We are leasing three additional office spaces. The St. Louis, Missouri lease is 4,375 square feet of office space and effective through June 2021. We currently pay a monthly rent equal to approximately $10,000. The Manhattan, New York lease is 1,796 square feet of office space and effective through February 2018. We currently pay a monthly rent equal to approximately $6,000. Upon completion of the Anchor acquisition, we assumed a lease for 25,396 square feet of office space in Melville, New York, which is effective through March 2022. We currently pay a monthly rent equal to approximately $60,000.
In this discussion and analysis, the term “common share” refers to the summation of restricted voting common shares and ordinary voting common shares when used to describe earnings (loss) or book value per common share.
Statutory income tax is the rate that is imposed on taxable income of corporations.
We are a financial services holding company incorporated under the laws of the Cayman Islands. Our core business is the underwriting of commercial automobile insurance policies, focusing on the “light” commercial automobile sector, which is carried out through our insurance subsidiaries. This sector includes taxi cabs, non-emergency para-transit, limousine, livery and business auto. Our goal is to always be the preferred specialty commercial transportation insurer in any geographic areas where our value proposition delivers benefit to all stakeholders. We are licensed to write property and casualty ("P&C") insurance in 49 states and the District of Columbia in the United States. The insurance subsidiaries distribute their products through a network of independent retail agents, and actively wrote insurance in 41 states and the District of Columbia during 2015. 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.
Our primary target market is made up of small to mid-size taxi, limousine, other livery and non-emergency para-transit operators. The “light” commercial automobile policies we underwrite provide coverage for lightweight commercial vehicles typically with the minimum limits prescribed by statute, municipal or other regulatory requirements. The majority of our policyholders are individual owners or small fleet operators. In certain jurisdictions like Illinois, Louisiana, Nevada and New York, we have also been successful working with larger operators who retain a meaningful amount of their own risk of loss through higher retentions, self-insurance or self-funded captive insurance entity arrangements. In these cases, we provide support in the areas of day to day policy administration and claims handling consistent with the value proposition we offer to all of our insureds, generally on a fee for service basis. We may also provide excess coverage above the levels of risk retained by the insureds where a better than average loss ratio is expected. Through these arrangements, we are able to effectively utilize the significant specialized operating infrastructure we maintain to generate revenue from business segments that may otherwise be more price sensitive in the current market environment.
The “light” commercial automobile sector is a subset of the historically profitable commercial automobile insurance industry segment. In more recent years the commercial automobile insurance industry has seen profitability pressure within certain segments, however, it has outperformed the overall property and casualty ("P&C") industry generally over the past fifteen years based on data compiled by A.M. Best Aggregates & Averages. Data compiled by SNL Financial also indicates that for 2014 the total market for commercial automobile liability insurance was approximately $29.3 billion. The size of the commercial automobile insurance market can be affected significantly by many factors, such as the underwriting capacity and underwriting criteria of automobile insurance carriers and general economic conditions. Historically, the commercial automobile insurance market has been characterized by periods of excess underwriting capacity and increased price competition followed by periods of reduced capacity and higher premium rates.
We believe that there is a positive correlation between the economy and commercial automobile insurance in general. Operators of “light” commercial automobiles may be less likely than other business segments within the commercial automobile insurance market to take vehicles out of service, as their businesses and business reputations rely heavily on availability. With respect to certain business lines such as the taxi line, there are also other factors such as the cost and limited supply of medallions, which may discourage a policyholder from taking vehicles out of service in the face of reduced demand for the use of the vehicle.
Our surety program primarily consists of U.S. Customs bonds (currently in run off). We engage a former affiliate, Avalon Risk Management, to help coordinate customer service and 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. No new business was written in connection with this program in 2015, however, there was a small amount of renewals recorded in 2015.
Other operating and general expenses consist primarily of personnel expenses (including salaries, benefits and certain costs associated with awards under our equity compensation plans, such as stock compensation expense) and other general operating expenses. Because a portion of our personnel expenses are relatively fixed in nature, increased writings could improve our operating scale and could lead to reduced operating expense ratios.
2015 Full Year Financial Performance Summary (comparisons to 2014 unless otherwise noted):
Book value per common share at December 31, 2015 was $10.15, compared to $9.08 at December 31, 2014
The following financial data is derived from Atlas’ consolidated financial statements for the years ended December 31, 2015, December 31, 2014, and December 31, 2013.
1 - See 'Use of Non-U.S. GAAP Financial Measurements' section above for definitions of these measurements
There was an increase in gross premium written related to core commercial lines of 73.8% for the year ended December 31, 2015 as compared to the year ended December 31, 2014. When excluding our excess taxi program, which experienced a modest decrease in gross premium written, for the year ended December 31, 2015, gross premium written on our traditional core lines increased by 83.4% as compared to the prior year. There was a 73.8% and a 52.0% increase in gross and net premium written, respectively, related to core commercial lines for the year ended December 31, 2015 compared to the year ended December 31, 2014. Net premium earned increased by 55.0% for the year ended December 31, 2015 to $152.1 million compared to $98.1 million for the year ended December 31, 2014. Global Liberty accounted for $26.4 million or 45.8% of this increase. Excluding the impact of
The overall loss ratio for the year ended December 31, 2015 improved to 59.2% as compared to 62.3% for the year ended December 31, 2014.The loss ratio improvement in 2015 resulted primarily from pricing activity related to our core lines and the results from our commercial auto program. We saw opportunities to positively impact pricing during 2015.
