
29.2%
Provision for Unpaid Claims by Line of Business, Net of Reinsurance Recoverables
($ in ‘000s)
Commercial automobile liability
Other1
Total
As of December 31,
2017
2018
$
$
200,984 $
3,741
204,725 $
153,319
4,927
158,246
% Change
31.1%
(24.1)
29.4%
1 See ‘Part II, Item 7, MD&A, Overview’ section for further information regarding the other lines of business.
The provision for unpaid claims and claims adjustment expenses increased by 29.2% to $273.5 million as of December 31, 2018
compared to $211.6 million as of December 31, 2017. During 2018, case reserves increased by 24.6% compared to 2017, while
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IBNR reserves increased by 31.2%. The increase in case reserves was primarily due to an increase in new and re-opened claims
reported on the three most recent accident years. The increase in IBNR was primarily due to the settlement of claims reported on
prior accident years for our commercial auto and non-voluntary assigned risk programs above established case reserves for 2018.
Provision for Unpaid Claims, Gross of Reinsurance
($ in ‘000s)
Case Reserves
IBNR
Accident Year
Current Year
Prior Years
Total
Current Year
Prior Years
Total
Commercial
Auto
Liability
Other
Commercial
Auto
Liability
As of December 31, 2018
Total
Other
Total
$
$
$
$
47,109 $
30,039
77,148 $
30,619 $
30,393
61,012 $
1,210 $
(167)
1,043 $
48,319 $
29,872
78,191 $
107,944 $
83,636
191,580 $
2,782 $
943
3,725 $
110,726
84,579
195,305
As of December 31, 2017
(462) $
2,219
1,757 $
30,157 $
32,612
62,769 $
78,625 $
65,017
143,642 $
1,180 $
4,057
5,237 $
79,805
69,074
148,879
Provision for Unpaid Claims, Net of Reinsurance Recoverables
($ in ‘000s)
Case Reserves
IBNR
Accident Year
Current Year
Prior Years
Total
Current Year
Prior Years
Total
Commercial
Auto
Liability
Other
Commercial
Auto
Liability
As of December 31, 2018
Total
Other
Total
$
$
$
$
40,073 $
26,502
66,575 $
27,421 $
25,701
53,122 $
481 $
(105)
376 $
40,554 $
26,397
66,951 $
76,337 $
58,072
134,409 $
2,556 $
809
3,365 $
78,893
58,881
137,774
As of December 31, 2017
(309) $
1,303
994 $
27,112 $
27,004
54,116 $
49,888 $
50,309
100,197 $
844 $
3,089
3,933 $
50,732
53,398
104,130
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Changes in the Provision for Unpaid Claims and Claims Adjustment Expenses,
Net of Reinsurance Recoverables
($ in ‘000s)
Year ended December 31,
2017
2016
2018
Unpaid claims and claims adjustment expenses, beginning of period
Less: reinsurance recoverable
Net unpaid claims and claims adjustment expenses, beginning of period
$
211,648 $
53,402
158,246
139,004 $
35,370
103,634
Change in retroactive reinsurance ceded
—
1,361
Incurred related to:
Current year
Prior years
Paid related to:
Current year
Prior years
137,916
82,746
220,662
52,637
121,546
174,183
128,476
75,397
203,873
50,626
99,996
150,622
Net unpaid claims and claims adjustment expenses, end of period
Add: reinsurance recoverable
Unpaid claims and claims adjustment expenses, end of period
$
$
204,725 $
68,771
273,496 $
158,246 $
53,402
211,648 $
127,011
29,399
97,612
107
102,133
32,613
134,746
39,652
89,179
128,831
103,634
35,370
139,004
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 $82.7 million in unfavorable prior accident year development in 2018 as reflected as incurred related to prior
years in the table above. The unfavorable development is primarily from our core commercial automobile liability line and was
mostly related to accident years 2013 through 2017.
Atlas experienced $75.4 million in unfavorable prior accident year development in 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.
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Table of Contents
Atlas experienced $32.6 million in unfavorable prior accident year development in 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
in 2016. Michigan commercial automobile claims accounted for approximately 62.5% of this development. Pre-acquisition Global
Liberty claims reserve development was $7.9 million in 2016. The remaining unfavorable prior year development of $1.5 million
for 2016 is attributable to assigned risk pools and run-off of non-core business.
Contractual Obligations
Future Payments and Estimated Claims Settlements
($ in ‘000s)
Year ended December 31, 2018
Total
Less than
1 year
1-3 years
3-5 years
More than
5 years
Notes payable, including interest
payments
Operating leases
Estimated claims liabilities, net of
reinsurance
Total
$
$
31,625 $
3,369
204,725
239,719 $
1,656 $
1,137
88,558
91,351 $
3,313 $
2,042
69,601
74,956 $
26,656 $
190
24,731
51,577 $
—
—
21,835
21,835
Estimated claims liabilities are calculated based on actuarial assumptions and may differ from actual future claims settlements.
The amounts in the table above have been presented net of reinsurance.
As of December 31, 2018, we had contractual obligations to provide additional funds for investments in limited liability investments
included in other investments for up to $6.0 million not included in the table above. There is no certainty of when these amounts
will be required to be provided.
Off-Balance Sheet Arrangements
As of December 31, 2018, we did not have any off-balance sheet arrangements as defined by SEC rules.
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Changes in Shareholders’ Equity
($ in ‘000s)
Ordinary
Voting
Common
Shares
Restricted
Voting
Common
Shares
Additional
Paid-In
Capital
Treasury
Stock
Retained
Deficit
Accumulated
Other
Comprehensive
(Loss) Income
Total
Shareholders'
Equity
Balance December 31, 2015
$
36 $
— $ 198,041 $
— $
(74,364) $
(1,032) $
122,681
Net income
Preferred dividends paid
Other comprehensive income
Share-based compensation
—
—
—
—
—
—
—
—
—
(409)
—
1,612
—
—
—
—
2,646
—
—
—
—
—
812
—
2,646
(409)
812
1,612
Balance December 31, 2016
$
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
Cumulative effect of new
accounting principle in period of
adoption
Net loss
Purchase of treasury stock
Preferred dividends paid
Other comprehensive loss
Share-based compensation
Other
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
1,201
(8)
—
—
(3,000)
—
—
—
—
377
(80,012)
—
(333)
—
—
—
(377)
—
—
—
(2,794)
—
—
Balance December 31, 2018
$
36 $
— $ 202,298 $
(3,000) $
(190,503) $
(3,132) $
—
(80,012)
(3,000)
(333)
(2,794)
1,201
(8)
5,699
As of December 31, 2018, there were 11,936,970 ordinary voting common shares outstanding and no preferred shares outstanding.
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 could 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 Share Repurchase Program was not extended. The Company’s decisions around the timing, volume, and nature of share
repurchases, and the ultimate amount of shares repurchased, was dependent on market conditions, applicable securities laws, and
other factors. The share repurchase program and the Board’s authorization of the program could have been modified, suspended,
or discontinued at any time. During 2018, 255,505 shares were repurchased under this Share Repurchase Program.
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, 2018.
On December 31, 2018, the Company awarded grants for ordinary voting common shares of the Company to its external directors
pursuant to a director equity award agreement dated December 31, 2018. The awards, which were approved by the Company’s
Board of Directors in March 2018, were valued at $40,000 per external director (“Aggregate Award”) and were made under the
Company’s Equity Incentive Plan. The number of restricted stock units awarded was determined by dividing (A) the Aggregate
Award by (B) the closing price of one share of Company ordinary voting common share at the close of market on April 4, 2018,
which was $10.50 per share. For new directors, the Aggregate Award is proportionate to the director’s start date and priced as of
that same day. During 2018, the Company awarded 17,524 Restricted Stock Unit (“RSU”) grants having an aggregate grant date
fair value of $179,000. The RSUs will vest 33.3% on January 1 of each year for the next three years.
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There were 24,932 and 14,816 non-vested RSUs issued as of December 31, 2018 and 2017, respectively. The RSUs are participative
and are included in the computations of earnings per common share and book value per common share for these periods.
During 2018, the Company issued 7,408 ordinary voting common shares as a result of the vesting of RSUs and 27,195 ordinary
voting common shares, then immediately canceled 6,169 shares, as a result of a cashless exercise of options. During 2017, the
Company issued 7,408 ordinary voting common shares as a result of the vesting of RSUs and 133,338 ordinary voting common
shares as a result of the exercise of options.
Mezzanine Equity
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, 2018 and 2017, there were no outstanding preferred shares. The
preferred shares redeemed and canceled during 2016 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 (loss) income and comprehensive (loss) 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. During 2018, Atlas paid $333,000 in dividends earned on the preferred shares to the former owner
of Anchor, the cumulative amount to which they were entitled through December 31, 2017, leaving no accrued or unpaid dividends.
The paid claims development on Global Liberty’s pre-acquisition claims reserves was in excess of $4.0 million, and as a result,
pursuant to the terms of the Anchor stock purchase agreement, dividends will no longer accrue to the former owner of Anchor.
Although the re-issuance of preferred shares to the former owner of Anchor may be highly unlikely, the contingent consideration
terms of the Anchor stock purchase agreement will remain in effect for a period of five years from the date of acquisition.
Book Value
Book Value per Common Share
($ in ‘000s, except for share and per share data)
Shareholders’ equity
Less: Accumulated dividends on preferred stock
Common equity
Common shares:
Common shares outstanding
Restricted stock units
Total common shares
Book value per common share outstanding
December 31,
2018
2017
5,699 $
—
5,699 $
90,645
333
90,312
11,936,970
24,932
11,961,902
0.48 $
12,164,041
14,816
12,178,857
7.42
$
$
$
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Changes to Book Value per Common Share
As of December 31, 2017
Net loss, after tax
Loss reserve estimate change
Loss from change in fair value of equity securities
Realized investment gains, after tax
Changes in unrealized gains and losses, after tax
Share repurchases
Shares issued
Share-based compensation
Goodwill impairment
Valuation allowance against DTAs related to net operating losses
Year-to-date decrease to book value per common share
As of December 31, 2018
$
7.42
1.34
(5.46)
(0.01)
0.04
(0.23)
(0.09)
(0.02)
0.08
(0.18)
(2.41)
$
(6.94)
0.48
The changes to book value per common share are attributed to the combined effects of the reasons cited in the ‘Net Premiums
Earned,’ ‘Net Claims Incurred,’ ‘Acquisition Costs,’ ‘Other Underwriting Expenses,’ ‘Net Investment Income,’ ‘Goodwill
Impairment Loss,’ ‘Interest Expense,’ ‘Loss from Change in Fair Value of Equity Securities,’ ‘Net Realized Investment Gains’
and ‘Other Income’ subsections of the ‘Operating Results’ section.
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, commissions and general expenses. Atlas may also use cash provided from these sources to repurchase common shares
in open market transactions. As discussed above in the ‘Changes in Shareholders’ Equity’ section, 255,505 shares were repurchased
under the Share Repurchase Program during 2018.
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 premiums collected, investment income and proceeds from the sales and
maturity of investments, and capital contributions from their parents. Refer also to the discussion above in the ‘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. See
“Risk Factors - Risks Related to 2019 Developments - Regulatory Developments” for certain developments with respect to the
Insurance Subsidiaries subsequent to December 31, 2018.
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,
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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 $1.9 million, $1.8 million and $1.0 million in 2018, 2017 and 2016, respectively.
Summary of Consolidated Cash Flows
($ in ‘000s)
Net cash flows (used in) provided by operating activities
Net cash flows provided by (used in) investing activities
Net cash flows (used in) provided by financing activities
Net (decrease) increase in cash
Year ended December 31,
2017
2016
2018
$
$
(26,442) $
19,070
(3,341)
(10,713) $
26,472 $
(15,909)
5,164
15,727 $
170
8,412
(1,048)
7,534
Cash used in operations during 2018 was primarily a result of net loss and increases in (i) premiums receivable and unearned
premium reserves due to premium growth, (ii) reinsurance recoverable on paid amounts, prepaid reinsurance premiums and
reinsurance premiums payable due to changes in the Quota Share cession rate, and (iii) unpaid claims liabilities due to growth and
the re-estimation of the ultimate claims incurred on prior accident years. Cash provided by operations during 2017 and 2016 was
primarily 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 provided by investing activities during 2018 was due to the net sales and maturities of fixed income securities, the net sales
of equity securities and the repayment of two collateral loans, partially offset by property and equipment purchases. Cash used in
investing activities during 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 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 financing activities during 2018 was primarily a result of shares repurchased under the Share Repurchase Program.
Cash provided by financing activities during 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 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.
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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 (loss) income.
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, loans or advances 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 $3.5
million under the provisions of the Illinois Insurance Code, the Missouri Insurance Code and the New York Insurance Code,
respectively. Dividends may only be paid from statutory unassigned surplus, and payments may not be made if such surplus is
less than a stipulated amount. The dividend restriction for the ASI Pool Subsidiaries is the greater of statutory net income or 10%
of total statutory capital and surplus. The dividend restriction for Global Liberty is the lower of 10% of statutory surplus or 100%
of adjusted net investment income for the preceding twelve months. Atlas' Insurance Subsidiaries did not declare or pay any
dividends to Atlas during 2018 or 2017. See “Risk Factors - Risks Related to 2019 Developments - Regulatory Developments”
for certain developments with respect to the Insurance Subsidiaries subsequent to December 31, 2018.
Statutory Net Loss and Surplus of Atlas’ Insurance Subsidiaries
($ in ‘000s)
2018
Year ended December 31,
2017
2016
Net loss computed under statutory-basis accounting
Combined statutory capital and surplus
$
$
49,648 $
35,199 $
3,585
14,377 $
87,813 $
113,943
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Item 7A. Quantitative and Qualitative Disclosures about
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 3.8 years, changes in interest rates are expected to 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.
Equity Price Risk
Atlas’ 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 equity securities portfolio is approximately 3.6% 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, 2018 were $130.0 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 $101,000. 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 $107,000. Atlas uses a 1 year time period with a 100 basis
point increase and decrease to determine the impact on the fixed income security portfolio.
A 100 basis point increase would have also decreased other comprehensive income by approximately $5.4 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.
On April 26, 2017, Atlas issued five-year 6.625% senior unsecured notes. As of December 31, 2018, the senior unsecured notes
have an outstanding balance of $24.3 million. 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. 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
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decrease would increase the fair market value on notes payable by $789,000. Conversely, an instantaneous 100 basis point increase
would decrease the fair market value on notes payable by $762,000.
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.
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 depends 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.
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Item 8. Financial Statements and Supplemental Schedules
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 statement of financial position of Atlas Financial Holdings, Inc. (the “Company”)
and subsidiaries as of December 31, 2018, the related consolidated statements of loss and comprehensive loss, shareholders’ equity,
and cash flows for the year ended December 31, 2018, and the related notes (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 its subsidiaries at December 31, 2018, and the results of their operations and their cash flows for the year ended
December 31, 2018, 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, 2018, 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 February 12, 2020 expressed an adverse opinion.
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 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 the U.S. federal securities laws
and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit 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 audit 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 audit 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 audit provides a reasonable basis for our opinion.
Emphasis of a Matter
As disclosed in Note 20 to the consolidated financial statements, Atlas Financial Holdings, Inc. has been exploring strategic
alternatives to its business model as all three of its Illinois domesticated insurance companies were placed into rehabilitation with
the Illinois Department of Insurance in 2019. The Company plans to reduce its risk as an insurance carrier and transition to a
managing general agency business model. The Company will utilize its existing managing general agency platform to effectuate
this change in its business model and work with strategic external insurance and reinsurance partners. Our opinion is not modified
with respect to this matter.
/s/ Baker Tilly Virchow Krause, LLP
We have served as the Company’s auditor since 2019.
Milwaukee, WI
February 12, 2020
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Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
Atlas Financial Holdings, Inc.
Schaumburg, Illinois
Adverse 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,
2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission (“COSO”). In our opinion, because of the effect of the material weakness described
in the following paragraph on the achievement of the objectives of the control criteria, the Company has not maintained effective
internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated
Framework (2013) issued by COSO.
A material weakness is a control deficiency, or a combination of deficiencies, in internal control over financial reporting, such
that there is a reasonable possibility that a material misstatement of the Company’s annual or interim consolidated financial
statements will not be prevented or detected on a timely basis. The following material weakness has been identified: The Company
did not have an effective internal control in place to monitor the progress of all aspects of its financial reporting close process to
timely identify delays, as described in the accompanying Management’s Report on Internal Control over Financial Reporting
(“Management’s Report”). This material weakness was considered in determining the nature, timing, and extent of audit tests
applied in our audit of the 2018 consolidated financial statements, and this report does not affect our report dated February 12,
2020, on those consolidated financial statements.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(“PCAOB”), the consolidated statement of financial position and the related statements of (loss) income and comprehensive (loss)
income, shareholders’ equity, and cash flows of the Company, and our report dated February 12, 2020 expressed an unqualified
opinion.
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 Annual Report on Form 10-K. 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 the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the
PCAOB.
