Section Description Page
I. Consolidated Performance 26
II. Application of Critical Accounting Estimates 27
III. Operating Results 28
IV. Financial Condition 33
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Overview
This MD&A contains "forward-looking information" which may include, but is not
limited to, statements with respect to estimates of future expenses, revenue and
profitability; trends affecting financial condition and results of operations;
the availability and terms of additional capital; dependence on key suppliers,
and other strategic partners; industry trends and the competitive and regulatory
environment; the impact of losing one or more senior executives or failing to
attract additional key personnel; and other factors referenced in this MD&A.
Often, but not always, forward-looking statements can be identified by the use
of words such as "plans", "expects", "is expected", "budget", "scheduled",
"estimates", "forecasts", "intends", "anticipates", or "believes" or variations
(including negative variations) of such words and phrases, or state that certain
actions, events or results "may", "could", "would", "might" or "will" be taken,
occur or be achieved. Forward-looking statements involve known and unknown
risks, uncertainties and other factors which may cause the actual results,
performance or achievements of Atlas to be materially different from any future
results, performance or achievements expressed or implied by the forward-looking
statements. Such factors include, among others, general business, economic,
competitive, political, regulatory and social uncertainties.
Although Atlas has attempted to identify important factors that could cause
actual actions, events or results to differ materially from those described in
forward-looking statements, there may be other factors that cause actions,
events or results to differ from those anticipated, estimated or intended.
Forward-looking statements contained herein are made as of the date of this MD&A
and Atlas disclaims any obligation to update any forward-looking statements,
whether as a result of new information, future events or results, or otherwise.
There can be no assurance that forward-looking statements will prove to be
accurate, as actual results and future events could differ materially from those
anticipated in such statements. Accordingly, readers should not place undue
reliance on forward-looking statements due to the inherent uncertainty in them.
25
--------------------------------------------------------------------------------(All amounts in thousands of US dollars, except for amounts preceded by "C" as
Canadian dollars, share and per share amounts)
I. CONSOLIDATED PERFORMANCE
Full year 2011 Highlights
• Core commercial auto lines gross premium written for 2011 increased 36.9%
over 2010 reflecting Atlas' strong focus on re-energizing this line of
business.
• Net loss for the year ended December 31, 2011 was $(2,470).
• After taking the impact of the liquidation preference of the preferred
shares into consideration, the basic and diluted loss per common share in
2011 was $(0.18).
• 2011 non-operating expenses totaled $4,971 ($3,357 net of tax) which
includes a one-time $2,544 ($1,755 net of tax) non-cash charge upon
settlement of the American Country Pension Plan , a $1,800 ($1,188 net of
tax) fourth quarter reserve strengthening charge related to pre-Atlas
periods, and non-recurring expenses incurred in Q1 2011 of $627 ($414 net
of tax) related to transaction costs and restructuring.
• The above non-operating expenses had an unfavorable impact of ($0.18) on
basic and diluted earnings per share in 2011.
• Total investment income (including realized capital gains) in 2011 was
$7,481, an increase of 35.9% as compared to 2010.
• Underwriting losses improved by $12,746 for the year ended December 31,
2011 as compared to 2010.
• Atlas' distribution channel was able to write business in a total of 25
states at the end of 2011.
• Book value per common share diluted at December 31, 2011 was $2.03.
The following financial data is derived from Atlas' consolidated financial
statements for the years ended December 31, 2011 and 2010:
Table 1 Selected financial information
For the year ended December 31, 2011 2010
Gross premium written $ 42,031 $ 46,679
Net premium earned 35,747 53,603
Losses on claims 28,994 48,074
Acquisition costs 7,294 11,115
Other underwriting expenses 10,697 18,398
Net underwriting loss (11,238 ) (23,984 )
Net investment and other income 7,605 4,747
Net loss before tax (3,633 ) (19,237 )
Income tax (benefit) expense (1,163 ) 2,575
Net loss $ (2,470 ) $ (21,812 )
Key Financial Ratios:
Loss ratio 81.1 % 89.7 %
Acquisition cost ratio 20.4 % 20.7 %
Other underwriting expense ratio 29.9 % 34.3 %
Combined ratio (see Table 6) 131.4 % 144.7 %
Return on equity (4.2 )% (38.7 )%
Loss per common share, basic and diluted $ (0.18 ) $ (1.19 )
Book value per common share, basic and diluted $ 2.03$ 2.30
Atlas' full year combined ratio for 2011 was 131.4%, compared to 144.7% for the
full year of 2010. The $4,971 in 2011 non-operating expenses added 13.9% to the
combined ratio in 2011.
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As planned, core commercial automobile lines became a more significant component
of Atlas' gross premium written as a result of the strategic focus on these core
lines of business coupled with positive response from new and existing agents.
Gross premium written related to these core commercial lines increased by 36.9%
for 2011 as compared to 2010. As a result, the overall loss ratio for 2011 was
81.1% compared to 89.7% in 2010. The $1,800 reserve strengthening charge in the
fourth quarter of 2011 related to pre-Atlas periods added 5.0% to the loss ratio
in 2011.
Investment performance and other income generated $7,605 of income for 2011, of
which $4,201 is realized gains. This resulted in a 4.7% yield for the full year
2011. Cash and invested assets were $127,881 as of December 31, 2011 and were
$45,167 lower than December 31, 2010, resulting primarily from the payment of
claim settlements. This reduction in cash and invested assets is in line with
expectations as Atlas rebuilds its book of business (see page 27 below).
Overall, Atlas generated a net loss of $(2,470). After taking the impact of the
liquidation preference of the preferred shares into consideration, the basic and
diluted loss per common share in 2011 was $(0.18). This compares to a net loss
of $(21,812) or $(1.19) per common share diluted in 2010.
Book value per common share diluted as of December 31, 2011 was $2.03.
II. APPLICATION OF CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with U.S. GAAP requires
management to adopt accounting policies and make estimates and assumptions that
affect amounts reported in the consolidated financial statements. The most
critical estimates include those used in determining:
•Fair value and impairment of financial assets
•Deferred policy acquisition costs amortization
•Reserve for property-liability insurance claims and claims expense estimation
•Deferred tax asset valuation
In making these determinations, management makes subjective and complex
judgments that frequently require estimates about matters that are inherently
uncertain. Many of these policies, estimates and related judgments are common in
the insurance and financial services industries; others are specific to our
businesses and operations. It is reasonably likely that changes in these
estimates could occur from period to period and result in a material impact on
our consolidated financial statements.
A brief summary of each of these critical accounting estimates follows. For a
more detailed discussion of the effect of these estimates on our consolidated
financial statements, and the judgments and assumptions related to these
estimates, see the referenced sections of this document. For a complete summary
of our significant accounting policies, see the notes to the consolidated
financial statements.
Fair values of financial instruments - Atlas has used the following methods and
assumptions in estimating its fair value disclosures:
Fair values for bonds 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 through a bank trustee.
Impairment of financial assets - Atlas assesses, on a quarterly basis, whether
there is objective evidence that a financial asset or
27
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group of financial assets is impaired. An investment is considered impaired when
the fair value of the investment is less than its cost or amortized cost. When
an investment is impaired, the Company must make a determination as to whether
the impairment is other-than-temporary.
Under ASC guidance, 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. 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 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.
Deferred policy acquisition costs - Atlas defers brokers' commissions, premium
taxes and other underwriting and marketing costs directly relating to the
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 ceding commissions.
Valuation of deferred tax assets - Deferred taxes are recognized using the asset
and liability method of accounting. Under this method the future tax
consequences attributable to temporary differences in the tax basis of assets,
liabilities and items recognized directly in equity and the financial reporting
basis of such items are recognized in the financial statements by recording
deferred tax liabilities or deferred tax assets.
Deferred tax assets related to the carry-forward of unused tax losses and
credits and those arising from temporary differences are recognized only to the
extent that it is probable that future taxable income will be available against
which they can be utilized. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The
effect on future tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the date of enactment or
substantive enactment.
Claims liabilities - The provision for unpaid claims represent the estimated
liabilities for reported claims, plus those incurred but not yet reported and
the related estimated loss adjustment expenses. Unpaid claims expenses are
determined using case-basis evaluations and statistical analyses, including
insurance industry loss data, and represent estimates of the ultimate cost of
all claims incurred. Although considerable variability is inherent in such
estimates, management believes that the liability for unpaid claims is adequate.
The estimates are continually reviewed and adjusted as necessary; such
adjustments are included in current operations and are accounted for as changes
in estimates.
III. OPERATING RESULTS
In the years prior the reverse merger which formed Atlas, the Company's
insurance subsidiaries were writing a variety of different lines of business,
many of which were non-profitable and/or managed by third parties. Challenges
facing the subsidiaries' former owner, coupled with that organization's
strategic decision to focus their business on private passenger, versus
commercial, lines of business resulted in a significant reduction in commercial
lines premiums written. In the year prior to the reverse merger, agents were
notified that the companies were exiting commercial lines of business resulting
in dramatic premium decline and an expense structure that was not in-line with
the premium volume written. The former ownership structure also created a
substantial amount
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of overhead and other expense resulting in negative pressure on the
subsidiaries' operating results. Effective with the reverse merger, Atlas'
management team realigned the strategic focus of the subsidiaries around
commercial lines of business which were historically profitable. Infrastructure
changes were made to ensure that the Company's expense structure was adjusted
based on near term premium expectations to support underwriting profit at a
scale considered realistic in the near term. The companies maintain strong core
competencies with respect to these lines of business and expect to re-capture
business lost in recent years and expect to win new business based on Atlas'
strong value proposition. As evidenced below, written premium from core lines of
business is increasing. Continued premium growth and the maintenance of the
current expense discipline will create positive cash flow. The negative cash
flow experienced in connection with claim payments will also reverse as claims
related to policies written in prior years are paid and new premium from core
lines of business is collected. The reduction in cash and invested assets seen
in 2011 was expected in light of the companies' reorganization and
circumstances. This is not expected to continue in 2012 forward.
Gross Premium Written
Table 2 Gross premium written by line of business
Year Ended December 31, 2011 2010 % Change
Commercial automobile $ 18,790 $ 13,729 36.9 %
Non-standard automobile 17,412 22,986 (24.2 )%
Other 5,829 9,964 (41.5 )%
$ 42,031 $ 46,679 (10.0 )%
Table 2 above summarizes gross premium written by line of business. For the year
ended December 31, 2011, gross premium written was $42,031 compared to $46,679
in 2010, representing a 10.0% decrease primarily due to the reduction of
non-core lines of business.
Commercial Automobile
The commercial automobile policies we underwrite provide coverage for light
weight, individual unit or small fleet commercial vehicles typically with the
minimum limits prescribed by statute, municipal or other regulatory
requirements. In the year ended December 31, 2011, gross premium written from
commercial automobile was $18,790, representing a 36.9% increase relative to
2010. Atlas' continued focus on these core lines of business coupled with a
positive response from both new and existing agents and policyholders to Atlas'
value proposition drove the improvement. As a percentage of the insurance
subsidiaries' overall book of business, commercial auto gross premium written
represented 44.7% of gross premium written in 2011 compared to 29.4% in 2010.
Commercial automobile insurance has outperformed the overall P&C industry in
each of the past ten years based on data compiled by the NAIC. Each of the
specialty business lines on which Atlas' strategy is focused is a subset of this
historically profitable industry segment.
Because there are a limited number of competitors specializing in these lines of
business, management believes a strong value proposition is very important and
can result in desirable retention levels as policies renew on an annual basis.
There are also a relatively limited number of agents who specialize in these
lines of business. As a result, strategic agent relationships are important to
ensure efficient distribution.
There is a positive correlation between the economy and commercial automobile
insurance in general. However, operators of commercial automobiles may be less
likely than other business segments within the commercial auto line 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 policy holder from taking vehicles out of
service in the face of reduced demand for the use of the vehicle.
29
--------------------------------------------------------------------------------Maintaining continuous insurance on all vehicles under dispatch is an important
aspect of Atlas' target policyholders' businesses.
Non-Standard Automobile
Non-standard automobile insurance is principally provided to individuals who do
not qualify for standard automobile insurance coverage because of their payment
history, driving record, place of residence, age, vehicle type or other factors.
Such drivers typically represent higher than normal risks and pay higher
insurance rates for comparable coverage.
Consistent with Atlas' focus on commercial automobile insurance, Atlas continues
to transition away from the non-standard auto line. Atlas' has ceased renewals
of policies of this type in 2011, allowing surplus and additional resources to
be devoted to the expected growth of the commercial automobile business. These
lines comprised 41.4% of our gross written premium in 2011 versus 49.2% in 2010.
In 2012, gross written premium related to non-standard auto will be negligible.
Other
This line of business is primarily comprised of Atlas' surety business, which is
100% reinsured.
Geographic Concentration
Table 3 Gross premium written by state
Year Ended December 31, 2011 2010
Illinois $ 25,398 60.4 % $ 28,230 60.5 %
Indiana 2,687 6.4 % 4,782 10.2 %
Michigan 3,828 9.1 % 2,032 4.4 %
New York 1,865 4.4 % 2,830 6.1 %
Minnesota 2,555 6.1 % 1,524 3.3 %
Louisiana 1,530 3.6 % (147 ) (0.3 )%
Wisconsin 758 1.8 % 371 0.8 %
Other 3,410 8.2 % 7,057 15.1 %
Total $ 42,031 100.0 % $ 46,679 100.0 %
As illustrated by the data in Table 3 above, 60.4% of Atlas' 2011 gross premium
written came from the state of Illinois and 76.0% came from the three states
currently producing the most year-to-date premium volume (Illinois, Indiana and
Michigan), as compared to 75.1% in 2010. Atlas is committed to diversifying
geographically by expanding in new areas of the country, leveraging experience,
historical data and research. In 2011, Atlas began actively writing insurance in
10 new states, 5 of which were added in the fourth quarter.
The decline of written premium for the year ended December 31, 2011 versus the
year ended December 31, 2010 in Illinois and Indiana is primarily attributable
to Atlas' de-emphasis of non-standard automobile insurance. The majority of the
2010 non-standard automobile written premium came from those two states.
Ceded Premium Written
Ceded premium written is equal to premium ceded under the terms of Atlas' in
force reinsurance treaties. Ceded premium written decreased 56.5% to $6,173 for
the year ended December 31, 2011 compared with $14,201 for the year ended
December 31, 2010. This decrease is attributed to the reduction of Atlas' surety
gross premium written.
Net Premium Written
Net premium written is equal to gross premium written less the ceded premium
written under the terms of Atlas' in force reinsurance treaties. Net premium
written increased 10.4% to $35,858 for 2011 compared with $32,478 for 2010.
These changes are attributed to the combined effects of the issues cited in the
'Gross Premium Written' and 'Ceded Premium Written' sections above.
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Net Premium Earned
Premiums are earned ratably over the term of the underlying policy. Net premium
earned was $35,747 in 2011, a 33.3% decrease compared with $53,603 in 2010. The
decrease in net premiums earned is attributable to the written premium decline
experienced by the Company's insurance subsidiaries prior to Atlas' formation,
coupled with the transition away from private passenger automobile insurance and
other non-core lines of business. Policy periods in Atlas' core lines of
business are typically twelve months.
