Our corporate headquarters is located at 150 Northwest Point Boulevard, Elk Grove Village, Illinois 60007, USA. The facility consists of one office building totaling 176,844 net rentable square feet of office space on 7.2 acres. We are leasing approximately 30,600 square feet for a term of 60 months that began May 22, 2012, unless terminated or extended pursuant to the lease agreement. We are paying an annual rent equal to approximately $672,000 or approximately $56,000 per month, with a nominal annual escalation beginning on the first anniversary date of the lease agreement. We believe the facility is suitable and adequate for our current business needs.
We own two properties in Alabama, which together comprise approximately 50 acres of land. These properties were transferred to us from Southern United and are currently held for sale.
We are a financial services holding company incorporated under the laws of the Cayman Islands. Our core business is the underwriting of commercial automobile insurance policies, focusing on the “light” commercial automobile sector, which is carried out through our insurance subsidiaries. This sector includes taxi cabs, non-emergency para-transit, limousine, livery and business auto. Our goal is to always be the preferred specialty commercial transportation insurer in any geographic areas where our value proposition delivers benefit to all stakeholders. We are licensed to write property and casualty, or P&C, insurance in 49 states plus the District of Columbia in the United States. The insurance subsidiaries distribute their products through a network of independent retail agents, and actively wrote insurance in 40 states and the District of Columbia during 2013.
Our primary target market is made up of small to mid-size taxi, limousine and non-emergency para-transit operators. The “light” commercial automobile policies we underwrite provide coverage for lightweight commercial vehicles typically with the minimum limits prescribed by statute, municipal or other regulatory requirements. The majority of our policyholders are individual owners
We believe that there is a positive correlation between the economy and commercial automobile insurance in general. Operators of “light” commercial automobiles may be less likely than other business segments within the commercial automobile insurance market to take vehicles out of service as their businesses and business reputations rely heavily on availability. With respect to certain business lines such as the taxi line, there are also other factors such as the cost and limited supply of medallions which may discourage a policyholder from taking vehicles out of service in the face of reduced demand for the use of the vehicle.
Our surety program primarily consists of U.S. Customs bonds. We engage a former affiliate, Avalon Risk Management, to help coordinate customer service and claim handling for the surety bonds written. This non-core program is 100% reinsured to an unrelated third party and is being transitioned to another carrier. We anticipate the program will be fully transitioned during 2014.
2013 Full Year Financial Performance Summary (comparisons to 2012 unless otherwise noted):
Gross premium written increased by 69.0% from the prior year to $93.1 million, with an increase of 75.2% related to core lines of business
We actively marketed our core products in 40 states and the District of Columbia during the year ended December 31, 2013
Operating income was $6.1 million, or an improvement of $4.6 million from the prior year
$18.0 million of preferred shares were repurchased at a discount of $1.8 million
Book value per diluted common share on December 31, 2013 was $6.54, compared to $6.55 at December 31, 2012
The following financial data is derived from Atlas’ consolidated financial statements for the for the years ended December 31, 2013 and December 31, 2012.
Overall, Atlas generated net income of $6.2 million for the year ended December 31, 2013. After taking the dilutive impact of the convertible preferred shares, stock options and the impact of the buyback discount of the preferred shares of $1.8 million, diluted earnings per common share in the year ended December 31, 2013 was $0.74. This compares to net income of $3.2 million or diluted earnings per common share of $0.38 for the year ended December 31, 2012.
Atlas' fixed income portfolio is managed by a SEC registered investment advisor specializing in the management of insurance company portfolios. Management works directly with them to ensure that Atlas benefits from their expertise and also evaluates investments as well as specific positions independently using internal resources. Atlas' investment advisor has a team of credit analysts for all investment grade fixed income sectors. The investment process begins with an independent analyst review of each security's credit worthiness using both quantitative tools and qualitative review. At the issuer level, this includes reviews of past financial data, trends in financial stability, projections for the future, reliability of the management team in place, market data (credit spread, equity prices, trends in this data for the issuer and the issuer's industry). Reviews also consider industry trends and the macro-economic environment. This analysis is continuous, integrating new information as it becomes available. In short, Atlas does not rely on rating agency ratings to make investment decisions, but instead with the support of its independent investment advisors, performs independent fundamental credit analysis to find the best securities possible. Together with its investment advisor, Atlas found that over time this process creates an ability to sell securities prior to rating agency downgrades or to buy
securities before upgrades. As of December 31, 2013, this process did not generate any significant difference in the rating assessment between Atlas' review and the rating agencies.
