Our corporate headquarters is located at 953 American Lane, Schaumburg, Illinois 60173, USA. The Company-owned facility consists of one three-story office building with approximately 110,000 square feet. An unaffiliated tenant currently leases one floor of the building. We believe that the new facility will be sufficient space to support the growth and expansion of our business.
We also lease four additional office spaces. The St. Louis, Missouri lease is 4,375 square feet of office space and effective through June 2021. This office is mainly used for certain underwriting operations for Gateway. The Manhattan, New York lease is 1,796 square feet of office space. The Manhattan lease was effective through February 2018 but was renewed upon expiration for an additional two years after year end. This office is mainly used for certain claims operations. Upon completion of the Anchor acquisition, we assumed a lease for 25,396 square feet of office space in Melville, New York, which is effective through February 2022. This office operates as the Global Liberty headquarters with underwriting, claims, and corporate and other operations. The Scottsdale, Arizona lease is 2,107 square feet of office space and effective through November 2020. This office is mainly used for certain underwriting operations.
We own one property in Alabama, which comprises approximately 13.6 acres of land and is currently held for sale.
The following table has selected financial information for the periods ended and as of the dates indicated. These historical results are not necessarily indicative of the results to be expected from any future period and should be read in conjunction with our consolidated financial statements and the related notes and the section of this Annual Report on Form 10-K entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
r - Prior to the year ended December 31, 2017, the Company presented preferred shares issued as contingent consideration within the permanent equity section of the Consolidated Statements of Financial Position. In accordance with Financial Accounting Standards Board ASC Topic 480 - Distinguishing Liabilities from Equity, contingent consideration issued as preferred shares wherein the number of shares to be issued is variable should be classified outside of permanent equity and reflected as mezzanine equity on the Consolidated Statements of Financial Position. This table has been restated to include the contingent consideration as a separate line called ‘Mezzanine equity’ and removed from ‘Total shareholders’ equity.’
For 2015, total assets, notes payable and total liabilities were restated according to the adoption of Accounting Standards Update 2015-03.
These results include the acquisitions of Gateway on January 2, 2013 and Anchor on March 11, 2015, which will affect the comparability of the data. See Note 3, ‘Acquisitions,’ to the Consolidated Financial Statements for further discussion of the impact of these acquisitions.
In addition to the historical consolidated financial information, this report contains “forward-looking statements,” within the meaning of the Private Securities Litigation Reform Act of 1995, which may include, but are not limited to, statements with respect to estimates of future expenses, revenue and profitability; trends affecting financial condition, cash flows and results of operations; the availability and terms of additional capital; dependence on key suppliers and other strategic partners; industry trends; the competitive and regulatory environment; the successful integration of acquisitions; the impact of losing one or more senior executives or failing to attract additional key personnel; and other factors referenced in this report. Factors that could cause or contribute to these differences include those discussed below and elsewhere, particularly in “Risk Factors.”
Since Atlas’ formation in 2010, we have disposed of non-core assets, consolidated infrastructure and placed into run-off certain non-core lines of business previously written by the Insurance Subsidiaries. Our focus going forward is the underwriting of commercial automobile insurance in the U.S. Substantially all of our new premiums written are in “light” commercial automobile lines of business.
Our primary target market is made up of small to mid-size taxi, limousine, other livery (including TNC drivers/operators) and non-emergency para-transit operators. The “light” commercial automobile policies we underwrite provide coverage for lightweight commercial vehicles typically with the minimum limits prescribed by statute, municipal or other regulatory requirements. The majority of our policyholders are individual owners or small fleet operators. In certain jurisdictions like Illinois, Louisiana, Nevada and New York, we have also been successful working with larger operators who retain a meaningful amount of their own risk of loss through higher retentions, self-insurance or self-funded captive insurance entity arrangements. In these cases, we provide support in the areas of day-to-day policy administration and claims handling consistent with the value proposition we offer to all of our insureds, generally on a fee for service basis. We may also provide excess coverage above the levels of risk retained by the insureds where a better than average loss ratio is expected. Through these arrangements, we are able to effectively utilize the significant specialized operating infrastructure we maintain to generate revenue from business segments that may otherwise be more price sensitive in the current market environment.
The “light” commercial automobile sector is a subset of the broader commercial automobile insurance industry segment, which over the long term has been historically profitable. In more recent years the commercial automobile insurance industry has seen profitability pressure within certain segments, however, it has outperformed the overall P&C industry generally over the past fifteen years based on data compiled by A.M. Best Aggregates & Averages. Data compiled by SNL Financial also indicates that for 2016 the total market for commercial automobile liability insurance was approximately $33.1 billion. The size of the commercial automobile insurance market can be affected significantly by many factors, such as the underwriting capacity and underwriting criteria of automobile insurance carriers and general economic conditions. Historically, the commercial automobile insurance market has been characterized by periods of excess underwriting capacity and increased price competition followed by periods of reduced capacity and higher premium rates.
Our surety program primarily consisted of U.S. Customs bonds. We engage a former affiliate, Avalon Risk Management, to help coordinate customer service and claims handling for the surety bonds written as this program runs off. This non-core program is 100% reinsured to an unrelated third party and has been transitioned to another carrier.
The Gateway truck and workers’ compensation programs were put into run-off during 2012. The truck program had little earned premium during 2012, and the workers’ compensation program was 100% reinsured retrospectively and prospectively to an unrelated third party. The workers’ compensation reinsurance agreement was terminated during 2017.
Atlas’ workers’ compensation related to taxi and other liability are ancillary products that are offered only to insureds who purchase our commercial automobile insurance products. The workers’ compensation program will be non-renewed in 2018 due to limited demand.
Assigned risk pools are established by state governments to cover high-risk insureds who cannot purchase insurance through conventional means.
obtaining a valuation analysis from third party investment managers regarding these holdings based on their knowledge, experience and other market based valuation techniques;
determining the necessary provision for declines in market value that are considered other than temporary based on the analyses performed.
Under U.S. GAAP, with respect to an investment in an impaired debt security, other-than-temporary impairment (“OTTI”) occurs if (a) there is intent to sell the debt security, (b) it is more likely than not it will be required to sell the debt security before its anticipated recovery, or (c) it is probable that all amounts due will be unable to be collected such that the entire cost basis of the security will not be recovered. If Atlas intends to sell the debt security, or will more likely than not be required to sell the debt security before the anticipated recovery, a loss in the entire amount of the impairment is reflected in net realized gains (losses) on investments in the consolidated statements of income (loss) and comprehensive income (loss). If Atlas determines that it is probable it will be unable to collect all amounts and Atlas has no intent to sell the debt security, a credit loss is recognized in net realized gains (losses) on investments in the consolidated statements of income (loss) and comprehensive income (loss) to the extent that the fair value is less than the amortized cost basis; any difference between fair value and the new amortized cost basis (net of the credit loss) is reflected in accumulated other comprehensive income (losses), net of applicable income taxes.
Underwriting loss for the year ended December 31, 2017 was $48.5 million, compared to an underwriting loss of $5.0 million, primarily due to the claims reserve strengthening related to prior accident years
The combined ratio increased by 19.6% to 122.5%, primarily as a result of a 34.9% impact from claims reserve strengthening related to prior accident years
Net loss was $38.8 million, or $3.22 loss per common share diluted, compared to net income of $2.6 million, or $0.19 earnings per common share diluted, representing a decrease in earnings per common share of $3.41
2 - For 2015, we restated our presentation for amortization of loan costs from other underwriting expense to interest expense in accordance with the Company’s adoption of Accounting Standards Update 2015-03. As a result, other underwriting expense and total underwriting expense decreased and income from operating activities, before income taxes and interest expense increased by $56,000. This restatement had a negligible impact on the other underwriting expense ratio, the total underwriting expense ratio and the combined ratio for the year ended December 31, 2015.