Claims Incurred
The loss ratio relating to the claims incurred in 2011 was 81.1% compared to
89.7% in 2010. The $1,800 reserve strengthening adjustment made in the fourth
quarter 2011 unfavorably impacted the loss ratio by 5% in 2011. The change in
loss ratios from 2010 to 2011 is attributable to the increased composition of
commercial auto as a percentage of the total written premium. Atlas has
extensive experience and expertise with respect to underwriting and claims
management in this specialty area of insurance and expects the loss ratio to
trend back towards levels seen in the second quarter 2011. The company is
committed to retain this claim handling expertise as a core competency as the
volume of business increases.
Acquisition Costs
Acquisition costs represent commissions and taxes incurred on net premium
earned. Acquisition costs were $7,294 in 2011 or 20.4% of net premium earned, as
compared to 20.7% in 2010. This ratio has declined slightly due to the shift
away from private passenger automobile insurance which carry higher commission
rates and are anticipated to continue decreasing as Atlas transitions entirely
away from these non-standard automobile lines.
Other Underwriting Expenses
The other underwriting expense ratio was 29.9% in 2011 compared to 34.3% in
2010. Atlas incurred additional expenses of approximately $627 in 2011 that are
deemed non-recurring. These items are highlighted in the table below:
Table 4 Non-recurring Expenses
Expense Item Description Non-recurring Expense
Licenses, taxes and assessments Amounts paid in Q1 2011 $ 198
Professional fees Legal and Accounting fees 121
Salary and benefits Q1 staff reduction impacts 174
Decommissioning software expenses
EDP expense previously capitalized 84
Occupancy/Miscellaneous expense Straight-line lease adjustment 50
Total non-recurring expenses $ 627
The combination of the settlement of the American Country Pension Plan in the
fourth quarter of 2011 and the above expenses unfavorably impacted the other
underwriting expense ratio by 8.8%. The favorable change in other areas of
underwriting expense can be attributed to operating efficiencies realized after
the reverse merger at the end of 2010 as well as the absence of significant
agent receivable write-offs.
Net Investment Income
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Table 5 Investment Results
Year Ended December 31, 2011 2010
Average securities at cost (including cash) $ 159,555$ 193,686
Interest income after expenses
3,280 4,616
Percent earned on average investments 2.1 % 2.4 %
Net realized gains $ 4,201 $ 888
Total investment income 7,481 5,504
Total realized yield (annualized) 4.7 % 2.8 %
Investment income (excluding net realized gains) decreased by 28.9% to $3,280 in
2011, compared to $4,616 in 2010. These amounts are primarily comprised of
interest income. This decrease is primarily due to the lower average investment
balance during 2011. However, the average yield on invested assets (including
net realized gains of $4,201) in 2011 increased to 4.7% as compared with 2.8% in
2010.
Net Realized Investment Gains (Losses)
Net realized investment gains in 2011 were $4,201 compared to $888 in 2010.
These gains were the result of management's decision to sell certain securities
during favorable market conditions in 2011.
Miscellaneous Income (Loss)
Atlas recorded miscellaneous income in 2011 of $124 compared to expense of $757
for 2010. Miscellaneous income in 2011 is primarily comprised of rental income
from the corporate headquarters in Elk Grove Village, Illinois.
Combined Ratio
Atlas' combined ratio are summarized in the table below. The underwriting loss
is attributable to the factors described in the 'Claims Incurred', 'Acquisition
Costs', and 'Other Underwriting Expenses' sections above.
Table 6 Combined Ratios
Year Ended December 31, 2011 2010
Net premium earned $ 35,747 $ 53,603
Underwriting expenses * 46,985 77,587
Combined ratio 131.4 % 144.7 %
*Underwriting expense is the combination of losses on claims, acquisition costs,
and other underwriting expenses
2011 non-operating expenses totaled $4,971 ($3,357 net of tax) which includes a
one-time $2,544 ($1,755 net of tax) non cash charge upon settlement of the
American Country Pension Plan, a $1,800 ($1,188 net of tax) fourth quarter
reserve strengthening charge related to pre-Atlas periods, and non-recurring
expenses incurred in Q1 2011 of $627 ($414 net of tax) related to the reverse
merger transaction costs and restructuring. These non-operating expenses had an
unfavorable impact of 13.9% on the Company's combined ratio in 2011.
Loss before Income Taxes
Atlas generated loss before tax of $3,633 in 2011 as compared to a loss before
income taxes of $19,237 in 2010.
Income Tax Benefit
Atlas recognized an income tax benefit in 2011 of $1,163, consistent with
operating results for the year. No further valuation allowance was recorded on
net operating losses generated in 2011. This compares to a tax expense of $2,575
in 2010. The following table reconciles tax benefit from applying the statutory
U.S. Federal tax rate of 34.0% to the actual percentage of pre-tax losses
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provided for the years ended December 31, 2011 and 2010.
Table 7 Income tax benefit reconciliation
Year ended December 31, 2011
2010
Amount % Amount %
Expected income tax benefit at statutory rate $ (1,235 ) (34.0 )% $ (6,541 ) (34.0 )%
Valuation allowance - - % (9,476 ) (49.3 )%
Nondeductible expenses 5 0.1 % 183 1.0 %
Tax implications of qualifying transaction 75 2.1 % 18,412 95.7 %
Other (8 ) (0.2 )% (3 ) - %
Total $ (1,163 ) (32.0 )% $ 2,575 13.4 %
Upon formation of Atlas on December 31, 2010, a yearly limitation as required by
U.S. tax law Section 382 that applies to changes in ownership on the future
utilization of Atlas' net operating loss carry-forwards was calculated. The
insurance subsidiaries' prior parent retained those tax assets previously
attributed to the insurance subsidiaries which could not be utilized by Atlas as
a result of this limitation. As a result, Atlas' ability to recognize future tax
benefits associated with a portion of its deferred tax assets generated during
prior years and the current year have been permanently limited to the amount
determined under U.S. tax law Section 382. The result is a maximum expected net
deferred tax asset which Atlas has available after the merger which is believed
more-likely-than-not to be utilized in the future.
Net Loss and Loss per Share
Atlas lost $2,470 during 2011 compared to net losses of $21,812 in 2010. After
taking the impact of the liquidation preference of the preferred shares into
consideration, the basic and diluted loss per common share in 2011 was $(0.18)
versus a loss per common share of $1.19 in 2010 computed under continuation
accounting rules.
The combination of the one-time $2,544 ($1,755 net of tax) non-cash charge upon
settlement of the American Country Pension Plan, the $1,800 ($1,188 net of tax)
fourth quarter reserve strengthening, and other non-recurring expenses incurred
in Q1 2011 of $627, had an unfavorable impact of ($0.18) on earnings per common
share in 2011.
There were 18,373,624 weighted average common shares outstanding at the end of
2011. In 2010, 18,358,363 common shares were used to compute both basic and
dilutive earnings per common share, the number of voting common shares at the
merger date as required by continuation accounting rules.
Book Value per Common Share
Book value per common share was $2.03 at December 31, 2011 as compared to $2.30
at December 31, 2010. The settlement of the American Country Pension Plan had no
significant impact on book value per share.
IV. FINANCIAL CONDITION
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Table 8 Consolidated Statement of Financial Position
December 31,
2011 2010
Assets
Investments
Fixed income securities, at fair value (Amortized cost $101,473
and $148,531)
$ 103,491 $ 154,011
Equity securities, at fair value (cost $994 and $0) 1,141 -
Total Investments 104,632 154,011
Cash and cash equivalents 23,249 19,037
Accrued investment income 586 1,293
Accounts receivable and other assets (Net of allowance of $4,254
and $4,212)
9,579
13,340
Reinsurance recoverables, net 8,044
4,277
Prepaid reinsurance premiums 2,214
6,999
Deferred policy acquisition costs 3,020
3,804
Deferred tax asset, net 6,775
6,399
Software and office equipment, net 440 1,274
Assets held for sale 13,634 15,004
Total Assets $ 172,173 $ 225,438
Liabilities
Claims liabilities $ 91,643 $ 132,579
Unearned premiums 15,691 17,061
Due to reinsurers and other insurers 5,701
9,614
Other liabilities and accrued expenses 2,884
6,015
Total Liabilities $ 115,919 $ 165,269
Shareholders' Equity
Preferred shares, par value per share $0.001, 100,000,000 shares
authorized, 18,000,000 shares issued and outstanding at December
31, 2011 and December 31, 2010. Liquidation value $1.00 per
share $ 18,000
$ 18,000
Ordinary voting common shares, par value per share $0.001,
800,000,000 shares authorized, 4,625,526 shares issued and
outstanding at December 31, 2011 and 4,553,502 at December 31,
2010
4 4
Restricted voting common shares, par value per share $0.001,
100,000,000 shares authorized, 13,804,861 shares issued and
outstanding at December 31, 2011 and December 31, 2010
14 14
Additional paid-in capital 152,652 152,466
Retained deficit (115,841 ) (113,371 )
Accumulated other comprehensive income, net of tax 1,425
3,056
Total Shareholders' Equity $ 56,254 $ 60,169
Total Liabilities and Shareholders' Equity $ 172,173 $ 225,438
See accompanying Notes to Consolidated Financial Statements.
Investments
Investments Overview and Strategy
Atlas manages its securities portfolio to support the liabilities of the
insurance subsidiaries, to preserve capital and to generate investment returns.
Atlas invests predominantly in corporate and government bonds with relatively
short durations that correlate with the payout patterns of Atlas' claims
liabilities. A third-party investment management firm manages Atlas' investment
portfolio pursuant to the Company's investment policies and guidelines as
approved by its Board of Directors. Atlas monitors the third-party investment
manager's performance and its compliance with both its mandate and Atlas'
investment policies and guidelines.
Atlas' investment guidelines stress the preservation of capital, market
liquidity to support payment of liabilities and the diversification of risk.
With respect to fixed income securities, Atlas generally purchases securities
with the expectation of holding them to their maturities; however, the
securities are available for sale if liquidity needs arise.
Portfolio Composition
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At December 31, 2011, Atlas held securities with a fair value of $104,632 which
was comprised primarily of fixed income securities. The insurance subsidiaries'
securities must comply with applicable regulations that prescribe the type,
quality and concentration of securities. These regulations in the various
jurisdictions in which the insurance subsidiaries are domiciled permit
investments in government, state, municipal and corporate bonds, preferred and
common equities, and other high quality investments, within specified limits and
subject to certain qualifications.
The following table summarizes the fair value of the securities portfolio,
including cash and cash equivalents, as at the dates indicated.
Table 9 Fair value of securities portfolio
Amortized Gross Unrealized Gross Unrealized
As at December 31, 2011 Cost Gains Losses Fair Value
Term Deposits $ - $ - $ - $ -
Fixed Income:
U.S. - Government 44,835 911 - 45,746
- Corporate 35,572 825 24 36,373
- Commercial mortgage backed 17,493 208 - 17,701
- Other asset backed 3,573 99 1 3,671
Total Fixed Income $ 101,473 $ 2,043 $ 25 $ 103,491
Equities 994 147 - 1,141
Totals $ 102,467 $ 2,190 $ 25 $ 104,632
Gross
Amortized Gross Unrealized Unrealized
As at December 31, 2010 Cost Gains Losses Fair Value
Term Deposits $ 7,898 $ 3 $ - $ 7,901
Fixed Income:
U.S. - Government 67,388 2,117 - 69,505
- Corporate 62,429 3,011 - 65,440
- Commercial mortgage backed 8,445 270 - 8,715
- Other asset backed 2,371 79 - 2,450
Total Fixed Income $ 148,531 $ 5,480 $ - $ 154,011
Equities
Totals $ 148,531 $ 5,480 $ - $ 154,011
Table 10 Net Change in unrealized gains/(losses) on available-for-sale securities
2011 2010
Term Deposits $ (3 ) $ 3
Fixed Income:
U.S. -Government (1,206 ) 852
- Corporate (2,210 ) 386
- Commercial mortgage backed (62 ) 33
- Other asset backed 19 2,037
Equities 147
Totals $ (3,315 ) $ 3,311
For the year ended December 31, 2011, Atlas recognized $7,481 in total
investment income, including $4,201 of realized gains.
Liquidity and Cash Flow Risk
35
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The following table summarizes the fair value by contractual maturities of the
fixed income securities portfolio excluding cash and cash equivalents at the
dates indicated.
Table 11 Fair value of fixed income securities by contractual maturity date
As of December 31, 2011 2010
Amount % Amount %
Due in less than one year $ 29,407 28.4 % $ 21,555 14.0 %
Due in one through five years 27,317 26.4 % 88,564 57.5 %
Due after five through ten years 10,242 9.9 % 24,026 15.6 %
Due after ten years 36,525 35.3 % 19,866 12.9 %
Total $ 103,491 100.0 % $ 154,011 100.0 %
At December 31, 2011, 54.8% of the fixed income securities, including treasury
bills, bankers' acceptances, government bonds and corporate bonds had
contractual maturities of five years or less. Actual maturities may differ from
contractual maturities because certain issuers have the right to call or prepay
obligations with or without call or prepayment penalties. Atlas holds cash and
high grade short-term assets which, along with fixed income security maturities,
management believes are sufficient for the payment of claims on a timely basis.
In the event that additional cash is required to meet obligations to
policyholders, Atlas believes that high quality securities portfolio provides us
with sufficient liquidity. With a weighted average duration of 2.35 years,
changes in interest rates will have a modest market value impact on the Atlas
portfolio relative to longer duration portfolios. Atlas can and typically does
hold bonds to maturity by matching duration with the anticipated liquidity
needs.
The Company's investment guidelines are designed to ensure that liquidity
provided by the insurance subsidiaries' investment portfolio can support claim
payments and any other cash operating needs of the subsidiaries. The non-core
private passenger automobile lines of business which were historically written
by the subsidiaries have a claim payout pattern that is substantially shorter
than the expected payout pattern of the Company's core commercial lines of
business. The non-recurring expenses described earlier in this document also
created an operating cash need in 2011 which is not expected in future years.
Based on the Company's business shift, expected operating cash flow needs and
the level of surplus as respects policyholders, the duration of the
subsidiaries' investment portfolio was extended resulting in a shift from
shorter maturity dates to longer ones. Working with our external investment
manager, we allocated invested assets to match liquidity and duration for those
assets expected to provide future cash for the payment of claims and have
extended duration to increase yield for a portion of invested assets considered
to be surplus.
Market Risk
Market risk is the risk that Atlas will incur losses due to adverse changes in
interest rates, currency exchange rates or equity prices. Having disposed of a
majority of its asset backed securities, its primary market risk exposures in
the fixed income securities portfolio are to changes in interest rates. Because
Atlas' securities portfolio is comprised of primarily fixed income securities
that are usually held to maturity, periodic changes in interest rate levels
generally impact its financial results to the extent that the securities in its
available for sale portfolio are recorded at market value. During periods of
rising interest rates, the market value of the existing fixed income securities
will generally decrease and realized gains on fixed income securities will
likely be reduced. The reverse is true during periods of declining interest
rates.
Credit Risk
Credit risk is defined as the risk of financial loss due to failure of the other
party to a financial instrument to discharge an obligation. Atlas is exposed to
credit risk principally through its investments and balances receivable from
policyholders and reinsurers. It monitors concentration and credit quality risk
through policies to limit and monitor its exposure to individual issuers or
related groups (with the exception of U.S. government bonds) as well as through
ongoing review of the credit ratings of issuers in the securities portfolio.