Under U.S. GAAP, with respect to an investment in an impaired debt security, other-than temporary impairment (OTTI) occurs if (a) there is intent to sell the debt security, (b) it is more likely than not it will be required to sell the debt security before its anticipated recovery, or (c) it is probable that all amounts due will be unable to be collected such that the entire cost basis of the security will not be recovered. If Atlas intends to sell the debt security, or will more likely than not be required to sell the debt security before the anticipated recovery, a loss in the entire amount of the impairment is reflected in net realized gains (losses) on investments in the consolidated statements of income and comprehensive income. If Atlas determines that it is probable it will be unable to collect all amounts and Atlas has no intent to sell the debt security, a credit loss is recognized in net realized gains (losses) on investments in the consolidated statements of income and comprehensive income to the extent that the fair value is less than the amortized cost basis; any difference between fair value and the new amortized cost basis (net of the credit loss) is reflected in accumulated other comprehensive income (losses), net of applicable income taxes.
Deferred policy acquisition costs - Atlas defers brokers’ commissions, premium taxes and other underwriting costs directly relating to the successful acquisition of premiums written to the extent they are considered recoverable. These costs are then expensed as the related premiums are earned. The method followed in determining the deferred policy acquisition costs limits the deferral to its realizable value by giving consideration to estimated future claims and expenses to be incurred as premiums are earned. Changes in estimates, if any, are recorded in the accounting period in which they are determined. Anticipated investment income is included in determining the realizable value of the deferred policy acquisition costs. Atlas’ deferred policy acquisition costs are reported net of deferred ceding commissions.
Year ended December 31, 2013 compared to year ended December 31, 2012:
In the year ended December 31, 2013, gross premium written from commercial automobile was $88.6 million, representing a 75.2% increase relative to the year ended December 31, 2012. This substantial increase is primarily the result of the planned expansion of the commercial auto business and our acquisition of Gateway on January 1, 2013. Removing the impact of the excess taxi program which did not experience a year over year increase in gross premium written, our traditional commercial automobile gross premium written was $75.8 million, an increase of 98.9% versus the year ended December 31, 2012. Gross premium written attributable to the Gateway acquisition was approximately $12.6 million for the full year 2013. As a percentage of the insurance subsidiaries’ overall book of business, commercial auto gross premium written represented 95.2% of gross premium written in the year ended December 31, 2013 compared to 91.8% during the year ended December 31, 2012.
As illustrated by the table above, 22.1% of Atlas’ gross premium written year ended December 31, 2013 came from New York and 57.2% came from the five states currently producing the most premium volume, as compared to 72.5% in the year ended December 31, 2012. Our commitment to expanding geographically resulted in 19 states with more than $1 million in written premium in 2013 compared to only 10 in 2012. Though we built an expanded presence in New York, the impact of Hurricane Sandy on loss experience was not material.
treaty that was entered into at January 1, 2013. The percentage of premium ceded is driven by the business mix within our total premium base. Except for the new Gateway workers' compensation program, our reinsurance partners have remained consistent compared to 2012.
The loss ratio relating to the claims incurred in the year ended December 31, 2013 was 63.9% compared to 68.6% in the year ended December 31, 2012. Loss ratios improved in the year ended December 31, 2013 relative to prior periods primarily due to the increased percentage of commercial auto, which has historically had a better overall underwriting result, relative to total written premium. In both years, the excess taxi program contributed significantly to favorable loss results in the year as we expect better than average claim experience from this program. We believe that our extensive experience and expertise with respect to underwriting and claims management in all our commercial lines will allow us to continue this decreasing trend since we expect 100% of net premium earned to be related to core lines of business moving forward. The Company is committed to retain this claim handling expertise as a core competency as the volume of business increases.
The increased proportion of commercial auto business in the past year, which historically has had more favorable overall underwriting results, coupled with price and underwriting initiatives, are the primary drivers for loss ratio improvement in 2013. We believe that our extensive experience and expertise specific to underwriting and claims management in commercial lines will allow continued loss ratio improvement. The addition of Gateway had no significant impact to the consolidated loss ratio in the year ended December 31, 2013.
Acquisition costs represent commissions and taxes incurred on net premium earned. Acquisition costs were $10.4 million in the year ended December 31, 2013 or 14.5% of net premium earned, as compared to 16.7% in the year ended December 31, 2012. The favorable trend in acquisition costs is primarily due to the shift away from non-standard automobile insurance during 2012 which had carried higher commission rates. We expect acquisition cost ratios to remain consistent with the 2013 ratio going forward.
The other underwriting expense ratio in 2013 excludes $406,000 in transaction costs incurred in conjunction with the acquisition of Gateway.