We approach investment and capital management with the intention of supporting insurance operations by providing a stable source of income to supplement underwriting income. The goals of our investment policy are to protect capital while optimizing investment income and capital appreciation and maintaining appropriate liquidity. We follow a formal investment policy, and the Board of Directors reviews the portfolio performance at least quarterly for compliance with the established guidelines. The Investment Committee of the Board of Directors provides interim guidance and analysis with respect to asset allocation, as deemed appropriate.
For the year ended December 31, 2017, gross premiums written was $276.0 million compared to $225.1 million for the year ended December 31, 2016, representing a 22.6% increase. This increase primarily resulted from growth in livery/limousine and para-transit gross premiums written primarily in New York, California, and New Jersey offset by a decrease in taxi gross premiums written in Louisiana and Nevada and in all lines in Minnesota and Michigan. New premium business represented approximately 40.7% of the total gross premiums written on our core lines for the year ended December 31, 2017, as compared to 33.9% for the year ended December 31, 2016.
In-force premium was $268.5 million and $224.6 million as of December 31, 2017 and December 31, 2016, respectively. The Company’s gross unearned premium reserves were $128.0 million and $113.2 million as of December 31, 2017 and December 31, 2016, respectively. The increase in gross unearned premium reserves and in-force premium since December 31, 2016 primarily resulted from growth in the states of California, New Jersey, and New York offset by a reduction in business in the states of Louisiana, Michigan and Minnesota.
Ceded premiums written decreased 0.5% to $44.8 million for the year ended December 31, 2017, compared with $45.0 million for the year ended December 31, 2016, primarily due to reductions in the cession rates of the Quota Share agreement and Global Liberty’s commercial automobile excess of loss reinsurance contracts offset by premium growth as compared to the prior year period. As our limousine and para-transit business grows, we expect ceded premiums written to increase, because, under the current market conditions, the reinsurance costs are more expensive for these products.
Atlas identified that claim expenses in Michigan were significantly outpacing other states and took a significant charge for the year ended December 31, 2016. Although exposure in Michigan was reduced to approximately 1.4% of the Company’s insured vehicles in force by year end 2017, payments for claims in this state continued to be disproportionate to historic premiums earned.
While the Company did see positive trends relating to more recent accident years in which predictive modeling had an impact, based on year-end work, it is clear that the challenges from the past outpaced more recent benefits.
The following tables summarize the claims and claims adjustment expenses incurred, net of reinsurance by line of business and accident year:
Gross commissions incurred excluding contingent commissions increased by $6.4 million over the prior year period. This increase resulted from premium growth in business where higher commission rates applied. Gross contingent commissions incurred increased by $840,000 over the prior year period primarily as a result of new agents becoming eligible for contingent commissions and premium growth. Gross contingent commissions are awarded based on the combination of developed loss experience and premium growth. Premium and other taxes incurred increased by $1.1 million over the prior year period as a result of premium growth.
Ceded commissions incurred excluding contingent commissions decreased by $1.5 million over the prior year period primarily due to the decrease in ceded premiums written for the Quota Share. Ceded contingent commissions incurred increased by $758,000 over the prior period. Ceded contingent commissions are based on loss experience. The increase in ceded contingent commissions resulted from favorable loss ratios on Atlas’ excess of loss reinsurance agreements and the Global Quota Share offset by unfavorable loss ratios on the Quota Share. As shown in the table in the ‘Combined Ratio’ section, on a pro-forma basis, without the effect of the Quota Share and Global Quota Share, the acquisition costs would have been 15.4% for the year ended December 31, 2017, as compared to 15.1% for the year ended December 31, 2016.
The other underwriting expense ratio (including share-based compensation expenses and expenses incurred related to stock purchase agreements) was 15.1% for the year ended December 31, 2017 compared to 13.1% for the year ended December 31, 2016. Other underwriting expenses increased by approximately $10.0 million over the prior year period. Depreciation, leasehold improvement amortization and facility costs related to Atlas’ new headquarters building increased by $806,000. Salary, payroll taxes and employee benefit costs decreased by $581,000. Because salary, payroll taxes and employee benefit costs decreased and gross premiums written and gross unearned premium reserves increased, DPAC amortization increased by $1.6 million. No expenses were recovered pursuant to stock purchase agreements during 2017, as compared to $6.3 million during 2016. The termination of Gateway’s workers’ compensation retroactive reinsurance agreement increased expenses by $1.7 million for year ended December 31, 2017. Directors fees increased by $30,000 over the prior year period due to the addition of a new board member during 2017.
Changes in our Quota Share reinsurance during 2017 had an impact on the reported other underwriting expense ratio when comparing year to year. As shown in the table in the ‘Combined Ratio’ section, on a pro-forma basis, without the effect of the Quota Share, the other underwriting expense ratio would have been 13.5% for the year ended December 31, 2017 compared to 11.0% for the year ended December 31, 2016. The 2016 ratio includes benefits from expenses recovered relating to acquisitions and stock purchase agreements, which decreased this ratio by 3.1%.
Atlas’ combined ratio for the year ended December 31, 2017 was 122.5%, compared to 102.9% for the year ended December 31, 2016.
Underwriting profitability, as opposed to overall profitability or net earnings, is measured by the combined ratio. The combined ratio is the sum of the claims and claims adjustment expense ratio, the acquisition cost ratio, and the underwriting expense ratio. The change in the combined ratio is attributable to the factors described in the ‘Net Premiums Earned’, ‘Net Claims Incurred’, and ‘Acquisition Costs and Other Underwriting Expenses’ sections above.
Net investment income is primarily comprised of interest income, dividend income, and income from other invested assets, net of investment expenses, which are comprised of investment management fees, custodial fees, and allocated salaries. Net investment income, net of investment expenses, increased by 1.5% to $4.9 million for the year ended December 31, 2017, compared to $4.8 million for the year ended December 31, 2016. These amounts are primarily comprised of interest income. This increase was primarily due to an increase in interest income from fixed income securities with higher coupon rates and a decrease in investment manager costs. The gross yield on our fixed income securities was 2.3% and 2.2% for the years ended December 31, 2017 and 2016, respectively. The gross yield on our cash and cash equivalents was 0.3% and 0.1% for the years ended December 31, 2017 and 2016, respectively. The increase in gross yield on our cash investments was due to higher interest rates on certain new accounts and higher balances in accounts earning greater interest. Equity method investments and collateral loans generated investment income of $1.9 million in each of the years ended December 31, 2017 and 2016.
Net realized investment gains is comprised of the gains and losses from the sales of investments. Net realized investment gains for the year ended December 31, 2017 were $872,000 compared to $1.2 million for the year ended December 31, 2016. This decrease resulted from lower gains from the sale of fixed income securities partially offset by higher gains on the sale of equity securities and equity method investments.
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) was signed into law. Among other things, beginning with the 2018 tax year, the Tax Act reduced the Company’s corporate federal tax rate from a marginal rate of 35% to a flat 21%, eliminated the corporate Alternative Minimum Tax (“AMT”), changed reserving and other aspects of the computation of taxable income for insurance companies, and modified the net operating loss carryback and carryforward provisions for all entities in the group except for those subject to tax as property and casualty companies. The modified net operating loss provisions no longer allow a carryback to prior years to recover past taxes, but now allow an indefinite carryforward period subject to a yearly utilization limit. As discussed above, any net operating losses with respect to the insurance entities taxed as property and casualty companies retain the current net operating loss carryback and carryover provisions, which are two years carryback and 20 years carryforward. As of December 31, 2016, the Company measured its deferred tax items at the enacted rate in effect of 35%. Due to the Tax Act’s enactment, the Company’s deferred tax assets and liabilities as of December 31, 2017 have been re-measured at the new enacted tax rate of 21%. For the year ended December 31, 2017, the Company recognized income tax expense of $10.5 million related to reduction in the net deferred tax asset a result of this re-measurement.
predictive modeling in underwriting and claims are generating better priced risks that are expected to create overall profitability over time; and
The following chart illustrates Atlas’ potential dilutive common shares for the years ended December 31, 2017 and 2016:
The effects of convertible instruments are excluded from the computation of earnings per common share diluted in periods in which the effect would be anti-dilutive. Convertible preferred shares are anti-dilutive when the amount of dividend declared or accumulated in the current period per common share obtainable upon conversion exceeds earnings per common share basic. For the year ended December 31, 2017, all exercisable stock options were deemed to be anti-dilutive. For the year ended December 31, 2016, all exercisable stock options were deemed to be dilutive and all of the convertible preferred shares were deemed to be anti-dilutive. The potentially dilutive impact for the convertible preferred stock excluded from the calculation due to anti-dilution is 441,357 common shares for the year ended December 31, 2016.