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 policies to evaluate the financial condition of its reinsurers and monitors
concentrations of credit risk arising from similar geographic
36
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regions, activities, or economic characteristics of the reinsurers to minimize
its exposure to significant losses from reinsurers' insolvency.
The following table summarizes the composition of the fair value of the fixed
income securities portfolio, excluding cash and cash equivalents, as of the
dates indicated, by ratings assigned by Fitch, S&P or Moody's Investors Service.
The fixed income securities portfolio consists of predominantly very high
quality securities in corporate and government bonds with 95.3% rated 'A' or
better as at December 31, 2011 compared to 97.4% as at December 31, 2010.
Table 12 Credit ratings of fixed income securities portfolio
As of December 31, 2011 2010
Amount % of Total Amount % of Total
AAA/Aaa $ 54,717 52.9 % $ 88,684 57.6 %
AA/Aa 21,567 20.8 % 26,388 17.1 %
A/A 22,380 21.6 % 35,027 22.7 %
BBB/Baa 4,827 4.7 % 3,851 2.5 %
CCC/Caa or lower or not rated - - % 61 0.1 %
Total Securities $ 103,491 100.0 % $ 154,011 100.0 %
Other-than-temporary impairment
Atlas recognizes losses on securities for which a decline in market value was
deemed to be other-than-temporary. Management performs a quarterly analysis of
the securities holdings to determine if declines in market value are
other-than-temporary. Atlas did not recognize charges for securities impairments
that were considered other-than-temporary for the years ended December 31, 2011
and December 31, 2010.
The length of time securities may be held in an unrealized loss position may
vary based on the opinion of the appointed investment manager and their
respective analyses related to valuation and to the various credit risks that
may prevent us from recapturing the principal investment. In cases of securities
with a maturity date where the appointed investment manager determines that
there is little or no risk of default prior to the maturity of a holding, Atlas
would elect to hold the security in an unrealized loss position until the price
recovers or the security matures. In situations where facts emerge that might
increase the risk associated with recapture of principal, Atlas may elect to
sell securities at a loss. As of December 31, 2011 and December 31, 2010, Atlas
had no material gross unrealized losses in its portfolio.
Estimated impact of changes in interest rates and securities prices
For Atlas' available-for-sale fixed income securities held as of December 31,
2011, a 100 basis point increase in interest rates on such held fixed income
securities would have increased net investment income and income before taxes by
approximately $271. Conversely, a 100 basis point decrease in interest rates on
such held fixed income securities would decrease net investment income and
income before taxes by $271.
A 100 basis point increase would have also decreased other comprehensive income
by approximately $3,041 due to "mark-to-market" requirement; however, holding
investments to maturity would mitigate this impact. Conversely, a 100 basis
point decrease would increase other comprehensive income by the same amount. The
impacts described here are approximately linear to the change in interest rates.
Due from Reinsurers and Other Insurers
Atlas purchases reinsurance from third parties in order to reduce its liability
on individual risks and its exposure to large losses. Reinsurance is insurance
purchased by one insurance company from another for part of the risk originally
underwritten by the purchasing (ceding) insurance company. The practice of
ceding insurance to reinsurers allows an insurance company to reduce
37
--------------------------------------------------------------------------------its exposure to loss by size, geographic area, and type of risk or on a
particular policy. An effect of ceding insurance is to permit an insurance
company to write additional insurance for risks in greater number or in larger
amounts than it would otherwise insure independently, having regard to its
statutory capital, risk tolerance and other factors.
Atlas generally purchases reinsurance to limit net exposure to a maximum amount
on any one loss of $500 with respect to commercial automobile liability claims.
Atlas also purchases reinsurance to protect against awards in excess of its
policy limits. In addition, in 2010 the insurance subsidiaries were part of a
larger group of insurance companies that purchased catastrophe reinsurance
providing coverage in the event of a series of claims arising out of a single
occurrence, limiting exposure to $2,000 per occurrence with a maximum coverage
of $38,000. This catastrophic coverage was deemed appropriate at the time based
on the insurance subsidiaries being part of a larger group of companies.
However, this exposure is now much more limited due to the insurance
subsidiaries' relatively low limits of first party physical damage coverage.
Further, Atlas primarily operates in geographic regions believed to have less
exposure to natural disasters; therefore management determined that catastrophe
reinsurance was not required in 2011 and going forward. Atlas will continue to
evaluate and adjust its reinsurance needs based on business volume, mix, and
supply levels.
Reinsurance ceded does not relieve Atlas of its ultimate liability to its
insured in the event that any reinsurer is unable to meet their obligations
under its reinsurance contracts. Therefore, Atlas enters into reinsurance
contracts with only those reinsurers deemed to have sufficient financial
resources to provide the requested coverage. Reinsurance treaties are generally
subject to cancellation by the reinsurers or Atlas on the anniversary date and
are subject to renegotiation annually. Atlas regularly evaluates the financial
condition of its reinsurers and monitors the concentrations of credit risk to
minimize its exposure to significant losses as a result of the insolvency of a
reinsurer. Atlas believes that the amounts it has recorded as reinsurance
recoverables are appropriately established. Estimating amounts of reinsurance
recoverables, however, is subject to various uncertainties and the amounts
ultimately recoverable may vary from amounts currently recorded. As at December
31, 2011, Atlas had $8,044 recoverable from third party reinsurers (exclusive of
amounts prepaid) and other insurers as compared to $4,277 as at December 31,
2010.
Estimating amounts of reinsurance recoverables is also impacted by the
uncertainties involved in the establishment of provisions for unpaid claims. As
underlying reserves potentially develop, the amounts ultimately recoverable may
vary from amounts currently recorded. Atlas' reinsurance recoverables are
generally unsecured. Atlas regularly evaluates its reinsurers, and the
respective amounts recoverable, and an allowance for uncollectible reinsurance
is provided for, if needed.
Atlas' largest reinsurance partners are Great American Insurance Company ("Great
American"), a subsidiary of American Financial Group, Inc. and Gen Re, a
subsidiary of Berkshire Hathaway, Inc. Great American has a financial strength
rating of A+ from Standard & Poor's, while Gen Re has a financial strength
rating of Aa1 from Moody's.
Deferred Tax Asset
Table 13 Components of Deferred Tax
As at year ended December 31, 2011 2010
Deferred tax assets:
Unpaid claims and unearned premiums $ 3,004 $ 4,218
Loss carry-forwards 15,558 13,252
Pension expense - 841
Bad debts 1,297 1,356
Other 1,338 1,394
Valuation Allowance (12,361 ) (11,288 )
Total gross deferred tax assets $ 8,836$ 9,773
Deferred tax liabilities:
Investment securities $ 740 $ 1,863
Deferred policy acquisition costs 1,027 1,293
Other
294 218
Total gross deferred tax liabilities $ 2,061 $ 3,374
Net deferred tax assets $ 6,775 $ 6,399
38--------------------------------------------------------------------------------
Atlas established a valuation allowance of approximately $12,361 and $11,288 for
its gross future deferred tax assets at December 31, 2011 and December 31, 2010,
respectively.
Based on Atlas' expectations of future taxable income, as well as the reversal
of gross future deferred tax liabilities, management believes it is more likely
than not that Atlas will fully realize the net future tax assets, with the
exception of the aforementioned valuation allowance. Atlas has therefore
established the valuation allowance as a result of the potential inability to
utilize a portion of its net operation losses in the U.S. which are subject to a
yearly limitation. The uncertainty over the Company's ability to utilize a
portion of these losses over the short term has led to the recording of a
valuation allowance.
Atlas has the following total net operating loss carry-forwards as of December
31, 2011:
Table 14 Net operating loss carry-forward by expiry
Year of Occurrence Year of Expiration Amount
2001 2021 $ 14,750
2002 2022 4,317
2006 2026 7,825
2007 2027 5,131
2008 2028 1,949
2009 2029 1,949
2010 2030 1,949
2011 2031 7,762
Total $ 45,632
Assets Held for Sale
As at December 31, 2010, Atlas had five properties held for sale with an
aggregate carrying value of $15,004, including its headquarters building in Elk
Grove Village, Illinois. During 2011, two of the properties were sold for
combined proceeds of $2,436 and Atlas re-classified leasehold improvements with
a net book value of $926 from office equipment to assets held for sale. At
December 31, 2011, Atlas had three properties remaining as held for sale with an
aggregate carrying value of $13,634.
All of the properties' individual carrying values were less than their
respective appraised values net of reasonably estimated selling costs at the
time those appraisals were received and at the time properties were deemed to be
held for sale. All properties were listed for sale through brokers at the
appraised values and above carrying values as of December 31, 2011. Atlas
expects to re-invest the proceeds from the sale of real estate in its investment
portfolio.
The Elk Grove Village building and property were previously owned by KAI and
were contributed to Atlas as a capital contribution in June 2010. The other
three properties, all located in Alabama, were assets of Southern United Fire
Insurance Company which was merged into American Service in February 2010.
On June 8, 2011, the Mobile, Alabama office building was sold for $2,100, which
was the same as its carrying value as of December 31, 2010. On November 2, 2011,
land in Saraland, Alabama held for sale as of December 31, 2010 was sold for
$336. Its carrying value on the date of sale was $296.
In 2011, bank financing for commercial properties in the Chicago suburbs became
more difficult to obtain due to high vacancy rates and tightened lending
standards. This has made the sale of the property more difficult than originally
envisioned in spite of a reasonable selling price relative to the appraised
value. In response, Atlas began offering structured financing to prospective
buyers in the fourth quarter, which Atlas believes will lead to a sale of the
property in 2012.
Claims Liabilities
The table below shows the amounts of total case reserves and incurred but not
reported ("IBNR") claims provision as of December
39
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31, 2011 and December 31, 2010. The provision for unpaid claims decreased by
30.9% to $91,643 at the end of 2011 compared to $132,579 at the end of 2010.
During 2011, case reserves decreased by 26.2% compared to December 31, 2010,
while IBNR reserves decreased by 39.8% generally due to the payment of claims
related to prior accident years, consistent with management's expectations.
Table 15 Provision for unpaid claims by type - gross
As at year ended December 31, 2011 2010 YTD% Change
Case reserves 64,276 87,119 (26.2 )%
IBNR 27,367 45,460 (39.8 )%
Total $ 91,643 $ 132,579 (30.9 )%
Table 16 Provision for unpaid claims by line of business - gross
As at year ended December 31, 2011 2010 YTD % Change
Non-standard auto $ 18,175 $ 28,897 (37.1 )%
Commercial auto 64,881 92,669 (30.0 )%
Other 8,587 11,013 (22.0 )%
Total $ 91,643 $ 132,579 (30.9 )%
Table 17 Provision for unpaid claims by line of business - net of reinsurance recoverables
As at year ended December 31, 2011 2010 YTD % Change
Non-standard Auto $ 18,175 $ 28,897 (37.1 )%
Commercial Auto 62,497 92,102 (32.1 )%
Other 3,146 5,103 (38.3 )%
Total $ 83,818 $ 126,102 (33.5 )%
The reduction of the provision for unpaid claims is consistent with the change
in written premium in prior years. 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.
40
--------------------------------------------------------------------------------Table 18 Provision for unpaid claims, net of recoveries from reinsurers
2011 2010 2009 2008 2007 2006
2005 2004 2003 2002 2001
Gross reserves for unpaid claims and claims expenses
$ 91,643$ 132,579$ 179,054$ 173,652$ 183,649$ 191,171$ 202,677$ 195,437$ 189,262$ 193,909$ 175,104
Less: Reinsurance recoverable on unpaid claims and claims expenses
7,825 6,477 5,196 103,612 107,837 111,911 95,215 90,596 91,079 94,510 38,779
Reserve for unpaid claims and claims expenses, net
83,818 126,102 173,858 70,040 75,812 79,260 107,462 104,841 98,183 99,399 136,325
Cumulative paid on originally established reserve as of:
One year later $ 58,562 $ 76,835 $ (38,449 ) * $ 29,811 $ 29,917 $ 30,637 $ 37,220 $ 41,426 $ 46,083 $ 51,260
Two years later 125,455 13,573 2,812 49,804 52,182 56,126 66,428 75,709 84,175
Three years later 43,671 38,650 33,742 66,806 69,801 77,919 91,773 104,423
Four years later 59,370 57,853 60,877 78,028 85,576 97,764 114,623
Five years later 69,428 75,935 76,174 89,396 101,725 118,347
Six years later 81,347 85,150 88,820 103,935 120,455
Seven years later 88,755 93,142 104,484 121,990
Eight years later 95,401 106,560 123,240
Nine years later 107,625 123,965
Ten years later 124,707
Unpaid claims as of:
One year later $ 69,230 $ 102,173 $ 114,284 $ 46,338 $ 50,772 $ 76,344 $ 62,895 $ 57,873 $ 61,668 $ 65,338
Two years later 56,268 65,101 75,258 31,322 56,428 46,081 35,431 33,838 39,466
Three years later 35,500 43,336 46,116 43,015 34,082 25,491 20,460 21,682
Four years later 21,859 25,534 26,714 26,833 19,231 14,710 12,591
Five years later 11,061 15,329 14,797 16,245 12,300 9,269
Six years later 6,712 9,359 8,674 10,780 9,515
Seven years later 4,339 6,108 5,523 8,446
Eight years later 3,300 4,105 3,624
Nine years later 2,539 3,275
Ten years later 2,102
Re-estimated liability as of:
One year later $ 127,792 $ 179,008 $ 75,835 $ 76,149 $ 80,689 $ 106,981 $ 100,115 $ 99,299 $ 107,751 $ 116,598
Two years later 181,723 78,674 78,070 81,126 108,610 102,207 101,859 109,547 123,641
Three years later 79,171 81,986 79,858 109,821 103,883 103,410 112,233 126,105
Four years later 81,229 83,387 87,591 104,861 104,807 112,474 127,214
Five years later 80,489 91,264 90,971 105,641 114,025 127,616
Six years later 88,059 94,509 97,494 114,715 129,970
Seven years later 93,094 99,250 110,007 130,436
Eight years later 98,701 110,665 126,864
Nine years later 110,164 127,240
Ten years later 126,809
As of December 31, 2011:
Cumulative (redundancy)
deficiency
$ 1,690 $ 7,865 $ 9,131 $ 5,417 $ 1,229 $ (19,403 ) $ (11,747 ) $ 518$ 10,765 $ (9,516 )
Cumulative (redundancy) deficiency as a % of reserves originally established- net
1.3 % 4.5 % 13.0 % 7.1 % 1.6 % -18.1 % -11.2 % 0.5 % 10.8 % -7.0 %
Re-estimated liability- gross
$ 134,223 $ 187,715 $ 194,560 $ 196,966 $ 200,740 $ 212,901$ 209,876$ 211,744$ 227,169$ 235,021
Less: Re-established reinsurance recoverable
6,431 5,992 115,389 115,737 120,251 124,842 116,782 113,043 117,005 108,212
Re-estimated provision- net
$ 127,792 $ 181,723 $ 79,171 $ 81,229 $ 80,489 $ 88,059$ 93,094$ 98,701$ 110,164$ 126,809
Cumulative deficiency- gross
1,645 8,661 20,908 13,317 9,569 10,224 14,439 22,482 33,260 59,917
* Results from the commutation of reinsured reserves by Kingsway Re
The financial statements are presented on a calendar year basis for all data.