Investment income (excluding net realized gains) net of investment expenses decreased by 12.7% to $2.1 million in the year ended December 31, 2013, compared to $2.5 million in the year ended December 31, 2012. These amounts are primarily comprised of interest income. This decrease is attributable to the timing of asset disposals, interest rates and the mix of securities on hand.
Atlas recorded other income in the year ended December 31, 2013 of $13,000 compared to other income of $194,000 for the year ended December 31, 2012. Other income prior to June 30, 2012 was primarily comprised of rental income from our corporate headquarters in Elk Grove Village, Illinois, which was sold in 2012.
Atlas recognized $72,000 of tax expense in the year ended December 31, 2013, however recognized no tax expense for the year ended December 31, 2012. The following table reconciles tax benefit from applying the statutory U.S. Federal tax rate of 34.0% to the actual percentage of pre-tax income provided for the years ended December 31, 2013 and 2012:
Upon the transaction forming Atlas on December 31, 2010, a yearly limitation as required by U.S. tax law Section 382 that applies to changes in ownership on the future utilization of Atlas’ net operating loss carry-forwards was calculated. The insurance subsidiaries’ prior parent retained those tax assets previously attributed to the insurance subsidiaries which could not be utilized by Atlas as a result of this limitation. As a result, Atlas’ ability to recognize future tax benefits associated with a portion of its deferred tax assets generated during prior years and the current year have been permanently limited to the amount determined under U.S. tax law Section 382. The result is a maximum expected net deferred tax asset, which Atlas has available after the merger and believed more-likely-than-not to be utilized in the future, after consideration of valuation allowance.
Atlas earned $6.2 million during the year ended December 31, 2013 versus net income of $3.2 million during the year ended December 31, 2012. After taking the impact of the liquidation preference of the preferred shares into consideration and the discount generated as a result of the repurchase of 18,000,000 preferred shares, the diluted earnings per common share in the year ended December 31, 2013 was $0.74 versus diluted earnings per common share of $0.38 in year ended December 31, 2012.
Atlas held securities with a fair value of $130.1 million as of the year ended December 31, 2013, which was primarily comprised of fixed income securities. The securities held by the insurance subsidiaries must comply with applicable regulations that prescribe the type, quality and concentration of securities. These regulations in the various jurisdictions in which the insurance subsidiaries are domiciled permit investments in government, state, municipal and corporate bonds, preferred and common equities, and other high quality investments, within specified limits and subject to certain qualifications.
As of the year ended December 31, 2013, 39.9% of the fixed income securities, including treasury bills, bankers’ acceptances, government bonds and corporate bonds had contractual maturities of five years or less. Actual maturities may differ from contractual maturities because certain issuers have the right to call or prepay obligations with or without call or prepayment penalties. Atlas holds cash and high grade short-term assets which, along with fixed income security maturities, management believes are sufficient for the payment of claims on a timely basis. In the event that additional cash is required to meet obligations to policyholders, Atlas believes that high quality securities portfolio provides us with sufficient liquidity. With a weighted contractual duration of 4.7 years, changes in interest rates will have a modest market value impact on the Atlas portfolio relative to longer duration portfolios. Atlas can and typically does hold bonds to maturity by matching duration with the anticipated liquidity needs.
The following table summarizes the composition of the fair value of the fixed income securities portfolio (excluding the bond which has been classified in Level 3 within the fair value hierarchy), excluding cash and cash equivalents, as of the dates indicated, by ratings assigned by Fitch, S&P or Moody’s Investors Service. The fixed income securities portfolio consists of predominantly very high quality securities in corporate and government bonds with 88.3% rated ‘A’ or better as of the year ended December 31, 2013 compared to 88.1% as of the year ended December 31, 2012.
The length of time securities may be held in an unrealized loss position may vary based on the opinion of the appointed investment manager and their respective analyses related to valuation and to the various credit risks that may prevent us from recapturing the principal investment. In cases of securities with a maturity date where the appointed investment manager determines that there is little or no risk of default prior to the maturity of a holding, Atlas would elect to hold the security in an unrealized loss position until the price recovers or the security matures. In situations where facts emerge that might increase the risk associated with recapture of principal, Atlas may elect to sell securities at a loss. Atlas had no material gross unrealized losses in its portfolio as of the year ended December 31, 2013 or as of the year ended December 31, 2012.