We achieved substantial premium growth primarily through organic expansion of core lines of business written in our target markets. There was an increase in gross premium written related to core commercial lines of 35.0% for the year ended December 31, 2014 as compared to the year ended December 31, 2013. When excluding our excess taxi program, which experienced a modest increase in gross premium written, for the year ended December 31, 2014, gross premium written on our traditional core lines increased by 40.6% as compared to the prior year. The overall loss ratio for the year ended December 31, 2014 improved to 62.3% as compared to 63.9% for the year ended December 31, 2013. The pricing activity and claims initiatives were the primary drivers for loss ratio improvement in 2014.
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.
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.
The valuations are finalized within 12 months of the close of the acquisition. The changes upon finalization to the initial purchase price allocation and valuation of assets and liabilities may result in an adjustment to identifiable intangible assets and goodwill. Adjustments to the provisional amounts identified during the measurement period are recognized in the reporting period in which the adjustment amounts are determined. The effect of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date, are recorded in the financial statements and presented separately on the income statement in the reporting period in which the adjustment amounts are determined.
Year ended December 31, 2015 compared to year ended December 31, 2014:
The following table summarizes gross premium written by line of business.
As illustrated by the table above, 29.3% of Atlas’ gross premium written year ended December 31, 2015 came from New York and 58.2% came from the five states currently producing the most premium volume, as compared to 55.8% for the year ended December 31, 2014. Our commitment to expanding geographically resulted in 29 states with more than $1 million in written premium in 2015 compared to 23 in 2014.
Ceded premium written is equal to premium ceded under the terms of Atlas’ inforce reinsurance treaties. The percentage of premium ceded is driven by the business mix within our total premium base. Effective July 1, 2014, Atlas entered into a quota share reinsurance contract ("Quota Share") with Swiss Reinsurance America Corporation ("Swiss Re") for the commercial auto and general liability lines of business written by American Country, American Service and Gateway. Our initial quota share percentage was 5% of subject written premiums. We increased this percentage to 15% effective April 1, 2015. As a result of the Quota Share, the acquisition of Global Liberty and overall gross premium growth, we saw our ceded premium written increase
259.7% to $39.6 million for the year ended December 31, 2015 compared with $11.0 million for the year ended December 31, 2014.
Net premium written is equal to gross premium written less the ceded premium written under the terms of Atlas’ inforce reinsurance treaties. Net premium written increased 52.3% to $169.7 million for the year ended December 31, 2015 compared with $111.4 million for the year ended December 31, 2014. These changes are attributed to the combined effects of the issues cited in the ‘Gross Premium Written’ and ‘Ceded Premium Written’ sections above.
Premiums are earned ratably over the term of the underlying policy. Net premium earned was $152.1 million for the year ended December 31, 2015, a 55.0% increase compared with $98.1 million for the year ended December 31, 2014. The increase in net premiums earned is attributable to the combined effects of the issues cited in the ‘Gross Premium Written’ and ‘Ceded Premium Written’ sections above.
The loss ratio relating to the claims incurred for the year ended December 31, 2015 was 59.2% compared to 62.3% for the year ended December 31, 2014. The loss ratio improvement was primarily the result of Atlas' core commercial auto program, creating a 1.2% decrease in loss ratio for the year ended December 31, 2015. In both years, the excess taxi program contributed significantly to favorable loss results. We expect the loss ratio for this program to remain within the range of 45% to 50% of net earned premiums. We believe that our extensive experience and expertise with respect to underwriting and claims management in all our commercial lines will allow us to maintain or improve loss ratios going forward. The Company is committed to retain this claim handling expertise as a core competency as the volume of business increases.
Acquisition costs represent commissions and taxes incurred on net premium earned offset by ceding commission on business reinsured by the Quota Share as was disclosed in the current year. Before the impact of the Quota Share reinsurance, acquisition costs were 14.7% for the year ended December 31, 2015, as compared to 14.6% for the year ended December 31, 2014. After the impact of Quota Share reinsurance, acquisition costs were $18.6 million for the year ended December 31, 2015 or 12.2% of net premium earned, as compared to 14.3% for the year ended December 31, 2014. The decrease in the ratio is related to the Quota Share's ceding commissions. The impacts of the Quota Share on acquisition costs are cited in the below 'Combined Ratio' section.