We conducted our audit 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 of internal control over financial reporting 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.
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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/ Baker Tilly Virchow Krause, LLP
Milwaukee, WI
February 12, 2020
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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 statement of financial position of Atlas Financial Holdings, Inc. (the “Company”)
and subsidiaries as of December 31, 2017, the related consolidated statements of (loss) income and comprehensive (loss) income,
shareholders’ equity, and cash flows for the years ended December 31, 2017 and 2016, 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 the results of their operations and their cash flows for the years ended December 31, 2017 and 2016,
in conformity with accounting principles generally accepted in the United States of America.
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
Grand Rapids, Michigan
February 12, 2020
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Atlas Financial Holdings, Inc.
Consolidated Statements of Financial Position
($ in ‘000s, except for share and per share data)
Assets
Investments
Fixed income securities, available for sale, at fair value (amortized cost $133,213 and
$158,411)
Equity securities, at fair value (cost $5,650 and $7,969)
Short-term investments, at cost
Other investments
Total investments
$
Cash and cash equivalents
Accrued investment income
Premiums receivable (net of allowance of $5,115 and $3,418)
Reinsurance recoverables on amounts paid
Reinsurance recoverables on amounts unpaid
Prepaid reinsurance premiums
Deferred policy acquisition costs
Deferred tax asset, net
Goodwill, net
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: December 31, 2018 - 12,192,475 and December 31, 2017 - 12,164,041; shares
outstanding: December 31, 2018 - 11,936,970 and December 31, 2017 - 12,164,041
Restricted voting common shares, $0.003 par value, 33,333,334 shares authorized, shares
issued and outstanding: December 31, 2018 and December 31, 2017 - 0
Additional paid-in capital
Treasury stock, at cost: December 31, 2018 - 255,505 and December 31, 2017 - 0 shares of
ordinary voting common shares
Retained deficit
Accumulated other comprehensive (loss) income, net of tax
Total shareholders' equity
Total liabilities and shareholders' equity
$
$
$
$
$
$
December 31,
2018
2017
129,991 $
5,929
4,745
25,043
165,708
34,902
749
88,596
12,388
68,771
36,898
7,309
—
—
3,755
31,363
19,899
470,338 $
273,496 $
134,040
15,849
24,255
16,999
464,639 $
157,984
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
482,503
211,648
128,043
8,411
24,031
19,725
391,858
36 $
36
—
202,298
(3,000)
(190,503)
(3,132)
5,699 $
470,338 $
—
201,105
—
(110,535)
39
90,645
482,503
See accompanying Notes to Consolidated Financial Statements.
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Atlas Financial Holdings, Inc.
Consolidated Statements of (Loss) Income
and Comprehensive (Loss) Income
Consolidated Statements of (Loss) Income
($ in ‘000s, except for share and per share data)
Net premiums earned
Net investment income
Loss from change in fair value of equity securities
Net realized gains
Other income
Total revenue
Net claims incurred
Acquisition costs
Other underwriting expenses
Amortization of intangible assets
Goodwill impairment loss
Interest expense
Expenses recovered pursuant to stock purchase agreements
Total expenses
(Loss) income from operations before income taxes
Income tax expense (benefit)
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 (Loss) Income
Net (loss) income
Other comprehensive (loss) income:
Changes in net unrealized investment (losses) gains
Reclassification to net income (loss)
Effect of income taxes
Other comprehensive (loss) income
Total comprehensive (loss) income
Year ended December 31,
2017
2016
2018
218,218 $
2,647
(198)
573
526
221,766
220,662
26,115
34,725
390
2,726
1,869
(520)
285,967
(64,201)
15,811
(80,012)
—
(80,012) $
215,771 $
4,897
—
872
435
221,975
203,873
27,885
32,140
390
—
1,840
—
266,128
(44,153)
(5,343)
(38,810)
—
(38,810) $
171,058
4,824
—
1,230
467
177,579
134,746
18,803
28,399
390
—
1,026
(6,297)
177,067
512
(2,134)
2,646
281
2,365
11,992,808
12,064,880
(6.67) $
(3.22) $
11,992,808
12,064,880
(6.67) $
(3.22) $
12,045,519
0.20
12,222,883
0.19
(80,012) $
(38,810) $
2,646
(3,078)
284
—
(2,794)
(82,806) $
437
(49)
(136)
252
(38,558) $
855
394
(437)
812
3,458
$
$
$
$
$
$
See accompanying Notes to Consolidated Financial Statements.
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Atlas Financial Holdings, Inc.
Consolidated Statements of Shareholders’ Equity
($ in ‘000s)
Balance December 31, 2015
Net income
Preferred dividends paid
Other comprehensive income
Share-based compensation
Ordinary
Voting
Common
Shares
Restricted
Voting
Common
Shares
Additional
Paid-In
Capital
Treasury
Stock
Retained
Deficit
Accumulated
Other
Comprehensive
(Loss)/Income
Total
Shareholders'
Equity
$
36 $
— $
198,041 $
— $
(74,364) $
(1,032) $
122,681
—
—
—
—
—
—
—
—
—
(409)
—
1,612
—
—
—
—
2,646
—
—
—
—
—
812
—
2,646
(409)
812
1,612
Balance December 31, 2016
$
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
Cumulative effect of new accounting
principle in period of adoption
Net loss
Purchase of treasury stock
Preferred dividends paid
Other comprehensive loss
Share-based compensation
Other
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
1,201
(8)
—
—
(3,000)
—
—
—
—
377
(80,012)
—
(333)
—
—
—
(377)
—
—
—
(2,794)
—
—
Balance December 31, 2018
$
36 $
— $
202,298 $
(3,000) $ (190,503) $
(3,132) $
—
(80,012)
(3,000)
(333)
(2,794)
1,201
(8)
5,699
See accompanying Notes to Consolidated Financial Statements.
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Table of Contents
($ in ‘000s)
Atlas Financial Holdings, Inc.
Consolidated Statements of Cash Flows
Year ended December 31,
2017
2018
2016
Operating activities:
Net (loss) income
Adjustments to reconcile net (loss) income to net cash flows (used in) provided by operating activities:
(80,012) $
$
(38,810) $
Depreciation and amortization
Share-based compensation expense
Amortization of deferred gain on sale of headquarters building
Amortization of intangible assets and goodwill impairment
Deferred income taxes
Loss from change in fair value of equity securities
Net realized gains
Loss (gain) in equity of investees
Amortization of bond premiums and discounts
Amortization of financing costs
Expenses recovered 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 (used in) provided by operating activities
Investing activities:
Purchases of:
Fixed income securities
Equity securities
Short-term investments
Other investments
Property, equipment and other
Proceeds from sale and maturity of:
Fixed income securities
Equity securities
Short-term investments
Other investments
Property, equipment and other
Net cash flows provided by (used in) investing activities
Financing activities:
Purchase of treasury stock
Preferred share buyback
Capital contributions
Proceeds from notes payable, net of issuance costs
Repayment of notes payable
Preferred dividends paid
Options exercised
Other
Net cash flows (used in) provided by financing activities
Net change in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
2,911
1,201
—
3,116
16,985
198
(573)
188
648
224
—
500
(8,932)
(43,795)
7,488
854
61,848
5,997
7,438
(2,726)
(26,442)
(42,873)
(2,350)
(4,873)
(1,161)
(9,832)
67,114
5,458
128
7,459
—
19,070
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
(48,529)
(7,900)
—
(3,615)
(14,055)
46,853
6,161
—
5,174
2
(15,909)
2,646
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
(58,061)
(2,000)
—
(11,404)
(10,181)
86,013
615
—
3,430
—
8,412
—
(2,539)
—
2,000
(100)
(409)
—
—
(1,048)
7,534
22,354
29,888
(3,000)
—
—
—
—
(333)
—
(8)
(3,341)
(10,713)
45,615
34,902 $
—
—
30
23,879
(19,400)
—
655
—
5,164
15,727
29,888
45,615 $
$
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Table of Contents
($ in ‘000s)
Atlas Financial Holdings, Inc.
Consolidated Statements of Cash Flows
Supplemental disclosure of cash information:
Cash (recovered) paid for:
Income taxes
Interest
Supplemental disclosure of noncash investing and financing activities:
Redemption of preferred shares related to Gateway stock purchase
agreement
Cancellation of preferred shares pursuant to Anchor stock purchase
agreement
Year ended December 31,
2017
2016
2018
(1,724) $
1,656
744 $
1,338
7,015
885
— $
—
— $
(2,297)
—
(4,000)
$
$
See accompanying Notes to Consolidated Financial Statements.
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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 (“U.S.”), 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, including certain transportation network companies (“TNC”) drivers/operators, 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 Global Liberty
Insurance Company of New York (“Global Liberty”); and other non-insurance company subsidiaries: Anchor Group Management
Inc. (“AGMI”), Plainview Premium Finance Company, Inc. (“Plainview Delaware”), UBI Holdings Inc. (“UBI Holdings”) and
UBI Holdings’ wholly-owned subsidiaries, optOn Digital IP Inc. (“OOIP”) and optOn Insurance Agency Inc. (“optOn” and together
with OOIP and UBI Holdings, “UBI”).
The Insurance Subsidiaries distribute their insurance products through AGMI, which has contracted a network of retail independent
agents. Together, the Insurance Subsidiaries are licensed to write property and casualty (“P&C”) insurance in 49 states and the
District of Columbia in the U.S. Atlas’ core products are actively distributed in 42 of those states plus the District of Columbia.
The Insurance Subsidiaries and the Company’s other non-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. All significant
intercompany accounts and transactions have been eliminated.
Seasonality
The 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. Our
New York “excess taxi program” 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
(loss) income and comprehensive (loss) income from the effective date of acquisition and up to the effective date of disposal, as
appropriate. All significant intercompany transactions and balances are eliminated in consolidation. Accounting policies of
subsidiaries have been changed where necessary to ensure consistency with the policies adopted by Atlas.
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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 Country Insurance Company (Illinois)
• American Insurance Acquisition Inc. (Delaware)
• American Service Insurance Company, Inc. (Illinois)
• Anchor Group Management Inc. (New York)
• Anchor Holdings Group, Inc. (New York)
• Gateway Insurance Company (Missouri)
• Global Liberty Insurance Company of New York (New York)
•
Plainview Premium Finance Company, Inc. (Delaware), merged into American Insurance Acquisition during 2018
• UBI Holdings Inc. (Delaware)
•
•
optOn Digital IP Inc. (Delaware)
optOn Insurance Agency Inc. (Delaware)
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.
Investment Income and Realized Gains (Losses)
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.
Short-Term Investments
Short-term investments consist of investments with original maturities between three months and one year and are reported at
cost, which approximates fair value.
Investments
Investments in fixed income 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 (loss) income in shareholders’ equity.
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In the normal course of investing activities, the Company enters into relationships with variable interest entities (“VIE”), as an
investor in limited partnerships or limited liability company. The Company is not the primary beneficiary of these VIEs, and
therefore does not consolidate them. The Company determines whether it is the primary beneficiary of a VIE based on a qualitative
assessment of the relative power and benefits of the Company and the other participants in the VIE. The Company’s maximum
exposure to loss with respect to these investments is limited to the investment carrying values and any unfunded commitments.
Fair Values of Financial Instruments
Atlas has used the following methods and assumptions in estimating its fair value disclosures:
Fair values for investments are based on quoted market prices, when available. If quoted market prices are not available, fair values
are based on quoted market prices of comparable instruments or values obtained from independent pricing services.
Atlas’ fixed income portfolio is managed by a Securities and Exchange Commission (“SEC”) registered investment adviser
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 adviser 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 and 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, 2018, 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 adviser 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 adviser 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
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 acquisitions costs (“DPAC”) 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 DPAC. Atlas’ DPAC are reported net of deferred ceding commissions.
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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 2018, 2017 or 2016.
Income Taxes
Income tax expense (benefit) includes all taxes based on taxable (loss) income of Atlas and its subsidiaries, and is recognized in
the statements of (loss) income and comprehensive (loss) 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 (loss) 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 (“DTAs” and “DTLs”) are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on
future tax assets and liabilities of a change in tax rates is recognized in income in the period of enactment.
When considering the extent of the valuation allowance on Atlas’ DTA, 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 DTAs. 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.
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.
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.
Property and Equipment
Buildings, office equipment and internal use software are stated at historical cost less depreciation and amortization. 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.
Internal use software includes costs associated with the Company’s policy and claims system including costs to develop those
systems. Costs incurred during the preliminary project stage are expensed as incurred; costs incurred for activities during the
application development stage are capitalized; and costs incurred during the post-implementation/operation stage are expensed as
incurred. Upon reaching the post-implementation/operation stage of the development of internal use software, the capitalized
costs are amortized over the estimated useful life of the asset.
Depreciation on buildings and building improvements are provided on a straight-line basis over the estimated useful life of 33
years for buildings and 10 years for building improvements. Depreciation and amortization on equipment and internal use software
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.
Repairs and maintenance are recognized as an expense during the period incurred.
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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 reported prior to the close of the accounting
period, estimates for unreported claims based on industry data and actuarial estimates, plus related estimated claim adjustment
expenses based on the experience of the Company. Unpaid claim 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.
The amount of uncertainty in the estimates is significantly affected by such factors as the amount of claims experience relative to
the development period, knowledge of the actual facts and circumstances and the amount of insurance risk retained. The actuarial
methods for making estimates for unpaid claims and for establishing the ultimate liability are periodically reviewed, and any
adjustments are reflected in current operations.
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. Compensation expense is estimated based on the
fair value of the award at the grant date and is recognized in net income over the requisite service period with a corresponding
increase to additional paid in capital. The share-based compensation expense associated with awards that have graded vesting
features and vest based on service conditions is calculated on a straight-line basis over the requisite service period for the entire
award. Compensation expense recognized in connection with performance awards is based on the achievement of the specified
performance and service conditions. During the recognition period compensation expense is accrued based on the performance
condition that is probable of achievement. The final measure of compensation expense recognized over the requisite service period
reflects the final performance outcome.
Operating Segments
Atlas operates in one business segment, the P&C 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, 2019 have been
adopted by the Company.
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Recently Adopted
Stock Compensation
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 adopted the update in the first quarter of 2018 using the
prescribed prospective approach. The adoption of this ASU did not have an impact on the consolidated financial statements.
Income Taxes
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 transactions 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 adopted the update in the first quarter of 2018 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 did 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.
Statement of Cash Flows
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 adopted the
update in the first quarter of 2018 using the prescribed retrospective approach by restating all prior periods presented. Atlas’
presentation of its consolidated statements of cash flows did not change as a result of this ASU. Atlas elected the cumulative
earnings approach for distributions from equity method investees upon adoption, which was consistent under prior GAAP treatment.
Financial Instruments - Recognition and Measurement
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 adopted the update in the first quarter of 2018.
The adoption of this ASU resulted 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 accumulated other comprehensive income. The investment
section of the consolidated statements of financial position has been modified from year end to reflect that equity securities are
no longer classified as available-for-sale. Changes in the fair value of equity securities are recorded as income (loss) in the
consolidated statements of income and comprehensive income and as an adjustment to net income in the consolidated statements
of cash flows.
Revenue Recognition
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 adopted the update in the first quarter of 2018 with no impact on the consolidated financial statements. While these
updates to Topic 606 are expected to have a significant impact on many companies, Atlas’ revenue is derived from transactions
that do not fall within the scope of Topic 606, namely insurance contracts, investment income, and lease income.
Not Yet Adopted
Fair Value Measurement
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the
Disclosure Requirements for Fair Value Measurement. The amendments in this update eliminate, add and modify certain disclosure
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requirements for fair value measurements. 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 Level 3 fair value measurements, 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 until adoption for any changes.
Leases
In March 2019, December 2018, July 2018 and February 2016, the FASB issued ASU 2019-01 Leases (Topic 842) Codification
Improvements, ASU 2018-20 Leases (Topic 842) Narrow-Scope Improvements for Lessors, ASU 2018-11 Leases (Topic 842):
Targeted Improvements and ASU 2018-10 Codification Improvements to Topic 842, Leases and ASU 2016-02, Leases (Topic
842), respectively. The provisions of these updates impact the classification criteria, disclosure requirements, and other specific
transactions in lease accounting. The update requires either the use of a modified retrospective approach, which requires leases to
be measured at the beginning of the earliest period presented, or the transition method, which requires entities to recognize a
cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. 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 transition method with no change to comparative
periods. See ‘Part II, Item 8, Note 8, Commitments and Contingencies’ in the Notes to Consolidated Financial Statements for
further discussion of the future lease commitments. The adoption of this update will result in the recognition of both a right-of-
use asset and lease liability equal to the present value of the lease payments on the date of adoption, which will be less than 1%
of total assets and total liabilities. The adoption of this guidance is not expected to have a material effect on the Company’s
consolidated financial statements. There is no expected impact to any of Atlas’ current financial covenants as a result of the increase
to reported liabilities.