Reinsurance ceded does not relieve Atlas of its ultimate liability to its insured in the event that any reinsurer is unable to meet their obligations under its reinsurance contracts. Therefore, Atlas enters into reinsurance contracts with only those reinsurers deemed to have sufficient financial resources to provide the requested coverage. Reinsurance treaties are generally subject to cancellation by the reinsurers or Atlas on the anniversary date and are subject to renegotiation annually. Atlas regularly evaluates the financial condition of its reinsurers and monitors the concentrations of credit risk to minimize its exposure to significant losses as a result of the insolvency of a reinsurer. Atlas believes that the amounts it has recorded as reinsurance recoverables are appropriately established. Estimating amounts of reinsurance recoverables, however, is subject to various uncertainties and the amounts ultimately recoverable may vary from amounts currently recorded. Atlas had $19.1 million recoverable from third party reinsurers (exclusive of amounts prepaid) and other insurers as of the year ended December 31, 2013 as compared to $6.0 million as of the year ended December 31, 2012.
Atlas’ largest reinsurance partners are Gen Re, a subsidiary of Berkshire Hathaway, Inc. and White Rock Insurance (SAC) Ltd. Gen Re has a financial strength rating of Aa1 from Moody’s while White Rock is unrated. The White Rock balances are specifically related to the Gateway workers' compensation program that was exited during 2013 and are fully secured by a letter-of-credit.
Atlas established a valuation allowance of approximately $9.4 million and $11.2 million for its gross future deferred tax assets as of the year ended December 31, 2013 and as of the year ended December 31, 2012, respectively.
Based on Atlas’ expectations of future taxable income, as well as the reversal of gross future deferred tax liabilities, management believes it is more likely than not that Atlas will fully realize the net future tax assets, with the exception of the aforementioned valuation allowance. Atlas has therefore established the valuation allowance as a result of the potential inability to utilize a portion of its net operation losses in the U.S. which are subject to a yearly limitation. The Company has been reducing its valuation allowance against deferred tax assets by an amount equal to the amount of income tax expense generate for the period. The Company will continue this process until such time as the management determines that certain specific events warrant a reassessment of this policy which could result in future reductions or the elimination of the valuation allowance. These events include but are not limited to continued underwriting profitability, the lack of significant prior year loss reserve development, continuing favorable market conditions, continued positive trend in taxable earnings, and other such indications deemed positive.
Atlas has the following total net operating loss carry-forwards as of the year ended December 31, 2013:
On May 22, 2012, Atlas closed the sale of the headquarters building to 150 Northwest Point, LLC, a Delaware limited liability company. The total sales price of the property, which was paid in cash, amounted to $14.0 million, less closing costs and related expenses of approximately $633,000. In connection with the sale, the Company also wrote down an accrual of approximately $792,000 held for real-estate taxes. Approximately $830,000 of the sales price was held in escrow for real-estate taxes. Atlas recognized a gain on the sale of this property of $213,000, which will be deferred and recognized over the 5 year lease term. Atlas recognized $43,000 and $26,000 as an offset to rent expense for the years ended December 31, 2013 and 2012, respectively. Total rental expense recognized on the headquarters building was $699,000 and $357,000 for the years ended December 31, 2013 and 2012, respectively.
There are two properties located in Alabama which are still for sale. These properties are listed for sale for amounts greater than carried values. Both were assets of Southern United Fire Insurance Company, which was merged into American Service in February 2010.
The table below shows the amounts of total case reserves and incurred but not reported (“IBNR”) claims provision as of the year ended December 31, 2013 and as of the year ended December 31, 2012. The provision for unpaid claims increased by 44.7% to $101.4 million as of the year ended December 31, 2013 compared to $70.1 million as of the year ended December 31, 2012. During the year ended December 31, 2013, case reserves increased by 38.5% compared to December 31, 2012, while IBNR reserves increased by 65.9% generally due to the acquisition of Gateway and the consolidation of its reserve balances and the increase in premiums earned in our core commercial lines of business.
The other line of business is comprised of Atlas’ surety business, Gateway's truck and workers' compensation programs, Atlas' non-standard personal lines business, Atlas' workers' compensation related to taxi, other liability and assigned risk business.
Claims liabilities - The changes in the provision for unpaid claims, net of amounts recoverable from reinsurers, for the years ended December 31, 2013 and December 31, 2012 were as follows ($ in '000's):
The change to the provision for unpaid claims is consistent with the changes in written premium and the addition of reserves related to the Gateway acquisition. However, because the establishment of reserves is an inherently uncertain process involving
The financial statements are presented on a calendar year basis for all data. Claims payments and changes in reserves, however, may be made on accidents that occurred in prior years, not solely on business that is currently insured. Calendar year losses consist of payments and reserve changes that have been recorded in the financial statements during the applicable reporting period, without regard to the period in which the accident occurred. Calendar year results do not change after the end of the applicable reporting period, even as new claim information develops. Accident year losses consist of payments and reserve changes that are assigned to the period in which the accident occurred. Accident year results will change over time as the estimates of losses change due to payments and reserve changes for all accidents that occurred during that period.