The total reported other underwriting expense ratio (including share based compensation expenses and intangible amortization) was 15.6% for the year ended December 31, 2015 compared to 14.1% for the year ended December 31, 2014. Changes in our Quota Share reinsurance during 2015 had an impact on the reported other underwriting expense ratio when comparing year to year. Before the impact of the Quota Share reinsurance, the total other underwriting expense ratio was 13.8% for the year ended December 31, 2015 compared to 14.0% for the year ended December 31, 2014. The growth of our core lines and our increasing operational scale has had positive impact on this ratio.
Also, while the Quota Share provides a ceding commission to offset underwriting expense, this commission reduces acquisition costs rather than other underwriting expenses on the income statement. With this in mind, acquisition costs and other underwriting expenses should be examined collectively as total underwriting expenses to understand operating efficiency.
Net investment income consists of the interest income and net realized gains or losses that are created by the Company's invested assets net of expenses associated with managing the portfolio. The table below compares the net investment results for the years ended December 31, 2015 and 2014.
The annualized realized yield on invested assets (including net realized gains of $455,000 and $382,000) was 2.2% for the years ended December 31, 2015 and 2014, respectively.
The change in underwriting income is attributable to the factors described in the 'Net Premium Earned', ‘Claims Incurred’, ‘Acquisition Costs’, and ‘Other Underwriting Expenses’ sections above.
Atlas generated pre-tax income of $22.0 million for the year ended December 31, 2015, compared to pre-tax income of $11.9 million for year ended December 31, 2014. The causes of these changes are attributed to the combined effects of the issues cited in the 'Net Premium Earned', 'Claims Incurred', 'Acquisition Costs', 'Other Underwriting Expenses', 'Net Investment Income', 'Net Realized Investment Gains', and 'Other Income' sections above.
Atlas recognized $7.6 million of tax expense for the year ended December 31, 2015, and recognized $5.8 million of tax benefit for the year ended December 31, 2014. The Company was able to reverse its deferred tax asset valuation allowance to offset substantially all current income tax expense for the year ended December 31, 2014. The following table reconciles the statutory U.S. Federal tax rate of 35.0% and 34.0% to the actual effective tax rate for the years ended December 31, 2015 and 2014, respectively:
As part of our on-going analysis of deferred tax assets, management has assessed both positive and negative evidence according to guidance provided by the FASB. Based on this guidance we have determined that it is more likely than not that the Company will be able to fully utilize its DTAs as a result of the overwhelming positive evidence and the lack of negative evidence. As such, it has evaluated its valuation allowance and determined that all DTAs net of DTLs are available to offset income in all future periods. This conclusion is based upon management’s evaluation of the new information it has analyzed and not from management’s new evaluation or new interpretation of information that was available in a previous financial reporting period. Accordingly, the Company recorded a reversal of its deferred tax asset valuation allowance of $9.4 million for the year ended December 31, 2014 commensurate with this conclusion.
Atlas' net income was $14.4 million for the year ended December 31, 2015 versus net income of $17.7 million for the year ended December 31, 2014. After taking the impact of the liquidation preference of the preferred shares into consideration, the diluted earnings per common share for the year ended December 31, 2015 was $1.13 versus diluted earnings per common share of $1.56 for the year ended December 31, 2014.
As illustrated by the table above, 23.7% of Atlas’ gross premium written for the year ended December 31, 2014 came from New York and 55.8% came from the five states currently producing the most premium volume, as compared to 57.2% for the year ended December 31, 2013. Our commitment to expanding geographically resulted in 23 states with more than $1 million in written premium in 2014 compared to 19 in 2013.
Premiums are earned ratably over the term of the underlying policy. Net premium earned was $98.1 million for the year ended December 31, 2014, a 37.5% increase compared with $71.3 million for the year ended December 31, 2013. The increase in net premiums earned is attributable to the combined effects of the issues cited in the ‘Gross Premium Written’ and ‘Ceded Premium Written’ sections above.
The other underwriting expense ratio in 2014 excludes $694,000 in transaction costs incurred in conjunction with the acquisition of Global Liberty. The other underwriting expense ratio in 2013 excludes $406,000 in transaction costs incurred in conjunction with the acquisition of Gateway. See Note 3 to the Consolidated Financial Statements for further details regarding these costs.
Investment income (excluding net realized gains) net of investment expenses increased by 45.3% to $3.1 million for the year ended December 31, 2014, compared to $2.1 million for the year ended December 31, 2013. These amounts are primarily comprised of interest income. This increase is primarily due to higher return on certain securities in our investment portfolio.
Net realized investment gains for the year ended December 31, 2014 were $382,000 compared to $529,000 for the year ended December 31, 2013. The difference is the result of management's decision not to sell fixed income securities due to unfavorable market conditions.
The annualized realized yield on invested assets (including net realized gains of $382,000) for the year ended December 31, 2014 increased to 2.2% as compared with 2.1% for the year ended December 31, 2013. This increase is attributable to interest rates and the mix of securities on hand.
1 - We reclassified our presentation for interest expense from other underwriting expenses to non-operating expenses. The reclassification reduced the other underwriting expense ratio and the combined ratio by .2% for the year ended December 31, 2013.