Claims payments and changes in reserves, however, may be made on accidents that
occurred in prior years, not on business that is currently insured. Calendar
year losses consist of payments and reserve changes that have been recorded in
the financial statements during the applicable reporting period, without regard
to the period in which the accident occurred. Calendar year results do not
change after the end of the applicable reporting period, even as new claim
information develops. Calendar year information is presented in Note 11 to the
consolidated financial statements and shows the claims activity and impact on
income for changes in estimates of unpaid claims. Accident year losses
41
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consist of payments and reserve changes that are assigned to the period in which
the accident occurred. Accident year results will change over time as the
estimates of losses change due to payments and reserve changes for all accidents
that occurred during that period.
Table 19 Net increase in prior years' incurred claims estimates by line of
business and accident year
Year Ended December 31, 2011
Accident year Non- standard Auto Commercial Auto Other Total
2006 & prior $ (423 ) $ (2,420 ) $ (53 ) $ (2,896 )
2007 (100 ) 2,259 (19 ) 2,140
2008 365 993 (104 ) 1,254
2009 (2,040 ) 3,716 542 2,218
2010 1,004 (1,588 ) (440 ) (1,024 )
Total $ (1,194 ) $ 2,960 $ (74 ) $ 1,692
Year Ended December 31, 2010
Accident year Non- standard Auto Commercial Auto Other Total
2005 & prior $ (103 ) $ 4,074 $ (297 ) $ 3,674
2006 (415 ) 421 (151 ) (145 )
2007 (1,164 ) 1,686 (133 ) 389
2008 (1,050 ) (123 ) 95 (1,078 )
2009 1,031 1,534 (253 ) 2,312
Total $ (1,701 ) $ 7,592 $ (739 ) $ 5,152
Due to Reinsurers
The decrease in due to reinsurers is consistent with the payout patterns of the
underlying claims liabilities.
Off-balance sheet arrangements
Atlas has no material off-balance sheet arrangements.
Shareholders' Equity
The table below identifies changes in shareholders' equity for the years ended
December 31, 2011 and December 31, 2010.
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Table 20 Changes in Shareholders' Equity
Restricted Accumulated Other
Preferred Ordinary Voting Voting Common Additional Comprehensive Income
Shares Common Shares Shares Paid-in Capital Retained Deficit (loss) Total
Balance
December 31,
2009 $ 18,000 $ 4 $ 14 $ 82,675 $ (47,714 ) $ (433 ) $ 52,546
Net loss (21,812 ) (21,812 )
Capital
Contribution 26,994 26,994
Dividends Paid (16,700 ) (16,700 )
Merger of
Southern United 59,944 (43,845 ) 331 16,430
Forgiveness of
debt (447 ) (447 )
Other
comprehensive
income 3,158 3,158
Balance
December 31,
2010 $ 18,000 $ 4 $ 14 $ 152,466 $ (113,371 ) $ 3,056 $ 60,169
Net loss (2,470 ) (2,470 )
Other
Comprehensive
Loss (3,315 ) (3,315 )
Share-based
compensation 113 113
Stock options
exercised 73 73
Settlement of
pension plan,
net of tax 1,684 1,684
Balance
December 31,
2011 $ 18,000 $ 4 $ 14 $ 152,652 $ (115,841 ) $ 1,425 $ 56,254
As of March 19, 2012, there are 4,628,292 ordinary voting common shares,
13,804,861 restricted voting common shares and 18,000,000 preferred shares
issued and outstanding.
The restricted voting common shares are convertible into ordinary voting common
shares at the option of the holder in the event that an offer is made to
purchase all or substantially all of the restricted voting common shares.
The holders of restricted voting 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.
All of the issued and outstanding restricted voting common shares are
beneficially owned or controlled by KFSI or its affiliated entities. In the
event that such shares ceased to be beneficially owned or controlled by KFSI or
its affiliated entities, the restricted voting common shares shall be converted
into fully paid and non-assessable ordinary voting shares on a one-to-one basis.
Preferred shares are not entitled to vote. They accrue dividends on a cumulative
basis whether or not declared by the Board of Directors at the rate of $0.045
per share per year (4.5%) and may be paid in cash or in additional preferred
shares at the option of Atlas. Upon liquidation, dissolution or winding-up of
Atlas, holders of preferred shares receive the greater of $1.00 per share plus
all declared and unpaid dividends or the amount they would receive in
liquidation if the preferred shares had been converted to restricted voting
common shares or ordinary voting common shares immediately prior to liquidation.
Preferred shares are convertible into ordinary voting common shares at the
option of the holder at any date that is after December 31, 2015, the fifth year
after issuance at the rate of 0.3808 ordinary voting common shares for each
preferred share. The conversion rate is subject to change if the number of
ordinary voting common shares or restricted voting common shares changes. The
preferred shares are redeemable at the option of Atlas at a price of US$1.00 per
share plus accrued and unpaid dividends commencing at the earlier of December
31, 2012, two years from issuance date, or the date at which KFSI's beneficial
interest is less than 10%.
The cumulative amount of dividends to which the preferred shareholders are
entitled upon liquidation or sooner, if Atlas declares dividends, is $810 as at
December 31, 2011.
43--------------------------------------------------------------------------------
Liquidity and Capital Resources
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. The timing and amount of catastrophe claims are
inherently unpredictable and may create increased liquidity requirements.
As a holding company, Atlas may derive cash from its subsidiaries generally in
the form of dividends and in the future may charge management fees to the extent
allowed by statute or other regulatory approval requirements to meet its
obligations. The insurance subsidiaries fund their obligations primarily through
premium and investment income and maturities in their securities portfolio.
Refer also to the discussion "Investments Overview and Strategy" on page 18.
These insurance subsidiaries require regulatory approval for the return of
capital and, in certain circumstances, payment of dividends. In the event that
dividends and management fees available to the holding company are inadequate to
service its obligations, the holding company would need to raise capital, sell
assets or incur debt obligations. At December 31, 2011, Atlas did not have any
outstanding debt, and therefore, no near term debt service obligations.
Atlas currently has no material commitments for capital expenditures.
In 2010 the insurance subsidiaries paid dividends of $16,700 to their parent,
KAI, during that time period.
In 2010 the insurance subsidiaries incurred losses under their former owner, as
did Atlas which at the time was a newly formed capital pool company known as JJR
VI with no operations. The result of the losses by the insurance subsidiaries
reduces Atlas' capital flexibility by limiting their dividend paying capacity.
Capital Requirements
In the United States, a RBC formula is used by the NAIC to identify P&C
insurance companies that may not be adequately capitalized. The NAIC requires
capital and surplus not fall below 200% of the authorized control level. As of
December 31, 2011, the insurance subsidiaries are well above the required risk
based capital levels, with risk based capital ratios based on the unaudited
statutory financial statements of 592.5% and 803.4% for American Country and
American Service, respectively, and have estimated aggregate capital in excess
of the 200% level of approximately $36,402.
44
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Item 8. Financial Statements and Supplementary Data
Page
Consolidated Statement of Comprehensive Income 46
Consolidated Statements of Financial Position 47
Consolidated Statements of Shareholders' Equity 48
Consolidated Statements of Cash Flows 49
Notes to Consolidated Financial Statements 50
Reports of Independent Registered Public Accounting Firm 72
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Table of Contents
ATLAS FINANCIAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
($ in thousands, except per share data)
Year ended December 31,
2011 2010
Net premiums earned $ 35,747 $ 53,603
Net claims incurred 28,994 48,074
Acquisition costs 7,294 11,115
Other underwriting expenses 10,697 18,398
Underwriting loss (11,238 ) (23,984 )
Net investment income 3,280 4,616
Net investment gains 4,201 888
Other income (expense), net 124 (757 )Loss from operations before income tax (benefit)/expense (3,633 )
(19,237 )
Income tax (benefit)/expense (1,163 )
2,575
Net loss attributable to Atlas $ (2,470 )
$ (21,812 )
Other comprehensive loss
Available for sale securities:
Changes in net unrealized gains (losses) $ 154 $ 3,514
Reclassification to income of net (gains) losses (3,469 ) (203 )
Effect of income tax - -
Pension Liability
Settlement of pension plan 2,473 -
Minimum pension liability adjustment - (153 )
Effect of income tax (789 ) -
Other comprehensive (loss)/income for the period (1,631 ) 3,158
Total comprehensive loss (4,101 ) (18,654 )
Basic weighted average common shares outstanding 18,373,624
18,358,363
Loss per common share, basic $ (0.18 ) $ (1.19 )
Diluted weighted average common shares outstanding 18,373,624
18,358,363
Loss per common share, diluted $ (0.18 )
$ (1.19 )
See accompanying Notes to Consolidated Financial Statements
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ATLAS FINANCIAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION($ in thousands)
December 31,
2011 2010
AssetsInvestments, available for sale
Fixed income securities, at fair value (Amortized cost
$101,473 and $148,531)
$ 103,491 $
154,011
Equity securities, at fair value (cost $994 and $0) 1,141 -
Total Investments 104,632 154,011
Cash and cash equivalents 23,249 19,037
Accrued investment income 586 1,293
Accounts receivable and other assets (Net of allowance of
$4,254 and $4,212)
9,579
13,340
Reinsurance recoverables, net 8,044
4,277
Prepaid reinsurance premiums 2,214
6,999
Deferred policy acquisition costs 3,020
3,804
Deferred tax asset, net 6,775
6,399
Software and office equipment, net 440 1,274
Assets held for sale 13,634 15,004
Total Assets $ 172,173 $ 225,438
Liabilities
Claims liabilities $ 91,643 $ 132,579
Unearned premiums 15,691 17,061
Due to reinsurers and other insurers 5,701
9,614
Other liabilities and accrued expenses 2,884 6,015
Total Liabilities $ 115,919 $ 165,269
Shareholders' Equity
Preferred shares, par value per share $0.001, 100,000,000
shares authorized, 18,000,000 shares issued and
outstanding at December 31, 2011 and December 31, 2010.
Liquidation value $1.00 per share $ 18,000 $
18,000
Ordinary voting common shares, par value per share $0.001,
800,000,000 shares authorized, 4,625,526 shares issued and
outstanding at December 31, 2011 and 4,553,502 at December
31, 2010
4
4
Restricted voting common shares, par value per share
$0.001, 100,000,000 shares authorized, 13,804,861 shares
issued and outstanding at December31, 2011 and December
31, 2010 14 14
Additional paid-in capital 152,652 152,466
Retained deficit (115,841 ) (113,371 )
Accumulated other comprehensive income, net of tax 1,425
3,056
Total Shareholders' Equity $ 56,254 $
60,169
Total Liabilities and Shareholders' Equity $ 172,173 $
225,438
See accompanying Notes to Consolidated Financial
Statements.
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ATLAS FINANCIAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
($ in thousands)
Restricted Accumulated Other
Preferred Ordinary Voting Voting Common Additional Comprehensive Income
Shares Common Shares Shares Paid-in Capital Retained Deficit (loss) Total
Balance
December 31,
2009 $ 18,000 $ 4 $ 14 $ 82,675 $ (47,714 ) $ (433 ) $ 52,546
Net loss (21,812 ) (21,812 )
Capital
Contribution 26,994 26,994
Dividends Paid (16,700 ) (16,700 )
Merger of
Southern United 59,944 (43,845 ) 331 16,430
Forgiveness of
debt (447 ) (447 )
Other
comprehensive
income 3,158 3,158
Balance
December 31,
2010 $ 18,000 $ 4 $ 14 $ 152,466 $ (113,371 ) $ 3,056 $ 60,169
Net loss (2,470 ) (2,470 )
Other
comprehensive
loss (3,315 ) (3,315 )
Share-based
compensation 113 113
Stock options
exercised 73 73
Settlement of
pension plan,
net of tax 1,684 1,684
Balance
December 31,
2011 $ 18,000 $ 4 $ 14 $ 152,652 $ (115,841 ) $ 1,425 $ 56,254
See accompanying Notes to Consolidated Financial Statements.
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ATLAS FINANCIAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands)
Year Ended December 31,
2011 2010
Operating Activities
Net loss $ (2,470 ) $ (21,812 )
Adjustments to reconcile net loss to net cash used by
operating activities:
Forgiveness of mortgage loan - 1,695
Amortization of fixed assets 218 3,370
Settlement of pension plan 2,544 -
Share-based compensation expense 113 -
(Gain)/loss on sale of fixed assets (54 ) 3
Deferred income taxes (1,163 ) 2,875
Net realized gains (4,147 ) (891 )
Amortization of bond premiums and discounts 953 1,431
Net changes in operating assets and liabilities, net of
effects of the merger of subsidiary:
Accounts receivable and other assets, net
3,762
13,074
Due from reinsurers and other insurers 1,018 (5,255 )
Deferred policy acquisition costs 784
5,750
Income taxes receivable -
271
Other assets and accrued investment income 707 493
Unpaid claims (40,936 ) (36,936 )
Unearned premium (1,370 ) (16,789 )
Due to reinsurers and other insurers (3,913 )
9,193
Accounts payable and accrued liabilities (3,207 ) (1,472 )
Net change in other balances - (7,466 )
Net cash used by operating activities $ (47,161 ) $ (52,466 )
Financing activities:
Capital contributions $ - $ -
Options exercised 73
Dividends paid - (16,700 )
Issuance of notes payable - -
Net cash provided/(used) by financing activities $ 73 $ (16,700 )
Investing activities:
Purchase of securities $ (64,563 ) $ (25,826 )
Proceeds from sales and maturities of securities 113,823
106,684
Sale of assets held for sale 2,436 -
Cash acquired from merger of subsidiary -
3,871
Net (purchases)/additions of software and other equipment (396 ) (3,221 )
Net cash provided by investing activities $ 51,300 $ 81,508
Net change in cash and cash equivalents 4,212
12,342
Cash and cash equivalents, beginning of year 19,037
6,695
Cash and cash equivalents, end of year $ 23,249 $ 19,037
Supplementary disclosure of cash information:
Represented by:
Cash on hand and balances with banks $ 23,249 $ 2,329
Investments with original maturities less than 30 days -
16,708
Cash and cash equivalents, end of year $ 23,249 $ 19,037
Cash paid for:
Interest - -
Income taxes - (227 )
See accompanying Notes to Consolidated Financial Statements.
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1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(All amounts in thousands of US dollars, except for amounts preceded by "C" as
thousands of Canadian dollars, share and per share amounts)
Formation and Description of the Business
Atlas Financial Holdings, Inc. ("Atlas", or "The Company") is a financial
services holding company formed on December 31, 2010 in a transaction amongst:
(a) JJR VI Acquisition Corporation ("JJR VI"), a Canadian Capital Pool
Company sponsored by JJR Capital, a Toronto based merchant bank,
(b) American Insurance Acquisition Inc., ("American Acquisition"), a corporation
formed under the laws of Delaware by Kingsway America Inc. ("KAI"), a
subsidiary of Kingsway Financial Services Inc. ("KFSI"), a Canadian public
company formed under the laws of Ontario and whose shares are traded on the
Toronto and New York Stock Exchanges, and
(c) Atlas Acquisition Corp, a Delaware corporation formed by JJR VI.
Prior to the transaction, KAI transferred 100% of the capital stock of American
Service Insurance Company ("American Service") and American Country Insurance
Company ("American Country," together with American Service the "insurance
subsidiaries"), to American Acquisition in exchange for common and preferred
shares of American Acquisition and promissory notes aggregating C$60,780. In
addition, American Acquisition raised C$7,967 through a private placement
offering of subscription receipts to qualified investors at a price of C$2.00
per subscription receipt.