For the year ended December 31, 2016, gross premiums written was $225.1 million compared to $209.3 million for the year ended December 31, 2015, representing a 7.6% increase. This increase primarily resulted from growth in livery/limousine and para-transit gross premiums written of approximately $41.1 million offset by a $25.6 million decrease in taxi gross premiums written. The growth in livery/limousine and para-transit gross premiums written resulted from having a full year’s worth of Global Liberty premium for 2016 as compared to the 9-1/2 months we had in 2015, coupled with market share growth in those products. The decrease in taxi business included overall reduction in available vehicles to insure, a $4.3 million excess taxi account and a few larger fleet accounts that were not renewed during 2016 due to our disciplined underwriting practice.
In-force premium was $224.6 million and $210.6 million as of December 31, 2016 and December 31, 2015, respectively. The Company’s gross unearned premium reserves were $113.2 million and $108.2 million as of December 31, 2016 and December 31, 2015, respectively. The increase in gross unearned premium reserves and in-force premium since December 31, 2015 primarily resulted from growth in the states of California, Nevada, New Jersey, New York and Washington offset by a reduction in business in the state of Michigan.
As illustrated by the table above, 31.0% of Atlas’ gross premiums written year ended December 31, 2016 came from New York and 58.6% came from the five states currently producing the most premium volume, as compared to 58.2% for the year ended December 31, 2015. Global Liberty experienced the highest gross premiums written growth among the Insurance Subsidiaries for the year ended December 31, 2016 in these top five states due to having a full year’s worth of premium in 2016.
Net premiums written increased 6.1% to $180.1 million for the year ended December 31, 2016 compared with $169.7 million for the year ended December 31, 2015. These changes are attributed to the combined effects of the reasons cited in the ‘Gross Premiums Written’ and ‘Ceded Premiums Written’ sections above.
Net premiums earned increased by $19.0 million to $171.1 million for the year ended December 31, 2016, a 12.5% increase compared with $152.1 million for the year ended December 31, 2015. The increase in net premiums earned is attributable to the combined effects of the reasons cited in the ‘Gross Premiums Written’ and ‘Ceded Premiums Written’ sections above. Global Liberty accounted for $11.0 million of this increase. The remaining increase in net premiums earned resulted from organic growth primarily in the states of California, Minnesota, Nevada, New York and Virginia.
Atlas experienced $166,000 in unfavorable prior accident year development during the year ended December 31, 2015. Prior accident year unfavorable development on non-core lines and assigned risk pools was $870,000 for the year ended December 31, 2015. The unfavorable development on non-core lines and assigned risk pools was offset by favorable prior accident year development of $475,000 and $230,000 on our core lines and pre-acquisition Global Liberty claims reserves, respectively. This favorable development on our core lines was attributable to our traditional taxi and excess taxi products.
Acquisition costs were $18.8 million for the year ended December 31, 2016, or 11.0% of net premiums earned, as compared to 12.2% for the year ended December 31, 2015. The decrease in the ratio is primarily due to the Quota Share’s and Global Quota Share’s ceding commissions.
The table below indicates the impact of the various components of acquisition costs on the combined ratio for the years ended December 31, 2016 and 2015:
As discussed above in ‘Gross Premiums Written’, we wrote a full year’s worth of Global Liberty premium for 2016 as compared to the 9-1/2 months we had in 2015. Due to this increase, coupled with market share growth in our livery/limousine and para-transit products where higher commission rates applied, gross commissions incurred excluding contingent commissions increased by $2.8 million over the prior year period. Gross contingent commissions incurred increased by $361,000 over the prior year period primarily as a result of Global Liberty business being included in the calculations. Premium and other taxes incurred increased by $1.3 million over the prior year period as a result of premium growth.
Ceded commissions incurred excluding contingent commissions increased by $4.2 million over the prior year period primarily due to the increase in ceded premiums written for the Quota Share and Global Quota Share. Ceded contingent commissions incurred increased by $108,000 over the prior period. The increase in ceded contingent commissions resulted from favorable loss ratios on Atlas’ excess of loss reinsurance agreements offset by unfavorable loss ratios on the Quota Share. As shown in the table in the ‘Combined Ratio’ section, on a pro-forma basis, without the effect of the Quota Share and Global Quota Share, the acquisition costs would have been 15.1% for the year ended December 31, 2016, as compared to 14.7% for the year ended December 31, 2015.
The change in underwriting profitability is attributable to the factors described in the ‘Net Premiums Earned’, ‘Net Claims Incurred’, ‘Acquisition Costs and Other Underwriting Expenses’ sections above.
2 - For 2015, we restated our presentation for amortization of loan costs from other underwriting expense to interest expense in accordance with the Company’s adoption of Accounting Standards Update 2015-03. The restatement decreased other insurance general and administrative expense and increased the total underwriting profit by $56,000. The restatement had a negligible impact on the other insurance general and administrative expense ratio and the combined ratio for the year ended December 31, 2015. For 2015, we combined our presentation of amortization of intangible assets and other insurance general and administrative expenses.
Net investment income, net of investment expenses, increased by 21.3% to $4.8 million for the year ended December 31, 2016, compared to $4.0 million for the year ended December 31, 2015. These amounts are primarily comprised of interest income. This increase was primarily due to the acquisition of Anchor and change in investment mix with higher yields. The gross yield on our fixed income securities was 2.2% for each of the years ended December 31, 2016 and 2015. The gross yield on our cash and cash equivalents was 0.1% for each of the years ended December 31, 2016 and 2015. For the year ended December 31, 2016, equity method investments and collateral loans generated investment income of $1.9 million, compared to investment income of $1.3 million for the year ended December 31, 2015. This increase is primarily due to interest income on our collateral loan investments.
Net realized investment gains for the year ended December 31, 2016 were $1.2 million compared to $455,000 for the year ended December 31, 2015. This increase resulted primarily from gains on the sale of state/political subdivision and corporate fixed income securities under favorable market conditions.
For the year ended December 31, 2016, all exercisable stock options were deemed to be dilutive and all of the convertible preferred shares were deemed to be anti-dilutive. The potentially dilutive impact for the convertible preferred stock excluded from the calculation due to anti-dilution is 441,357 common shares for the year ended December 31, 2016. For the year ended December 31, 2015, all of the convertible preferred shares and all exercisable stock options were deemed to be dilutive.
The fair value for Atlas’ investments in fixed income securities and equities by type and sector are as follows:
Most of the Company’s holdings are impacted by the U.S economy, and we anticipate a very moderate impact from the effect of global economic conditions on the domestic economy. Global economic conditions may create brief periods of market volatility, but we do not believe it will alter the fundamental outlook of the Company’s investment holdings.
Atlas’ other investments are comprised of collateral loans and various limited partnerships that invest in income-producing real estate, equities, or insurance linked securities. Atlas accounts for these limited partnership investments using the equity method of accounting. As of December 31, 2017, the carrying values of these other investments were approximately $31.4 million versus approximately $32.2 million as of December 31, 2016. The carrying values of the equity method limited partnerships were $25.3 million and $24.9 million as of December 31, 2017 and December 31, 2016, respectively. The increase in the carrying value of the limited partnerships was primarily due to the purchase of investments and favorable changes in Atlas’ share of the net book value of certain limited partnerships offset by the return of capital. The carrying value of these investments is Atlas’ share of the net book value for each limited partnership, an amount that approximates fair value. Atlas receives payments on a routine basis that approximate the income earned on one of the limited partnerships that invest in income-producing real estate. The carrying values of the collateral loans were $6.2 million and $7.2 million as of December 31, 2017 and December 31, 2016, respectively. The decrease was due to the partial return of principal of one collateral loan offset by additional loans acquired in 2017.