Premium Amortization on Purchased Callable Debt Securities
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 guidance shortens the amortization period to the earliest call date for
certain purchased callable debt securities held at a premium that have explicit, noncontingent call features and are callable at a
fixed price and preset 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. The adoption of this ASU is not expected to have an impact on the Company’s consolidated financial statements because
Atlas’ callable debt securities, that are held at a premium, are amortized to the earliest call date, which is consistent with current
accounting treatment.
Financial Instruments - Credit Losses
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. Atlas does not currently have any investments with credit losses recorded or other significant credit allowance,
therefore the provisions of this update are not expected to have a material impact on the consolidated financial statements upon
adoption. The Company plans on adopting the update on the required effective date.
All other recently issued pronouncements with effective dates after December 31, 2018 are not expected to have a material impact
on the consolidated financial statements.
3. Goodwill and Intangible Assets
Goodwill and indefinite-lived intangible assets are tested for impairment annually or when a triggering even occurs. During the
fourth quarter of 2018, the Company performed an assessment of the recoverability of goodwill related to Anchor Group Holdings,
Inc. as of December 31, 2018. Based on the assessment, the Company reduced the carrying value of goodwill to $0, which resulted
in a goodwill impairment loss of $2.7 million for 2018. There were no goodwill impairment losses during 2017 and 2016.
Atlas concluded that there was no indefinite-lived intangible asset impairment in 2018, 2017 or 2016.
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Changes in the Carrying Amount of Goodwill
($ in ‘000s)
2018
2017
Balance as of January 1,
Goodwill
Accumulated impairment losses
Additions
Impairment losses
Balance as of December 31,
Goodwill
Accumulated impairment losses
Intangible Assets by Major Asset Class
($ in ‘000s)
As of December 31, 2018
Trade name and trademark
Customer relationship
State insurance licenses
As of December 31, 2017
Trade name and trademark
Customer relationship
State insurance licenses
$
2,726 $
—
2,726
—
(2,726)
2,726
(2,726)
$
— $
Economic
Useful Life
15 years
10 years
Indefinite
15 years
10 years
Indefinite
$
$
$
$
Gross
Carrying
Amount
Accumulated
Amortization
Net
1,800 $
2,700
740
5,240 $
1,800 $
2,700
740
5,240 $
459 $
1,026
—
1,485 $
337 $
758
—
1,095 $
2,726
—
2,726
—
—
2,726
—
2,726
1,341
1,674
740
3,755
1,463
1,942
740
4,145
Atlas recognized amortization expense of $390,000 in each of the twelve months ended December 31, 2018, 2017 and 2016.
Estimated future amortization expense for definite-lived intangible assets is $390,000 for each of the next five years.
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4. Earnings per Share
Computations of Basic and Diluted Earnings per Common Share
($ in ‘000s, except share and per share amounts)
Basic
(Loss) income from operations before income taxes
Income tax expense (benefit)
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
Diluted weighted average common shares outstanding
(Loss) earnings per common share diluted
Year ended December 31,
2017
2016
2018
$
$
$
$
(64,201) $
15,811
(80,012) $
—
(80,012) $
(44,153) $
(5,343)
(38,810) $
—
(38,810) $
11,992,808
12,064,880
(6.67) $
(3.22) $
512
(2,134)
2,646
281
2,365
12,045,519
0.20
11,992,808
12,064,880
12,045,519
—
11,992,808
—
12,064,880
$
(6.67) $
(3.22) $
177,364
12,222,883
0.19
Common shares are defined as ordinary voting common shares, restricted voting common shares and participative restricted stock
units (“RSUs”). 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 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). See ‘Part II, Item 8, Note 14, Share Capital and Mezzanine Equity,’ in the Notes 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.
In 2018 and 2017, all exercisable stock options were deemed to be anti-dilutive. The potentially dilutive impact for all exercisable
stock options excluded from the calculation due to anti-dilution is 16,372 and 71,475 common shares for 2018 and 2017,
respectively. In 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 2016.
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5. Investments
Atlas adopted ASU 2016-01 as of January 1, 2018, which requires equity investments, except those accounted for under the equity
method, to be measured at fair value and changes in fair value to be recognized in net income. Prior periods have not been restated
for the current presentation, per the guidance in the ASU. See ‘Part II, Item 8, Note 2, New Accounting Standards,’ in the Notes
to Consolidated Financial Statements for a summary of the changes.
Cost or Amortized Cost, Gross Unrealized Gains and Losses, and Fair Value of Investments
($ in ‘000s)
Cost or
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
December 31, 2018
Fixed income securities:
U.S. Treasury and other U.S. government obligations
States, municipalities and political subdivisions
Corporate
$
20,522 $
8,970
30 $
19
(356) $
(146)
Banking/financial services
Consumer goods
Capital goods
Energy
Telecommunications/utilities
Health care
Total corporate
Mortgage-backed
Agency
Commercial
Total mortgage-backed
Other asset-backed
Total fixed income securities
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
Agency
Commercial
Total mortgage-backed
Other asset-backed
Total fixed income securities
Equities
Total
13,482
10,108
3,711
7,191
8,647
832
43,971
25,778
20,091
45,869
13,881
133,213 $
9
1
36
—
1
—
47
6
105
111
13
220 $
(367)
(319)
(200)
(379)
(325)
(77)
(1,667)
(656)
(574)
(1,230)
(43)
(3,442) $
21,488 $
13,265
— $
78
(302) $
(100)
189
70
181
81
109
1
631
57
153
210
8
927 $
503
1,430 $
(53)
(65)
(11)
(26)
(73)
(54)
(282)
(364)
(255)
(619)
(51)
(1,354) $
(26)
(1,380) $
21,246
9,674
7,822
7,460
11,179
1,112
58,493
30,920
22,689
53,609
11,556
158,411 $
7,969
166,380 $
82
$
$
$
$
Fair Value
20,196
8,843
13,124
9,790
3,547
6,812
8,323
755
42,351
25,128
19,622
44,750
13,851
129,991
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
157,984
8,446
166,430
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Amortized Cost and Fair Value of Fixed Income Securities by Contractual Maturity
Amortized
($ in ‘000s)
Cost
As of December 31, 2018
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
5,573 $
29,000
33,790
5,100
73,463
59,750
133,213 $
$
$
Fair Value
5,546
28,324
32,724
4,796
71,390
58,601
129,991
As certain securities and debentures have the right to call or prepay obligations, the actual settlement dates may differ from
contractual maturity.
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 the 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 (loss) income. If Atlas determines that it is probable it will be unable to collect all amounts and
Atlas has no intent to sell the debt security, a credit loss is recognized in net investment gains (losses) on investments in the
consolidated statements of (loss) income to the extent that the present value of expected cash flows is less than the amortized cost
basis; any difference between fair value and the new amortized cost basis (net of the credit loss) is reflected in other comprehensive
(loss) income, 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.
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There were no other-than-temporary impairments recorded in 2018, 2017 or 2016 as a result of the OTTI analysis performed by
management.
Aging of Unrealized Losses in Fixed Income Securities and Equities
($ in ‘000s)
Less Than 12 Months
Unrealized
Losses
Fair Value
More Than 12 Months
Unrealized
Losses
Fair Value
Total
Fair Value
Unrealized
Losses
December 31, 2018
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
Agency
Commercial
Total mortgage-backed
Other asset-backed
$
507 $
— $
15,857 $
(356) $
16,364 $
(356)
1,687
(27)
4,875
(119)
6,562
(146)
8,376
5,442
1,727
4,516
3,806
127
23,994
(235)
(176)
(135)
(295)
(99)
(2)
(942)
3,861
4,132
1,430
2,296
4,259
628
16,606
(132)
(143)
(65)
(84)
(226)
(75)
(725)
12,237
9,574
3,157
6,812
8,065
755
40,600
5,035
5,256
10,291
9,568
46,047 $
(72)
(149)
(221)
(22)
(1,212) $
19,210
11,062
30,272
1,748
69,358 $
(584)
(425)
(1,009)
(21)
(2,230) $
24,245
16,318
40,563
11,316
115,405 $
(367)
(319)
(200)
(379)
(325)
(77)
(1,667)
(656)
(574)
(1,230)
(43)
(3,442)
Total fixed income securities
$
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
Agency
Commercial
Total mortgage-backed
Other asset-backed
Total fixed income securities
Equities
Total
$
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)
1,931
710
101
—
938
322
4,002
(27)
(18)
(1)
—
(50)
(47)
(143)
7,952
6,545
2,712
3,368
5,426
929
26,932
(136)
(53)
(189)
(44)
(518) $
(26)
(544) $
9,786
6,553
16,339
1,087
34,253 $
—
34,253 $
(228)
(202)
(430)
(7)
(836) $
—
(836) $
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)
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As of December 31, 2018, we held 391 individual fixed income securities that were in an unrealized loss position, of which 246
individual fixed income securities were in a continuous loss position for longer than 12 months. 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. We did not recognize the unrealized
losses in earnings on these fixed income securities in 2018 or 2017, 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.
Components of Net Investment Income
($ in ‘000s)
Total investment income
Interest income
(Loss) income from other investments
Investment expenses
Net investment income
Year ended December 31,
2017
2016
2018
$
$
4,115 $
(470)
(998)
2,647 $
3,834 $
1,911
(848)
4,897 $
3,747
1,942
(865)
4,824
Aggregate Proceeds and Gross Realized Investment Gains and Losses
($ in ‘000s)
Year ended December 31,
2017
2016
2018
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
Other investments:
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
$
$
49,247 $
343
(652)
24,274 $
300
(55)
59,161
1,296
(131)
5,458
814
(25)
93
93
—
6,161
635
(2)
(6)
—
(6)
662
65
—
—
—
—
54,798 $
1,250
(677)
30,429 $
935
(63)
59,823
1,361
(131)
1 The proceeds from sales and calls, gross realized investment gains and gross realized investment losses on fixed income securities in 2016 were restated to
include both voluntary and involuntary calls.
Components of Net Realized Gains (Losses)
($ in ‘000s)
Fixed income securities
Equities
Other investments
Net realized gains
Other Investments
Year ended December 31,
2017
2016
2018
$
$
(309) $
789
93
573 $
245 $
633
(6)
872 $
1,165
65
—
1,230
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. The carrying values of the equity method limited partnerships were $24.0 million and $25.3 million as of December
31, 2018 and 2017, respectively. The carrying value of these investments is Atlas’ share of the net book value for each limited
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partnership. The carrying values of the collateral loans were $1.0 million and $6.2 million as of December 31, 2018 and 2017,
respectively.
Equity Method Investments by Type
($ in ‘000s)
Real estate
Insurance linked securities
Activist hedge funds
Venture capital
Other joint venture
Total equity method investments
As of December 31,
2018
2017
2018
Unfunded
Commitments
$
2,887 $
—
—
3,070
—
5,957 $
$
Carrying Value
11,085 $
6,694
3,911
2,015
325
24,030 $
10,660
9,073
4,367
853
325
25,278
Due to the timing of financial information of the Company’s equity method investments, certain investments are recorded on a
financial reporting lag of one to three months.
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, 2018 and 2017, the Company had no valuation allowances established for equity method limited partnerships
and loans.
Short-Term Investments
Atlas’ short-term investments are comprised of fixed income securities. As of December 31, 2018, short-term investments totaled
$4.7 million. Atlas had no short-term investments as of December 31, 2017.
Collateral Pledged
As of December 31, 2018 and 2017, bonds, cash and cash equivalents with a fair value of $14.9 million and $15.0 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, 2018 and 2017, the amounts of such pledged securities were $31.3
million and $12.2 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.
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6. Fair Value of Financial Instruments
U.S. GAAP requires certain assets and liabilities to be reported at fair value in the financial statements and provides a framework
for establishing that fair value. Level 1 inputs are given the highest priority in the hierarchy while Level 3 inputs are given the
lowest priority. Assets and liabilities carried at fair value are classified in one of the following three categories based on the nature
of the inputs to the valuation technique used:
Level 1
Observable inputs that reflect unadjusted quoted prices for identical assets or liabilities in active markets as of the
reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency
and volume to provide pricing information on an ongoing basis.
Level 2 Observable market-based inputs or unobservable inputs that are corroborated by market data.
Level 3
Unobservable inputs that are not corroborated by market data. These inputs reflect management’s best estimate of
fair value using its own assumptions about the assumptions a market participant would use in pricing the asset or
liability.
Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
Atlas’ assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the
placement of the asset or liability within the fair value hierarchy levels.
The following is a summary of significant valuation techniques for assets measured at fair value on a recurring basis:
U.S. treasury and other U.S.
government obligations
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 1
Equities
States, municipalities and
political subdivisions
Level 2
Corporate bonds
Mortgage-backed and
other asset-backed
Comprised of publicly-traded common stocks. Valuation is based on unadjusted quoted
prices for identical assets in active markets that Atlas can access.
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.
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.
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.
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Investments at Fair Value
($ in ‘000s)
As of December 31, 2018
Fixed income securities:
Level 1
Level 2
Level 3
Total
U.S. Treasury and other U.S. government obligations
States, municipalities and political subdivisions
Corporate
$
20,196 $
—
— $
8,843
— $
—
Banking/financial services
Consumer goods
Capital goods
Energy
Telecommunications/utilities
Health care
Total corporate
Mortgage-backed
Agency
Commercial
Total mortgage-backed
Other asset-backed
Total fixed income securities
Equities
Total
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
Agency
Commercial
Total mortgage-backed
Other asset-backed
Total fixed income securities
Equities
Total
—
—
—
—
—
—
—
—
—
—
—
20,196 $
5,929
26,125 $
13,124
9,790
3,547
6,812
8,323
755
42,351
25,128
19,622
44,750
13,851
109,795 $
—
109,795 $
21,186 $
—
— $
13,243
—
—
—
—
—
—
—
—
—
—
—
21,186 $
8,446
29,632 $
21,382
9,679
7,992
7,515
11,215
1,059
58,842
30,613
22,587
53,200
11,513
136,798 $
—
136,798 $
$
$
$
$
$
—
—
—
—
—
—
—
—
—
—
—
— $
—
— $
— $
—
—
—
—
—
—
—
—
—
—
—
—
— $
—
— $
20,196
8,843
13,124
9,790
3,547
6,812
8,323
755
42,351
25,128
19,622
44,750
13,851
129,991
5,929
135,920
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
157,984
8,446
166,430
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, 2018. 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.
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The Company had no fair value investments classified as Level 3 as of December 31, 2018 and 2017. There were no transfers in
or out of Level 2 or Level 3 during 2018 and 2017.
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 P&C 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 P&C 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%. In 2017, the Company recognized
income tax expense of $10.5 million related to reduction in the net deferred tax asset as a result of this re-measurement.
Atlas’ effective tax rate was (24.6)%, 12.1% and (416.8)% in 2018, 2017 and 2016, respectively.
Reconciliation of U.S. Statutory Marginal Income Tax Rate to the Effective Tax Rate
($ in ‘000s)
2018
Year ended December 31,
2017
2016
Provision for taxes at U.S. statutory
marginal income tax rate
Provision for deferred tax assets deemed
unrealizable (valuation allowance)
Nondeductible expenses
Tax-exempt income
State tax (net of federal benefit)
Stock compensation
Nondeductible goodwill
Nondeductible acquisition accounting
adjustment
Change in statutory tax rate
Other
Provision for income taxes for continuing
operations
Amount
%
Amount
%
Amount
%
$
(13,482)
21.0 % $
(15,453)
35.0% $
179
35.0 %
28,830
62
(12)
(2)
(42)
572
(109)
—
(6)
(44.9)
(0.1)
—
—
0.1
(0.9)
0.2
—
—
—
51
(23)
(2)
(458)
—
—
10,542
—
—
(0.1)
0.1
—
1.0
—
—
(23.9)
—
—
24
(39)
28
—
—
—
4.7
(7.6)
5.5
—
—
(2,204)
—
(122)
(430.5)
—
(23.9)
$
15,811
(24.6)% $
(5,343)
12.1% $
(2,134)
(416.8)%
Components of Income Tax Expense (Benefit)
($ in ‘000s)
Current tax benefit
Deferred tax (benefit) expense
Change in deferred tax valuation allowance
Total
Year ended December 31,
2017
2016
2018
$
$
(1,174) $
(11,845)
28,830
15,811 $
(6,719) $
1,376
—
(5,343) $
(2,586)
452
—
(2,134)
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 the valuation allowance.
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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 (“NOLs”) of
approximately $25.3 million as of December 31, 2018.