Our combined ratio improvement in 2014 is attributable to the combined effects of the issues described in the ‘Claims Incurred’, ‘Acquisition Costs’, ‘Other Underwriting Expenses’ and 'Net Premium Earned' sections above.
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. In 2013, the Board of Directors established an Investment Committee to provide further analysis and guidance in connection with the company's investment activities.
The following table summarizes investments in equity method investments by investment type at December 31, 2015 and December 31, 2014 (all amounts in '000s):
At December 31, 2015, 44.0% 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 a high quality securities portfolio provides us with sufficient liquidity. With a weighted contractual duration of 4.1 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.
Atlas’ largest reinsurance partners are Great American Insurance Company (“Great American”), a subsidiary of American Financial Group, Inc., General Reinsurance Corporation ("Gen Re"), a subsidiary of Berkshire Hathaway, Inc., SCOR Re, a subsidiary of SCOR U.S. Corporation, Swiss Re and White Rock Insurance (SAC) Ltd. ("White Rock"). Great American has a financial strength rating of A+ from Standard & Poor’s, Gen Re has a financial strength rating of AA from Standard & Poor's, SCOR Re has a financial strength rating of A1 from Moody's, Swiss Re has a financial strength rating of Aa3 from Moody's, and White Rock is unrated. The White Rock balances are specifically related to the Gateway workers' compensation program that was exited during 2013 and are fully secured by a letter-of-credit.
Based on Atlas’ expectations of future taxable income, its ability to change its investment strategy, as well as reversing gross future tax liabilities, management believes it is more likely than not that Atlas will fully realize the net future tax assets. The Company, therefore, released its remaining valuation allowance at December 31, 2014.
Atlas has the following total net operating loss carryforwards at December 31, 2015:
On May 22, 2012, Atlas closed the sale of the headquarters building to 150 Northwest Point, LLC, a Delaware limited liability company. Atlas recognized a gain on the sale of this property of $213,000, which will be deferred and recognized over the 5 year lease term. Atlas recognized $43,000 as an offset to rent expense for the years ended December 31, 2015, 2014, and 2013. Total rental expense recognized on the headquarters building was $704,000, $707,000 and $699,000 for the years ended December 31, 2015, 2014, and 2013, respectively. The decrease in rental expense on the headquarters building for the year ended December 31, 2015 was due to lower utility costs.
The table below shows the amounts of total case reserves and incurred but not reported (“IBNR”) claims provision at December 31, 2015 and at December 31, 2014. The provision for unpaid claims increased by 24.0% to $127.0 million at December 31, 2015 compared to $102.4 million at December 31, 2014. During the year ended December 31, 2015, case reserves decreased by 19.7% compared to December 31, 2014, while IBNR reserves increased by 89.9%. The decrease in case reserves resulted from management's review of outstanding unpaid claims based on the findings of its predictive analytics software offset by the reserves acquired from Global Liberty. Predictive analytics software observes patterns in past data and uses mathematics and statistics to predict future data consistently without human subjectivity. The continuing pay down of non-core programs in runoff also decreased loss reserves on a year over year basis. The increase in IBNR related primarily to premium growth offset by the favorable development on Gateway's commercial auto program. The Global Liberty acquisition increased case reserves by 19.4% and IBNR by 41.5%. Excluding the Global Liberty acquisition, gross case reserves on Atlas' core lines decreased by 31.8% during the year ended December 31, 2015 due to updates in the estimated costs on outstanding unpaid claims.
The Other line of business is comprised of run-off and non-core lines, namely, Atlas’ surety business, Gateway's truck and workers' compensation programs, Atlas' non-standard personal lines business, Global Liberty's homeowners, and other liability and assigned risk pools.
At December 31, 2015, we had contractual obligations to provide additional funds for investments in limited liability investments included in other investments for up to $2.5 million not included in the table above. There is no certainty of when these amounts will be required to be provided.
As of March 4, 2016, there were 11,890,432 ordinary voting common shares outstanding, 132,863 restricted voting common shares outstanding, and 6,940,500 preferred shares issued and outstanding.
All of the issued and outstanding restricted voting common shares are beneficially owned or controlled by Kingsway, or its affiliated entities. The restricted voting common shares will convert to ordinary voting common shares in the event that these Kingsway owned shares are sold to non-affiliates of Kingsway.
$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. The preferred shares are redeemable at the option of Atlas at a price of $1.00 per share plus accrued and unpaid dividends, subject to certain conditions, prior to the conversion date. Preferred shareholders are not entitled to vote. Preferred shares are convertible into ordinary voting common shares at the option of the former owners of Gateway and Anchor at any date after the fifth year of issuance at the rate of 0.1270 and 0.0500, respectively, 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 by way of an anti-dilution event.
As of December 31, 2015, $2.0 million in funds were accessed from the Revolver and used for the Anchor acquisition. $15.5 million in funds were accessed against the Draw Amount as of December 31, 2015. The draw was contributed to the ASI Pool Subsidiaries in exchange for surplus notes that carry a variable interest rate of prime plus 2% with a maturity date of April 30, 2020. No letters of credit were issued under the terms of this Loan Agreement as of December 31, 2015. As of December 31, 2015, the unused funds for the Revolver and the Draw Amount were $3.0 million and $14.5 million, respectively.