The following table summarizes investments in equity method investments by investment type as of December 31, 2017 and December 31, 2016:
The following table summarizes the amortized cost and fair value by contractual maturities of the fixed income securities portfolio, excluding cash and cash equivalents, at the dates indicated:
The debt-to-equity ratio is the sum of the Company’s long-term debt and interest payable divided by total shareholders’ equity. The Company’s debt-to-equity ratio as of December 31, 2017 and December 31, 2016 was 26.8% and 15.2%, respectively. The increase is the result of the increase in notes payable and interest payable and the decrease in shareholders’ equity. Refer to the ‘Shareholders’ Equity’ and ‘Liquidity and Capital Resources’ subsections of the ‘Financial Condition’ section for further information.
Credit risk is defined as the risk of financial loss due to failure of the other party to a financial instrument to discharge an obligation. Atlas is exposed to credit risk principally through its investments and balances receivable from policyholders, agents and reinsurers. It monitors concentration and credit quality risk through policies designed to limit and monitor its exposure to individual issuers or related groups (with the exception of U.S. government bonds) as well as through ongoing review of the credit ratings of issuers in the securities portfolio. Credit exposure to any one individual policyholder is not material. The Company’s insurance policies, however, are distributed by agents who may manage cash collection on its behalf pursuant to the terms of their agency agreement. Atlas has protocols to evaluate the financial condition of its reinsurers and monitors concentrations of credit risk arising from similar geographic regions, activities, or economic characteristics of the reinsurers to minimize its exposure to significant losses from reinsurers’ insolvency.
As of December 31, 2017, Atlas’ allowance for bad debt was $3.4 million, compared to $2.4 million as of December 31, 2016. This increase in the allowance for bad debt was related to the re-estimation of the allowance, which is based on premium growth.
Atlas generally purchases reinsurance to limit net exposure to a maximum amount on any one claim of $500,000 with respect to commercial automobile liability claims. Atlas also purchases reinsurance to protect against awards in excess of its policy limits. Atlas continually evaluates and adjusts its reinsurance needs based on business volume, mix, and supply levels. As a result, the Company has entered into the Quota Share with Swiss Re for ASI Pool Subsidiaries and the Global Quota Share with Swiss Re for Global Liberty. Under these contracts, cessions can be increased at our election should we want to utilize it as a means of deleveraging. This gives us flexibility in terms of the timing and approach to potential future capital raising activities in light of anticipated increased operating leverage. Prior to 2016, Global Liberty had a 20% quota share reinsurance with SCOR Re. In 2016, this contract was replaced by the Global Quota Share.
Reinsurance ceded does not relieve Atlas of its ultimate liability to its insured in the event that any reinsurer is unable to meet their obligations under its reinsurance contracts. Therefore, Atlas enters into reinsurance contracts with only those reinsurers deemed to have sufficient financial resources to provide the requested coverage. Reinsurance treaties are generally subject to cancellation by the reinsurers or Atlas on the anniversary date and are subject to renegotiation annually. Atlas regularly evaluates the financial condition of its reinsurers and monitors the concentrations of credit risk to minimize its exposure to significant claims as a result of the insolvency of a reinsurer. Atlas believes that the amounts it has recorded as reinsurance recoverables are appropriately established. Estimating amounts of reinsurance recoverables, however, is subject to various uncertainties, and the amounts ultimately recoverable may vary from amounts currently recorded. Atlas had $61.4 million recoverable from third party reinsurers (exclusive of amounts prepaid) and other insurers as of December 31, 2017 as compared to $43.2 million as of December 31, 2016. The increase in the amount recoverable from third party reinsurers resulted from an increase in case and incurred but not reported (“IBNR”) reserves and a slight increase in amounts recoverable on paid claims.
Estimating amounts of reinsurance recoverables is also impacted by the uncertainties involved in the establishment of provisions for unpaid claims and claims adjustment expenses. As underlying reserves potentially develop, the amounts ultimately recoverable may vary from amounts currently recorded. Atlas’ reinsurance recoverables are generally unsecured. Atlas regularly evaluates its reinsurers, and the respective amounts recoverable, and an allowance for uncollectible reinsurance is provided for, if needed.
Based on Atlas’ expectations of future taxable income, its ability to change its investment strategy, as well as reversing gross future tax liabilities, management believes it is more likely than not that Atlas will fully realize the net future tax assets.
On July 22, 2013, as a result of shareholder activity, a “triggering event” as determined under IRC Section 382 occurred. As a result, under IRC Section 382, the use of the Company’s net operating loss and other carry-forwards generated prior to the “triggering event” will be limited as a result of this “ownership change” for tax purposes, which is defined as a cumulative change of more than 50% during any three-year period by shareholders owning 5% or greater portions of the Company’s shares.
Due to this triggering event, the Company estimates that it will retain total tax effected federal net operating loss carryforwards of approximately $13.3 million as of December 31, 2017.
In the fourth quarter of 2016, Atlas purchased a property in Schaumburg, Illinois to serve as the new corporate headquarters in 2017. The building and land were purchased for $9.3 million. During the year ended December 31, 2017, the Company purchased furnishings and made improvements to this building. The total cost of furnishings and improvements was approximately $11.3 million. See MD&A,‘Contractual Obligations’ section below, Note 8, ‘Commitments and Contingencies’ and Note 9 ‘Property and Equipment’ for further discussion of the new corporate headquarters.
The following tables summarize the provision for unpaid claims, gross of reinsurance by type and line of business and accident year:
The following tables summarize the provision for unpaid claims, net of reinsurance by type and line of business and accident year:
The process of establishing the estimated provision for unpaid claims and claims adjustment expenses is complex and imprecise, as it relies on the judgment and opinions of a large number of individuals, on historical precedent and trends, on prevailing legal, economic, social and regulatory trends and on expectations as to future developments. The process of determining the provision necessarily involves risks that the actual results may deviate, perhaps substantially, from the best estimates made. The change to the provision for unpaid claims and claims adjustment expenses is consistent with the changes in written premium. However, because the establishment of reserves is an inherently uncertain process involving estimates, current provisions may not be sufficient. Adjustments to reserves, both positive and negative, are reflected quarterly in the statement of income as estimates are updated.
Atlas experienced $166,000 in unfavorable prior accident year development during the year ended December 31, 2015 as reflected as incurred related to prior years in the table above. Prior accident year development on non-core lines and assigned risk pools was $870,000 for the year ended December 31, 2015. This increase was offset by favorable prior accident year development of $475,000 and $230,000 on our core lines and pre-acquisition Global Liberty claims reserves, respectively. This favorable development on our core lines was attributable to our traditional taxi and excess taxi products.
The Company entered into various contracts to renovate and furnish the building that was purchased in 2016 to serve as the Company’s new headquarters (see Note 8, ‘Commitments and Contingencies’ and Note 9, ‘Property and Equipment’). The remaining contractual obligations related to the renovation and furnishing of Atlas’ new headquarters building are included under ‘Other contractual obligations’.
As of December 31, 2017, we had contractual obligations to provide additional funds for investments in limited liability investments included in other investments for up to $7.0 million not included in the table above. There is no certainty of when these amounts will be required to be provided.
As of December 31, 2017, we did not have any material off-balance sheet arrangements as defined by SEC rules.
The table below identifies changes in shareholders’ equity for the years ended years ended December 31, 2017, 2016, and 2015:
As of December 31, 2017, there were 12,164,041 ordinary voting common shares outstanding and no preferred shares outstanding.