Components of Deferred Income Tax Assets and Liabilities
($ in ‘000s)
Gross deferred tax assets:
Losses carried forward
Claims liabilities and unearned premium reserves
Bad debts
Tax credits
Commissions
Stock compensation
Other
Valuation allowance
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,
2018
2017
$
25,326 $
5,949
1,009
—
—
760
418
(29,416)
4,046
1,535
189
1,371
633
318
4,046
$
— $
13,313
6,171
—
1,172
623
602
1,094
—
22,975
3,107
213
847
715
1,108
5,990
16,985
Net Operating Loss Carryforward as of December 31, 2018 by Expiry Date
($ in ‘000s)
Year of Occurrence
2001
2002
2006
2007
2008
2009
2010
2011
2012
2015
2017
2018
2018
Total
Year of Expiration
2021
2022
2026
2027
2028
2029
2030
2031
2032
2035
2037
2038
Indefinite
Amount
5,007
4,317
7,825
5,131
1,949
1,949
1,949
4,166
9,236
1
27,313
47,653
4,106
120,602
$
$
NOLs and other carryforwards generated in 2017 and 2018 are not limited by IRC Section 382.
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. When considering the extent of the valuation allowance on Atlas’ DTA, 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
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evidence that is difficult to overcome in determining that a valuation allowance is not needed against DTAs. Based on Atlas’
cumulative loss in recent years, Atlas has established a valuation allowance of $29.4 million for its gross future deferred tax assets
as of December 31, 2018. The Company had no valuation allowance as of December 31, 2017.
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 in 2018, 2017 or 2016. Tax years 2015 and years thereafter are subject to examination by the Internal Revenue
Service (“IRS”).
8. Commitments and Contingencies
On May 22, 2012, Atlas closed the sale and leaseback of its 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 in 2017. There was no offset to rent expense recognized in 2018. Atlas recognized $17,000 and $43,000 as an offset
to rent expense in 2017 and 2016, respectively. There was no rental expense recognized on the former headquarters building in
2018. Total rental expense recognized on the former headquarters building was $740,000 and $743,000 in 2017 and 2016,
respectively.
Future Minimum Rentals1
($ in ‘000s)
Year
Amount
2019
2020
2021
2022
2023
2024 &
Beyond
Total
$
1,137 $
1,088 $
954 $
174 $
16 $
— $
3,369
1 Related principally to office space, required under operating leases, having initial or remaining non-cancelable lease terms in excess of one year.
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, 2018, the unfunded
commitments are $6.0 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 premiums written”), 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.
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9. Property and Equipment
Property and Equipment Held1
($ in ‘000s)
Buildings
Land
Building improvements
Leasehold improvements
Internal use software
Computer equipment
Furniture and other office equipment
Total
Accumulated depreciation
Total property and equipment, net
1 Excluding assets held for sale.
As of December 31,
2017
2018
7,425 $
1,840
9,006
190
17,575
1,821
2,897
40,754 $
(9,391)
31,363 $
7,425
1,840
7,900
140
9,567
1,465
2,582
30,919
(6,480)
24,439
$
$
$
Depreciation expense and amortization was $2.9 million, $1.4 million and $1.0 million in 2018, 2017 and 2016, respectively.
During 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 in the building. An unrelated tenant occupies the remaining office space in the building. The Company made improvements
to its corporate headquarters building of $1.1 million, $7.8 million and $139,000 in 2018, 2017 and 2016, respectively. Rental
income related to this lease agreement was $433,000, $415,000 and $69,000 in 2018, 2017 and 2016, respectively. Depreciation
expense related to the building and its improvements was $1.1 million and $171,000 in 2018 and 2017, respectively. There was
no depreciation expense related to the building and its improvements recorded in 2016.
For the years ended December 31, 2018, 2017, and 2016 the Company capitalized $7.9 million, $2.9 million, and $449,000,
respectively, of costs incurred, consisting primarily of external consultants and internal labor costs incurred during the application
development stage of the internal-use software. Substantially all of the costs incurred during the period were part of the application
development stage. For the years ended December 31, 2018, 2017, and 2016, there was $705,000, $563,000, and $576,000,
respectively, of amortization expense recorded for projects in the post-implementation/operation stage.
Net realized gains on the disposal and sales of equipment were $2,000 in 2018, and net realized losses on the disposal and sales
of equipment were $12,000 in 2017. There were no realized gains or losses on the disposal of property or equipment in 2016.
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10. Reinsurance Ceded
As is customary in the insurance industry, Atlas reinsures portions of certain insurance policies it writes, thereby providing a
greater diversification of risk and minimizing exposure on larger risks. Atlas remains contingently at risk with respect to any
reinsurance ceded and would incur an additional loss if an assuming company were unable to meet its obligation under the
reinsurance treaty.
Atlas monitors the financial condition of its reinsurers to minimize its exposure to significant losses from reinsurer insolvencies.
Letters of credit are maintained for any unauthorized reinsurer to cover ceded unearned premium reserves, ceded claims and claims
adjustment expense reserve balances and ceded paid claims. These policies mitigate the risk of credit quality or dispute from
becoming a danger to financial strength. To date, the Company has not experienced any material difficulties in collecting reinsurance
recoverables.
2016
221,723
3,372
(45,028)
180,067
217,053
3,074
(49,069)
171,058
32,496
12,065
35,370
13,372
7,786
Premiums Written, Premiums Earned and Amounts Related to Reinsurance
($ in ‘000s)
Year ended December 31,
2017
2018
Direct premiums written
Assumed premiums written
Ceded premiums written
Net premiums written
Direct premiums earned
Assumed premiums earned
Ceded premiums earned
Net premiums earned
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
$
$
$
$
253,068 $
33,546
(86,419)
200,195 $
257,646 $
22,972
(62,400)
218,218 $
53,201
14,518
68,771
36,898
12,388
261,276 $
14,685
(44,825)
231,136 $
251,293 $
9,796
(45,318)
215,771 $
46,643
11,304
53,402
12,878
7,982
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11. Claims Liabilities
Unpaid Claims and Claims Adjustment Expenses
Changes in the Provision for Unpaid Claims and Claims Adjustment Expenses,
Net of Reinsurance Recoverables
($ in ‘000s)
Year ended December 31,
2017
2018
Unpaid claims and claims adjustment expenses, beginning of period
Less: reinsurance recoverable
Net unpaid claims and claims adjustment expenses, beginning of period
$
211,648 $
53,402
158,246
139,004 $
35,370
103,634
2016
127,011
29,399
97,612
Change in retroactive reinsurance ceded
—
1,361
107
Incurred related to:
Current year
Prior years
Paid related to:
Current year
Prior years
137,916
82,746
220,662
52,637
121,546
174,183
128,476
75,397
203,873
50,626
99,996
150,622
Net unpaid claims and claims adjustment expenses, end of period
Add: reinsurance recoverable
Unpaid claims and claims adjustment expenses, end of period
204,725
68,771
273,496 $
158,246
53,402
211,648 $
$
102,133
32,613
134,746
39,652
89,179
128,831
103,634
35,370
139,004
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.
Atlas experienced $82.7 million in unfavorable prior accident year development in 2018 as reflected as incurred related to prior
years in the table above. The unfavorable development is primarily from our core lines with $66.4 million of the development
related to claims from accident years 2015 through 2017. Year-end 2018 reserve estimates for the Insurance Subsidiaries were
strengthened to the high point of the actuarial range established by the outside independent actuaries for each entity based on
December 31, 2018 data, claim settlement activities, and other factors evaluated subsequent to the receipt of the 2018 actuarial
opinions. While the Company believes that the changes made to its claim process will result in better outcomes than would have
otherwise been the case, uncertainty regarding the ultimate outcome exists, and it cannot be assumed that reserve estimates will
be adequate. Primarily as a result of regulatory concerns regarding reserve levels, the ASI Pool Companies were placed into
rehabilitation in 2019. See ‘Item 1, 2019 Developments’ and “Item 1A, Risk Factors - Risks Related to 2019 Developments -
Regulatory Developments” for certain developments with respect to the Company and the Insurance Subsidiaries subsequent to
December 31, 2018. Incremental claim outcomes and other factors could result in future adjustments to reserves and reserve
estimates.
Atlas experienced $75.4 million in unfavorable prior accident year development in 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 in 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
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pre-acquisition Global Liberty reserve development, the development of our core lines on prior accident years was $23.2 million
in 2016. Michigan commercial automobile claims accounted for approximately 62.5% of this development. Pre-acquisition Global
Liberty claims reserve development was $7.9 million in 2016. The remaining unfavorable prior year development of $1.5 million
in 2016 is attributable to assigned risk pools and run-off of non-core business.
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.
The following is information about incurred and paid claims and claims adjustment expenses development for the year ended
December 31, 2018, 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, 2009 to 2015, is presented as unaudited supplementary information.
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Commercial Automobile Liability
Incurred Claims and Allocated Claims Adjustment Expenses, Net of Reinsurance
($ in ‘000s, except cumulative number of reported claims)
Year ended December 31,
Accident
Year
2009
unaudited
2010
unaudited
2011
unaudited
2012
unaudited
2013
unaudited
2014
unaudited
2015
unaudited
2016
2017
2018
As of December 31, 2018
Incurred but
Not
Reported
Liabilities,
Net of
Reinsurance
Cumulative
Number of
Reported
Claims
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Total
$
37,394 $ 40,309 $ 43,889 $ 43,604 $ 42,909 $ 42,326 $ 42,987 $ 43,728 $ 43,902 $ 44,542 $
35,877
34,677
31,044
35,711
38,822
35,948
37,026
34,887
37,839
48,449
37,205
34,720
38,972
48,636
61,145
38,002
35,136
40,429
53,656
53,005
69,060
38,841
36,080
44,627
64,687
69,555
67,184
80,824
39,246
36,472
46,755
73,749
39,488
36,986
47,780
78,701
92,245
100,546
96,521
122,995
87,516
104,504
101,983
120,510
111,288
Total
$ 807,340
70
129
251
807
1,928
6,344
17,837
13,926
31,118
55,380
13,243
8,577
7,835
9,391
11,764
14,738
19,275
20,063
22,660
19,570
Cumulative Paid Claims and Allocated Claims Adjustment Expenses, Net of Reinsurance
($ in ‘000s)
Year ended December 31,
Accident
Year
2009
unaudited1
2010
unaudited
2011
unaudited
2012
unaudited
2013
unaudited
2014
unaudited
2015
unaudited
2016
2017
2018
$
(3,218) $ 10,711 $ 24,468 $ 31,784 $ 36,385 $ 39,664 $ 42,030 $ 43,287 $ 43,707 $ 44,415
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Total
10,097
20,483
8,725
26,654
18,980
8,385
31,300
24,978
18,230
10,358
34,831
29,660
26,995
27,198
15,404
37,051
33,217
35,563
43,117
38,257
18,597
38,187
35,324
41,587
59,973
60,486
49,556
21,850
38,930
36,058
44,835
68,612
81,141
39,262
36,660
46,702
75,491
92,593
76,398
101,323
53,812
27,977
81,330
66,055
29,404
$ 613,235
318
$ 194,423
All outstanding liabilities before 2009, net of reinsurance
Liabilities for claims and allocated claims adjustment expenses, net of reinsurance
1 Year 2009 negative amounts results from the termination of reinsurance agreements.
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Table of Contents
Other Short-Duration Lines
Incurred Claims and Allocated Claims Adjustment Expenses, Net of Reinsurance
($ in ‘000s, except cumulative number of reported claims)
Year ended December 31,
Accident
Year
2009
unaudited
2010
unaudited
2011
unaudited
2012
unaudited
2013
unaudited
2014
unaudited
2015
unaudited
2016
2017
2018
As of December 31, 2018
Incurred but
Not
Reported
Liabilities,
Net of
Reinsurance
Cumulative
Number of
Reported
Claims
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Total
$
35,688 $ 34,764 $ 34,626 $ 35,453 $ 36,343 $ 36,202 $ 36,736 $ 37,061 $ 37,070 $ 37,423 $
26,884
27,729
20,315
24,714
22,176
13,054
24,922
22,310
12,723
5,897
24,392
21,782
13,634
4,754
6,645
24,456
22,122
13,854
4,556
6,849
8,320
24,477
22,941
13,934
4,687
6,978
8,616
9,357
24,478
22,414
14,109
4,711
7,580
9,591
9,960
11,086
24,526
22,408
13,674
4,655
7,909
9,036
9,983
12,302
12,190
Total
$ 154,106
3
29
20
32
20
889
454
305
408
746
27,847
14,331
10,002
3,616
2,149
2,945
3,979
4,708
5,323
4,885
Cumulative Paid Claims and Allocated Claims Adjustment Expenses, Net of Reinsurance
($ in ‘000s)
For the Years Ended December 31,
Accident
Year
2009
unaudited
2010
unaudited
2011
unaudited
2012
unaudited
2013
unaudited
2014
unaudited
2015
unaudited
2016
2017
2018
$
11,296 $ 25,422 $ 30,343 $ 33,186 $ 34,375 $ 35,785 $ 36,164 $ 36,499 $ 36,714 $ 37,119
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Total
14,182
20,420
11,517
22,596
17,419
6,446
23,812
19,696
9,789
4,195
24,225
20,939
11,554
4,602
6,154
24,368
21,600
12,782
4,603
6,677
7,886
24,414
22,235
13,343
4,612
6,728
8,154
9,413
24,452
22,326
13,317
4,641
6,820
8,291
9,802
10,619
24,492
22,331
13,621
4,627
6,833
8,474
9,859
12,238
11,548
$ 151,142
595
$
3,559
All outstanding liabilities before 2009, 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.
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Table of Contents
The following table reconciles 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, 2018.
Reconciliation of Unpaid Claims and Claims Adjustment Expenses
($ in ‘000s)
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
As of
December 31,
2018
$
194,423
3,559
197,982
67,744
1,027
68,771
6,743
Unpaid claims and claims adjustment expenses, gross of reinsurance
$
273,496
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, 2018 (amounts are unaudited).
Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance
Year ended December 31, 2018
Years
Commercial automobile liability
Other short-duration lines
2
3
1
17.4% 26.4% 21.4% 17.3% 10.6% 6.8% 3.5% 2.1% 0.9% 1.6%
71.7% 16.6% 6.0% 4.3% 2.1% 1.3% 1.0% 0.4% 0.4% 1.1%
10
9
8
4
5
7
6
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12. Share-Based Compensation
On January 6, 2011, Atlas adopted a stock option plan (“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 (“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 stock, 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.
Stock Options
Stock Option Activity
(prices in Canadian dollars designated with “C$” and U.S. dollars
designated with “US$”)
Year ended December 31,
2018
2017
Number of
Options
Weighted
Average
Exercise Price
Number of
Options
Weighted
Average
Exercise Price
54,390
—
(27,195)
27,195
375,000
—
—
375,000
C$6.00
—
C$6.00
C$6.00
US$17.01
—
—
US$17.01
187,728
—
(133,338)
54,390
375,000
—
—
375,000
C$6.22
—
C$6.31
C$6.00
US$17.01
—
—
US$17.01
As of December 31, 2018
Expiration Date
January 18, 2021
March 6, 2024
March 12, 2025
Number Outstanding
Number Exercisable
27,195
175,000
200,000
402,195
27,195
—
—
27,195
There are 27,195 stock options that are exercisable as of December 31, 2018. The stock option grants outstanding have a weighted
average remaining life of 5.48 years and have an intrinsic value of $100,000 as of December 31, 2018.
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
‘Part II, Item 8, Note 13, Other Employee Benefit Plans’ in the Notes to Consolidated Financial Statements) 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 6 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
(“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 (“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 share at
close of market on June 17, 2013 (“Closing Price”), which was $8.10 per share. The restricted stock grants for ordinary voting
common shares will vest 20% on each anniversary of the Grant Date, subject to the terms of the Guidelines. The matching grant
will be subject to all of the terms and conditions of the Equity Incentive Plan and applicable grant agreements. The matching grant
award was discontinued during 2018 with no additional grants under the program since those discussed above.
99
C$ Denominated:
Outstanding, beginning of period
Granted
Exercised
Outstanding, end of period
US$ Denominated:
Outstanding, beginning of period
Granted
Exercised
Outstanding, end of period
Options Outstanding
Grant Date
January 18, 2011
March 6, 2014
March 12, 2015
Total
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On December 31, 2018, the Company awarded restricted stock unit grants for ordinary voting common shares of the Company
to its external directors pursuant to a director equity award agreement dated December 31, 2018. The awards, which were approved
by the Company’s Board of Directors in March 2018, were valued at $40,000 per external director (“Aggregate Award”) and were
made under the Company’s Equity Incentive Plan. The number of restricted stock units awarded was determined by dividing (A)
the Aggregate Award by (B) the closing price of one share of Company ordinary voting common share at the close of market on
April 4, 2018, which was $10.50 per share. For new directors, the Aggregate Award is proportionate to the director’s start date
and priced as of that same day. During 2018, the Company awarded 17,524 RSU grants having an aggregate grant date fair value
of $179,000. The RSUs will vest 33.3% on January 1 of each year for the next three years.
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 five 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. In 2018, no shares of either the restricted stock grants for ordinary voting common
shares or the options to acquire ordinary voting common shares vested, due to not meeting annual performance targets. In 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.