The insurance subsidiaries must each maintain a minimum statutory capital and surplus of $1.5 million, $2.4 million, and $3.5 million under the provisions of the Illinois Insurance Code, the Missouri Insurance Code, and New York Insurance Code, respectively. Dividends may only be paid from statutory unassigned surplus, and payments may not be made if such surplus is less than a stipulated amount. The dividend restriction is the greater of statutory net income or 10% of total statutory capital and surplus.
Net income computed under statutory-basis accounting was $3.4 million, $6.1 million, $2.0 million and $1.2 million for American Country, American Service, Gateway and Global Liberty, respectively, for the year ended December 31, 2015. Net income for the year ended December 31, 2014 was $2.0 million, $4.0 million and $1.7 million for American Country, American Service and Gateway, respectively. The combined statutory capital and surplus of the insurance subsidiaries was $118.5 million and $63.0 million as of December 31, 2015 and December 31, 2014, respectively.
In our opinion, Atlas Financial Holdings, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015 based on the COSO criteria.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Atlas Financial Holdings, Inc. as of December 31, 2015 and 2014, and the results of its operations and its cash flows for the years ended December 31, 2015 and 2014, in conformity with accounting principles generally accepted in the United States of America.
We have audited the accompanying consolidated statements of income and comprehensive income, shareholders' equity and cash flows of Atlas Financial Holdings, Inc. ("the Company") for the year ended December 31, 2013. Our audit also included the financial statement schedules for the year ended December 31, 2013 listed in Item 15 of the Company's Form 10-K. These consolidated financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and schedules based on our audit.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of Atlas Financial Holdings, Inc.’s consolidated operations and its cash flows for the year ended December 31, 2013, 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' business is carried out through its insurance subsidiaries: American Country Insurance Company (“American Country”), American Service Insurance Company, Inc. (“American Service”), Gateway Insurance Company ("Gateway"), and as of March 11, 2015, Global Liberty Insurance Company of New York ("Global Liberty"), Anchor Group Management, Inc. ("Anchor Management"), Plainview Premium Finance Company, Inc. ("Plainview Delaware") and Plainview Delaware's wholly-owned subsidiary, Plainview Premium Finance Company of California, Inc. ("Plainview California" and together with Plainview Delaware, "Plainview").
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.
We filed our Quarterly Report on Form 10-Q for the period ended September 30, 2015, under the assumption that certain variable interest entities (“VIEs”), were controlled by Atlas. Based on new information obtained after the filing of our Quarterly Report on Form 10-Q for the period ended September 30, 2015, we have determined that these VIEs are not controlled by Atlas. As a result, the Company no longer consolidates these VIEs. The amounts included within the September 30, 2015 Quarterly Report on Form 10-Q were not material.
Effective interest method - For securities other than mortgage backed and asset backed, Atlas utilizes the effective interest method to calculate the amortized cost of the financial asset and to amortize or accrete the discount or premium over the remaining life. The effective interest rate is the rate that discounts the estimated future cash flows through the expected life of the financial instrument. Mortgage backed and asset backed securities are valued using the retrospective adjustment method which uses the effective interest method and includes anticipated prepayments. Interest income is reported net of amortization of premium and accretion of discount. Realized gains and losses on disposition of available-for-sale securities are based on the net proceeds and the adjusted cost of the securities sold using the specific identification method.
Available for sale - Investments in fixed income and equity securities are classified as available for sale. Securities are classified as available-for-sale when Atlas may decide to sell those securities due to changes in market interest rates, liquidity needs, changes in yields or alternative investments, and for other reasons. Available-for-sale securities are carried at fair value, with unrealized gains and losses, net of income tax, included as a separate component of accumulated other comprehensive income (loss) in shareholders' equity.
Atlas' fixed income portfolio is managed by a SEC registered investment advisor specializing in the management of insurance company portfolios. Management works directly with them to ensure that Atlas benefits from their expertise and also evaluates investments as well as specific positions independently using internal resources. Atlas' investment advisor has a team of credit analysts for all investment grade fixed income sectors. The investment process begins with an independent analyst review of each security's credit worthiness using both quantitative tools and qualitative review. At the issuer level, this includes reviews of past financial data, trends in financial stability, projections for the future, reliability of the management team in place, market data (credit spread, equity prices, trends in this data for the issuer and the issuer's industry). Reviews also consider industry trends and the macro-economic environment. This analysis is continuous, integrating new information as it becomes available. As of December 31, 2015, this process did not generate any significant difference in the rating assessment between Atlas' review and the rating agencies.