KAI received 13,804,861 restricted voting common shares valued at $27,760, along
with 18,000,000 non-voting preferred shares valued at $18,000 and C$7,967 cash
in exchange for 100% of the outstanding shares of American Acquisition and full
payment of the promissory notes. Investors in the American Acquisition
subscription receipts received 3,983,502 ordinary voting common shares plus
warrants to purchase one ordinary voting common share for each subscription
receipt at C$2.00 at any time until December 31, 2013. JJR VI common shares held
by former shareholders of JJR VI were consolidated on the basis of one
post-consolidation JJR VI common share for every 10 pre-consolidation JJR VI
common shares. The post-consolidation JJR VI common shares were then exchanged
on a one-for-one basis for ordinary voting common shares of Atlas.
Atlas commenced operations on December 31, 2010. Atlas ordinary voting common
shares have been listed on the TSX Venture Exchange ("TSXV") under the symbol
"AFH" since January 6, 2011.
The primary business of Atlas is commercial automobile insurance in the United
States, with a niche market orientation and focus on insurance for the "light"
commercial automobile sector including taxi cabs, non-emergency paratransit,
limousine, livery and business auto.
The business of the Company is carried on through its insurance subsidiaries.
The insurance subsidiaries distribute their insurance products through a network
of retail independent agents. Together, American Country and American Service
are licensed to write property and casualty insurance in 47 states in the United
States. The management and operating infrastructure of American Country is
integrated with that of American Service.
On February 25, 2010, while under KAI ownership, Southern United Fire Insurance
Company (Southern United) merged into American Service. The transaction was
accounted for as a merger of companies under common control with the Southern
United assets and liabilities included at their carrying values and its results
of operations included in the financial statements from the date of the merger.
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Summary of Significant Accounting Policies
Basis of presentation - These statements have been prepared in conformity with
accounting principles generally accepted in the United States of America ("U.S.
GAAP"). All significant intercompany accounts and transactions have been
eliminated. To conform to the current year presentation, certain amounts in the
prior years' consolidated financial statements and notes have been reclassified.
Classification of assets and liabilities - It is not customary in the insurance
and financial services industries to classify assets and liabilities as current
(settled in 1 year or less) and non-current (settled beyond 1 year). Assets and
liabilities that could otherwise be classified as current include cash and cash
equivalents, accrued investment income, accounts receivable and other assets,
due from reinsurers and other insurers, income tax receivable, deferred policy
acquisition costs, assets held for sale, accounts payable and accrued expenses,
due to reinsurers and other insurers. Balances that would otherwise be
classified as non-current include deferred tax assets and office equipment. All
other assets and liabilities include balances that are both current and
non-current.
Reverse acquisition continuation accounting - Atlas was formed through a reverse
triangular merger and these consolidated financial statements are those of Atlas
and subsidiaries and have been prepared in accordance with Accounting Standard
Codification ("ASC") 805 Business Combinations. Financial statements prepared
following the reverse merger are presented in the name of the legal parent
acquirer, Atlas, but are a continuation of the financial statements of the
accounting acquirer, American Acquisition, with an adjustment for the capital
structure (that is the number and type of equity interests, including equity
instruments issued to effect the merger) of Atlas, as the legal parent acquirer
and accounting acquiree. Accordingly, and as a result of the December 31, 2010
merger date, shareholders' equity at December 31, 2010 reflects the common
shares outstanding at the date of the merger together with the ordinary voting
common shares, restricted voting common shares and preferred shares that were
issued to effect the merger, and also reflect the historical retained earnings
(retained deficit) balances of American Acquisition, as the accounting acquirer.
Estimates and assumptions - The preparation of financial statements requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and liabilities
at the date of the financial statements and reported amounts of revenues and
expenses during the reporting period. Actual results could differ from these
estimates and changes in estimates are recorded in the accounting period in
which they are determined. The liability for unpaid loss and loss adjustment
expenses and related amounts recoverable from reinsurers represents the most
significant estimate in the accompanying financial statements. Significant
estimates in the accompanying financial statements also include the fair values
of investments in bonds, deferred tax asset valuation, premium receivable bad
debt allowance and deferred policy acquisition cost recoverability.
Business combinations - The reverse merger was consummated and Atlas commenced
operations on December 31, 2010. In accordance with ASC 805 Business
Combinations, American Acquisition is considered the accounting acquirer and
Atlas (formerly JJR VI), the legal acquirer, is considered to be the accounting
acquiree. Accordingly, the consolidated financial statements for all periods
presented herein are a continuation of the financial statements of American
Acquisition adjusted for the legal capital of Atlas.
Principles of consolidation - The consolidated financial statements include the
accounts of Atlas and the entities it controls, its subsidiaries. Subsidiaries
are entities over which Atlas, directly or indirectly, has the power to govern
the financial and operating policies in order to obtain the benefits from their
activities, generally accompanying an equity shareholding of more than one half
of the voting rights. Subsidiaries are fully consolidated from the date on which
control is transferred to Atlas and would be de-consolidated from the date that
control ceases. The operating results of subsidiaries acquired or disposed of
during the year will be included in the consolidated statement of operations
from the effective date of acquisition and up to the effective date of disposal,
as appropriate. All significant intercompany transactions and balances are
eliminated in consolidation. Accounting policies of subsidiaries have been
changed where necessary to ensure consistency with the policies adopted by
Atlas.
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The following are Atlas' subsidiaries, all of which are 100% owned, either
directly or indirectly, together with the jurisdiction of incorporation that are
included in consolidated financial statements:
American Insurance Acquisition Inc. (Delaware)
American Country Insurance Company (Illinois)
American Service Insurance Company, Inc. (Illinois)
Financial Instruments - Financial instruments are recognized and derecognized
using trade date accounting, since that is the date Atlas contractually commits
to the purchase or sale with the counterparty.
Effective interest method - Atlas utilizes the effective interest method for
calculating the amortized cost of a financial asset and to allocate interest
income or interest expense over the relevant period. The effective interest rate
is the rate that exactly discounts the estimated future cash flows through the
expected life of the financial instrument. 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.
Financial assets - Atlas classifies financial assets as described below.
Management determines the classification at initial recognition based on the
purpose of the financial asset.
Cash and cash equivalents - Cash and cash equivalents include cash and highly
liquid securities with original maturities of 90 days or less.
Available-for-sale ("AFS") - Investments in fixed income 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
shareholder's equity.
Accounts receivable and other assets - Receivables are financial assets with
fixed or determinable payments that are not quoted in an active market. These
assets are recognized initially at fair value, together with directly
attributable transaction costs and subsequently measured at amortized cost.
Accounts receivable include premium balances due and uncollected and installment
premiums not yet due from agents and insureds.
Atlas evaluates the collectibility of accounts receivable based on a combination
of factors. When aware of a specific customer's inability to meet its financial
obligations, such as in the case of bankruptcy or deterioration in the
customer's operating results or financial position, Atlas records a specific
reserve for bad debt to reduce the related receivable to the amount Atlas
reasonably believes is collectible. Atlas also records reserves for bad debt for
all other customers based on a variety of factors, including the length of time
the receivables are past due and historical collection experience. Accounts are
reviewed for potential write-off on a case-by-case basis. Accounts deemed
uncollectible are written off, net of expected recoveries. If circumstances
related to specific customers change, the Company's estimates of the
recoverability of receivables could be further adjusted.
Premiums receivable are shown net of bad debt allowance of $4,254 and $4,212 at
December 31, 2011 and December 31, 2010, respectively. Bad debt expense of $248
and $2,766 was incurred in the years ended December 31, 2011 and December 31,
2010, respectively. Atlas' allowance for bad debt primarily relates to a single
agent. Settlement proceedings with this agent were ongoing as of December 31,
2011. The entire receivable balance from this agency was fully reserved as of
December 31, 2011. A settlement executed in April 2012, which resulted in a
minor recovery of previously reserved amounts, will be reflected in Atlas'
financial statements for the six month period ended June 30, 2012.
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.
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Under ASC guidance, 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. 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 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.
There were no other-than-temporary impairments recognized in 2011.
Fair values of financial instruments - Atlas has used the following methods and
assumptions in estimating its fair value disclosures:
Fair values for bonds are based on quoted market prices, when available. If
quoted market prices are not available, fair values are based on quoted market
prices of comparable instruments or values obtained from independent pricing
services.
Atlas' fixed income portfolio is managed by Asset Allocation Management ("AAM"),
an SEC registered investment advisor specializing in the management of insurance
company portfolios. Management works directly with AAM to ensure that Atlas
benefits from their expertise and also evaluates investments as well as specific
positions independently using internal resources. AAM has a team of credit
analysts for all investment grade fixed income sectors. The investment process
begins with an independent analyst review of each security's credit worthiness
using both quantitative tools and qualitative review. At the issuer level, this
includes reviews of past financial data, trends in financial stability,
projections for the future, reliability of the management team in place, market
data (credit spread, equity prices, trends in this data for the issuer and the
issuer's industry). Reviews also consider industry trends and the macro-economic
environment. This analysis is continuous, integrating new information as it
becomes available. In short, Atlas does not rely on rating agency ratings to
make investment decisions, but instead with the support of its independent
investment advisors, do independent fundamental credit analysis to find the best
securities possible. AAM has found that over time this process creates an
ability to sell securities prior to rating agency downgrades or to buy
securities before upgrades. As of December 31, 2011, this process did not
generate any significant difference in the rating assessment between Atlas'
review and the rating agencies.
Atlas employs specific control processes to determine the reasonableness of the
fair value of its financial assets. These processes are designed to supplement
those performed by AMM to ensure that the values received from them are
accurately recorded and that the data inputs and the valuation techniques
utilized are appropriate, consistently applied, and that the assumptions are
reasonable and consistent with the objective of determining fair value. For
example, on a continuing basis, Atlas assesses the reasonableness of individual
security values which have stale prices or whose changes exceed certain
thresholds as compared to previous values received from those AMM 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.
Deferred policy acquisition costs (DAC) - Atlas defers producers' commissions,
premium taxes and other underwriting and marketing costs directly relating to
the 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 ceding commissions.
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Deferred policy acquisition costs for the years ended December 31 follows:
2011 2010
Balance, beginning of year $ 3,804$ 9,399
Acquisition costs deferred 6,510 5,520
Amortization charged to income 7,294 11,115
Balance, end of year
$ 3,020$ 3,804
When anticipated losses, loss adjustment expenses, commissions and other
acquisition costs exceed recorded unearned premium, and any future installment
premiums on existing policies, a premium deficiency reserve is recognized by
recording an additional liability for the deficiency, with a corresponding
charge to operations. Atlas utilizes anticipated investment income as a factor
in its premium deficiency calculation. In 2011 and 2010, Atlas concluded that no
premium deficiency adjustments were necessary.
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 operations except to the extent that they relate to items
recognized directly in other comprehensive income, in which case the income tax
effect is also recognized in other comprehensive income.
Deferred taxes are recognized using the asset and liability method of
accounting. Under this method the future tax consequences attributable to
temporary differences in the tax basis of assets, liabilities and items
recognized directly in equity and the financial reporting basis of such items
are recognized in the financial statements by recording deferred tax liabilities
or deferred tax assets.
Deferred tax assets related to the carry-forward of unused tax losses and
credits and those arising from temporary differences are recognized only to the
extent that it is probable that future taxable income will be available against
which they can be utilized. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The
effect on future tax assets and liabilities of a change in tax rates is
recognized in income in the period of enactment.
When considering the extent of the valuation allowance on Atlas' deferred tax
asset, the weight given by management to the positive and negative evidence is
commensurate with the extent to which the evidence may be objectively verified.
GAAP states that a cumulative loss in recent years is a significant piece of
negative evidence that is difficult to overcome in determining that a valuation
allowance is not needed against deferred tax assets. However, the strength and
trend of earnings, as well as other relevant factors are considered.
Office equipment and software - Office equipment is stated at historical cost
less deprecation. Subsequent costs are included in the asset's carrying amount
or capitalized as a separate asset only when it is probable that future economic
benefits will be realized. Repairs and maintenance are recognized as an expense
during the period incurred. Depreciation on equipment is provided on a
straight-line basis over the estimated useful lives which range from 5 years for
vehicles, 7 years for furniture and the term of the lease for leased equipment.
Insurance contracts - Contracts under which Atlas' insurance subsidiaries accept
risk at the inception of the contract from another party (the insured holder of
the policy) by agreeing to compensate the policyholder or other insured
beneficiary if a specified future event (the insured event) adversely affects
the holder of the policy are classified as insurance contracts. All policies are
short-duration contracts.
Revenue Recognition - Premium income is recognized on a pro rata basis over the
terms of the respective insurance contracts. Unearned premiums represent the
portion of premiums written that are related to the unexpired terms of the
policies in force.
Claims liabilities - The provision for unpaid claims represent the estimated
liabilities for reported claims, plus those incurred but not yet reported and
the related estimated loss adjustment expenses. Unpaid claims expenses are
determined using case-basis evaluations and statistical analyses, including
insurance industry loss data, and represent estimates of the ultimate cost of
all claims
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incurred. Although considerable variability is inherent in such estimates,
management believes that the liability for unpaid claims is adequate. The
estimates are continually reviewed and adjusted as necessary; such adjustments
are included in current operations and are accounted for as changes in
estimates.
Reinsurance - As part of Atlas' insurance risk management policies, portions of
its insurance risk is ceded to reinsurers. Reinsurance premiums and claims
expenses are accounted for on a basis consistent with those used in accounting
for the original policies issued and the terms of the reinsurance contracts.
Premiums and claims ceded to other companies have been reported as a reduction
of premium revenue and claims incurred expense. Commissions paid to Atlas by
reinsurers on business ceded have been accounted for as a reduction of the
related policy acquisition costs. Reinsurance receivables are recorded for that
portion of paid and unpaid losses and loss adjustment expenses that are ceded to
other companies. Prepaid reinsurance premiums are recorded for unearned premiums
that have been ceded to other companies.
Share-based payments - Atlas has a stock-based compensation plan which is
described fully in Note 10. Under ASC 718 Compensation-Stock Compensation ("ASC
718"), the fair-value method of accounting is used to determine and account for
equity settled transactions and to determine stock-based compensation awards
granted to employees and non-employees using the Black-Scholes option pricing
model. Compensation expense is recognized over the period that the stock options
vest, with a corresponding increase to additional paid in capital.
For option awards with graded vesting, ASC 718 provides two options: on a
straight-line basis over the service period for each separately vesting portion
of the award (as if the award were in effect multiple awards), or on a straight
line basis over the service period for the entire award. Atlas has chosen the
latter policy. Atlas recognized $113 in stock compensation expense in 2011 and
none in 2010.
Post-employment benefits - Prior to December 31, 1997, substantially all
salaried employees of American Country were covered by a defined benefit pension
plan known as the American Country Pension Plan (the "pension plan"). The
pension plan was dissolved in the fourth quarter 2011 and the plan assets were
distributed. The dissolution resulted in the immediate recognition of $2,544 in
prior service costs previously recorded in Accumulated Other Comprehensive
Income, which are shown within Other Underwriting Expenses.
Until its dissolution, periodic net pension expense was based on the cost of
incremental benefits for employee service during the period, interest on
projected benefit obligation, actual return on plan assets and amortization of
actuarial gains and losses.