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
Restricted Stock Grants for Ordinary Voting Common Shares and Restricted Share Unit Activity
Non-vested, beginning of period
Granted
Vested
Non-vested, end of period
Year ended December 31,
2018
2017
Number of
Shares
Weighted
Average Fair
Value at Grant
Date
Number of
Shares
Weighted
Average Fair
Value at Grant
Date
234,080 $
17,524
(44,448)
207,156 $
16.15
10.22
12.20
16.50
311,120 $
—
(77,040)
234,080 $
15.92
—
15.21
16.15
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 (loss) income and comprehensive (loss) income. Atlas
recognized share-based compensation expense of $1.2 million in each of the years ended December 31, 2018 and 2017 and $1.6
million in 2016. As of December 31, 2018, there was $644,000 of unrecognized total compensation expense related to all restricted
stock and restricted stock units grants for ordinary voting common shares. The expense will be amortized over a weighted average
period of 1.2 years.
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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
$543,000, $441,000 and $424,000 in 2018, 2017 and 2016, respectively.
Employee Stock Purchase Plan
The Atlas Employee Stock Purchase Plan (“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. In 2018, 2017 and 2016, Atlas’ costs incurred related to
the matching portion of the ESPP were $239,000, $212,000 and $199,000, respectively. Share purchases pursuant to this plan are
made in the open market.
14. Share Capital and Mezzanine Equity
Share Capital
Share Capital Activity
As of December 31,
2018
2017
Shares
Authorized
Shares
Issued
Shares
Outstanding
Amount
($ in ‘000s)
Shares
Issued
Shares
Outstanding
Amount
($ in ‘000s)
Ordinary voting common
shares
Restricted voting
common shares
Total common shares
266,666,667
12,192,475
11,936,970 $
36 12,164,041
12,164,041 $
33,333,334
300,000,001
—
12,192,475
—
11,936,970 $
—
—
36 12,164,041
—
12,164,041 $
36
—
36
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, 2018.
There were 24,932 and 14,816 non-vested RSUs as of December 31, 2018 and 2017, 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 2018, the Company issued 7,408 ordinary voting common shares as a result of the vesting of RSUs and 27,195 ordinary
voting common shares, then immediately canceled 6,169 shares, as a result of a cashless exercise of options. During 2017, the
Company issued 7,408 ordinary voting common shares as a result of the vesting of RSUs and 133,338 ordinary voting common
shares as a result of 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 common
stock. The repurchases could 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 Share Repurchase Program was not extended. The Company’s decisions around the timing, volume, and nature of share
repurchases, and the ultimate amount of shares repurchased, was dependent on market conditions, applicable securities laws and
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other factors. The Share Repurchase Program and the Board’s authorization of the program could have been modified, suspended
or discontinued at any time. During 2018, 255,505 shares were repurchased under the Share Repurchase Program. No shares were
repurchased under the Share Repurchase Program during 2017.
Atlas did not declare or pay any dividends to its common shareholders during 2018 or 2017.
Mezzanine Equity
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, 2018 and 2017, there were no outstanding preferred shares. The
preferred shares redeemed and canceled during 2016 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 (loss) income and comprehensive (loss) 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. During 2018, Atlas paid $333,000 in dividends earned on the preferred shares to the former owner
of Anchor, the cumulative amount to which they were entitled through December 31, 2017, leaving no accrued or unpaid dividends.
The paid claims development on Global Liberty’s pre-acquisition claims reserves was in excess of $4.0 million, and as a result,
pursuant to the terms of the Anchor stock purchase agreement, dividends will no longer accrue to the former owner of Anchor.
15. Deferred Policy Acquisition Costs
DPAC represent those costs that are incremental and directly related to the successful acquisition of new or renewal written
premium. Such DPAC generally includes agent commissions, premium taxes and a portion of employee compensation and benefits
directly related to time spent performing specific acquisition or renewal activities. The method followed in determining the DPAC
limits the deferral to its realizable value by giving consideration to estimated future claims and expenses to be incurred as premiums
are earned. Changes in estimates, if any, are recorded in the accounting period in which they are determined. Anticipated investment
income is included in determining the realizable value of the DPAC. Atlas’ DPAC are reported net of deferred ceding commissions.
Policy acquisition costs are deferred and amortized over the period in which the related premiums written are earned, typically
12 months.
Components of Deferred Policy Acquisition Costs
($ in ‘000s)
Balance, beginning of period
Acquisition costs deferred
Amortization charged to operations
Balance, end of period
Year ended December 31,
2017
2016
2018
$
$
14,797 $
18,627
(26,115)
7,309 $
13,222 $
29,460
(27,885)
14,797 $
10,235
21,790
(18,803)
13,222
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16. Related Party Transactions
See ‘Item 13, Certain Relationships and Related Transactions, and Director Independence ” for disclosure regarding the Company’s
related party transactions.
17. Selected Quarterly Financial Data (unaudited)
($ in ‘000s, except per share data)
Q4
Q3
Q2
Q1
Gross premiums written
Net premiums earned
Net (loss) income attributable to common shareholders
(Loss) earnings per common share basic
(Loss) earnings per common share diluted
Gross premiums written
Net premiums earned
Net (loss) income attributable to common shareholders
(Loss) earnings per common share basic
(Loss) earnings per common share diluted
$
$
$
$
$
$
57,749 $
52,506
(96,722)
(8.06) $
(8.06) $
54,213 $
57,431
(54,297)
(4.48) $
(4.48) $
2018
75,917 $
54,461
5,605
0.47 $
0.47 $
2017
65,898 $
55,865
5,125
0.43 $
0.42 $
57,359 $
55,359
5,576
0.47 $
0.47 $
57,354 $
54,049
5,510
0.46 $
0.45 $
95,589
55,892
5,529
0.46
0.45
98,496
48,426
4,852
0.40
0.40
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18. Notes Payable
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).
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 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
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.
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.
Interest expense on notes payable was $1.9 million, $1.8 million and $1.0 million in 2018, 2017 and 2016, respectively.
Notes Payable Outstanding
($ in ‘000s)
6.625% Senior Unsecured Notes due April 26, 2022
Unamortized issuance costs
Total notes payable
As of December 31,
2017
2018
$
$
25,000 $
(745)
24,255 $
25,000
(969)
24,031
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19. Statutory Information
Atlas’ Insurance Subsidiaries 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 (“NAIC”). 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. The Insurance Subsidiaries must each maintain a minimum
statutory capital and surplus of $1.5 million, $2.4 million and $3.5 million under the provisions of the Illinois Insurance Code,
the Missouri Insurance Code and the New York Insurance Code, respectively. As of December 31, 2018, 2017 and 2016, each of
our Insurance Subsidiaries individually exceed the minimum required statutory capital and surplus requirements. See “Risk Factors
- Risks Related to 2019 Developments - Regulatory Developments” for certain developments with respect to the Insurance
Subsidiaries subsequent to December 31, 2018.
Statutory Net Loss and Surplus of Atlas’ Insurance Subsidiaries
($ in ‘000s)
Year Ended December 31,
2017
2016
2018
Statutory net loss
Combined statutory capital and surplus
$
$
49,648 $
35,199 $
3,585
14,377 $
87,813 $
113,943
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. The NAIC RBC formula generates the regulatory minimum amount of capital
that a company is required to maintain to avoid regulatory action. There are four levels of action that a company can trigger under
the formula: company action, regulatory action, authorized control and mandatory control levels. Each RBC level requires some
particular action on the part of the regulator, the company, or both. For example, an insurer that breaches the Company Action
Level must produce a plan to restore its RBC levels. As of December 31, 2018, the total adjusted capital of three of our Insurance
Subsidiaries exceeded the minimum levels required under RBC requirements, with one subsidiary breaching the Company Action
Level. We are working with the appropriate regulators to restore its RBC levels. We do not expect that this restoration will impede
our ability to execute on strategic plans. See “Risk Factors - Risks Related to 2019 Developments - Regulatory Developments”
for certain developments with respect to the Insurance Subsidiaries subsequent to December 31, 2018.
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, loans or advances 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.
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 months. Atlas' Insurance Subsidiaries did not declare or pay any dividends
to Atlas during 2018 or 2017.
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20. Subsequent Events
Throughout 2019, the Company has been exploring strategic alternatives, including, but not limited to, further strengthening its
processes, reviewing its capital allocation and opportunities, a potential sale of the Company or certain assets, and balance sheet
strengthening options with the goal of facilitating shareholder value generation. Atlas concluded that the utilization of its wholly
owned MGA operation to work with strategic external insurance and reinsurance partners will enable the Company to leverage
its focus, experience and infrastructure to create value for stakeholders. A definitive agreement was executed effective June 10,
2019 between Atlas and American Financial Group, Inc. (NYSE: AFG), under which Atlas will act as an underwriting manager
for AFG’s National Interstate (“NATL”) subsidiary and transition new and renewal paratransit business to NATL paper for this
book of business. The Company is working on additional arrangements with the objective of establishing MGA relationships in
connection with the Company’s other lines of business as well. The Company agreed that should it choose to sell its MGA
operations, 49% of the proceeds from any future sale of AGMI would be provided to the ASI Pool Companies to facilitate the
rehabilitation process. There can be no assurance that any portion of the proceeds allocated to the ASI Pool Companies would be
available for distribution to the Company.
During 2019, the Illinois Department of Insurance (the “Department”) placed all three of the ASI Pool Companies (after Gateway
was redomesticated in Illinois) into rehabilitation with the Director of the Department as the statutory rehabilitator. While in
rehabilitation, the operations of such insurance subsidiaries will be overseen by the statutory rehabilitator although Atlas continues
to maintain its legal ownership of the stock of the ASI Pool Companies. Management’s overriding strategic plan continues to
include a transition of business from these insurance companies to alternative markets within a reasonable period of time utilizing
the existing platform of the MGA to work with strategic external insurance and reinsurance partners.
Effective August 15, 2019, no new business was written by the ASI Pool Companies, and only New York area new business was
written by Global Liberty, which is focusing its resources on New York area business to leverage the subsidiary’s heritage in this
large and specific market. The ASI Pool Companies and Global Liberty continued to write renewal business that met their
underwriting standards during 2019. Non-renewals related to ASI Pool Companies’ insurance policies began towards the end of
2019.
On January 22, 2020, the Company announced a non-binding letter of intent with Buckle, a technology-driven financial services
company, to purchase the stock of Atlas’ indirect subsidiary Gateway Insurance Company (“Gateway”) and its corporate charter
and forty-seven (47) state insurance licenses as well as state statutory deposits, subject to regulatory and other necessary approvals,
for $4.7 million plus the value of all purchased deposits, such amount to be paid to the Rehabilitator for the benefit of the rehabilitation
estate of Gateway, with a tentative closing date in March of 2020. The Company anticipates that Buckle will engage the MGA
and certain other subsidiaries of the Company to provide services to Buckle and that Buckle will lease space at the Company’s
headquarters and its Melville, NY office.
The transaction will be subject to court approval and a bid process established by the Rehabilitator and approved by the court, and
there can be no assurance that the transaction will be consummated on the terms described herein or at all.
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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 maintain disclosure controls and procedures designed to provide reasonable assurance that information required to be disclosed
in our reports filed pursuant to the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed,
summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated
and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow
timely decisions regarding required disclosure. A control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system are met.
As of December 31, 2018, our Chief Executive Officer and Chief Financial Officer carried out an evaluation of the effectiveness
of our disclosure controls and procedures as such term is defined in Rule 13a-15(e) under the Exchange Act, and concluded as of
the end of the period covered by this report that our disclosure controls and procedures were not effective due to failure to timely
file certain periodic reports during 2019 as discussed below in connection with 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).
The 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. The Company’s internal control over financial reporting includes those policies and procedures
that:
i. Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions
of the assets of the company;
ii. 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 in
accordance with authorizations of management and directors of the Company; and
iii. 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.
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is
a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented
or detected on a timely basis.
Under the supervision 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 using the criteria established in Internal Control -
Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Based on our assessment of those criteria, management concluded that our internal control over financial reporting as of December
31, 2018 was not effective due to the material weakness described below:
Timely identification of financial closing delays: Through a confluence of events involving the Company’s former auditor
which we do not believe could have reasonably been anticipated, the Company did not timely file its Annual Report on Form
10-K containing its audited financial statements for the year ending December 31, 2018 and therefore did not have an effective
internal control in place to monitor the progress of all aspects of its financial reporting close process to timely identify delays,
resulting in the Company being unable to timely meet its financial reporting requirements with the SEC and Nasdaq.
The delay in the completion of the audit of the Company’s financial statements for the fiscal year ended December 31, 2018
was due to the previously disclosed disagreement with the Company’s former independent registered public accounting firm
with respect to insurance reserves in certain of the Company’s insurance subsidiaries for the fiscal year ended December 31,
2018. The Company dismissed its former independent registered public accounting firm on April 29, 2019. As a result of
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this disagreement and termination, the audit of the Company’s financial statements for the fiscal year ended December 31,
2018 could not be completed in such time as to remain compliant with SEC and Nasdaq reporting requirements.
Remediation Plan for Material Weakness in Internal Control over
Financial Reporting
With respect to the material weakness related to timely identification of financial closing delays and the resulting failure to timely
file, the Company engaged another independent registered public accounting firm to complete the audit of its December 31, 2018
financial statements. The Company has also taken steps to monitor the progress of all aspects of its financial closing process
including more detailed discussions as needed with its independent registered public accounting firm regarding insurance reserve
calculations. The Company expects to file its delayed Quarterly Reports on Form 10-Q for the periods ending March 31, June
30, and September 30, 2019 as soon as practicable.
Changes in Internal Control over Financial Reporting
There were no changes in the Company’s internal control over financial reporting identified in connection with management’s
evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the quarter ended December 31, 2018 that have
materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. Further,
there have been no such changes since December 31, 2018 other than the action described in Remediation Plan for Material
Weaknesses in Internal Control over Financial Reporting.
The Company’s independent registered public accounting firm has audited the Company’s internal control over financial reporting
as of December 31, 2018, as stated in the Report of Independent Registered Public Accounting Firm, appearing under Item 8.
Item 9B. Other Information
None.
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Part III
Item 10. Directors, Executive Officers and Corporate
Governance
Director
Scott D. Wollney
Gordon G. Pratt
Ronald E. Konezny
Jordan M. Kupinsky
Walter F. Walker
John T. Fitzgerald
Director since Principal Occupation
2010
2010
2018
2009
2013
2013
Current Committees
IC
President, Chief Executive Officer and Director of Atlas
Financial Holdings, Inc.
Managing Member of Fund Management Group LLC
CC
Chief Executive Officer and Director of Digi International
President of Justley Capital Corporation
Owner and Chief Investment Officer of Hana Road
Capital LLC
President, Chief Executive Officer and Director of
Kingsway Financial Services Inc.
AC*, CC*, IC, NCGC
AC, IC*, NCG
AC, CC, NGC*
AC = Audit Committee CC = Compensation Committee IC = Investment Committee NCGC = Nominating and Corporate Governance Committee
* Denotes committee chair.
Each nominee, other than Mr. Ronald Konezny, was previously elected at Atlas' annual meeting on May 22, 2018, for one-year
terms. Mr. Konezny was elected by the Board effective July 10, 2018. Effective January 2, 2018, Mr. Larry Swets retired from
the Atlas Board of Directors. On February 27, 2019, Mr. John T. Fitzgerald informed Atlas that he will not stand for reelection to
the Atlas Board of Directors. Mr. Fitzgerald's decision not to stand for reelection was not the result of any disagreement with the
Company.
The following sets forth the name, age, and business experience during at least the past five years, indicating their principal
occupation during the period, and the name and principal business of the organization by which they were employed, and
qualifications of each person serving as a director of the Company as of December 31, 2018.
SCOTT WOLLNEY
President, Chief Executive Officer and Director
Age: 51
Principal Occupation: President, Chief Executive Officer and Director of Atlas Financial Holdings, Inc.
Business Experience:
•
•
•
•
President and Chief Executive Officer since December 31, 2010.
President and Chief Executive Officer of Kingsway America Inc. (“KAI”), a property and casualty holding company,
from July 2009 until December 31, 2010.
President and Chief Executive Officer of Lincoln General Insurance Company (a subsidiary of KAI), a property and
casualty insurance company, from May 2008 to March 2009.
President of Avalon Risk Management, Inc., an insurance broker, from January 1998 to May 2008.
Qualifications:
• MBA graduate of Northwestern University's Kellogg School of Management with a concentration in finance and
management strategy.
• Bachelor of Arts degree from the University of Illinois.
• Experience building successful businesses as well as re-organizing challenged companies around a focused strategy to
address legacy issues and set them on a path for future success.
• Direct experience and expertise with respect to the numerous disciplines that are critical to the insurance business.
Other Board Service:
• Director of 1347 Property Insurance Holdings, Inc., a property and casualty insurance holding company.
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GORDON PRATT
Director and Chairman of the Board
Age: 57
Principal Occupation: Managing Member of Fund Management Group LLC
Business Experience:
• Managing Member of Fund Management Group LLC, a privately-held investment and holding company, organized in
Connecticut and headquartered in Florida since 2004.