There were 14,816 and 22,224 non-vested restricted stock units (“RSUs”) issued as of December 31, 2017 and December 31, 2016, respectively. These RSUs are participative and are included in the computations of earnings per common share and book value per common share for these periods.
Book value per common share decreased by $3.12 relative to December 31, 2016 as follows: a decrease of $2.35 related to net loss after tax (excluding expenses recovered pursuant to stock purchase agreements), a decrease of $0.87 related to the change in statutory tax rate due to the Tax Act, an increase of $0.05 related to realized investment gains after tax, an increase of $0.02 related to the change in unrealized gains/losses after tax, and a net increase of $0.03 related to share-based compensation impacts. These changes are attributed to the combined effects of the reasons cited in the ‘Net Premiums Earned’, ‘Net Claims Incurred’, ‘Acquisition Costs and Other Underwriting Expenses’, ‘Net Investment Income’, ‘Interest Expense’, ‘Net Realized Investment Gains’, and ‘Other Income’ subsections of the ‘Operating Results’ section.
Liquidity Management - The purpose of liquidity management is to ensure there is sufficient cash to meet all financial commitments and obligations as they become due. The liquidity requirements of Atlas’ business have been met primarily by funds generated from operations, asset maturities and income and other returns received on securities. Cash provided from these sources is used primarily for payment of claims and operating expenses. Atlas may also use cash provided from these sources to repurchase common shares in open market transactions under the new Share Repurchase Program.
Cash provided by operations during the years ended December 31, 2017, 2016, and 2015 was primarily as a result of net income and increases in unpaid claims liabilities and unearned premium reserves. We receive most premiums in advance of the payment of claims. Our ability to generate positive operating cash flows depends on the frequency and severity of claims and the timing of collection of premiums receivable and reinsurance recoverables on paid claims.
Net loss computed under statutory-basis accounting was $9.1 million, $15.2 million, $5.9 million, and $5.1 million for American Country, American Service, Gateway and Global Liberty, respectively, for the year ended December 31, 2017. Net loss for the year ended December 31, 2016 was $1.3 million, $1.2 million, $1.1 million, and $49,000 for American Country, American Service, Gateway and Global Liberty, respectively. The combined statutory capital and surplus of the Insurance Subsidiaries was $87.8 million and $113.9 million as of December 31, 2017 and December 31, 2016, respectively.
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying “Item 9A, Management’s Report on Internal Control over Financial Reporting”. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit of internal control over financial reporting in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Atlas Financial Holdings, Inc. (“Atlas” or “We” or the “Company”) commenced operations on December 31, 2010. The primary business of Atlas is underwriting commercial automobile insurance in the United States, with a niche market orientation and focus on insurance for the “light” commercial automobile sector. This sector includes taxi cabs, non-emergency para-transit, limousine, livery and business autos. Automobile insurance products provide insurance coverage in three major areas: liability, accident benefits and physical damage. Liability insurance provides coverage subject to policy terms and conditions where the insured is determined to be responsible and/or liable for an automobile accident, for the payment for injuries and property damage to third parties. Accident benefit policies or personal injury protection policies provide coverage for loss of income, medical and rehabilitation expenses for insured persons who are injured in an automobile accident, regardless of fault. Physical damage coverage subject to policy terms and conditions provides for the payment of damages to an insured automobile arising from a collision with another object or from other risks such as fire or theft. In the short run, automobile physical damage and liability coverage generally provides more predictable results than automobile accident benefit or personal injury insurance.
Atlas’ business is carried out through its “Insurance Subsidiaries”: American Country Insurance Company (“American Country”), American Service Insurance Company, Inc. (“American Service”), Gateway Insurance Company (“Gateway”), and as of March 11, 2015, Global Liberty Insurance Company of New York (“Global Liberty”); and other non-insurance company subsidiaries: Anchor Group Management Inc. (“Anchor Management”), Plainview Premium Finance Company, Inc. (“Plainview Delaware”), Plainview Delaware’s wholly owned subsidiary, Plainview Premium Finance Company of California, Inc. (“Plainview California” and together with Plainview Delaware, “Plainview”), UBI Holdings Inc. (“UBI Holdings”) and UBI Holdings’ wholly-owned subsidiary, DriveOn Digital IP Inc. (“DOIP” and together with UBI Holdings, “UBI”).
The Insurance Subsidiaries distribute their insurance products through a network of retail independent agents. Together, the Insurance Subsidiaries are licensed to write property and casualty insurance in 49 states and the District of Columbia in the United States. Atlas’ core products are actively distributed in 42 of those states plus the District of Columbia. The Insurance Subsidiaries share common management and operating infrastructure.
Basis of presentation - These statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The consolidated financial statements include the accounts of Atlas and the entities it controls. Equity investments in entities that we do not consolidate, including corporate entities in which we have significant influence and partnership and partnership-like entities in which we have more than minor influence over operating and financial policies, are accounted for under the equity method unless we have elected the fair value option. All significant intercompany accounts and transactions have been eliminated.
Seasonality - The property and casualty (“P&C”) insurance business is seasonal in nature. While Atlas’ net premiums earned are generally stable from quarter to quarter, Atlas’ gross premiums written follow the common renewal dates for the “light” commercial risks that represent its core lines of business. For example, January 1 and March 1 are common taxi cab renewal dates in Illinois and New York, respectively. Additionally, we implemented our New York “excess taxi program” in the third quarter of 2012, which has an annual renewal date in the third quarter. Net underwriting income is driven mainly by the timing and nature of claims, which can vary widely.
Camelot Services, Inc. (Missouri) - merged into American Insurance Acquisition Inc. during 2014
Prior to the year ended December 31, 2017, the Company presented preferred shares issued as contingent consideration within the permanent equity section of the Consolidated Statements of Financial Position. In accordance with Financial Accounting Standards Board (“FASB”) ASC Topic 480 - Distinguishing Liabilities from Equity, contingent consideration issued as preferred shares wherein the number of shares to be issued is variable should be classified outside of permanent equity and reflected as mezzanine equity on the Consolidated Statements of Financial Position.
For the year ended December 31, 2017, the Company has restated the Consolidated Statements of Shareholders’ Equity to remove the preferred shares and related activity as previously stated for the periods as of January 1, 2015 and for the years ended December 31, 2015 and 2016. Although this impacted total equity for 2015, it had no impact on total equity as of December 31, 2016 due to the redemption and clawback of preferred shares previously issued. In addition, this change did not impact the Consolidated Statements of Financial Position, Consolidated Statements of Income (Loss) and Comprehensive Income (Loss), earnings per common share or the Consolidated Statements of Cash Flows. The Company has evaluated the effect of the incorrect presentation in the prior period, both qualitatively and quantitatively, and concluded that it did not have a material impact on, nor did it require amendment of, any previously filed annual or quarterly consolidated financial statements. See Note 20, ‘Change in Accounting Principle and Error Corrections’ for additional information regarding the preferred shares restatement.
Cash and cash equivalents - Cash and cash equivalents include cash and highly liquid securities with original maturities of 90 days or less.
Impairment of financial assets - Atlas assesses, on a quarterly basis, whether there is evidence that a financial asset or group of financial assets is impaired. An investment is considered impaired when the fair value of the investment is less than its cost or amortized cost. When an investment is impaired, the Company must make a determination as to whether the impairment is other than temporary.
The analysis includes some or all of the following procedures as deemed appropriate by management:
Under Accounting Standards Codification (“ASC”), with respect to an investment in an impaired debt security, other-than-temporary impairment (“OTTI”) occurs if (a) there is intent to sell the debt security, (b) it is more likely than not it will be required to sell the debt security before its anticipated recovery, or (c) it is probable that all amounts due will be unable to be collected such that the entire cost basis of the security will not be recovered. If Atlas intends to sell the debt security, or will more likely than not be required to sell the debt security before the anticipated recovery, a loss in the entire amount of the impairment is reflected in net investment gains (losses) on investments in the consolidated statements of income (loss). If Atlas determines that it is probable it will be unable to collect all amounts and Atlas has no intent to sell the debt security, a credit loss is recognized in net investment gains (losses) on investments in the consolidated statements of income (loss) to the extent that the present value of expected cash flows is less than the amortized cost basis; any difference between fair value and the new amortized cost basis (net of the credit loss) is reflected in other comprehensive income (losses), net of applicable income taxes.