Operating segments - Atlas is in a single operating segment - property and
casualty insurance.
Presentation of equity and cash flows: Ordinary and restricted voting common
shares are reflected as par value amounts with any remaining consideration upon
issuance recorded in additional paid in capital. In 2010, the Company reported
the total consideration within the common share equity amounts in the
consolidated statement of financial position. The Company has adjusted the prior
period common share and additional paid in capital amounts to conform to the
presentation in 2011.
In the consolidated statements of cash flows, adjustments to reconcile net
income (loss) to cash used in operating activities includes a non cash expense
for forgiveness of mortgage loan and net realized investment gains and losses.
In 2010, the amount of the expense for forgiveness of mortgage loan was reported
as an increase to the net loss amount rather than a reduction. The Company has
adjusted the prior period cash flows for the immaterial error in presentation.
2. PENDING ACCOUNTING STANDARDS
Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts -
In October 2010, the Financial Accounting Standards Board ("FASB") issued
guidance modifying the definition of the types of costs incurred by insurance
entities that can be capitalized in the acquisition of new and renewal insurance
contracts. The guidance specifies that the costs must be directly
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related to the successful acquisition of insurance contracts. The guidance also
specifies that advertising costs should be included as deferred acquisition
costs only when the direct-response advertising accounting criteria are met. The
new guidance is effective for reporting periods beginning after December 15,
2011. Atlas' current policy for accounting for acquisition costs is already
materially consistent with this guidance. Therefore the adoption of this
guidance will not have an impact of on our financial statements.
Amendments to Fair Value Measurement and Disclosure Requirements - In May 2011,
the FASB issued guidance that clarifies the application of existing fair value
measurement and disclosure requirements and amends certain fair value
measurement principles, requirements and disclosures. Changes were made to
improve consistency in global application. The guidance is to be applied
prospectively for reporting periods beginning after December 15, 2011. Early
adoption is not permitted. The impact of adoption is not expected to be material
to the Company's results of operations or financial position.
Presentation of Comprehensive Income - In June and December 2011, the FASB
issued guidance amending the presentation of comprehensive income and its
components. Under the new guidance, a reporting entity has the option to present
comprehensive income in a single continuous statement or in two separate but
consecutive statements. The guidance is effective for reporting periods
beginning after December 15, 2011 and is to be applied retrospectively. The new
guidance affects presentation only and will have no material impact on the
Company's results of operations or financial position.
3. INVESTMENTS
The amortized cost, gross unrealized gains and losses and fair value for Atlas'
investments are as follows:
Amortized Gross Unrealized Gross Unrealized
December 31, 2011 Cost Gains Losses Fair Value
Term Deposits $ - $ - $ - $ -
Bonds:
U.S. - Government 44,835 911 - 45,746
- Corporate 35,572 825 24 36,373
- Commercial mortgage backed 17,493 208 - 17,701
- Other asset backed 3,573 99 1 3,671
Total Fixed Income $ 101,473 $ 2,043 $ 25 $ 103,491
Equities 994 147 - 1,141
Totals $ 102,467 $ 2,190 $ 25 $ 104,632
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Gross
Amortized Gross Unrealized Unrealized
December 31, 2010 Cost Gains Losses Fair Value
Term Deposits $ 7,898 $ 3 $ - $ 7,901
Fixed Income:
U.S. - Government 67,388 2,117 - 69,505
- Corporate 62,429 3,011 - 65,440
- Commercial mortgage backed 8,445 270 - 8,715
- Other asset backed 2,371 79 - 2,450
Total Fixed Income $ 148,531 $ 5,480 $ - $ 154,011
Equities - - - -
Totals $ 148,531 $ 5,480 $ - $ 154,011
The following tables summarize carrying amounts of fixed income securities by
contractual maturity. As certain securities and debentures have the right to
call or prepay obligations, the actual settlement dates may differ from
contractual maturity.
One year or One to five Five to ten More than
As at December 31, 2011 less years years ten years Total
Fixed Income Securities $ 29,407 $ 27,317 $ 10,242 $ 36,525 $ 103,491
Percentage of total 28.4 % 26.4 % 9.9 % 35.3 % 100.0 %
One year or One to five Five to ten More than
As at December 31, 2010 less years years ten years Total
Fixed Income Securities $ 21,556 $ 88,564 $ 24,026 $ 19,865 $ 154,011
Percentage of total 14.0 % 57.5 % 15.6 % 12.9 % 100.0 %
The following table summarizes the change in unrealized gains and losses for the
years ended December 31:
2011 2010
Term Deposits $ (3 ) $ 3
Fixed Income:
U.S. -Government (1,206 ) 852
- Corporate (2,210 ) 386
- Commercial mortgage backed (62 ) 33
- Other asset backed 19 2,037
Equities 147
Totals $ (3,315 ) $ 3,311
The following table summarizes the components of net investment income for the
years ended December 31:
2011 2010
Total investment income
Interest (from fixed income securities) $ 3,791 $ 4,915
Dividends 12 -
Other - -
Investment expenses (523 ) (299 )
Net investment income $ 3,280 $ 4,616
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The following table summarizes the components of net investment gains for the
years ended December 31:
2011 2010
Fixed income securities $ 4,149 $ 888
Equities - -
Other 52 -
Net invesment gains (losses) $ 4,201 $ 888
Management performs a quarterly analysis of Atlas' investment holdings to
determine if declines in fair value are other than temporary. The analysis
includes some or all of the following procedures as deemed appropriate by
management:
• identifying all security holdings in unrealized loss positions that have
existed for at least six months or other circumstances that management
believes may impact the recoverability of the security;
• obtaining a valuation analysis from third party investment managers
regarding these holdings based on their knowledge, experience and other
market based valuation techniques;
• reviewing the trading range of certain securities over the preceding
calendar period;
• assessing if declines in market value are other than temporary for debt
security holdings based on their investment grade credit ratings from
third party security rating agencies;
• assessing if declines in market value are other than temporary for any
debt security holding with a non-investment grade credit rating based on
the continuity of its debt service record; and
• determining the necessary provision for declines in market value that are
considered other than temporary based on the analyses performed.
The risks and uncertainties inherent in the assessment methodology utilized to
determine declines in market value that are other than temporary include, but
may not be limited to, the following:
• the opinion of professional investment managers could be incorrect;
• the past trading patterns of individual securities may not reflect future
valuation trends;
• the credit ratings assigned by independent credit rating agencies may be
incorrect due to unforeseen or unknown facts related to a company's
financial situation; and
• the debt service pattern of non-investment grade securities may not reflect future debt service capabilities and may not reflect a company's
unknown underlying financial problems.
There were no impairments recorded in the years ended December 31, 2011 or
December 31, 2010 as a result of the above analysis performed by management to
determine declines in market value that may be other than temporary. All
securities as of December 31, 2011 and 2010 in an unrealized loss position have
been in said position for less than 12 months.
4. FINANCIAL AND CREDIT RISK MANAGEMENT
By virtue of the nature of Atlas' business activities, financial instruments
make up the majority of the balance sheet. The risks which arise from
transacting financial instruments include credit risk, market risk, liquidity
risk and cash flow risk. These risks may be caused by factors specific to an
individual instrument or factors affecting all instruments traded in the market.
Atlas has a risk management framework in place to monitor, evaluate and manage
the risks assumed in conducting its business. Atlas' risk management policies
and practices are as follows:
Credit risk - Atlas is exposed to credit risk principally through its fixed
income securities and balances receivable from policyholders and reinsurers.
Atlas controls and monitors concentration and credit quality risk through
policies to limit and monitor its exposure to individual issuers or related
groups (with the exception of U.S. Government bonds) as well as through ongoing
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review of the credit ratings of issuers held in the securities portfolio. Atlas'
credit exposure to any one individual policyholder is not material. Atlas has
policies requiring evaluation of the financial condition of its reinsurers and
monitors concentrations of credit risk arising from similar geographic regions,
activities, or economic characteristics of the reinsurers to minimize its
exposure to significant losses from reinsurer insolvency.
The following table summarizes the credit exposure of Atlas from its investments
in fixed income securities and term deposits by rating as assigned by Fitch,
Standard & Poor's or Moody's Investor Services, using the higher of these
ratings for any security where there is a split rating:
2011 2010
Amount % of Total Amount % of Total
AAA/Aaa $ 54,717 52.9 % $ 88,684 57.6 %
AA/Aa 21,567 20.8 % 26,388 17.1 %
A/A 22,380 21.6 % 35,027 22.7 %
BBB/Baa 4,827 4.7 % 3,851 2.5 %
CCC/Caa or lower or not rated - - 61 0.1 %
Total Securities
$ 103,491 100.0 % $ 154,011 100.0 %
Equity price risk - This is the risk of loss due to adverse movements in equity
prices. Atlas' investment in equity securities comprises a small percentage of
its total portfolio, and as a result, the exposure to this type of risk is
minimal.
Foreign currency risk - Atlas is not currently exposed to material changes in
the U.S. dollar currency exchange rates with any other foreign currency.
Liquidity and cash flow risk - Liquidity risk is the risk of having insufficient
cash resources to meet current financial obligations without raising funds at
unfavorable rates or selling assets on a forced basis. Liquidity risk arises
from general business activities and in the course of managing the assets and
liabilities of Atlas. There is the risk of loss to the extent that the sale of a
security prior to its maturity is required to provide liquidity to satisfy
policyholder and other cash outflows. Cash flow risk arises from risk that
future inflation of policyholder cash flow exceeds returns on long-term
investment securities. The purpose of liquidity and cash flow management is to
ensure that there is sufficient cash to meet all financial commitments and
obligations as they fall due. The liquidity and cash flow requirements of Atlas'
business have been met primarily by funds generated from operations, asset
maturities and income and other returns received on securities. Cash provided
from these sources is used primarily for claims and claim adjustment expense
payments and operating expenses. The timing and amount of catastrophe claims are
inherently unpredictable and may create increased liquidity requirements.
Fair value - Fair value amounts represent estimates of the consideration that
would currently be agreed upon between knowledgeable, willing parties who are
under no compulsion to act.
Fair value is best evidenced by quoted bid or ask price, as appropriate, in an
active market. Where bid or ask prices are not available, such as in an illiquid
or inactive market, the closing price of the most recent transaction of that
instrument subject to appropriate adjustments as required is used. Where quoted
market prices are not available, the quoted prices of similar financial
instruments or valuation models with observable market based inputs are used to
estimate the fair value. These valuation models may use multiple observable
market inputs, including observable interest rates, foreign exchange rates,
index levels, credit spreads, equity prices, counterparty credit quality,
corresponding market volatility levels and option volatilities. Minimal
management judgment is required for fair values calculated using quoted market
prices or observable market inputs for models. The calculation of estimated fair
value is based on market conditions at a specific point in time and may not be
reflective of future fair values.
Atlas records the available for sale securities held in its securities portfolio
at their fair value. Atlas primarily uses the services of external securities
pricing vendors to obtain these values. The securities are valued using quoted
market prices or prices established using observable market inputs. In volatile
market conditions, these quoted market prices or observable market inputs can
change rapidly causing a significant impact on fair value and financial results
recorded.
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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 market prices (Level 1), third party models using observable market
information (Level 2) and internal models without observable market information
(Level 3). The following table summarizes Atlas' investments at fair value as at
the years ended December 31, 2011 and December 31, 2010:
December 31, 2011 Level 1 Level 2 Level 3 Total
Fixed Income Securities $ 13,363 $ 90,128 $ - $ 103,491
Equities 1,141 - - 1,141
Totals $ 14,504 $ 90,128 $ - $ 104,632
December 31, 2010 Level 1 Level 2 Level 3 Total
Fixed Income Securities$ 27,561$ 126,450 $ - $ 154,011
Equities
- - - -
Totals $ 27,561 $ 126,450 $ - $ 154,011
There were no transfers in or out of Level 2 during either period.
Capital Management - The Company manages capital using both regulatory capital
measures and internal metrics. The company's capital is primarily derived from
common shareholders' equity, retained deficit and accumulated other
comprehensive income (loss).
As a holding company, Atlas derives cash from its insurance subsidiaries
generally in the form of dividends to meet its obligations, which will primarily
consist of operating expense payments. Atlas' insurance subsidiaries fund their
obligations primarily through premium and investment income and maturities in
the securities portfolio. The insurance subsidiaries require regulatory approval
for the return of capital and, in certain circumstances, prior to the payment of
dividends. In the event that dividends available to the holding company are
inadequate to cover its operating expenses, the holding company would need to
raise capital, sell assets or incur future debt.
The insurance subsidiaries must each maintain a minimum statutory capital and
surplus of $1,500 under the provisions of the Illinois Insurance Code. 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 loss computed under statutory-basis accounting for American Country and
American Service were $(2,328) and $(497) respectively for the year ended
December 31, 2011 (unaudited), versus $(1,451) and $(5,351) for the year ended
December 31, 2010 (unaudited). Statutory capital and surplus of the insurance
subsidiaries was $49,954 (unaudited) and $45,560 at December 31, 2011 and 2010,
respectively.
Atlas did not pay any dividends to its common shareholders during 2011 and has
no current plans to pay dividends to its common shareholders.
A risk based capital formula is used by the National Association of Insurance
Commissioners ("NAIC") to identify property and casualty insurance companies
that may not be adequately capitalized. The NAIC requires that capital and
surplus not fall below 200% of the authorized control level. As of December 31,
2011, based on the unaudited statutory basis financial statements, both the
insurance subsidiaries are above the required risk based capital levels, with
risk based capital ratio estimates for American Country and American Service of
592.5% and 803.4%. The insurance subsidiaries had approximately $36,402 of
capital in excess of the 200% minimum described above. As of December 31, 2010,
the comparable risk based capital ratio estimates for American Country and
American Service were 322% and 536%, and estimated capital in excess of the 200%
level was approximately $26,100.
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5. INCOME TAXES
The effective tax rate was (32.0)% and 13.4% for the years ended December 30,
2011 and 2010, respectively, compared to the U.S. statutory income tax rate of
34% as shown below:
Year ended December 31, 2011 2010
Amount % Amount %
Expected income tax benefit at statutory rate $ (1,235 ) (34.0 )% $ (6,541 ) (34.0 )%
Valuation allowance - - % (9,476 ) (49.3 )%
Nondeductible expenses 5 0.1 % 183 1.0 %
Tax implications of qualifying transaction 75 2.1 % 18,412 95.7 %
Other (8 ) (0.2 )% (3 ) - %
Total $ (1,163 ) (32.0 )% $ 2,575 13.4 %
Atlas carried deferred tax assets on its balance sheet that were generated by
its subsidiaries, primarily related to net operating loss carry-forwards. The
qualifying transaction caused a change in control for tax purposes which
triggered Internal Revenue Code Section 382. Section 382 created a yearly limit
on its deferred tax assets such that a portion of the operating loss deferred
tax assets would never be able to be utilized. In addition, as a result of the
structure of the transaction, the seller, Kingsway, retains a portion of those
deferred tax assets as dictated by the Internal Revenue Code. Kingsway, in
general, retained those portions of the net operating loss deferred tax assets
that Atlas would have otherwise not been able to use due to the Section 382
limit mentioned above. Since the removal of the deferred tax asset from the
balance sheet without an off-setting cash recoverable from the U.S. Government,
this removal created a reconciling item from Atlas' statutory income tax rate.