• Director, President and Chief Executive Officer of 1347 Capital Corp., a NASDAQ listed special purpose acquisition
company. Upon 1347 Capital Corp's merger, on July 20, 2016, 1347 Capital Corp. was renamed Limbach Holdings, Inc.
•
Senior Vice-President, Finance of the Willis Group, an insurance brokerage company, in New York from June 2004 to
April 2006, prior to which he was an equity holder and Managing Director of Hales Capital Advisors, a private equity
firm, and co-founder and Managing Partner for Distribution Partners Investment Capital L.P., a private equity fund focused
on the insurance industry.
• Before joining Hales, served as Senior Vice President and member of the management committee of Conning & Company,
a third party investment manager, where he helped to raise and invest capital for three Conning private equity funds.
• Began career in 1986 at The Chase Manhattan Bank, N.A., a financial institution, in New York.
Qualifications:
• Master of Management degree from Northwestern University's Kellogg School of Management.
• Bachelor of Arts degree from Cornell University.
• Experience evaluating financial statements for more than 50 insurance companies and/or their holding company parents.
Such evaluations include companies' uses of accounting estimates, accruals and provisions.
• Experience with investing and offers his opinion to company management teams based upon his evaluations concerning
financial statements, which cover a wide range of complexity and accounting issues.
• Understanding of internal controls and procedures for financial reporting for insurance companies and/or insurance
holding company parents from his services as a member of certain boards of directors.
Other Board Service:
• Director, Chairman of the Board and member of the Compensation Committee of Limbach Holdings, Inc., a NASDAQ
listed integrated building systems provider, since 2014.
• Director of 1347 Property Insurance Holdings, Inc. from November 2013 to March 2017.
• Chairman of the Board of 1347 Capital LLC, a private investment advisory firm from March 2014 to June 2016.
• Chairman and Vice Chairman of the boards of directors of United Insurance Holdings Corp. and its predecessor company
FMG Acquisition Corp., NASDAQ listed companies, from 2007 through 2012.
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RONALD KONEZNY
Director
Age: 52
Principal Occupation: Chief Executive Officer and Director of Digi International
Business Experience:
• Chief Executive Officer and Director of Digi International, a leading provider of solutions to industrial and commercial
clients worldwide, since December 17, 2014.
• General Manager of Worldwide Transportation and Logistics Division at Trimble Navigation Limited and PeopleNet
Communications Corporation, both transportation and logistics technology companies, from August 2011 to September
2013.
•
Founded PeopleNet Communications Corporation in 1995. Served as Chief Executive Officer since July 23, 2007. Served
as Chief Operating Officer and Chief Financial Officer from 2001 to 2007 and Chief Technology Officer from 1996 to
2007.
Qualifications:
• Bachelor of Arts degree in Economics from Northwestern University and a Phi Eta Sigma nominee.
•
Possesses extensive business, operating and executive expertise.
• Experience improving companies' profitability to sustainable double-digit levels and expanding recurring revenue
business.
• Direct experience with multiple successful acquisitions.
Other Board Service:
•
•
•
President, CEO and Director of Digi International Inc. since December 17, 2014.
Former Director of I.D. Systems, Inc. from June 2014 through June 2018.
Served on the Boards of Directors of the National Private Truck Council Institute and the Truckload Carriers
Association.
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JORDAN KUPINSKY
Director
Age: 46
Principal Occupation: President of Justley Capital Corporation
Business Experience:
•
•
•
Senior Vice President and Managing Director at Windsor Private Capital, a private merchant banking firm, since July
2019.
President of Justley Capital Corporation, a private investment and advisory firm, since September 2016.
Partner with JJR Private Capital, an independent private capital and diversified merchant bank, from April 2008 to
September 2016.
• Managing Director with Windsor Private Capital, a private merchant banking firm, from January 2011 to July 2014.
• Vice President at Greenhill & Co., an independent global investment banking firm, listed on the NYSE, focused on
mergers and acquisitions and financial restructuring from March 2006 to May 2008.
• Vice President of Corporate Development and General Counsel at Minacs Worldwide Inc., a publicly traded company
on the TSX, from July 2002 to February 2005.
• Began career practicing corporate securities law at Torys LLP in Toronto from 1997 to 1999.
• An investment banking associate at Houlihan Lokey Howard & Zukin from 1999 to 2002.
Qualifications:
•
Joint MBA and JD degree from the Schulich School of Business and Osgoode Hall Law School at York University.
• Experience in financial statement review with both public and private companies.
• Direct experience includes securities law, financial analysis and corporate governance.
Other Board Service:
•
Former Chairman of Concordia International Corp. from 2016 through 2019 and former Director from 2013 through
May 2018.
• Director of both private and public companies, including having served as a director of Perk Inc. from November 2014
to January 2017, Xceed Mortgage Corporation from May 2012 to July 2013 when the sale of Xceed to MCAN
Mortgage Corporation was completed.
• Director of the following TSXV publicly traded entities: WB II Acquisition Corporation, a capital pool company, from
February 2012 to July 2013, WB III Acquisition Corporation, a capital pool company, from June 2013 to December
2014, Ferrum Americas, an iron ore exploration company, from June 2010 to July 2011, and J5 Acquisition
Corporation, a capital pool company, from July 2009 to July 2011.
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WALTER WALKER
Director
Age: 65
Principal Occupation: Owner and Chief Investment Officer of Hana Road Capital LLC
Business Experience:
•
Formed Hana Road Capital LLC, an equity investment fund, where he remains as its owner and Chief Investment Officer
since late 2007.
• Chief Executive Officer and President of the Seattle Sonics and Storm from 2001 until their sale in 2006, as well as
minority owner. During his executive tenure, the Sonics had the fifth best winning percentage in the NBA and the Storm
won the WNBA title in 2004.
•
President and General Manager of the Seattle SuperSonics in September 1994 to 2001. During his seven years as General
Manager, the Sonics had the third best winning percentage (65.1%) in the NBA and won the Western Conference
Championship in 1996.
•
Formed Walker Capital, Inc., a San Francisco based money management firm, in April 1994.
• Vice President of Goldman, Sachs & Co.’s Private Client Services group from 1987 through 1994.
Qualifications:
• Chartered Financial Analyst (1992).
• Masters of Business Administration from Stanford University Graduate School of Business.
• Named as one of six recipients of the NCAA Silver Anniversary Scholar-Athlete Awards in 2001 and was a member of
the NCAA Honors Committee from 2016 through 2019.
• Bachelor of Arts degree in Psychology from the University of Virginia as an Academic All-American.
Other Board Service:
•
Served on the Board of Visitors at the University of Virginia from 1997 to 2001.
• Member of the Advisory Council of Stone Arch Capital, a Minneapolis based private equity firm, since 2005.
•
Independent trustee and Chair of the Audit Committee at Smead Capital Management, a Seattle based mutual fund,
since 2015.
•
Previously served on the boards of multiple public companies and non-profits.
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JOHN T. FITZGERALD
Director
Age: 48
Principal Occupation: President & Chief Executive Officer of Kingsway Financial Services, Inc.
Business Experience:
• Currently President and Chief Executive Officer of Kingsway Financial Services, Inc. (“Kingsway”) since 2018 and
Managing Member of Argo Management Group, LLC (“Argo”) since 2002.
• Co-founded Argo, a private equity investment partnership, in 2002 which was subsequently sold to Kingsway in 2016.
•
Former managing director of Adirondack Capital, LLC, a financial futures and derivatives trading firm, from January
1998 through June 2001.
Qualifications:
• Masters of Business Administration from Northwestern University’s Kellogg School of Management with concentrations
in Finance, Accounting, and Management Strategy.
• Bachelor of Science degree in Finance from DePaul University with highest honor, Beta Gamma Sigma.
• Extensive transactional and operating experience in extended warranty, insurance, consumer products manufacturing,
marketing and distribution operations.
•
Seat-owner on the Chicago Board of Trade from 1998 through 2004.
Other Board Service:
• Director of Kingsway since April 2016.
• Director of Itasca Capital Ltd., an advisory and investment firm, from June 2016 through December 2019.
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Executive Officers
Biographical information for each of the executive officers of Atlas and its insurance subsidiaries is set out below, except for Scott
Wollney, President & Chief Executive Officer, whose biographical information is contained above. None of the below officers
serve as directors for any other reporting issuers.
PAUL ROMANO
Vice President, Chief Financial Officer and Principal Accounting Officer
Age: 58
Date First Appointed as an Officer: December 31, 2010
Business Experience:
• Vice President and Chief Financial Officer since December 31, 2010.
• Vice President and Treasurer of KAI from March 2010 to December 2010.
• Vice President, Data Management of Lincoln General Insurance Company, a property and casualty insurance company,
from October 2008 to March 2009.
• Various Vice President and Director positions with American Country Insurance Company, a property and casualty
insurance company, which became a subsidiary of the Corporation on December 31, 2010, and its affiliates from 2002
to 2008.
Qualifications:
• Certified Public Accountant designation in the State of Illinois.
• Master of Business Administration degree from the Northwestern University's Kellogg School of Management (1996).
• Bachelor of Science, Accounting, from the University of Illinois (1984).
JOSEPH SHUGRUE
Chief Operating Officer
Age: 56
Date First Appointed as an Officer: December 31, 2010
Business Experience:
• Vice President, Claims from December 31, 2010 through December 17, 2019.
• Various senior management positions at KAI and American Service Insurance Company, which became a subsidiary of
the Company on December 31, 2010, from March 1, 2004 to December 31, 2010.
• Various positions with other specialized insurance businesses beginning in October 1986.
BRUCE GILES
Vice President, Underwriting
Age: 60
Date First Appointed as an Officer: December 31, 2010
Business Experience:
• Vice President, Underwriting since December 31, 2010.
• Assistant Vice President of Commercial Underwriting for KAI, with whom he held various positions from December
2003 to June 2010.
• Various positions with Allstate Insurance Group, CIGNA and other insurance companies from 1981 to 2003.
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LESLIE DIMAGGIO (1)
Vice President, Operations and Information Technology
Age: 51
Date First Appointed as an Officer: December 31, 2010
1 On December 16, 2019, it was announced that Ms. DiMaggio notified the Company that she would resign from the Company effective December 27, 2019.
Business Experience:
• Vice President, Operations and IT since December 31, 2010.
• Vice President, Information Technology for KAI from November 2008 to June 2010.
•
President, Chief Executive Officer and Chief Operations Officer of Southern United Fire Insurance Company, a property
and casualty insurance company, from April 2007 to November 2008.
• Various executive positions at KAI from 2000 to 2008
• Various positions with other specialized insurance businesses.
Code of Business Conduct and Ethics
We have a Code of Business Conduct and Ethics that applies to all of our employees, officers and directors. The Code of Business
Conduct and Ethics is designed to promote honest and ethical conduct, full, fair, accurate, timely and understandable disclosure
of financial information in our public filings and communications, and compliance with applicable laws, rules and regulations.
The Code of Business Conduct and Ethics is posted on our website at www.atlas-fin.com under “Investor Relations-Corporate
Governance.” A written copy is available to shareholders, free of charge, upon written request to us, to the attention of Scott
Wollney.
Audit Committee
During 2018, the Audit Committee was comprised of Jordan Kupinsky (Chairman), Walter Walker and John Fitzgerald. Each
member of the Audit Committee is independent under NASDAQ Rule 5605(a)(2) and Rule 10A-3 of the Exchange Act and meets
the financial literacy requirements of the NASDAQ rules.
The Board has determined that Mr. Kupinsky, Mr. Walker and Mr. Fitzgerald, because of their accounting and financial management
expertise discussed above are all considered “audit committee financial experts” as that term is defined under the Exchange Act
and, accordingly, that at least one audit committee financial expert is serving on the Company’s Audit Committee.
Item 11. Executive Compensation
Director Compensation
During the fiscal year ended December 31, 2018, the Company paid cash compensation for services rendered to the non-employee
directors of our Board, and we reimbursed the out-of-pocket expenses of our directors incurred in connection with attendance at
or participation in meetings of the Board. With respect to non-employee directors, a combination of equity and cash is provided
to reflect a focus on both (i) long-term performance and shareholder value and (ii) compensation for the Board’s continuing
oversight and corporate governance role.
Each non-employee, independent director receives an annual cash retainer of $55,000, plus a stipend for each committee the
director is a member of. The Chairman of the Board receives an additional $20,000 retainer. The chair of the Audit Committee
receives an additional $10,000 retainer for his service as a committee chair.
The following table shows the compensation earned by directors for the most recently completed fiscal year. Named Executive
Officers who also act as our directors do not receive any additional compensation for services rendered in such capacity, other
than as paid by us to such officers in their capacity as officers and other than the stock awards granted to Mr. Wollney as part of
the Director Stock Matching Program. See “Summary Compensation Table” under the heading Executive Compensation for
information regarding the compensation paid to our Named Executive Officers.
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Name
Gordon Pratt 1
Jordan Kupinsky 2
John T. Fitzgerald 2
Walter Walker 3
Ronald Konezny 4
Scott Wollney 5
Fees Earned or Paid in Cash
$98,500
$90,500
$69,000
$65,500
$26,005
$—
Stock Awards 6
$130,010
$130,010
$—
$—
$—
$130,010
Total Compensation
$228,510
$220,510
$69,000
$65,500
$26,005
$130,010
1 As of December 31, 2018, Mr. Pratt had an aggregate of 11,218 stock awards outstanding, subject to vesting per the Director Stock Matching Program and
Equity Incentive Plan. Additionally, Mr. Pratt has 27,195 option awards outstanding.
2 As of December 31, 2018, each of Mr. Kupinsky and Mr. Fitzgerald had an aggregate of 11,218 stock awards outstanding, subject to vesting per the Director
Stock Matching Program and Equity Incentive Plan. Mr. Kupinksy and Mr. Fitzgerald had no option awards outstanding.
3 As of December 31, 2018, Mr. Walker had an aggregate of 3,810 stock awards outstanding, subject to vesting per the Equity Incentive Plan. Mr. Walker had
no option awards outstanding.
4 As of December 31, 2018, Mr. Konezny had an aggregate of 2,284 stock awards outstanding, subject to vesting per the Equity Incentive Plan. Mr. Konezny
had no option awards outstanding.
5 As of December 31, 2018, Mr. Wollney had an aggregate of 7,408 stock awards outstanding, subject to vesting per the Director Stock Matching Program. Mr.
Wollney also had an aggregate of 154,500 option awards outstanding as of December 31, 2018 and 80,000 restricted ordinary share awards received solely for
his services as an executive officer and not for his services as a director, as disclosed in the section “Outstanding Equity Awards at 2018 Fiscal Year End”.
6 Stock Awards consist of stock vested as part of the Director Stock Matching Program. The shares and units were issued on February 28, 2014 to each Director
provided that they purchased at least $100,000 during a defined time period in 2013. The shares and units vest 20% on each anniversary of the grant date,
provided that (i) the director has maintained ownership of the up to $100,000 investment made to qualify for the award; (ii) his service is continuous from the
Grant Date through the applicable date upon which vesting is scheduled to occur; and (iii) he has, as of the date upon which vesting is scheduled to occur, not
indicated that he will not be submitting his name for re-election as a director of the Company. See ‘Part II, Item 8, Note 12, Share-Based Compensation’ in the
Notes to Consolidated Financial Statements for further discussion regarding the valuation of stock awards.
Executive Compensation
Compensation for executive officers is reviewed annually by the Compensation Committee. Current compensation was set based
on the following criteria: (i) our size and scale; (ii) nature of our strategic objectives; and (iii) each executive’s role and responsibility.
Industry data (such as surveys compiled by Towers Watson and the Property and Casualty Insurers Association for the P&C
insurance industry), past paid consultant reports, as well as the potential for incentive compensation are taken into consideration
in the regular evaluation of base salary.
Employment agreements were executed with our executives in 2011 with an initial effective term of January 1, 2011 through
December 31, 2012 and subsequent annual terms commencing January 1, 2013. These agreements provide for compensation based
on a combination of base salary and incentive compensation. Incentive compensation in subsequent years will be based on a
combination of financial results and the achievement of strategic objectives, as determined by the Compensation Committee of
the Board. No incentive compensation was earned during 2018 or 2017. Final determination of incentive compensation is subject
to approval by the Board. Return on equity is a primary metric utilized in evaluating such results.
Employment Agreements with Named Executive Officers
Employment agreements were executed in 2011 with our Named Executive Officers with an initial effective term of January 1,
2011 through December 31, 2012 and subsequent annual terms commencing January 1, 2013(1). The key terms of such employment
agreements include:
(a) employment being “at-will” and, subject to the severance and post-termination obligations described below, the employment
agreement being terminable by either party at any time;
(b) an annual base salary as set out in the table under the “Summary Compensation Table” section;
(c) the executive being entitled to participate in such employee benefit plans as we shall approve, including retirement plans,
paid vacation and sick days/paid time off, disability plans, our Stock Option Plan, our Equity Incentive Plan, or such other
plans as may be offered from time to time; and
(d) severance payments and post-termination obligations as further described below under “Termination and Change of Control
Benefits” section.