Fair values of financial instruments - Atlas has used the following methods and assumptions in estimating its fair value disclosures:
Fair values for investments are based on quoted market prices, when available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments or values obtained from independent pricing services.
Atlas employs specific control processes to determine the reasonableness of the fair value of its financial assets. These processes are designed to supplement those performed by Atlas’ investment advisor to ensure that the values received from them are accurately recorded and that the data inputs and the valuation techniques utilized are appropriate, consistently applied, and that the assumptions are reasonable and consistent with the objective of determining fair value. For example, on a continuing basis, Atlas assesses the reasonableness of individual security values that have stale prices or whose changes exceed certain thresholds as compared to previous values received from Atlas’ investment advisor or to expected prices. The portfolio is reviewed routinely for transaction volumes, new issuances, any changes in spreads, as well as the overall movement of interest rates along the yield curve to determine if sufficient activity and liquidity exists to provide a credible source for market valuations. When fair value determinations are expected to be more variable, they are validated through reviews by members of management or the Board of Directors who have relevant expertise and who are independent of those charged with executing investment transactions.
Atlas employs a fair value hierarchy to categorize the inputs it uses in valuation techniques to measure the fair value. The hierarchy is comprised of quoted prices in active markets (Level 1), third party pricing models using available trade, bid and market information (Level 2) and internal models without observable market information (Level 3). The Company recognizes transfers between levels of the fair value hierarchy at the end of the period in which events occur impacting the availability of inputs to the fair value methodology.
Premiums receivable - Premiums receivable include premium balances due and uncollected and installment premiums not yet due from agents and insureds.
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 statements of income and comprehensive income except to the extent that they relate to items recognized directly in other comprehensive income, in which case the income tax effect is also recognized in other comprehensive income.
Atlas accounts for uncertain tax positions in accordance with the income taxes accounting guidance. Atlas analyzes filing positions in the federal and state jurisdiction where it is required to file tax returns, as well as the open tax years in these jurisdictions. Atlas would recognize interest and penalties related to unrecognized tax benefits as a component of the provision for federal income taxes.
Goodwill - Atlas recognized goodwill as part of the acquisition of Anchor Holdings Group, Inc. The amounts recognized represent the cost of the acquisition above the fair value of the net assets acquired. Atlas reviews goodwill at least annually for impairment. Atlas concluded that there was no goodwill impairment in any of the years ended December 31, 2017, 2016, and 2015.
Intangible assets - Atlas recognized intangible assets as part of the acquisitions of Gateway and Anchor Holdings Group, Inc. The intangible assets are classified as either indefinite-lived or definite-lived depending on whether the useful lives can be identified. Atlas indefinite-lived intangible assets consist of state insurance licenses, and these intangible assets are reviewed for impairment at least annually. Atlas concluded that there was no indefinite-lived intangible asset impairment in any of the years ended December 31, 2017, 2016, and 2015. Definite-lived intangible assets are amortized over their useful lives on a straight-line basis except for customer related intangibles, which are on an accelerated basis. Atlas definite-lived intangible assets consist of trade names and trademarks with useful lives of 15 years and customer relationships with useful lives of 10 years.
The valuations are finalized within 12 months of the close of the acquisition (not including claims reserve development consideration, if applicable). The changes upon finalization to the initial purchase price allocation and valuation of assets and liabilities may result in an adjustment to identifiable intangible assets and goodwill. Adjustments to the provisional amounts identified during the measurement period are recognized in the reporting period in which the adjustment amounts are determined. The effect of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date, are recorded in the financial statements and presented separately on the statements of income and comprehensive income in the reporting period in which the adjustment amounts are determined.
Property and equipment - Buildings, office equipment, and internal use software are stated at historical cost less depreciation. Subsequent costs are included in the asset’s carrying amount or capitalized as a separate asset only when it is probable that future economic benefits will be realized. Land is stated at historical cost. Repairs and maintenance are recognized as an expense during the period incurred. Depreciation on buildings and building improvements are provided on a straight-line basis over the estimated useful life of 33 years. Depreciation on equipment is provided on a straight-line basis over the estimated useful lives which range from 5 years for vehicles, 5 years for furniture, 5 years for enterprise software and 3 years for all other software and computer equipment and the term of the lease for leased equipment.
Revenue recognition - Premium income is recognized on a pro rata basis over the terms of the respective insurance contracts. Unearned premium reserves represent the portion of premiums written that are related to the unexpired terms of the policies in force.
Operating segments - Atlas operates in one business segment, the property and casualty insurance business.
In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718). The provisions of this update simplify certain areas around share-based compensation transactions including income taxes and cash flow classifications. Each amendment within this update has specific guidance on the method of application, which includes prospective, retrospective, and modified retrospective applications. For public entities, this guidance is effective for years beginning after December 15, 2016, including interim periods within those years. Early adoption is permitted. The Company adopted this ASU in the first quarter of 2017. Atlas did not have any tax “windfall” net operating loss carryforwards as of January 1, 2017, therefore no cumulative effect adjustment is needed. All tax related cash flows are included in the operating section of the Consolidated Statements of Cash Flows with other income taxes retrospectively. Atlas has made the election to estimate future forfeitures, which is consistent with current accounting treatment.
In May 2017, the FASB issued ASU 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting. This update provides guidance on when an entity should apply modification accounting when changes are made to a share-based compensation award. For public entities, this guidance is effective for years beginning after December 15, 2017, including interim periods within those years. Early adoption is permitted. The Company plans on adopting the update on the required effective date using the prescribed prospective approach. The adoption of this ASU is not expected to have a material impact on the consolidated financial statements.
In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. The provisions of this update modify the income tax consequences for intra-entity transaction not involving inventory. For public entities, this guidance is effective for years beginning after December 15, 2017, including interim periods within those years. Early adoption is permitted. The Company plans on adopting the update on the required effective date using the prescribed modified retrospective approach. Although Atlas has a number of fixed income securities that were transferred between companies owned by Atlas, this ASU will not affect the consolidated financial statements, because the transactions are between two U.S. entities that are part of the same consolidated group, the transactions were elected to be deferred for U.S. tax purposes until the items leave the group, which is consistent with the pre-tax GAAP treatment, and the Company already reports as part of its computational approach, the State tax results (which are zero) under the new ASU. If the sales were between a U.S. company and a foreign affiliate or between non-consolidated U.S. affiliates this would be applicable. However, the investment sales did not fall under either of these two fact patterns.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326). The provisions of this update require an entity to broaden the information that it considers in developing its allowance for credit losses for assets. For public entities, this guidance is effective for years beginning after December 15, 2019, including interim periods within those years. Early adoption is permitted. The Company plans on adopting the update on the required effective date. Atlas does not currently have any investments with credit losses recorded or other significant credit allowances, therefore the provisions of this update are not expected to have a material impact on the consolidated financial statements upon adoption. Atlas will continue to monitor the investment portfolio and other financial instruments until adoption for any changes.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The provisions of this update impact the classification criteria, disclosure requirements, and other specific transactions in lease accounting. The update requires the use of a modified retrospective approach, which requires leases to be measured at the beginning of the earliest period presented. For public entities, this guidance is effective for years beginning after December 15, 2018, including interim periods within those years. Early adoption is permitted. The Company plans on adopting the update on the required effective date using the modified retrospective approach to restate beginning with the earliest period presented. See Note 8, ‘Commitments and Contingencies’ for further discussion of the future lease commitments. The adoption of this update is expected to increase both assets and liabilities, equally, on the Consolidated Statements of Financial Position by the present value of the leases at each reporting date. There is no expected impact to any of Atlas’ current financial covenants as a result of the increase to reported liabilities.