The development of the provision for unpaid loss and loss adjustment expenses is shown by the difference between the original estimates and the re-estimated liabilities at each subsequent year-end. The re-estimated liabilities at each year-end are based on actual payments in full or partial settlement of claims plus re-estimates of the payments required for claims still open or IBNR claims. Favorable development (redundancy) means that the original estimated provision was higher than subsequently re-estimated. Unfavorable development (deficiency) means that the original estimated provision was lower than subsequently re-estimated. The cumulative development represents the aggregate change in the estimates over all prior years.
As of December 31, 2013, Atlas has the following cash obligations related to its operating leases.
The table below identifies changes in shareholders’ equity for the year ended December 31, 2013 and December 31, 2012:
underwriters exercised this option and purchased an additional 451,500 shares. After underwriting and other expenses, Atlas realized combined proceeds of $9.8 million.
All of the issued and outstanding restricted voting common shares are beneficially owned or controlled by Kingsway. In the event that such shares are disposed of such that Kingsway’s beneficial interest is less than 10% of the issued and outstanding restricted voting common shares (which is now the case), the restricted voting common shares shall be converted into fully paid and non-assessable ordinary voting common shares. The restricted voting common shares are entitled to vote at all meetings of shareholders, except at meetings of holders of a specific class that are entitled to vote separately as a class. The restricted voting common shares as a class shall not carry more than 30% of the aggregate votes eligible to be voted at a general meeting of common shareholders. The restricted voting common shares will convert to ordinary voting common shares in the event that these Kingsway owned shares are sold to non-affiliates of the Company.
On October 18, 2013 and on November 13, 2013, Kingsway notified the Company that it had sold 529,608 and 600,000 of its restricted shares, respectively, bringing its restricted share count to 132,863 or 1.4% of the outstanding common shares as of December 31, 2013.
The total purchase price for all of Camelot Services’ outstanding shares was $14.3 million, consisting of a combination of cash and Atlas preferred shares. Consideration consisted of a $6.0 million dividend paid to the sellers immediately prior to the closing, $2.0 million of Atlas preferred shares (consisting of a total of 2,000,000 preferred shares) and $6.3 million in cash. This transaction did not impair our near-term liquidity.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. Our audit of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Atlas Financial Holdings, Inc. as of December 31, 2013 and 2012, and the results of its consolidated operations and its cash flows for the years ended December 31, 2013 and 2012, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements as a whole, present fairly, in all material respects, the information set forth therein.
Atlas Financial Holdings, Inc. ("Atlas" or the "Company") commenced operations on December 31, 2010. The primary business of Atlas is underwriting commercial automobile insurance in the United States, with a niche market orientation and focus on insurance for the “light” commercial automobile sector. This sector includes taxi cabs, non-emergency para-transit, limousine, livery and business autos. Automobile insurance products provide insurance coverage in three major areas: liability, accident benefits and physical damage. Liability insurance provides coverage subject to policy terms and conditions where the insured is determined to be responsible and/or liable for an automobile accident, for the payment for injuries and property damage to third parties. Accident benefit policies or personal injury protection policies provide coverage for loss of income, medical and rehabilitation expenses for insured persons who are injured in an automobile accident, regardless of fault. Physical damage coverage subject to policy terms and conditions provides for the payment of damages to an insured automobile arising from a collision with another object or from other risks such as fire or theft. In the short run, automobile physical damage and liability coverage generally provides more predictable results than automobile accident benefit or personal injury insurance.
Atlas' business is carried out through its insurance subsidiaries: American Country Insurance Company (“American Country”), American Service Insurance Company, Inc. (“American Service”) and, as of January 1st, 2013, Gateway Insurance Company ("Gateway"). The insurance subsidiaries distribute their insurance products through a network of retail independent agents. Together, the insurance subsidiaries are licensed to write property and casualty insurance in 49 states and the District of Columbia in the United States. The insurance subsidiaries share common management and operating infrastructure .
Atlas ordinary common shares had been listed on the TSXV under the symbol “AFH” since January 6, 2011. Atlas ordinary common shares became listed on the NASDAQ stock exchange on February 11, 2013 and continue to trade on this exchange under the same symbol. The Company delisted from the TSXV on June 5, 2013.
Basis of presentation - These statements have been prepared in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP"). All significant intercompany accounts and transactions have been eliminated. To conform to the current year presentation, certain amounts in the prior years’ consolidated financial statements and notes have been reclassified.