Atlas evaluates the collectibility of accounts receivable based on a combination of factors. When aware of a specific customer's inability to meet its financial obligations, such as in the case of bankruptcy or deterioration in the customer's operating results or financial position, Atlas records a specific reserve for bad debt to reduce the related receivable to the amount Atlas reasonably believes is collectible. Atlas also records reserves for bad debt for all other customers based on a variety of factors, including the length of time the receivables are past due and historical collection experience. Accounts are reviewed for potential write-off on a case-by-case basis. Accounts deemed uncollectible are written off, net of expected recoveries. If circumstances related to specific customers change, estimates of the recoverability of receivables could be further adjusted.
Deferred policy acquisition costs ("DPAC") - Atlas defers producers’ commissions, premium taxes and other underwriting costs directly relating to the successful acquisition of premiums written to the extent they are considered recoverable. These costs are then expensed as the related premiums are earned. The method followed in determining the deferred policy acquisition costs limits the deferral to its realizable value by giving consideration to estimated future claims and expenses to be incurred as premiums are earned. Changes in estimates, if any, are recorded in the accounting period in which they are determined. Anticipated investment income is included in determining the realizable value of the deferred policy acquisition costs. Atlas’ deferred policy acquisition costs are reported net of deferred ceding commissions.
Income taxes - Income taxes expense (benefit) includes all taxes based on taxable income (loss) of Atlas and its subsidiaries, and are recognized in the statement of income and comprehensive income except to the extent that they relate to items recognized directly in other comprehensive income, in which case the income tax effect is also recognized in other comprehensive income.
Goodwill - Atlas recognized goodwill as part of the acquisition of Anchor Holdings Group, Inc. The amounts recognized represent the cost of the acquisition above the fair value of the net assets acquired. Atlas reviews goodwill at least annually for impairment. Atlas concluded that there was no goodwill impairment in the year ended December 31, 2015.
Intangible assets - Atlas recognized intangible assets as part of the acquisition of Gateway and Anchor Holdings Group, Inc. The intangible assets are classified as either indefinite or definite lived depending on whether the useful lives can be identified. Atlas indefinite-lived intangible assets consist of state insurance licenses, and these intangible assets are reviewed for impairment at least annually. Atlas concluded that there was no indefinite-lived intangible asset impairment in either of the years ended December 31, 2015 and December 31, 2014. Definite-lived intangible assets are amortized over their useful lives on a straight-line basis except for customer related intangibles, which are on an accelerated basis. Atlas definite-lived intangible assets consist of trade names and trademarks with useful lives of 15 years and customer relationships with useful lives of 10 years. Atlas recorded $315,000 of intangible asset amortization for the year ended December 31, 2015.
Business combinations - The value of certain assets and liabilities acquired are subject to adjustment from the initial purchase price allocation as additional information is obtained, including, but not limited to, valuation of separately identifiable intangibles, the preferred stock issued to the seller, and deferred taxes.
The valuations are finalized within 12 months of the close of the acquisition (not including loss reserve development consideration, if applicable). The changes upon finalization to the initial purchase price allocation and valuation of assets and liabilities may result in an adjustment to identifiable intangible assets and goodwill. Adjustments to the provisional amounts identified during the measurement period are recognized in the reporting period in which the adjustment amounts are determined. The effect of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date, are recorded in the financial statements and presented separately on the income statement in the reporting period in which the adjustment amounts are determined.
Office equipment and software - Office equipment is stated at historical cost less depreciation. Subsequent costs are included in the asset’s carrying amount or capitalized as a separate asset only when it is probable that future economic benefits will be realized. 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, 5 years for enterprise software and 3 years for all other software and computer equipment and the term of the lease for leased equipment.
Rent expense for the lease on Atlas' headquarters is recognized on a straight-line basis over the life of the lease.
In February 2016, the FASB issued updated guidance on leases. For public entities, this guidance is effective for years beginning after December 15, 2018, including interim periods within those years. The Company is currently evaluating the guidance to determine the potential impact of its adoption on its consolidated financial statements.
value and changes in fair value are recognized in net income. For public entities, this guidance is effective for years beginning after December 15, 2017, including interim periods within those years. The Company is currently evaluating the guidance to determine the potential impact of its adoption on its consolidated financial statements.
In September 2015, the FASB issued updated business combination guidance requiring an acquirer to recognize and disclose adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. This update eliminates the requirement to retrospectively account for those adjustments. For public entities, this guidance is effective for years beginning after December 15, 2015, including interim periods within those years. The Company adopted this guidance for the reporting period ending December 31, 2015.
In May 2014, the FASB issued a comprehensive revenue recognition standard which applies to all entities that have contracts with customers, except for those that fall within the scope of other standards, such as insurance contracts. The Company is currently evaluating the guidance, which will be effective in 2018, to determine the potential impact, if any, of its adoption on its consolidated financial statements.
Global Liberty also wrote homeowners insurance in the northeast, which was non-renewed prior to the transaction.
The Anchor acquisition was accounted for using the acquisition method. Atlas began consolidating Anchor on March 11, 2015. The following unaudited pro forma summary presents Atlas' consolidated financial information for the years ended December 31, 2015 and 2014 as if Anchor had been acquired on January 1, 2014. These amounts have been calculated after applying the Company's accounting policies had the acquisition been completed on January 1, 2014. These results were prepared for comparative purposes only and do not purport to be indicative of the results of operations that may have actually resulted had the acquisition occurred on the indicated dates, nor are they indicative of potential future operating results of the Company.