The FASB issued ASU 2014-09, ASU 2015-14, ASU 2016-10, ASU 2016-12, ASU 2016-20 and ASU 2017-05, Revenue from Contracts with Customers (Topic 606). This update is a comprehensive revenue recognition standard that applies to all entities that have contracts with customers, except for those that fall within the scope of other standards, such as insurance contracts. Updates may be applied retrospectively to each period presented or retrospectively with the cumulative effect recognized at the date of initial application. The update is now effective for interim and annual reporting periods beginning after December 15, 2017. The Company plans to adopt the update on the required effective date. While these updates to Topic 606 are expected to have a significant impact on many companies, the majority of Atlas’ revenue is derived from transactions that do not fall within the scope of Topic 606, namely insurance contracts, investment income, and lease income. The adoption of these ASUs will not have a material impact on the consolidated financial statements. Atlas will continue to monitor and examine transactions that could potentially fall within the scope of Topic 606.
All other recently issued pronouncements with effective dates after December 31, 2017 are not expected to have a material impact on the consolidated financial statements.
The Anchor acquisition was accounted for using the acquisition method. Atlas began consolidating Anchor on March 11, 2015, therefore their financial results are included in Atlas’ consolidated financial results starting with the three month period ended March 31, 2015. However, the following unaudited pro forma summary presents Atlas’ consolidated financial information for the year ended December 31, 2015 as if Anchor had been acquired on January 1, 2014. These amounts have been calculated after applying the Company’s accounting policies had the acquisition been completed on January 1, 2014. These results were prepared for comparative purposes only and do not purport to be indicative of the results of operations that may have actually resulted had the acquisition occurred on the indicated dates, nor are they indicative of potential future operating results of the Company.
The acquisition of Anchor resulted in the recognition of intangible assets and goodwill valued at $4.5 million and $2.7 million, respectively. The Company recorded an adjustment to the purchase price allocation and amortization related to the identified intangible assets during the fourth quarter of 2015. Atlas recognized amortization expense of $390,000, $390,000 and $315,000 for the years ended December 31, 2017, 2016 and 2015, respectively, related to intangible assets acquired in the Anchor transaction. Atlas incurred no transaction expenses related to the Anchor acquisition for the years ended December 31, 2017 and 2016, and $999,000 in transaction expenses for the year ended December 31, 2015.
Estimated future amortization expense for definite-lived intangible assets is $390,000 for each of the next five years.
During the third quarter of 2016, the Company and the former owner of Camelot Services agreed to settle the additional consideration related to future claim development and the utilization of certain tax assets. Atlas redeemed all 2,538,560 of the remaining preferred shares issued as additional consideration and paid all accrued dividends.
The effects of these convertible instruments are excluded from the computation of earnings per common share diluted in periods in which the effect would be anti-dilutive. Convertible preferred shares are anti-dilutive when the amount of dividends declared or accumulated in the current period per common share obtainable upon conversion exceeds earnings per common share basic. For the year ended December 31, 2017, all exercisable stock options were deemed to be anti-dilutive. For the year ended December 31, 2016, all exercisable stock options were deemed to be dilutive and all of the convertible preferred shares were deemed to be anti-dilutive. The potentially dilutive impact for the convertible preferred stock excluded from the calculation due to anti-dilution is 441,357 common shares for the year ended December 31, 2016. For the year ended December 31, 2015, all of the convertible preferred shares and all exercisable stock options were deemed to be dilutive.
The following table summarizes the amortized cost and fair value of fixed income securities by contractual maturity ($ in ‘000s). As certain securities and debentures have the right to call or prepay obligations, the actual settlement dates may differ from contractual maturity.
the credit ratings assigned by independent credit rating agencies may prove to be incorrect due to unforeseen or unknown facts related to a company’s financial situation; and
There were no other-than-temporary impairments recorded for the years ended December 31, 2017, 2016, and 2015 as a result of the above analysis performed by management.
The following table presents the aggregate proceeds, gross realized investment gains and gross realized investment losses from sales and calls of fixed income securities and equities for the years ended December 31, 2017, 2016, and 2015 ($ in ‘000s):
The following table summarizes the components of net realized gains (losses) for the years ended December 31, 2017, 2016, and 2015 ($ in ‘000s):
Atlas’ other investments are comprised of collateral loans and various limited partnerships that invest in income-producing real estate, equities, or insurance linked securities. Atlas accounts for these limited partnership investments using the equity method of accounting. As of December 31, 2017, the carrying values of these other investments were approximately $31.4 million versus approximately $32.2 million as of December 31, 2016. The carrying values of the equity method limited partnerships were $25.3 million and $24.9 million as of December 31, 2017 and December 31, 2016, respectively. The carrying value of these investments is Atlas’ share of the net book value for each limited partnership. The carrying value of the collateral loans was $6.2 million and $7.2 million as of December 31, 2017 and December 31, 2016, respectively.
Net realized investment gains were $6,000 for the year ended December 31, 2017 and resulted from the sale of one equity method investment. There were no net realized investment gains or losses for the years ended December 31, 2016 and 2015.
Level 2 - Observable market-based inputs or unobservable inputs that are corroborated by market data.
Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Atlas’ assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the placement of the asset or liability within the fair value hierarchy levels.
The following is a summary of significant valuation techniques for assets measured at fair value on a recurring basis:
Equities: Comprised of publicly-traded common stocks. Valuation is based on unadjusted quoted prices for identical assets in active markets that Atlas can access.
Corporate Bonds: Comprised of investment-grade fixed income securities. The primary inputs to the valuation include quoted prices for identical assets in inactive markets or similar assets in active or inactive markets, contractual cash flows, benchmark yields and credit spreads.
Atlas primarily uses the services of external securities pricing vendors to obtain these values. Atlas then reviews these valuations to ensure that the values are accurately recorded and that the data inputs and valuation techniques utilized are appropriate, consistently applied, and that the assumptions are reasonable and consistent with the objective of determining fair value.
The Company had no fair value investments classified as Level 3 as of December 31, 2017 and December 31, 2016. There were no transfers in or out of Level 2 or Level 3 during the years ended December 31, 2017 and 2016.
On July 22, 2013, due to shareholder activity, a “triggering event” as determined under IRC Section 382 occurred. As a result, under IRC Section 382, the use of the Company’s net operating loss and other carryforwards generated prior to the “triggering event” will be limited as a result of this “ownership change” for tax purposes, which is defined as a cumulative change of more than 50% during any three-year period by shareholders owning 5% or greater portions of the Company’s shares. Due to this triggering event, the Company estimates that it will retain total tax effected federal net operating loss carryforwards of approximately $13.3 million as of December 31, 2017.
The Company has entered into subscription agreements to allow for participation by the Company in limited liability investments, which invest in income-producing real estate, equities and insurance linked securities. As of December 31, 2017, the unfunded commitments are $7.0 million.
In the ordinary course of its business, Atlas is involved in legal proceedings, including lawsuits, regulatory examinations and inquiries.
Atlas is exposed to credit risk on balances receivable from policyholders, agents and reinsurers. Credit exposure to any one individual policyholder is not material. The Company’s policies, however, are distributed by agents who may manage cash collection on its behalf pursuant to the terms of their agency agreement. Atlas has procedures to monitor and minimize its exposure to delinquent agent balances, including, but not limited to, reviewing account current statements, processing policy cancellations for non-payment and other collection efforts deemed appropriate. Atlas also has procedures to evaluate the financial condition of its reinsurers and monitors concentrations of credit risk arising from similar geographic regions, activities, or economic characteristics of the reinsurers to minimize its exposure to significant losses from reinsurers’ insolvency.