Income tax expense consists of the following for the years ended December 31:
2011 2010
Current tax expense/(benefit) $ - $ (300 )
Deferred tax (benefit)/expense (1,163 ) 2,875
Total
$ (1,163 ) $ 2,575
The components of deferred income tax assets and liabilities as of December 31
are as follows:
2011 2010
Deferred tax assets:
Unpaid claims and unearned premiums $ 3,004 $ 4,218
Loss carry-forwards 15,558 13,252
Pension expense - 841
Bad debts 1,297 1,356
Other 1,338 1,394
Valuation Allowance (12,361 ) (11,288 )Total gross deferred tax assets $ 8,836$ 9,773
Deferred tax liabilities:
Investment securities 740 1,863
Deferred policy acquisition costs 1,027 1,293
Other
294 218
Total gross deferred tax liabilities $ 2,061$ 3,374
Net deferred tax assets
$ 6,775$ 6,399
Amounts and expiration dates of the operating loss carry forwards as of December
31, 2011 are as follows:
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Year of Occurrence Year of Expiration Amount
2001 2021 $ 14,750
2002 2022 4,317
2006 2026 7,825
2007 2027 5,131
2008 2028 1,949
2009 2029 1,949
2010 2030 1,949
2011 2031 7,762
Total $ 45,632
Atlas established a valuation allowance of approximately $12,361 and $11,288 for
its gross deferred tax assets at December 31, 2011 and December 31, 2010
respectively.
In assessing the need for a valuation allowance, Atlas considers both positive
and negative evidence related to the likelihood of realization of the deferred
tax assets. If, based on the weight of available evidence, it is more likely
than not the deferred tax assets will not be realized or if it is deemed
premature to conclude that these assets will be realized in the near future, a
valuation allowance is recorded. The weight given to the positive and negative
evidence is commensurate with the extent to which the evidence may be
objectively verified. As such, it is generally difficult for positive evidence
regarding projected future taxable income exclusive of reversing taxable
temporary differences to outweigh objective negative evidence of recent
financial reporting losses. GAAP states that a cumulative loss in recent years
is a significant piece of negative evidence that is difficult to overcome in
determining that a valuation allowance is not needed against deferred tax
assets.
Atlas' assessment also accounted for the following evidence:
? Recent spin-off from prior ownership - Atlas was formed on December 31,
2010 in a reverse merger transaction. Consideration was made as to the
impact of this transaction on future earnings.
? Nature, frequency, and severity of current and cumulative financial reporting losses - A pattern of objectively-measured recent financial
reporting losses is heavily weighted as a source of negative evidence.
Cumulative pre-tax losses in the three-year period ending with the current
quarter are generally considered to be significant negative evidence
regarding future profitability. However, the strength and trend of
earnings are also considered, as well as other relevant factors. Atlas did
not consider historical information as relevant due to the significant
changes in business operations beginning on January 1, 2011;
? Trends in quarterly earnings from operating activities during the period -
When performing the assessment, Atlas excluded certain non-operating items
which impacted 2011 results: (1) a $2,544 charge upon settlement of the
American Country Pension Plan (see Note 10 below); (2) a $1,800 reserve
strengthening adjustment related to claims incurred under prior ownership
(See Note 8 below); (3) $627 in non-recurring costs relating to the
transactions that created Atlas.
? Sources of future taxable income - Future reversals of existing temporary
differences are heavily-weighted sources of objectively verifiable
positive evidence. Projections of future taxable income exclusive of
reversing temporary differences are a source of positive evidence only when the projections are combined with a history of recent profits and can
be reasonably estimated. Otherwise, these projections are considered
inherently subjective and generally will not be sufficient to overcome
negative evidence that includes relevant cumulative losses in recent
years, particularly if the projected future taxable income is dependent on
an anticipated turnaround to profitability that has not yet been achieved.
In such cases, future taxable income is generally given no weight for the
purposes of assessing the valuation allowance pursuant to GAAP; and
? Tax planning strategies - If necessary and available, tax planning
strategies could be implemented to accelerate taxable amounts to utilize
expiring carry-forwards. These strategies would be a source of additional
positive evidence and, depending on their nature, could be heavily
weighted.
At the end of 2011, Atlas' operations (excluding the aforementioned
non-operating items) had returned to a position of cumulative profits for the
most recent one-year period. Further, operations showed three consecutive
quarters of pre-tax operating profits (before non-operating items). Management
concluded that the successful repositioning of Atlas during 2011 combined with
the
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business plan showing continued profitability into future periods, provide
assurance that future tax benefits more likely than not will be realized.
Accordingly, at year-end 2011, a tax benefit was realized and the valuation was
reduced against net deferred tax assets.
Atlas accounts for uncertain tax positions in accordance with the income taxes
accounting guidance. Atlas has analyzed 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 believes that its federal and state
income tax filing positions and deductions will be sustained on audit and does
not anticipate any adjustments that will result in a material change to its
financial position. Therefore, no reserves for uncertain federal and state
income tax positions have been recorded. Atlas would recognize interest and
penalties related to unrecognized tax benefits as a component of the provision
for federal income taxes. Atlas did not incur any federal income tax related
interest income, interest expense or penalties for the years ended December 31,
2011 or 2010. Tax years 2006 through 2010 are subject to examination by the
Internal Revenue Service.
6. ASSETS HELD FOR SALE
As at December 31, 2011, Atlas had three properties held for sale with an
aggregate carrying value of $13,634, including its headquarters building in Elk
Grove Village, Illinois. All of the properties' individual carrying values were
less than their respective appraised values net of reasonably estimated selling
costs at the time those appraisals were received and at the time properties were
deemed to be held for sale. All properties were listed for sale through brokers
at the appraised values and above carrying values as of December 31, 2011. Atlas
expects to re-invest the proceeds from the sale of real estate in its investment
portfolio which will support strategic growth initiatives.
The Elk Grove Village building and property were previously owned by KAI and
were contributed to Atlas as a capital contribution in June 2010. The other two
properties, all located in Alabama, were assets of Southern United Fire
Insurance Company which was merged into American Service in February 2010.
7. UNDERWRITING POLICY AND REINSURANCE CEDED
Underwriting Risk - Underwriting risk is the risk that the total cost of claims
and acquisition expenses will exceed premiums received and can arise from
numerous factors, including pricing risk, reserving risk, catastrophic loss
risk, reinsurance coverage risk and that loss and loss adjustment expense
reserves are not sufficient.
Reinsurance Ceded - As is customary in the insurance industry, Atlas reinsures
portions of certain insurance policies it writes, thereby providing a greater
diversification of risk and minimizing exposure on larger risks. Atlas remains
contingently at risk with respect to any reinsurance ceded and would incur an
additional loss if an assuming company were unable to meet its obligation under
the reinsurance treaty.
Atlas monitors the financial condition of its reinsurers to minimize its
exposure to significant losses from reinsurer insolvencies. Letters of credit
are maintained for any unauthorized reinsurer to cover ceded unearned premium,
ceded loss reserve balances and ceded paid losses. These policies mitigate the
risk of credit quality or dispute from becoming a danger to financial strength.
To date, the Company has not experienced any material difficulties in collecting
reinsurance recoverables.
Gross premiums written and ceded premiums, losses and commissions as of and for
the year ended December 31 are as follows:
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2011 2010
Gross premiums written $ 42,031 $ 46,679
Ceded premiums written 6,173 14,201
Net premiums written 35,858 32,478
Ceded premiums earned $ 7,653 $ 7,434
Ceded losses and loss adjustment expenses 2,767 3,628
Ceded unpaid losses and loss adjustment expenses 7,825 5,192
Ceded unearned premiums
2,214 3,694
Other amounts due from reinsurers 219 2,390
Ceded commissions 2,412 5,441
8. UNPAID CLAIMS
Claims liabilities - The changes in the provision for unpaid claims, net of
amounts recoverable from reinsurers, for the year ended December 31, 2011 and
2010 were as follows:
2011 2010
Unpaid claims, beginning of period $ 132,579$ 169,520
Less: reinsurance recoverable
6,477 5,197
Net beginning unpaid claims reserves 126,102 164,323
Incurred related to:
Current year 27,303 42,739
Prior years 1,691 5,335
28,994 48,074
Paid related to:
Current year 12,715 18,994
Prior years 58,563 76,835
71,278 95,829
Net unpaid claims of subsidiary acquired - 9,534
Net unpaid claims, end of period $ 83,818$ 126,102
Add: reinsurance recoverable
7,825 6,477
Unpaid claims, end of period $ 91,643 $ 132,579
At the end of 2010, a detailed review of claim payment and reserving practices
was performed, which led to significant changes in both practices, increasing
ultimate loss estimates and accelerating claim payments. Reserves were adjusted
at that time to account for these changes, primarily during the second and third
quarters of 2010. This review continued into 2011 and Atlas recorded a $1,800
adjustment to further strengthen its reserves for claims related to policies
issued while the insurance subsidiaries were under previous ownership in years
preceding 2010. The establishment of the estimated provision for unpaid claims
is based on known facts and interpretation of circumstances and is therefore a
complex and dynamic process influenced by a large variety of factors. These
factors include the Atlas' experience with similar cases and historical trends
involving claim payment patterns, loss payments, pending levels of unpaid
claims, product mix or concentration, claims severity and claim frequency
patterns.
Other factors include the continually evolving and changing regulatory and legal
environment, actuarial studies, professional experience and expertise of the
Atlas' claims department personnel and independent adjusters retained to handle
individual claims, the quality of the data used for projection purposes,
existing claims management practices including claims handling and settlement
practices, the effect of inflationary trends on future claims settlement costs,
court decisions, economic conditions and public attitudes. In addition, time can
be a critical part of the provision determination, since the longer the span
between the incidence of a loss and the payment or settlement of the claims, the
more variable the ultimate settlement amount can be. Accordingly, short tail
claims such as property claims, tend to be more reasonably predictable than long
tail claims, such as general liability and automobile accident benefit claims
that are less predictable.
Consequently, the process of establishing the estimated provision for unpaid
claims is complex and imprecise as it relies on the
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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 will deviate, perhaps
substantially, from the best estimates made.
As the processes of management and the independent appointed actuary are
undertaken independently, the provision for unpaid claims recorded by management
can differ from the independent appointed actuary's central estimate.
Comparing management's selected reserve estimate to the actuarial central
estimate and range of reasonable reserves independently determined by the
independent appointed actuary continues to be an important step in the reserving
process of the Company, however; where differences exist and the Company
believes the internally developed reserve estimate to be more accurate,
management's estimate will not change. We believe this to be consistent with
industry practice for companies with a robust reserving process in place. As of
December 31, 2011, the Company's carried reserves were within the range of
reasonable reserves of its independent appointed actuary. As of December 31,
2011, the carrying value of unpaid claims was $91,643. There is no active market
for policy liabilities; hence market value is not determinable. The carrying
value of unpaid claims does not take into consideration the time value of money
or make explicit provisions for adverse deviation. Fair value of unpaid claims
would include such considerations.
9. STOCK OPTIONS AND WARRANTS
Stock options - Stock option activity for years ended December 31, 2011 and
December 31, 2010 is as follows:
2011 2010
Number Avg. Price Number Avg. Price
Outstanding, beginning of period 110,600 C$1.00 -- --
Granted 369,749 C$2.00 132,000 C$1.00
Exercised (72,024 ) C$1.00 -- --
Expired -- -- (21,400 ) C$1.00
Outstanding, end of period 408,325 C$1.90 110,600 C$1.00
Information about options outstanding at December 31, 2011 is as follows:
Remaining
Contractual Number Number
Grant Date Expiration Date Exercise Price Life (Years) Outstanding Exercisable
January 18, 2011 January 18, 2021 C$2.00 9.1 369,749 92,437
March 18, 2010 March 31, 2012 C$1.00 0.3 6,476
6,476
March 18, 2010 March 18, 2020 C$1.00 8.2 32,100 32,100
8.8 wtd.
Total average 408,325 131,013
On March 18, 2010, JJR VI issued options to purchase 250,000 common shares to
the agent that assisted JJR VI in raising capital (the "IPO agent") and options
to purchase 1,070,000 shares to directors. All of the options were vested at the
date of grant. Options to purchase 214,000 shares held by directors expired
before the merger as a result of a director resignation. All outstanding JJR VI
options were exchanged for Atlas options without modification on the basis of 1
Atlas option for each 10 JJR VI options and the exercise price was changed from
C$0.10 to C$1.00, which was on the same basis as the JJR VI exchange ratio for
shares, and thus did not represent any additional value or related expense. This
resulted in 25,000 and 85,600 Atlas options for the agent and former JJR VI
directors, respectively, outstanding after the merger. In total, 72,024 of these
options were exercised in 2011. The options granted on March 18, 2010 have an
aggregate intrinsic value of $39, as of December 31, 2011.
On January 6, 2011, Atlas adopted a stock option plan in order to advance the
interests of Atlas by providing incentives to eligible
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persons defined in the plan. The maximum number of ordinary voting common shares
reserved for issuance under the plan together with all other security based
plans is equal to 10% of issued and outstanding ordinary voting common shares at
the date of grant. The exercise price of options granted under the plan cannot
be less than the volume weighted average trading price of Atlas' ordinary voting
common shares for the five preceding trading days. Options generally vest over a
three year period and expire ten years from grant date.
On January 18, 2011, Atlas granted options to purchase 369,749 ordinary shares
of Atlas stock to officers and directors at an exercise price of C$2.00 per
share. The options vest 25% at date of grant and 25% on each of the next three
anniversary dates and expire on January 18, 2021. The weighted average grant
date fair value of the options is $1.24 per share. As of December 31, 2011 the
options had no aggregate intrinsic value.
The Black-Scholes option pricing model was used to estimate the fair value of
compensation expense using the following assumptions - risk-free interest rate
2.27% to 3.13%; dividend yield 0.0%; expected volatility 100%; expected life of
6 to 9 years.
In accordance with ASC 718, 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. In 2011, Atlas recognized $113 in expense, which
is a component of other underwriting expenses on the income statement. Total
unrecognized stock compensation expense associated with the January 18, 2011
grant is $337 as of December 31, 2011 which will be recognized ratably over the
next three years.
The weighted average exercise price of all the shares exercisable at December
31, 2011 is $1.71.
Warrants - On November 1, 2010, American Acquisition closed a private placement
and issued 3,983,502 subscription receipts for ordinary voting common shares of
Atlas and warrants to purchase 3,983,502 ordinary voting common shares of Atlas
for C$2.00 per share in connection with the merger. The subscription receipts
were converted to Atlas ordinary voting shares in connection with the merger.
All the warrants were still outstanding at December 31, 2011 and expire on
December 31, 2013.
Atlas ordinary voting common shares were trading on the TSXV for C$1.60 on
December 30, 2011 (the last trading day of the 2011 calendar year).
10. OTHER EMPLOYEE BENEFIT PLANS
Defined Contribution Plan
In January 2011, Atlas formed a defined contribution 401(k) plan covering all
qualified employees of Atlas and its subsidiaries. Employees can choose to
contribute up to 60% of their annual earnings but not more than $16,500 for 2011
to the plan. Qualifying employees age 50 and older can contribute an additional
$5,500 in 2011. Atlas matches 50% of the employee contribution up to 5% of
annual earnings for a total maximum expense of 2.5% of annual earnings per
participant. Atlas contributions are discretionary. Employees are 100% vested in
their own contributions and vest in Atlas contributions based on years of
service with 100% vested after five years. Atlas' contributions were $105 in
2011.