1 - Excludes expenses incurred in the connection with the Anchor acquisition
The following table presents a summary of definite-lived intangible assets by major asset class at December 31, 2015:
On January 2, 2013 we acquired Camelot Services, Inc. ("Camelot Services"), a privately owned insurance holding company, and its sole subsidiary, Gateway from an unaffiliated third party. Gateway provides specialized commercial insurance products, including commercial automobile insurance to niche markets such as taxi, black car and sedan service owners and operators.
Atlas incurred $406,000 in legal and professional fee expenses related to the transaction during the year ended December 31, 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 $372,000 of additional interim transition/integration costs. These termination and transition/integration costs are included in "Other Underwriting Expenses" on the Consolidated Statements of Income and Comprehensive Income.
Earnings per ordinary voting common shares, restricted voting common shares, and participative restricted stock units ("RSUs") (collectively, the "common shares") for the years ended December 31, 2015, December 31, 2014, and December 31, 2013 are as follows ($ in '000s except for share and per share amounts):
As of December 31, 2015 and December 31, 2014, there were no outstanding warrants. On August 1, 2013, 18,000,000 preferred shares were repurchased. Atlas’ dilutive potential ordinary voting common shares consist of outstanding stock options to purchase ordinary voting common shares and preferred shares potentially convertible to ordinary voting common shares at the option of the holder at any date after December 31, 2018 (2,940,500 at the rate of 0.1270 ordinary voting common shares for each preferred share) and after March 11, 2020 (4,000,000 preferred shares at the rate of 0.05 ordinary voting common shares for each preferred
The total fair value of the securities currently in an unrealized loss position was $123.6 million at December 31, 2015 with a total temporary impairment relating to unrealized losses of $2.6 million. Atlas has the ability and intent to hold these securities until their fair value is recovered. Therefore, Atlas does not expect the near term change in market value of these securities to be realized.
As of December 31, 2015, we held 435 and 1 individual fixed income and equity securities, respectively, that were in an unrealized loss position, of which 35 individual fixed income securities were in a continuous loss position for longer than 12 months. As of December 31, 2014, we held 153 and 3 individual fixed income and equity securities, respectively, that were in an unrealized loss position, of which 49 individual fixed income securities were in a continuous loss position for longer than 12 months. We did not recognize the unrealized losses in earnings on these fixed income securities for the years ended December 31, 2015 and 2014,
The following table summarizes the components of net investment income for the years ended December 31, 2015, 2014, and 2013 (all amounts in '000s):
At December 31, 2015 and 2014, bonds and term deposits with a fair value of $15.8 million and $14.5 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. At December 31, 2015, the amount of such pledged securities was $3.6 million versus $6.8 million at December 31,
The following table summarizes Atlas' investments at fair value as of December 31, 2015 and December 31, 2014 (all amounts in '000s):
The Company's investments in fixed income securities that are classified as Level 2 in the two preceding tables consist of investments in corporate bonds, states and political subdivisions bonds and mortgage-backed securities of U.S. government agencies and other asset-backed bonds.
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, 2015. 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.
There were no transfers in or out of Level 2 or Level 3 during the years ended December 31, 2015 and 2014.
Information by security type pertaining to the changes in fair value of the Company's investments classified as Level 3 for the years ended December 31, 2015 and 2014 are presented below (all amounts in '000s):
On July 22, 2013, as a result of shareholder activity, a "triggering event" as determined under IRC Section 382 occurred. As a result, under IRC Section 382, the use of the Company's net operating loss and other carryforwards will be limited due to this "ownership change” for tax purposes, which is defined as a cumulative change of more than 50% during any three-year period by shareholders owning 5% or greater portions of the Company's shares. Due to this triggering event, the Company estimates that it will retain total tax effected federal net operating loss carryforwards of approximately $12.7 million as of December 31, 2015.
The components of deferred income tax assets and liabilities as of December 31, 2015 and December 31, 2014 are as follows (all amounts in '000s):
During the year ended December 31, 2015, Atlas sold one of its two properties located in Alabama and recognized a loss of $20,000 to an unaffiliated third party. The remaining property is listed for sale for an amount greater than its carried value.
Atlas held the following internal-use software and capital assets at December 31, 2015 and December 31, 2014 (excluding assets held for sale) (all amounts in '000s):
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.
Gross premiums written and ceded premiums, losses and commissions as of and for the years ended December 31, 2015, 2014, and 2013 are as follows (all amounts in '000s):
Information about options outstanding at December 31, 2015 is as follows:
There are 215,505 stock options that are exercisable as of December 31, 2015. The stock option grants outstanding have a weighted average remaining life of 7.83 years and have an intrinsic value of $3.9 million as of December 31, 2015. On March 12, 2015, the Board of Directors of Atlas granted equity awards of (i) 200,000 restricted voting common shares of the Company and (ii) 200,000 options to acquire ordinary voting common shares to the executive officers of the Company as part of the Company’s annual compensation process. The awards were made under the Company’s Equity Incentive Plan.