Impairment of financial assets - Atlas assesses, on a quarterly basis, whether there is evidence that a financial asset or group of financial assets is impaired. An investment is considered impaired when the fair value of the investment is less than its cost or amortized cost. When an investment is impaired, the Company must make a determination as to whether the impairment is other-than-temporary.
Under Accounting Standards Codification ("ASC"), with respect to an investment in an impaired debt security, other-than temporary impairment ("OTTI") occurs if (a) there is intent to sell the debt security, (b) it is more likely than not it will be required to sell the debt security before its anticipated recovery, or (c) it is probable that all amounts due will be unable to be collected such that the entire cost basis of the security will not be recovered. If Atlas intends to sell the debt security, or will more likely than not be required to sell the debt security before the anticipated recovery, a loss in the entire amount of the impairment is reflected in net investment gains (losses) on investments in the consolidated statements of income. If Atlas determines that it is probable it will be unable to collect all amounts and Atlas has no intent to sell the debt security, a credit loss is recognized in net investment gains (losses) on investments in the consolidated statements of income to the extent that the present value of expected cash flows is less than the amortized cost basis; any difference between fair value and the new amortized cost basis (net of the credit loss) is reflected in other comprehensive income (losses), net of applicable income taxes.
Atlas' fixed income portfolio is managed by a SEC registered investment advisor specializing in the management of insurance company portfolios. Management works directly with them to ensure that Atlas benefits from their expertise and also evaluates investments as well as specific positions independently using internal resources. Atlas' investment advisor has a team of credit analysts for all investment grade fixed income sectors. The investment process begins with an independent analyst review of each security's credit worthiness using both quantitative tools and qualitative review. At the issuer level, this includes reviews of past financial data, trends in financial stability, projections for the future, reliability of the management team in place, market data (credit spread, equity prices, trends in this data for the issuer and the issuer's industry). Reviews also consider industry trends and the macro-economic environment. This analysis is continuous, integrating new information as it becomes available. In short,
Atlas does not rely on rating agency ratings to make investment decisions, but instead with the support of its independent investment advisors, performs independent fundamental credit analysis to find the best securities possible. Together with its investment advisor, Atlas found that over time this process creates an ability to sell securities prior to rating agency downgrades or to buy securities before upgrades. As of December 31, 2013, this process did not generate any significant difference in the rating assessment between Atlas' review and the rating agencies. The Company recognizes transfers between levels of the fair value hierarchy at the end of the period in which events occur impacting the availability of inputs to the fair value methodology.
When anticipated losses, loss adjustment expenses, commissions and other acquisition costs exceed recorded unearned premium and any future installment premiums on existing policies, a premium deficiency reserve is recognized by recording a reduction to DPAC with a corresponding charge to operations. Atlas utilizes anticipated investment income as a factor in its premium deficiency calculation. Atlas concluded that no premium deficiency adjustments were necessary in either of the years ended December 31, 2013 and December 31, 2012.
Office equipment and software - Office equipment is stated at historical cost less deprecation. Subsequent costs are included in the asset’s carrying amount or capitalized as a separate asset only when it is probable that future economic benefits will be realized. Repairs and maintenance are recognized as an expense during the period incurred. Depreciation on equipment is provided on a
straight-line basis over the estimated useful lives which range from 5 years for vehicles, 5 years for furniture, 3 years for software and computer equipment and the term of the lease for leased equipment.
We began consolidating Gateway on January 1, 2013, therefore, Gateway's financial results have not been included in Atlas' financial results for the year ended December 31, 2012. However, the following unaudited pro forma summary presents Atlas' consolidated financial information as if Gateway had been acquired on January 1, 2012. These amounts have been calculated after applying the Company's accounting policies had the acquisition been completed on January 1, 2012. These results were prepared for comparative purposes only and do not purport to be indicative of the results of operations which may have actually resulted had the acquisitions occurred on the indicated dates, nor are they indicative of potential future operating results of the Company.
The acquisition of Gateway resulted in the recognition of intangible assets, comprised entirely of state insurance licenses valued at $740,000. The state insurance licenses are considered to have an infinite life and will not be amortized, but will be evaluated for impairment at least annually. Thus, Atlas recognized no amortization expense during the year ended December 31, 2013 related to intangible assets acquired in the Gateway transaction.