1
As previously disclosed, on October 7, 2019, new employment agreements were entered into.
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Compensation Committee
The Compensation Committee was comprised of Jordan Kupinsky (Chairman), Gordon Pratt and John Fitzgerald. Each member
of the Compensation Committee is independent. We are currently in compliance with NASDAQ Rule 5605(d)(2)(A), which
requires a compensation committee be comprised of at least two members, each of whom must be an independent director. The
Compensation Committee met 3 times during the fiscal year ended December 31, 2018.
The Compensation Committee oversees our remuneration policies and practices. The principal responsibilities of the Compensation
Committee include: (i) periodically reviewing and advising the Board concerning the Company’s overall compensation philosophy,
policies and plans; (ii) reviewing and making recommendations to the Board regarding all compensation of the Company’s chief
executive officer and all other executive officers and director compensation; and (iii) administering the Company’s incentive
compensation plans and approving grants of options and other equity awards to all executive officers and directors under such
plans.
The Compensation Committee reviewed executive compensation with management in the course of the 2019 budgeting process.
As set forth in the Compensation Committee's charter, the Compensation Committee may delegate the day-to-day administration
of the Company's equity compensation plans to one or more officers and employees of the Company or an affiliate thereof. Authority
was extended to management within the approved budget for compensation. Mr. Wollney, in consultation with the Compensation
Committee, set the executive compensation for the named executive officers other than Mr. Wollney.
During the year ended December 31, 2018, the Compensation Committee and the Board engaged Meridian Compensation Partners,
LLC (“Meridian”) for the purposes of analyzing director compensation. Meridian was tasked to compare the relative ranking
among the Company and 10 peer companies based on the most recently available public data as of October 1, 2018 and also
considered broader compensation data from the NACD’s 2017-2018 Director Compensation Report. Total compensation amounts
and structure for the director positions were evaluated, including the following publicly available components of pay: director
fees, chairman stipends, committee member fees, equity compensation and long-term incentives. As part of this analysis, Meridian
outlined adjustments to more closely align the Company’s director compensation to the peer group.
Summary Compensation Table
The following table sets forth information concerning the total compensation for each of the Named Executive Officers during
each of the last two fiscal years.
($)
Name and Principal Position
Scott Wollney
President, Chief Executive
Officer and Director
Paul A. Romano
Vice President and Chief
Financial Officer
Leslie DiMaggio
Year
Salary
Bonus
Stock
Awards 1
Option
Awards
All Other
Compensation 2
Total
Compensation
2018 $ 450,000 $
— $ 130,010 $
2017 $ 450,000 $
— $ 100,008 $
2018 $ 254,808 $
2017 $ 254,808 $
2018 $ 224,231 $
— $
— $
— $
— $
— $
— $
— $
— $
— $
— $
— $
— $
— $
— $
29,309 $
609,319
32,703 $
582,711
36,073 $
290,881
31,833 $
15,602 $
13,665 $
286,641
239,833
253,350
Vice President, Operations & IT
2017 $ 239,685 $
1 Mr. Wollney's Stock Awards for 2018 and 2017 are pursuant to the Director Stock Matching Program described under “Director Compensation” as compensation
for his services as a director. The value of the stock awards consists of 7,408 shares which vested at the market price on February 28, 2018 and 2017, respectively.
2 Includes company contributions to 401(k) plan, employee stock purchase plan and annual car allowance.
Stock Option Plan
On January 3, 2011, we adopted a 10% rolling stock option plan (“Stock Option Plan”) in order to advance our interests by
providing certain “Eligible Persons” (any employee, officer, director, or consultant who is approved for participation in the Stock
Option Plan by the Compensation Committee) with incentives. In connection with completion of the offering of our Voting Shares
in February 2013, the Compensation Committee of the Board performed a review of our executive and director compensation,
including our Stock Option Plan. This review included, among other considerations, comparisons to industry data, including the
executive and director compensation programs of other publicly traded property and casualty insurance companies. As a result,
our executive compensation and director compensation was increased to bring us in line with other public companies in our
industry. These changes included a new Equity Incentive Plan. See the “Equity Incentive Plan” section below.
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Prior to the adoption of the Equity Incentive Plan, the Stock Option Plan provided for the granting of options to purchase Voting
Shares to Eligible Persons. Options were granted at the discretion of the Compensation Committee in such number determined at
the time of grant, subject to the limits set out in the Stock Option Plan. The number of Voting Shares issuable under the Stock
Option Plan was limited to not more than 10% of the number of Voting Shares that were issued and outstanding as of the date of
the grant of an option. Any increase in the issued and outstanding Voting Shares would have resulted in an increase in the available
number of Voting Shares issuable under the Stock Option Plan, and any exercises of options or expirations or terminations of
options would make new grants available under the Stock Option Plan.
The exercise price of all options was established by the Compensation Committee at the time of grant, provided that the exercise
price would not be less than the market price of the Voting Shares on the date of grant. Under the Stock Option Plan, market price
was equal to the volume weighted average trading price of the Voting Shares on the NASDAQ (the principal stock exchange on
which the Voting Shares are listed for trading) for the five trading days immediately preceding the date on which the option is
granted. The expiry of options was also established by the Compensation Committee at the time of the grant, provided that the
options have a maximum term of ten years. The Compensation Committee determined when any option will become exercisable
and whether the option will be exercisable in installments or pursuant to a vesting schedule. In the event of a change of control,
vesting may be accelerated.
Equity Incentive Plan
In the second quarter of 2013, a new Equity Incentive Plan was approved by shareholders at our annual general meeting. As of
such date, Atlas ceased to grant new stock options under the existing Stock Option Plan discussed above. The Equity Incentive
Plan is a new securities based compensation plan pursuant to which Atlas may issue restricted shares, restricted units, 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.
On March 12, 2015, Atlas granted 200,000 restricted Ordinary Shares and options to purchase 200,000 Voting Shares under the
Equity Incentive Plan, all of which were granted to the Company’s officers. The awards vest in five equal annual installments of
20%, provided that an installment shall not vest unless an annual performance target based on book value growth equal to an
annual 15% return on average equity is attained. In the event the performance target is not met in any year, the 20% installment
for such year shall not vest, but such unvested installment shall carry forward and can vest in future years (up to the fifth year
from the date of grant), subject to achievement in a future year of the applicable cumulative performance target expected through
such year. The options have an exercise price of $20.29 per share and expire on March 12, 2025. In the event of a change of control,
vesting may be accelerated.
On December 31, 2018, Atlas granted 17,524 restricted stock units under the Equity Incentive Plan, all of which were granted to
the Company's independent directors. The awards vest in three equal installments on January 1 of each of the next three years,
beginning on January 1, 2019. The restricted stock units were approved by the Board of Directors during March 2018.
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Outstanding Equity Awards at 2018 Fiscal Year End
The following table sets forth all equity awards held by the Named Executive Officers that were outstanding at the end of the
most recently completed fiscal year.
Outstanding Equity Awards as at December 31, 2018
Option Awards 3
Stock Awards
Number of
securities
underlying
unexercised
options
(#)
exercisable 1
Number of
securities
underlying
unexercised
options
(#)
unexercisable 1
—
54,500
—
—
20,000
80,000
Number of
shares or
units of
stock that
have not
vested (#) 2
Market
value of
shares or
units of
stock that
have not
vested ($)
Equity incentive
plan awards:
Number of
unearned shares,
units or other
rights that have
not vested (#)
Equity incentive
plan awards:
Market or
payout value of
unearned shares,
units or other
rights that have
not vested ($)
Option
exercise
price
($)
Option
expiration
date
—
—
14,816
$119,861
$13.26 March 6,
2024
$20.29 March 12,
2025
35,000
—
$13.26
5,000
20,000
$20.29
28,500
—
$13.26
5,000
20,000
$20.29
March 6,
2024
March 12,
2025
March 6,
2024
March 12,
2025
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
80,000
$647,200
—
—
20,000
$161,800
—
—
20,000
$161,800
Name and
Principal
Position
Scott Wollney
President, Chief
Executive Officer
and Director
Paul A. Romano
Vice President
and Chief
Financial Officer
Leslie DiMaggio
Vice President,
Operations & IT
Grant
date
February
28, 2014
March 6,
2014
March 12,
2015
March 6,
2014
March 12,
2015
March 6,
2014
March 12,
2015
1 The March 6, 2014 grants vest equally on the first, second and third anniversary dates of the grant date. The March 12, 2015 grants vest 20% equally on the
first, second, third, fourth and fifth anniversary pending a return on equity as described in the “Equity Incentive Plan” section of this Proxy Statement.
2 The February 28, 2014 Stock Awards vest 20% on each anniversary of the grant date. The March 12, 2015 Stock Awards vest 20% equally on the first, second,
third, fourth and fifth anniversary pending a return on equity as described in the “Equity Incentive Plan” section of this Proxy Statement.
3 Vesting of stock awards under the Director Stock Matching Program (in the case of Mr. Wollney) and the Equity Incentive Plan (in the case of all Named
Executive Officers and other members of the Company’s executive team) resulted in tax related reimbursement obligations to the Company. These obligations,
as well as obligations under personal loans of certain members of the Company’s executive team, were due in the fourth quarter of 2017. These obligations
were funded by the exercise of vested stock options and the subsequent sale of Company stock received in connection with such exercises.
Pension Plan Benefits
We do not currently maintain any pension or retirement plans that provide for payments or benefits at, following or in connection
with retirement.
Termination and Change of Control Benefits
We are party to employment agreements effective January 1, 2011 with the Named Executive Officers pursuant to which, if we
terminate the executive without Cause (as defined in the employment agreement), or the executive’s employment is terminated
in connection with a Change of Control (as defined in the employment agreement), the executive will be entitled to certain payments
and benefits as set out below.
If terminated
without Cause:
2018
2017
Continuation of base
salary for: 1
12 months
12 months
Lump-sum payment equal to:
Most recently awarded bonus
Most recently awarded bonus
Continuation of employee health benefits
covered under COBRA for: 1, 2
12 months
12 months
1 The continuation of base salary and COBRA benefits will cease on the first of the month immediately following the date on which the executive becomes
employed by a subsequent employer.
2 Continuation coverage will continue for the period set forth in this column, or the maximum period of time allowed by law, if shorter.
If, after a Change of Control (as defined in the employment agreement), the executive maintains employment with us (or our
successor) for at least 180 days, the executive may terminate his employment at will and will be entitled to certain severance
payments and post-termination benefits. Such payments and benefits shall mirror the payments and benefits that would have been
in effect had we terminated the executive’s employment without Cause on such date.
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Item 12. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters
The following table sets forth information concerning the beneficial ownership of the Voting Shares held on March 31, 2019 by
(i) each person known to us to own beneficially more than 5% of the total issued and outstanding Voting Shares, (ii) each of our
directors and director nominees, (iii) each of our named executive officers, and (iv) all directors and executive officers as a group.
The options included in the below beneficial ownership table are exercisable within 60 days of March 31, 2019. Unless
otherwise indicated, each person has sole voting and investment power over the shares listed.
Name and Address of Beneficial Owner
Number of Voting Shares Owned 1, 2
Percentage of Total Outstanding
Voting Shares 1, 2
5% Beneficial Owners
Ariel Investments, LLC 3, 9
200 E. Randolph Street, Suite 2900
Chicago, IL 60601
Tieton Capital Management 4, 9
4700 Tieton Drive, Suite C
Yakima, WA 98908
Wellington Management Group LLP 6, 9
280 Congress Street
Boston, MA 02210
Capital Returns Management, LLC 5, 9
641 Lexington Avenue, 18th Floor
New York, NY 10022
Gordon Pratt 7
Scott Wollney 8
Jordan Kupinsky
John Fitzgerald
Walter Walker
Ronald E. Konezny
Larry Swets, Jr. 10
Paul Romano 8
Leslie DiMaggio 8
All Directors and Executive Officers as a Group
(9 individuals)
1,737,158
764,720
704,347
698,534
461,443
401,658
65,162
64,164
390,733
2,284
—
120,891
111,730
1,835,262
Executive Officers and Directors
14.6%
6.4%
5.9%
5.9%
3.9%
3.4%
*
*
3.3%
*
*
1.0%
*
15.4%
* Indicates that ownership is less than 1%
1 As of March 31, 2019, there were 11,936,970 Voting Shares outstanding. Included in the shares above are the following convertible securities, exercisable
within 60 days of March 31, 2019, that are deemed to be beneficially owned by the persons holding them for the purpose of computing that person’s percentage
ownership: Gordon Pratt (managed through Atlas Investors LLC, see (7) below) holds 27,195 options; Scott Wollney holds 74,500 options; Jordan Kupinsky
holds 7,408 restricted stock units; Paul Romano holds 40,000 options; and Leslie DiMaggio holds 33,500 options. The shares underlying these convertible
securities are not treated as outstanding for the purpose of computing the percentage beneficial ownership of any other person.
2 Under Rule 13d-3, a beneficial owner of a security includes any person who, directly or indirectly, through any contract, arrangement, understanding, relationship,
or otherwise has or shares: (i) voting power, which includes the power to vote, or to direct the voting of shares; and/or (ii) investment power, which includes
the power to dispose or direct the disposition of shares. Certain shares may be deemed to be beneficially owned by more than one person (if, for example,
persons share the power to vote or the power to dispose of the shares). In addition, shares are deemed to be beneficially owned by a person if the person has
the right to acquire beneficial ownership of the shares (for example, upon exercise of a vested option) within 60 days of the date as of which the information
is provided. Any securities not outstanding which are subject to such acquisition rights shall be deemed to be outstanding for the purpose of computing the
percentage of outstanding securities of the class owned by such person but shall not be deemed to be outstanding for the purpose of computing the percentage
of the class owned by any other person. As a result, the percentage of outstanding shares of any person as shown in this table does not necessarily reflect the
person’s actual ownership or voting power with respect to the number of shares outstanding.
3 The Schedule 13G/A filed by Ariel Investments, LLC, an investment adviser, on February 14, 2019 states that as of December 31, 2018, it has sole power to
vote 1,494,258 Voting Shares and sole power to dispose of 1,737,158 Voting Shares.
4 The Schedule 13G filed by Tieton Capital Management, an investment adviser, on January 30, 2019 states that as of December 31, 2018, it has shared power
to vote 764,720 Voting Shares and shared power to dispose of 764,720 Voting Shares.
5 The Schedule 13G filed by Capital Returns Management, LLC (“CRM”), an investment adviser, on February 13, 2019 states that as of December 31, 2018, it
has shared power to vote 698,534 Voting Shares and shared power to dispose of 698,534 Voting Shares. Such schedule also identifies Ronald D. Bobman, an
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individual and control person with shared power to vote 698,534 Voting Shares and shared power to dispose of 698,534 Voting Shares. CRM serves as the
investment manager of Capital Returns Master, Ltd. (“Master”) and as a sub-adviser of MAP 41 Segregated Portfolio, a segregated portfolio of LMA SPC
(“MAP”). CRM is wholly owned by Mr. Bobman. In such capacities, CRM and Mr. Bobman may be deemed to beneficially own, and to have the power to
vote or direct the vote of, and the power to direct the disposition of the 698,534 shares, which consists of 223,700 shares held for the account of Master and
474,834 shares held for the account of MAP.
6 The Schedule 13G/A filed by Wellington Management Group LLP, a parent holding company, on February 12, 2019 states that as of December 31, 2018, it has
shared power to vote 704,347 Voting Shares and shared power to dispose of 704,347 Voting Shares. Such schedule also identifies Wellington Group Holdings
LLP, a holding company with shared power to vote 704,347 Voting Shares and shared power to dispose of 704,347 Voting Shares; Wellington Investment
Advisors Holdings LLP, a holding company with shared power to vote 704,347 Voting Shares and shared power to dispose of 704,347 Voting Shares; and
Wellington Management Company LLP, an investment adviser with shared power to vote 687,174 Voting Shares and shared power to dispose of 687,174 Voting
Shares as subsidiaries which acquired the security being reported on by the parent holding company. Such schedule also identifies Wellington Trust Company,
NA as the only client of the investment advisers named in such schedule that has the right to receive, or the power to direct the receipt of, dividends from, or
the proceeds from the sale of, such securities with respect to more than five percent of the Voting Shares. Wellington Trust Company, NA, a bank acting in its
capacity as investment adviser, filed a separate Schedule 13G/A on February 12, 2019 stating that as of December 31, 2018, it has shared power to vote 637,776
Voting Shares and shared power to dispose of 637,776 Voting Shares.
7 Mr. Pratt holds 434,248 Voting Shares which are held either directly or through Atlas Investors LLC, of which Mr. Pratt is a Managing Member. In July 2016,
Fund Management Group LLC (“FMG”) pledged 110,255 shares of the Company as security for a loan in the amount of $750,000 due July 2019. At the time
the loan was made, such shares were worth 200% of the principal and interest that would be due at the time of the loan's maturity. FMG is required to post
additional collateral should the value of its current collateral fall below 150% of the principal and interest that would be due at the time of the loan's maturity.