The Monte-Carlo simulation model was used, for both the options and restricted share grants, to estimate the fair value of compensation expense as a result of the performance based component of these grants. Utilizing the Monte-Carlo simulation model, the fair values were $1.5 million and $1.9 million for the options and restricted share grants, respectively. This expense will be amortized over the anticipated vesting period.
In accordance with ASC 718 (Stock-Based Compensation), 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 $1.8 million, $1.5 million and $247,000 in stock compensation expense for the years ended December 31, 2015, 2014, and 2013, respectively, which is a component of other underwriting expenses on the income statement. Total unrecognized stock compensation expense related to all stock and restricted share option grants is $1.7 million and $3.0 million, respectively as of December 31, 2015, which will be recognized over the next 50 months.
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 were allowed to invest up to 5% of adjusted salary in Atlas ordinary voting common shares. Effective April 2014, 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. During the years ended December 31, 2015, December 31, 2014, and December 31, 2013, Atlas' costs incurred related to the matching portion of the ESPP were $151,000, $113,000, and $58,000, respectively. Share purchases pursuant to this plan are made in the open market.
owners of Gateway (2,940,500 preferred shares) and Anchor (4,000,000 preferred shares). The Gateway preferred shares issued during the first quarter of 2015 have been recorded as additional acquisition expense and not as an adjustment to goodwill because the fair value of the contingent consideration was determined to be zero at the date of the Gateway acquisition. In accordance with U.S. GAAP, such adjustments are reflected in the income statement in the period that the contingency is re-estimated. The estimate of this contingency could change in the future until all remaining claims are settled.
During the year ended December 31, 2015, Atlas did not declare or pay dividends earned through the preferred shares. The former owners of Gateway and Anchor earned $130,000 and $146,000, respectively, in dividends during the year ended December 31, 2015. As of December 31, 2015, Atlas has accrued $314,000 and $146,000 in dividends for the former owners of Gateway and Anchor, respectively, which remain unpaid.
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 voting 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.
Policy acquisition costs are deferred and amortized over the period in which the related premiums written are earned, typically 12 months. Deferred policy acquisition costs for the years ended December 31, 2015, December 31, 2014, and December 31, 2013 (all amounts in '000s):
1 - We reclassified interest expense from underwriting expense to non-operating expense during the fourth quarter. As a result, underwriting income was restated and increased by $139,000 and $269,000 for the three months ended June 30, 2015 and September 30, 2015, respectively.
On May 22, 2012, Atlas closed the sale and leaseback of the headquarters building to 150 Northwest Point, LLC, a Delaware limited liability company. Atlas recognized a gain on the sale of this property of $213,000, which will be deferred and recognized over the five year lease term. Atlas recognized $43,000 as an offset to rent expense for the years ended December 31, 2015, 2014, and 2013. Total rental expense recognized on the headquarters building was $704,000, $707,000 and $699,000 for the years ended
Virtually all states require insurers licensed to do business therein to bear a portion of contingent and incurred claim handling expenses and the unfunded amount of “covered” claim and unearned premium obligations of impaired or insolvent insurance companies, either up to the policy's limit, the applicable guaranty fund covered claim obligation cap, or 100% of statutorily defined workers' compensation benefits, subject to applicable deductibles. These obligations are funded by assessments, made on a retrospective, prospective or pre-funded basis, which are levied by guaranty associations within the state, up to prescribed limits (typically 2% of “net direct written premium”), on all member insurers in the state on the basis of the proportionate share of the premiums written by member insurers in certain covered lines of business in which the impaired, insolvent or failed insurer was engaged.
The Loan Agreement also provides for the issuance of letters of credit in an amount up to $2.0 million outstanding at any time. In addition, there is a non-utilization fee for each of the $30.0 million line of credit and $5.0 million revolving line of credit equal to 0.50% per annum of an amount equal to $30.0 million and $5.0 million, respectively, less the daily average of the aggregate
The Loan Agreement requires American Acquisition to comply with customary affirmative and negative covenants, including those governing indebtedness, liens, investments, sales of assets, issuance of securities, and distributions. The Loan Agreement also requires American Acquisition to make mandatory prepayments under certain conditions and to comply with certain financial covenants, including the ASI Pool Subsidiaries (defined below) maintaining a combined statutory net worth in an amount not less than $60 million (subject to adjustment) and maintaining a minimum funded debt to Earnings Before Interest, Taxes, Depreciation and Amortization ratio. The Loan Agreement is secured by substantially all of the property of American Acquisition, including all of the outstanding shares of American Country, American Service and Gateway, which are wholly-owned direct subsidiaries of American Acquisition (the “ASI Pool Subsidiaries”). As of December 31, 2015, American Acquisition was in compliance with the covenants of the Loan Agreement.