Atlas incurred $406,000 in legal and professional fee expenses related to the transaction during the the first quarter of 2013. Atlas incurred $337,000 in one-time employee termination costs during the year ended December 31, 2013, plans for which were formulated in the same period, and also incurred $372,000 of additional interim transition/integration costs. These termination and transition/integration costs are included in "Other Underwriting Expenses" on the Consolidated Statements of Income and
Earnings per ordinary and restricted common share (collectively, the "common shares") for the years ended December 31, 2013 and December 31, 2012 are as follows ($ in '000's except for share and per share amounts):
In computing the diluted earnings per share on a year to date basis, the Company included the dilutive impact of the convertible preferred shares that were redeemed during the third quarter of 2013 on a pro-rata basis for the period during which those convertible preferred shares were outstanding. This dilutive impact increased the denominator in the full year 2013 diluted EPS computation by 1,333,500 shares; however, this has no impact on the actual earnings used for the numerator in the EPS computation. The preferred shares redeemed decreased diluted earnings per share for the year by $0.10. Future diluted earnings per share computations will not be impacted by the convertible impact of the preferred shares redeemed.
As a result of the above analysis performed by management to determine declines in fair value that may be other than temporary there was an impairment related to an equity position that was recorded in 2013. The Company reduced the fair value of its equity position by $311,000 and recorded an adjustment through the Consolidated Statements of Income and Comprehensive Income to account for this other than temporary impairment.
claim adjustment expense payments and operating expenses. The timing and amount of catastrophe claims are inherently unpredictable and may create increased liquidity requirements.
Though Atlas believes its valuation methods are appropriate, the use of different methodologies or assumptions to determine its fair value could result in a different fair value as of December 31, 2013. Management does not believe that reasonable changes to the inputs to its valuation methodology would result in a significantly higher or lower fair value measurement.
The insurance subsidiaries must each maintain a minimum statutory capital and surplus of $1.5 million and $2.4 million under the provisions of the Illinois Insurance Code and the Missouri Insurance Code, respectively. Dividends may only be paid from statutory unassigned surplus, and payments may not be made if such surplus is less than a stipulated amount. The dividend restriction is the greater of statutory net income or 10% of total statutory capital and surplus. As of December 31, 2013, all dividends required prior regulatory approval prior to distribution.
Net income computed under statutory-basis accounting was $1.6 million, $3.6 million and $2.1 million for American Country, American Service and Gateway, respectively. Net income for the year ended December 31, 2012 was $457,000 for American Country while American Service and Gateway generated net losses of $1.6 million and $12.1 million, respectively. Statutory capital and surplus of the insurance subsidiaries was $53.1 million and $52.2 million (without Gateway for 2012) at December 31, 2013 and 2012, respectively.
The effective tax rate was 1.2% and 0.0% for the years ended December 31, 2013 and 2012, respectively, compared to the U.S. statutory income tax rate of 34% as shown below ($ in '000s):
Income tax expense consists of the following for the year ended December 31, 2013 and December 31, 2012:
Following this triggering event, the Company estimates that it will retain total tax effected federal net operating loss carryforwards of approximately $15.3 million as of December 31, 2013. Book value per common share is unaffected by this event as the amount of lost net deferred tax assets of $578,000 were offset by a corresponding decrease in the valuation allowance which was already held against the majority of these assets. The completion and filing of the Company's 2013 U.S. Federal tax return will determine the final adjustment.
Atlas established a valuation allowance of $9.4 million and $11.2 million for its gross deferred tax assets as of the year ended December 31, 2013 and as of the year ended December 31, 2012, respectively.
On May 22, 2012, Atlas closed the sale of the headquarters building to 150 Northwest Point, LLC, a Delaware limited liability company. The total sales price of the property, which was paid in cash, amounted to $14.0 million, less closing costs and related
As of December 31, 2013, Atlas has the following cash obligations related to its lease of its headquarters building.
Gross premiums written and ceded premiums, losses and commissions as of and for the years ended December 31, 2013 and December 31, 2012 are as follows (all amounts in '000s):
Claims liabilities - The changes in the provision for unpaid claims, net of amounts recoverable from reinsurers, for the years ended December 31, 2013 and December 31, 2012 were as follows (all amounts in '000s):
On January 11, 2013, Atlas granted options to purchase 91,668 ordinary shares of Atlas stock to officers at an exercise price of C$6.45 per share. The options vest 25% at date of grant and 25% on each of the next three anniversary dates and expire on January 11, 2023.
In accordance with U.S. GAAP, Atlas has recognized stock compensation expense on a straight-line basis over the requisite service period of the last separately vesting portion of the award. Atlas recognized $247,000 and $113,000 in expense for the years ended December 31, 2013 and 2012, respectively, which is a component of other underwriting expenses on the income statement. Total unrecognized stock compensation expense of $113,000 associated with the January 18, 2011 grant and $281,000 associated with the January 11, 2013 grant as of the year ended December 31, 2013 which will be recognized ratably through the next 2 years.