Under certain circumstances, the holder of the pledged shares has the right to sell such shares in order to satisfy any amount outstanding under the loan. In May
2018, FMG pledged 25,000 shares of the Company as security for the $750,000 loan due July 2019. FMG has pledged a total of 135,255 shares of the Company.
As of the date of this report, no additional collateral and no sale of pledged shares has occurred.
8 As of March 31, 2019, Scott Wollney had 180,724 Voting Shares, Paul Romano had 14,530 Voting Shares and Leslie DiMaggio had 14,488 Voting Shares
pledged as security for personal loans.
9 As set forth in schedules filed subsequent to March 31, 2019, the applicable beneficial owner’s holding have since been reduced to zero. On June 14, 2019,
American Financial Group, Inc. filed a Schedule 13G reflecting beneficial ownership exceeding 5%.
10 Mr. Swets retired from the Board of Directors on January 2, 2018.
Item 13. Certain Relationships and Related Transactions, and
Director Independence
Related Person Transactions
We have established procedures for reviewing transactions between us and our directors and executive officers, their immediate
family members and entities with which they have a position or relationship. These procedures help us evaluate whether any such
related party transaction could impair the independence of a director or present a conflict of interest on the part of a director or
executive officer.
Directors are considered independent if they are not an executive officer or employee of the Company and have no relationship
which, in the opinion of the Board, would interfere with the exercise of independent judgment in carrying out the responsibilities
of a director. There are six directors on the Board, of which five are independent directors for purposes of Rule 5605(a)(2) of the
Nasdaq Capital Market. Mr. Swets, who retired from the Board effective January 2, 2018 was also an independent director. Scott
Wollney is not independent, as he is a member of our management. A majority of the Board is independent.
Our Audit Committee charter specifically requires the Audit Committee to review and approve all related party transactions that
are required to be disclosed under Item 404 of Regulation S-K. In addition, our Code of Business Conduct and Ethics requires
our directors, executive officers and all employees to provide full disclosure of the circumstances surrounding any potential conflict
of interest and refrain from any related decision making process. Directors and officers must provide this full disclosure to our
senior executives and our Audit Committee.
To capture all relevant information with respect to such transactions, we annually require each of our directors and executive
officers to complete a Code of Business Conduct and Ethics as well as a Director and Officer Questionnaire that, among other
things, elicits information about related party transactions. Our senior executives review the information disclosed in these
documents, and review any unique circumstances potentially involving a related party transaction with our Chief Financial Officer,
other members of management and the Audit Committee, as warranted. The Audit Committee, and possibly the full Board, would
review any specific fact patterns as required.
As further described below, the Company has participated in certain investments with Kingsway, some of which also involve
participation by Company directors Gordon Pratt and John T. Fitzgerald, and former director Larry Swets, Jr., (in 2018 Messrs.
Swets and Fitzgerald were also directors and executive officers of Kingsway). We believe that it is beneficial for us to be able to
leverage the collective expertise of Kingsway and our directors with respect to the sourcing of certain investments for inclusion
in our investment portfolio, especially given the industry experience shared by the parties. The aggregate value of the investments
described below make up less than 5.1% of the Company's investment portfolio as of December 31, 2018. Under the Company's
current investment guidelines, other than fixed income (“OTFI”) investments (including any related party OTFI investments) may
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not exceed the lesser of a total of 15% of the Company's overall cash and invested assets or 50% of the Company's statutory surplus
(“Allowable OTFI Allocation”), with no new single investment to represent more than 20% of the Company's Allowable OTFI
Allocation assets at the time such investment is made. Should the OTFI exceed these thresholds, the Company would seek to
liquidate these positions in an economically beneficial manner. The related party transactions described below are consistent with
the Company's current investment guidelines and have been reviewed and approved by both the Investment Committee of the
Company's Board of Directors as well as the Audit Committee pursuant to the Company's policy on related party transactions
described above.
Real Estate Investments
The Company and Kingsway have participated in the following transactions involving the acquisition and management of revenue
producing real estate:
As of December 31, 2018, the Company, Kingsway and a third party real estate manager have investments in four separate ventures,
with each venture acquiring, improving and managing underutilized retail real estate. Total aggregate investment in these ventures
by the three parties is approximately $8.3 million, with Atlas and Kingsway investing approximately $5.1 million and $2.4 million,
respectively, in all four ventures. The outstanding third party debt as of March 31, 2019 totaled $7.5 million.
The Company and Kingsway have invested in a portfolio of net leased office properties managed by a third party. The Company
and Kingsway have made aggregate investments of approximately $2.5 million and $6.1 million, respectively, in the properties.
Other Transactions
In addition to the real estate related transactions described above, the Company has also participated in the following transactions:
During 2017, the Company had $5.0 million outstanding related to debt investment in 1347 Investors, LLC (“SPAC Sponsor”)
which was the sponsor of 1347 Capital Corp., a special purpose acquisition company which has since merged with and into Limbach
Holdings, Inc., a NASDAQ listed company (“Limbach”). In December 2017, the Company received $2.6 million from SPAC
Sponsor to settle a portion of this debt which left approximately $2.4 million of the debt investment outstanding as of December
31, 2017. The remaining outstanding $2.4 million balance was subsequently paid in full in January 2018 by SPAC Sponsor. Such
debt investment bore interest at an annual rate of 13%. SPAC Sponsor, of which Mr. Swets is a manager, owns equity securities
of Limbach having a market value of approximately $33.7 million as of April 13, 2018. Messrs. Swets and Pratt are members of
the board of directors of Limbach, and Messrs. Swets, Fitzgerald, individually, and Mr. Pratt, directly and indirectly, own equity
in Limbach and the SPAC Sponsor. The Company received interest payments on such debt of approximately $986,000 during
2017.
During 2018, the Company decreased its debt investment by $1.6 million in an entity in which Kingsway owns an approximate
45.6% ownership interest. The total outstanding debt owed to the Company was paid in Q1 2019 along with a liquidation of its
equity interest in this entity. Kingsway’s debt investment was paid in full in Q1 2019. Mr. Swets, Mr. Fitzgerald and Paul Romano,
the Chief Financial Officer of the Company, served on the board of managers of this entity, and Messrs. Pratt and Fitzgerald own
direct and indirect investments in the entity. The debt investment bears interest at an annual rate of 14%, and the Company received
interest payments on such debt of approximately $112,000 during 2018.
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Item 14. Principal Accounting Fees and Services
Audit and Non-Audit Fees
The aggregate fees billed by the Company’s external auditors for the financial years ending December 31, 2018 and December 31,
2017, are set out in the table below.
(US$)
Auditor
Baker Tilly
Virchow Krause,
LLP
RSM US LLP 5
BDO USA, LLP
BDO USA, LLP
Year
Audit Fees1
Audit-Related
Fees2
Tax Fees3
All Other Fees4
December 31, 2018
Q3-Q4 2018
Q1-Q2 2018
December 31, 2017
$632,719
$458,622
$60,216
$796,502
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
1 Fees related to our annual audit, review of our quarterly reports on Form 10-Q and review of documents filed with the SEC.
2 Fees related to procedures associated with the adoption of the new accounting standards and acquisitions.
3 Fees related to tax compliance services and tax preparation services.
4 Fees for other incidental expenses.
5 Fees paid to RSM US LLP during the period they were engaged to complete the 2018 audit; however they were terminated prior to completing the audit.
Pre-Approval Policies and Procedures
The Audit Committee has adopted specific policies and procedures for the engagement of non-audit services as described in its
charter which is available on the Company's website at www.atlas-fin.com in the “Corporate Governance” section under Investor
Relations. The Audit Committee shall approve all audit engagements and pre-approve the provision by the external auditors of all
non-audit services, including fees and terms for all audit engagements and non-audit engagements, and in such regard the Audit
Committee may establish the types of non-audit services the external auditors shall be prohibited from providing and shall establish
the types of audit, audit related and non-audit services for which the Audit Committee will retain the external auditors. The Audit
Committee may delegate to one or more of its members the authority to pre-approve non-audit services, provided that any such
delegated pre-approval shall be exercised in accordance with the types of particular non-audit services authorized by the Audit
Committee to be provided by the external auditor and the exercise of such delegated pre-approvals shall be presented to the full
Audit Committee at its next scheduled meeting following such pre-approval. The Audit Committee has reviewed and approved
the incurrence of all of the fees described above for 2018 and 2017.
124
Table of Contents
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 Part II, Item 8.
• Consolidated Statements of (Loss) Income and Comprehensive (Loss) Income
• Consolidated Statements of Financial Position
• Consolidated Statements of Shareholders’ Equity
• Consolidated Statements of Cash Flows
• Notes to Consolidated Financial Statements
• Report of Independent Registered Public Accounting Firm on Internal Controls over Financial Reporting
• Report of Independent Registered Public Accounting Firm
(a) (2) The following additional financial statement schedules and independent auditors’ report are furnished herewith pursuant
to the requirements of Form 10-K:
•
Schedules required to be filed under the provisions of Regulation S-X Article 7:
– Schedule II - Condensed Financial Information of Registrant
– Schedule IV - Reinsurance
– Schedule V - Valuation and qualifying accounts
– Schedule VI - Supplemental information concerning property - casualty insurance operations
• All other schedules pursuant to Article 7 of Regulation S-X are omitted because they are not applicable, or because the
required information is included in the consolidated financial statements or in the notes thereto.
(a) (3) The following is a list of the exhibits filed as part of this Annual Report on 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
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)
Description of the Company’s Ordinary Shares
Description of the Company’s 6.625% Notes due 2022
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 *
3.2
4.1(1)
4.2(1)
4.3
4.4
4.5
4.6
4.7
4.8
4.9
4.10
10.1(1)
10.2(1)
10.3(1)
125
Table of Contents
10.4(1)
10.5
10.6(2)
10.7(2)
10.8(2)
10.9(2)
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
10.19
10.20
10.21
10.22
10.23
10.24
10.25
14
16.1
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)
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)
Director Equity Awards Agreement dated December 31, 2018*
Code of Business Conduct and Ethics (incorporated by reference from our general form for registration of securities
on Form 10 filed March 26, 2012)
Letter Regarding Change in Certifying Accountant (incorporated by reference from our current report on Form 8-K
filed June 18, 2018)
Letter Regarding Change in Certifying Accountant (incorporated by reference from our current report on Form 8-K
filed October 31, 2019
List of Subsidiaries
Consent of Baker Tilly Virchow Krause, LLP
Consent of BDO USA, LLP
16.2
21
23.1
23.2
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
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
126
Table of Contents
32.2
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.
127
Table of Contents
Signatures
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.
ATLAS FINANCIAL HOLDINGS, INC.
(Registrant)
/s/ Paul A. Romano
By: Paul A. Romano
Vice President and Chief Financial Officer
(Principal Accounting Officer)
February 12, 2020
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
Gordon G. Pratt
/s/ John T. Fitzgerald
John T. Fitzgerald
/s/ Ronald E. Konezny
Ronald E. Konezny
/s/ Jordan M. Kupinsky
Jordan M. Kupinsky
/s/ Walter F. Walker
Walter F. Walker
President, Chief Executive Officer
and Director
February 12, 2020
Vice President and Chief Financial Officer
(Principal Accounting Officer)
February 12, 2020
Director, Chairman of the Board
February 12, 2020
Director
February 12, 2020
Director
February 12, 2020
Director
February 12, 2020
Director
February 12, 2020
128
Table of Contents
Schedule II – Condensed Financial Information of Registrant
Statements of (Loss) Income and Comprehensive (Loss) Income
($ in ‘000s)
Net investment expense
Other underwriting (expense) income
Interest expense
(Loss) income from operations before income taxes
Income tax expense (benefit)
(Loss) income before equity in net income of subsidiaries
Equity in net loss of subsidiaries
Net (loss) income
Other comprehensive (loss) income:
Changes in net unrealized investment (losses) gains
Reclassification to net income (loss)
Effect of income taxes
Other comprehensive (loss) income
Total comprehensive (loss) income
Year ended December 31,
2017
2018
2016
$
$
$
$
(21) $
(2,926)
(1,871)
(4,818)
4,141
(8,959) $
(71,053)
(80,012) $
(3,078)
284
—
(2,794)
(82,806) $
(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
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: December 31, 2018 - 12,192,475 and December 31, 2017 12,164,041; shares
outstanding: December 31, 2018 - 11,936,970 and December 31, 2017 - 12,164,041
Restricted voting common shares, $0.003 par value, 33,333,334 shares authorized, shares
issued and outstanding: December 31, 2018 and December 31, 2017 - 0
Additional paid in capital
Treasury stock, at cost: December 31, 2018 - 255,505 and December 31, 2017 - 0 shares of
ordinary voting common shares
Retained deficit
Accumulated other comprehensive (loss) income, net of tax
Total Shareholders’ Equity
Total Liabilities and Shareholders’ Equity
December 31,
2018
2017
371 $
—
36,049
36,420 $
4,233
4,116
109,897
118,246
24,255 $
6,466
30,721 $
24,031
3,570
27,601
36 $
36
—
202,298
(3,000)
(190,503)
(3,132)
5,699 $
36,420 $
—
201,105
—
(110,535)
39
90,645
118,246
$
$
$
$
$
$
$
See accompanying Notes to Condensed Financial Information of Registrant.
129
Table of Contents
Schedule II (Continued) – Condensed Financial Information of Registrant
Statements of Cash Flows
($ in ‘000s)
Year ended December 31,
2017
2018
2016
$
(80,012) $
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 of subsidiaries
Share-based compensation expense
Deferred income taxes
Amortization of financing costs
Expenses recovered 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
71,053
1,201
4,116
224
—
—
2,897
(521)
36,219
1,176
(712)
152
—
—
673
(1,302)
(38,810) $
Investing activities:
Capital contributions made to subsidiaries
Net cash flows used in investing activities
Financing activities:
Preferred share buyback
Capital contribution
Repurchase of common shares
Proceeds from notes payable, net of issuance costs
Preferred dividends paid
Options exercised
Net cash flows (used in) provided by financing activities
Net change in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
Supplemental disclosure of cash paid (recovered) for:
Interest
Income taxes
Supplemental disclosure of noncash investing and financing activities:
Redemption of preferred shares related to Gateway stock purchase
agreement
Cancellation of preferred shares related to Anchor stock purchase
agreement
$
$
$
—
—
(19,300)
(19,300)
—
(8)
(3,000)
—
(333)
—
(3,341)
(3,862)
4,233
371 $
—
30
—
23,879
—
655
24,564
3,962
271
4,233 $
1,656 $
(1,806)
828 $
(192)
—
(3,464)
— $
—
— $
(2,297)
—
(4,000)
2,646
2,463
1,612
(417)
—
(6,623)
479
2,897
3,057
—
—
(2,539)
—
—
—
(409)
—
(2,948)
109
162
271
See accompanying Notes to Condensed Financial Information of Registrant.
130
December 31, 2018
December 31, 2017
December 31, 2016
($ in ‘000s)
Table of Contents
Schedule II (Continued) – Condensed Financial Information of Registrant
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 ‘Part II, Item 8.’
On April 26, 2017, Atlas issued $25 million of five-year 6.625% senior unsecured notes and received net proceeds of approximately
$23.9 million after deducting underwriting discounts and commissions and other estimated offering expenses, as described in ‘Part
II, Item 8, Note 18, Notes Payable.’ Atlas has no other long-term debt obligations.
Atlas has not received cash dividends from its subsidiaries since its inception on December 31, 2010.
Schedule IV – Reinsurance
($ in ‘000s)
Premiums Earned
Gross
Amount
Ceded to
Other
Companies
Assumed
from Other
Companies
257,646 $
(62,400) $
22,972 $
Net Amount
218,218
251,293 $
(45,318) $
9,796 $
215,771
217,053 $
(49,069) $
3,074 $
171,058
$
$
$
% of Amount
Assumed to
Net
10.5%
4.5%
1.8%
Schedule V – Valuation and Qualifying Accounts
Balance at
Beginning of
Period
Charged to
Expenses
Other
Additions
Deductions
Balance at
End of
Period
December 31, 2018
Allowance for uncollectible receivables
Valuation allowance for deferred tax assets
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
$
$
$
3,418 $
—
2,344 $
28,830
2,366 $
—
2,365 $
—
846 $
—
2,397 $
—
— $
—
— $
—
12 $
—
(647) $
—
5,115
28,830
(1,313) $
—
(889) $
—
3,418
—
2,366
—
Schedule VI - Supplemental Information Concerning Property-Casualty
Insurance Operations
($ in ‘000s)
Deferred policy acquisition costs
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
Year ended December 31,
2017
2016
2018
$
7,309 $
273,496
134,040
218,218
2,647
137,916
82,746
26,115
174,183
286,614
14,797 $
211,648
128,043
215,771
4,897
128,476
75,397
27,885
150,622
275,961
13,222
139,004
113,171
171,058
4,824
102,133
32,613
18,803
128,831
225,095
131