Virtually all states require insurers licensed to do business therein to bear a portion of contingent and incurred claims handling expenses and the unfunded amount of “covered” claims and unearned premium obligations of impaired or insolvent insurance companies, either up to the policy’s limit, the applicable guaranty fund covered claims obligation cap, or 100% of statutorily defined workers’ compensation benefits, subject to applicable deductibles. These obligations are funded by assessments, made on a retrospective, prospective or pre-funded basis, which are levied by guaranty associations within the state, up to prescribed limits (typically 2% of “net direct written premium”), on all member insurers in the state on the basis of the proportionate share of the premiums written by member insurers in certain covered lines of business in which the impaired, insolvent or failed insurer was engaged.
Net realized losses on the disposal and sales of equipment were $12,000 for the year ended December 31, 2017. There were no realized gains or losses on the disposal of property or equipment for the year ended December 31, 2016. For the year ended December 31, 2015, the Company sold property in Alabama and recognized a loss of $20,000.
Premiums written, premiums earned and amounts related to reinsurance as of and for the years ended December 31, 2017, 2016, and 2015 are as follows ($ in ‘000s):
The changes in the provision for unpaid claims and claims adjustment expenses, net of amounts recoverable from reinsurers, for the years ended December 31, 2017, 2016, and 2015 were as follows ($ in ‘000s):
Atlas experienced $166,000 in unfavorable prior accident year development during the year ended December 31, 2015 as reflected as incurred related to prior years in the table above. Prior accident year unfavorable development on non-core lines and assigned risk pools was $870,000 for the year ended December 31, 2015. The unfavorable development on non-core lines and assigned risk pools was offset by favorable prior accident year development of $475,000 and $230,000 on our core lines and pre-acquisition Global Liberty claims reserves, respectively. This favorable development on our core lines was attributable to our traditional taxi and excess taxi products.
The following is information about incurred and paid claims and claims adjustment expenses development for the year ended December 31, 2017, net of reinsurance, as well as cumulative claim frequency and the total of incurred but not reported liabilities plus expected development on reported claims included within the net incurred claims amounts. The information about incurred and paid claims development for the years ended December 31, 2008 to 2015, is presented as unaudited supplementary information.
Incurred claims and allocated claim adjustment expenses, net of reinsurance, show how the initial estimate of incurred claims develop for each of the past 10 accident years. Incurred but not reported liabilities, net of reinsurance, by accident year are estimates that are based on the difference between the reported claims and the estimate of the ultimate paid claims and claims adjustment expenses for known and unknown claims. These estimates involve actuarial and statistical projections at a given point in time of what we expect the cost of the ultimate settlement and administration of known and unknown claims. The process reflects the uncertainties and significant judgmental factors inherent in estimating future results of both known and unknown claims, and as such, the process is inherently complex and imprecise. We utilize a third party actuarial firm to assist us in the estimation process.
On January 6, 2011, Atlas adopted a stock option plan (the “Stock Option Plan”) in order to advance the interests of Atlas by providing incentives to eligible persons defined in the plan. In the second quarter of 2013, a new equity incentive plan (the “Equity Incentive Plan”) was approved by the Company’s common shareholders at the Annual General Meeting, and Atlas ceased to grant new stock options under the preceding Stock Option Plan. The Equity Incentive Plan is a securities based compensation plan, pursuant to which Atlas may issue restricted stock grants for ordinary voting common shares, restricted units, stock grants for ordinary voting common shares, stock options and other forms of equity incentives to eligible persons as part of their compensation. The Equity Incentive Plan is considered an amendment and restatement of the Stock Option Plan, although outstanding stock options issued pursuant to the Stock Option Plan will continue to be governed by the terms of the Stock Option Plan.
Under the Equity Incentive Plan, a director who either directly or indirectly purchases up to $100,000 of Atlas ordinary voting common stock on the open market, through the employee stock purchase plan, or via other means acceptable under this plan (see Note 13, ‘Other Employee Benefit Plans’) will receive a 3 to 1 matching grant of restricted stock grants for ordinary voting common shares (or for Canadian taxpayers, restricted stock units) based on the aggregate purchase price of ordinary voting common shares the director purchases during the six month period that began on June 18, 2013 and ended on December 31, 2013, or for new directors within 6 months of their initial appointment date (the “Purchase Period”). Matching share grants of 148,152 restricted stock grants for ordinary voting common shares and 37,038 restricted stock units were made on February 28, 2014 (the “Grant Date”). The number of ordinary voting common shares issued on the Grant Date were determined by dividing (A) the dollar amount of the Company matching contribution due based on purchases during the Purchase Period by (B) the closing common share price of one share of Company ordinary voting common stock at close of market on June 17, 2013 (the “Closing Price”) which was $8.10 per share. The restricted stock grants for ordinary voting common shares will vest 20% on each anniversary of the Grant Date, subject to the terms of the Guidelines. The matching grant will be subject to all of the terms and conditions of the Equity Incentive Plan and applicable grant agreements.
Restricted shares - The activity for the restricted voting common shares and restricted share units for the years ended December 31, 2017 and 2016 are as follows:
Defined Contribution Plan - Atlas has a defined contribution 401(k) plan covering all qualified employees of Atlas and its subsidiaries. Contributions to this plan are limited based on IRS guidelines. Atlas matches 100% of the employee contribution up to 2.5% of annual earnings, plus 50% of additional contributions up to 2.5% of annual earnings, for a total maximum expense of 3.75% of annual earnings per participant. Atlas’ matching contributions are discretionary. Employees are 100% vested in their own contributions and vest in Atlas contributions based on years of service equally over 5 years with 100% vested after 5 years. Company contributions were $441,000, $424,000, and $300,000 for the years ended December 31, 2017, 2016, and 2015, respectively.
During 2017, the 128,191 restricted voting common shares that were beneficially owned or controlled by Kingsway Financial Services, Inc. (including its subsidiaries and affiliated companies, “Kingsway”) were sold to non-affiliates of Kingsway. The restricted voting common shares are entitled to vote at all meetings of shareholders, except at meetings of holders of a specific class that are entitled to vote separately as a class. The restricted voting common shares as a class shall not carry more than 30% of the aggregate votes eligible to be voted at a general meeting of common shareholders. The Kingsway-owned restricted voting common shares automatically converted to ordinary voting common shares upon their sale to non-affiliates of Kingsway. There are no restricted voting common shares outstanding as of December 31, 2017.
Policy acquisition costs are deferred and amortized over the period in which the related premiums written are earned, typically 12 months. Deferred policy acquisition costs for the years ended December 31, 2017, 2016, and 2015 ($ in ‘000s) were:
Notes payable outstanding as of December 31, 2017 and 2016 ($ in ‘000s) were:
Atlas did not declare or pay any dividends to its common shareholders during the years ended December 31, 2017 and 2016.
The following line items presented in the Consolidated Statements of Shareholders’ Equity were affected by the restatement:
On March 5, 2018, a complaint was filed in the U.S. District Court for the Northern District of Illinois asserting claims under the federal securities laws against the Company and two of its executive officers on behalf of a putative class of purchasers of the Company’s securities, styled Fryman v. Atlas Financial Holdings, Inc., et al., No. 1:18-cv-01640 (N.D. Ill.). In the complaint, the plaintiff asserts claims on behalf of a putative class consisting of purchasers of the Company’s securities between March 13, 2017 and March 2, 2018. The complaint alleges that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder by making allegedly false and misleading statements or failing to disclose certain information regarding the adequacy of the Company’s reserves. The complaint seeks, among other remedies, unspecified damages, attorneys’ fees and other costs, equitable and/or injunctive relief, and such other relief as the court may find just and proper. Under applicable provisions of the federal securities laws, motions for appointment as lead plaintiffs must be filed within sixty days after a notice announcing the filing of the Fryman complaint. The Company and the other defendants anticipate that they will file a motion to dismiss the complaint for failure to state a claim upon which relief can be granted. Under the federal securities laws, discovery and other proceedings automatically will be stayed during the pendency of any such motion to dismiss.