The weighted average exercise price of all the shares exercisable at December 31, 2013 and December 31, 2012 was C$6.05 and C$5.76 and the grants have a weighted average remaining life of 7.8 years. The outstanding stock options have an intrinsic value of $2.0 million as of the year ended December 31, 2013.
Defined Contribution Plan - In January 2011, Atlas formed a defined contribution 401(k) plan covering all qualified employees of Atlas and its subsidiaries. Employees can choose to contribute up to 60% of their annual earnings but not more than $17,500 for 2013 to the plan. Qualifying employees age 50 and older can contribute an additional $5,500 in 2013. Atlas matches 50% of the employee contribution up to 5% of annual earnings for a total maximum expense of 2.5% of annual earnings per participant. Atlas contributions are discretionary. Employees are 100% vested in their own contributions and vest in Atlas contributions based on years of service with 100% vested after five years. Company contributions were $118,000 and $110,000, for the years ended December 31, 2013 and December 31, 2012, respectively.
Employee Stock Purchase Plan - In the second quarter of 2011, Atlas initiated the Atlas Employee Stock Purchase Plan (the “ESPP”) to encourage continued employee interest in the operation, growth and development of Atlas and to provide an additional investment opportunity to employees. Beginning in June 2011, full time and permanent part time employees working more than 30 hours per week are allowed to invest up to 5% of adjusted salary in Atlas ordinary voting common shares. Atlas matches 50% of the employee contribution up to 5% of annual earnings for a total maximum expense of 2.5% of annual earnings per participant. Employees who signed up for the ESPP by May 30, 2011 each received an additional 100 ordinary common shares as an initial participation incentive. Atlas will also pay administrative costs related to this plan. During the years ended December 31, 2013 and December 31, 2012, Atlas incurred costs related to the plan of $58,000 and $51,000, respectively.
All of the issued and outstanding restricted common shares are beneficially owned or controlled by Kingsway. The restricted common shares are entitled to vote at all meetings of shareholders, except at meetings of holders of a specific class that are entitled to vote separately as a class. The restricted common shares as a class shall not carry more than 30% of the aggregate votes eligible to be voted at a general meeting of common shareholders. The restricted common shares will convert to ordinary common shares in the event that these Kingsway owned shares are sold to non-affiliates of the Company.
On August 1, 2013, Atlas repurchased 18,000,000 preferred shares owned by Kingsway pursuant to the Share Repurchase Agreement. Atlas recorded a $1.8 million benefit related to the discount on the repurchase of these shares from Kingsway.
On October 18, 2013 and on November 13, 2013, Kingsway notified the Company that it had sold 529,608 and 600,000 of its restricted common shares, respectively, bringing its restricted common share count to 132,863 or 1.4% of the outstanding common shares as of December 31, 2013.
The remaining outstanding preferred shares are not entitled to vote and are beneficially owned or controlled by Hendricks as of the year ended December 31, 2013. Preferred shareholders are entitled to dividends on a cumulative basis whether or not declared by the Board of Directors at the rate of $0.045 per share per year (4.5%) and may be paid in cash or in additional preferred shares at the option of Atlas. In liquidation, dissolution or winding-up of Atlas, preferred shareholders receive the greater of $1.00 per share plus all declared and unpaid dividends or the amount it would receive in liquidation if the preferred shares had been converted to restricted voting common shares or ordinary voting common shares immediately prior to liquidation. Preferred shares are convertible into ordinary voting shares at the option of the holder at any date after the fifth year of issuance at the rate of 0.1270 ordinary voting common shares for each preferred share. The conversion rate is subject to change if the number of ordinary voting common shares or restricted voting common shares changes. The preferred shares are redeemable at the option of Atlas at a price of $1.00 per share plus accrued and unpaid dividends commencing at two years from January 1, 2013 (the issuance date of the preferred shares).
Deferred policy acquisition costs for the year ended December 31, 2013 and December 31, 2012 (in '000s):
It is the Company’s objective to ensure alignment between incentives for directors and officers with the creation of shareholder value. On February 28, 2014, Atlas granted 185,190 restricted shares under the Company’s equity incentive plan, all of which were granted to the Company’s directors. This grant is a component of the Company’s director compensation plan. To qualify, each director personally purchased $100,000 of Company stock during the second half of 2013. The granted restricted shares vest equally on the anniversary of the grant date for the next five consecutive years. Additional terms and conditions are set forth in the grant agreements which were filed as exhibits to the Company’s current report on Form 8-K filed on March 4, 2014.
On March 6, 2014, Atlas granted to certain executive officers (i) stock options to purchase 175,000 common shares, with an exercise price of $13.26 and a three year vesting period, and (ii) 37,700 fully-vested, unrestricted common shares. These grants were made under the Company's equity incentive plan.