Prior to 2011, eligible employees participated in a defined contribution 401(k)
plan maintained by KAI ("the Kingsway Plan") with features identical to Atlas'
current plan (the "Atlas Plan"). Employer contributions to the Kingsway Plan
attributable to the Atlas insurance subsidiaries were $144 in 2011 and $130 in
2010, and are included in Other Underwriting Expenses. Assets of the Kingsway
Plan attributable to Atlas' employees, were transferred to the Atlas Plan in
March 2011.
Defined Benefit Plan - Prior to December 31, 1997, substantially all salaried
employees of American Country were covered by a defined benefit pension plan
known as the American Country Pension Plan (the "pension plan"). Benefits were
based on the employee's length of service and wages and benefits, as defined by
the pension plan. The funding policy of the pension plan was
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generally to contribute amounts required to maintain minimum funding standards
in accordance with the Employee Retirement Income Security Act. Effective
December 31, 1997, upon resolution by the board of directors, the pension plan
was frozen. During 2010, American Country made an application to the U.S.
Internal Revenue Service to dissolve the pension plan and distribute the net
plan assets to the beneficiaries. In the fourth quarter of 2011, the plan assets
were fully distributed. As a result of the plan liquidation, the Company
recognized a settlement charge of $2,544 within other underwriting expenses in
the fourth quarter of 2011. The settlement impact was previously reflected as an
unrecognized adjustment to other comprehensive income and therefore, has created
a nil impact to shareholders' equity.
2011 2010
Change in Benefit Obligation
Benefit Obligation, beginning of year $ 5,110 $ 4,913
Interest cost 228 263
Actuarial losses (28 ) 192
Benefits paid (229 ) (258 )
Settlement of obligation (5,081 ) -
Benefit Obligation, end of year $ - $ 5,110
Change in Plan Assets
Fair value of plan assets, beginning of year $ 3,993 $ 3,869
Actual return on plan assets 17 244
Employer contributions 1,300 138
Benefits Paid (229 ) (258 )
Settlement of obligation (5,081 ) -
Fair value of plan assets, end of year $ - $ 3,993
Funded Status, end of year $ - $ 1,117
Items unrecognized as component of net pension cost, end of year (pre-tax)
- 2,473
Deferred income tax - (789 )
Items unrecognized as component of net pension cost, end of year
- 1,684
Components of net pension cost
Interest cost $ 229 $ 263
Expected return on plan assets (177 ) (268 )
Amortization of:
Prior Service Cost - -
Actuarial Losses 61 64
Subtotal $ 113 $ 59
Expense resulting from settlement of plan 2,544 -
Net periodic pension cost $ 2,657 $ 59
Weighted average assumptions used to determine net pension cost for the years
ended December 31:
2011 2010 2009
Weighted average discount
rate 5.25% 5.5% 6.0%
Rate of increase in
compensation n/a n/a n/a
Expected long-term rate of
return 5.0% 7.0% 7.0%Weighted average discount rate used to determine end of year
benefit obligation
n/a 5.25%
5.5%
Employee Stock Purchase Plan - In the second quarter of 2011, Atlas initiated
the Atlas Employee Stock Purchase Plan (the "ESPP") to encourage continued
employee interest in the operation, growth and development of Atlas and to
provide an additional investment opportunity to employees. Beginning in June
2011, full time and permanent part time employees working more than 30 hours per
week are allowed to invest up to 5% of adjusted salary in Atlas ordinary voting
common shares. Atlas matches 50%
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of the employee contribution up to 5% of annual earnings for a total maximum
expense of 2.5% of annual earnings per participant.. Employees who signed up for
the ESPP by May 30, 2011 each received an additional 100 ordinary voting common
shares as an initial participation incentive. Atlas will also pay administrative
costs related to this plan. In 2011, Atlas' incurred total expenses of $38
related to the plan.
11. COMMITMENTS AND CONTINGENCIES
Legal proceedings:
In connection with its operations, the Company and its subsidiaries are, from
time to time, named as defendants in actions for damages and costs allegedly
sustained by the plaintiffs. While it is not possible to estimate the outcome of
the various proceedings at this time, such actions have generally been resolved
with minimal damages or expense in excess of amounts provided and the Company
does not believe that it will incur any significant additional loss or expense
in connection with such actions.
Collateral pledged:
As of December 31, 2011, bonds and term deposits with an estimated fair value of
$11,843 were on deposit with state and provincial regulatory authorities, versus
$9,294 as of December 31, 2010. Also, from time to time, the Company pledges
securities to third parties to collateralize liabilities incurred under its
policies of insurance. At December 31, 2011, the amount of such pledged
securities was $10,396 versus $1,629 at December 31, 2010. Collateral pledging
transactions are conducted under terms that are common and customary to standard
collateral pledging and are subject to the Company's standard risk management
controls. These assets and investment income related thereto remain the property
of the Company while pledged. Neither the state and/or provincial regulatory
authorities nor any other third party has the right to re-pledge or sell said
securities held on deposit.
Collateral held:
In the normal course of business, the Company receives collateral on certain
business transactions to reduce its exposure to credit risk. As of December 31,
2011, the amount of such pledged securities was $240. The Company is normally
permitted to sell or re-pledge the collateral it receives under terms that are
common and customary to standard collateral holding and are subject to the
Company's standard risk management controls.
12. SHARE CAPITAL
The share capital for the common shares:
As at December 31, 2011 2010
Shares Issued Shares Issued
Shares and and
Authorized Outstanding Amount Outstanding Amount
Ordinary 800,000,000 4,625,526 $ 4 4,553,502 1 $ 4
Restricted 100,000,000 13,804,861 14 13,804,861 14
Total common shares 900,000,000 18,430,387 $ 18 18,358,363 $ 18
1 Summation of 3,983,502 ordinary voting common shares (refer above) and 570,000
shares issued to former JJR VI shareholders (no cash paid).
The restricted voting common shares are convertible to ordinary voting common
shares at the option of the holder in the event that an offer is made to
purchase all or substantially all of the restricted voting common shares.
All of the issued and outstanding restricted voting common shares are
beneficially owned or controlled by Kingsway. In the event that such shares are
disposed of such that Kingsway's beneficial interest is less than 10% of the
issued and outstanding restricted
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voting common shares, the restricted voting common shares shall be converted
into fully paid and non-assessable ordinary voting common shares.
The restricted voting common shares are entitled to vote at all meetings of
shareholders, except at meetings of holders of a specific class that are
entitled to vote separately as a class. The restricted voting common shares as a
class shall not carry more than 30% of the aggregate votes eligible to be voted
at a general meeting of common shareholders.
Preferred shares are not entitled to vote. Preferred shareholders are entitled
to dividends on a cumulative basis whether or not declared by the Board of
Directors at the rate of U.S. $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 US$1.00 per share plus all declared and unpaid dividends or the
amount it would receive in liquidation if the preferred shares had been
converted to restricted voting common shares or ordinary voting common shares
immediately prior to liquidation. Preferred shares are convertible into ordinary
voting shares at the option of the holder at any date after the fifth year of
issuance at the rate of 0.3808 ordinary voting common shares for each preferred
share. The conversion rate is subject to change if the number of ordinary voting
common shares or restricted voting common shares changes. The preferred shares
are redeemable at the option of Atlas at a price of US$1.00 per share plus
accrued and unpaid dividends commencing at the earlier of two years from
issuance date of the preferred shares or the date the preferred shares are
transferred to a party other than Kingsway or its subsidiaries or entities in
which KAI holds a 10% or greater interest.
The cumulative amount of dividends to which the preferred shareholders are
entitled upon liquidation or sooner, if Atlas declares dividends, is $810 as at
December 31, 2011.
13. EARNINGS PER SHARE
Earnings per ordinary and restricted voting common for the year ended December
31, 2011 and 2010 is as follows:
2011 2010
Net loss attributable to Atlas $ (2,470 ) $ (21,812 )
Less: Preferred share dividends (810 ) -
Net loss attributable to common shareholders (3,280 ) (21,812 )
Basic:
Weighted average common shares outstanding 18,373,624 18,358,363
Basic loss per common share
$ (0.18 ) $ (1.19 )
Diluted:
Weighted average common shares outstanding 18,373,624 18,358,363
Dilutive potential ordinary shares - -
Dilutive average common shares outstanding 18,373,624 18,358,363
Dilutive loss per common share
$ (0.18 ) $ (1.19 )
For 2011 and 2010, basic loss per common share has been computed by dividing net
loss for the period by the weighted average number of common shares outstanding
during the period. As required by continuation accounting, Atlas assumed the
same number of common shares outstanding for all of 2010.
Diluted loss per share is computed by dividing net loss attributable to common
shareholders by the weighted average number of common shares outstanding each
period plus the incremental number of shares added as a result of converting
dilutive potential ordinary shares, calculated using the treasury stock method.
Atlas' dilutive potential common shares consist of outstanding stock options and
warrants to purchase ordinary voting common shares. The effects of options and
warrants to issue ordinary voting common shares are excluded from the
computation of diluted loss per share in periods in which the effect would be
anti-dilutive. For the year ended December 31, 2011, potential ordinary voting
common shares were anti-dilutive due to the net loss attributable to common
shareholders.
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14. RELATED PARTY TRANSACTIONS
The business of Atlas is carried on through its insurance subsidiaries. Atlas'
insurance subsidiaries have been a party to various transactions with affiliates
in the past, although activity in this regard has diminished over time. Related
party transactions, including services provided to or received by Atlas'
insurance subsidiaries, are carried out in the normal course of operations and
are measured at the amount of consideration paid or received as established and
agreed upon by the parties. Management believes that consideration paid for such
services approximates fair value.
At December 31, 2011 and December 31, 2010, Atlas reported net amounts
receivable from (payable to) affiliates as follows which are included within
other assets and accounts payable and accrued expenses on the balance sheets:
As at year ended December 31, 2011 2010
Kingsway America, Inc. $ 291 $ 2,058
Universal Casualty Company (500 ) -
Kingsway Amigo Insurance Company (1 ) (13 )
Hamilton Risk Management Inc. - (1 )
Total
$ (210 ) $ 2,044
In 2010, Atlas' insurance subsidiaries remitted management fees monthly to KAI
for managerial services. During the first six months of 2010, those management
fees included rent for Atlas' Elk Grove Village headquarters building. That
building was contributed to Atlas on June 30, 2010 and rental payments ceased at
that time. Management fees paid to KAI totaled approximately $0 and $2,643 for
the year ended December 31, 2011 and 2010, respectively.
Atlas' insurance subsidiaries received $158 in regularly scheduled monthly
mortgage payments for the six months ended June 30, 2010 under mortgage loan
agreements with KAI which were secured by the Elk Grove Village headquarters
building. In June 2010, American Service forgave the $1,695 remaining balance of
its mortgage loan from KAI and American Country was paid the $1,767 total
remaining balance of its mortgage loan from KAI.
The amounts due to Universal Casualty Company relate primarily to claim handling
services provided to Atlas.
For the year ended December 31, 2011 and 2010, Atlas incurred $2,279 and $4,463,
respectively, in commissions to Avalon Risk Management, Inc. ("Avalon"). In the
year ended December 31, 2011 and 2010, Atlas also incurred expenses of $137 and
$125 respectively, for marketing services performed by Avalon. Avalon was a KFSI
subsidiary through October 2009, and has certain investors and directors in
common with Atlas. Avalon acts as a program manager for a surety program
primarily consisting of U.S. Customs bonds. In this capacity they are
responsible for coordinating marketing, customer service and claim handling for
the surety bonds written under this agreement. This program is 100% reinsured by
an unrelated third party.
During 2010, dividends of $16,700 were paid to KAI by the insurance subsidiaries
of Atlas.
15. ACCUMULATED OTHER COMPREHENSIVE INCOME
Accumulated other comprehensive income is comprised of the following:
As at December 31,
2011
2010
Pre-tax Tax Post-tax Pre-tax Tax Post-tax
Available-for-sale securities $ 2,165 $ (740 ) $ 1,425 $ 5,478 $ (737 ) $ 4,741
Pension liability - - - (2,474 ) 789 (1,685 )
Total $ 2,165 $ (740 ) $ 1,425 $ 3,004 $ 52 $ 3,056
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16. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
2011 2010 2011 2010 2011 2010 2011 2010
Gross Premium Written $ 14,166 $ 18,704 $ 7,856 $ 8,558 $ 10,928 $ 10,163 $ 9,081 $ 9,273
Net Premium Earned 8,809 19,301 9,062 12,515 8,797 10,192 9,079 11,595
Underwriting loss (1,906 ) (4,061 ) (1,278 ) (12,805 ) (1,729 ) (2,393 ) (6,325 ) (4,723 )
Net (loss)/income
attributable to Atlas (705 ) (1,583 ) 193 (8,135 ) 1,066 (664 ) (3,024 ) (11,430 )
Net (loss)/income
attributable to common
shareholders (905 ) (1,583 ) (9 ) (8,135 ) 862 (664 ) (3,228 ) (11,430 )
Basic earnings (loss) per
share $ (0.05 ) $ (0.09 ) $ - $ (0.44 ) $ 0.05 $ (0.04 ) $ (0.18 ) $ (0.62 )
Diluted earnings (loss) per
share (0.05 ) (0.09 ) - (0.44 ) 0.05 (0.04 ) (0.18 ) (0.62 )
17. SUBSEQUENT EVENTS
As of March 26, 2012, there were no subsequent events which had a material
impact on the 2011 consolidated financial statements.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors
Atlas Financial Holdings, Inc.:
We have audited the accompanying consolidated statement of financial position of
Atlas Financial Holdings, Inc. and subsidiaries (the Company) as of December 31,
2010, and the related consolidated statements of comprehensive income,
shareholders' equity, and cash flows for the year then ended. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with the auditing standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
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, 2010, and the results of its operations and
its cash flows for the year then ended in conformity with U.S. generally
accepted accounting principles.
/s/ KPMG LLPChicago, ILApril 15, 2011
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Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Atlas Financial Holdings, Inc.
We have audited the accompanying consolidated statement of financial position of
Atlas Financial Holdings, Inc. ("the Company") as of December 31, 2011, and the
related consolidated statements of comprehensive income, shareholders' equity,
and cash flows for the period ended December 31, 2011. These consolidated
financial statements and financial statement schedules listed on Item 15 of the
Company's Form 10-K are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Atlas
Financial Holdings, Inc as of December 31, 2011, and the results of its
operations and its cash flows for the period ended December 31, 2011, in
conformity with accounting principles generally accepted in the United States of
America.
/s/ Johnson Lambert & Co. LLP
Arlington Heights, IllinoisMarch 26, 2012--------------------------------------------------------------------------------
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
We have had no changes in or disagreements with our independent accountants
since our Board of Directors' June 20, 2011 appointment, based upon the
recommendation of our Audit Committee, of Johnson Lambert & Co. LLP as Atlas'
independent auditors for the year ended December 31, 2011, replacing KPMG LLP as
our independent auditors.
KPMG LLP was discharged on June 20, 2011. KPMG LLP had not issued a report in
the last two fiscal years containing a disclaimer or adverse opinion, or that
was qualified or modified. We had no disagreements with KPMG at any time during
their tenure as our independent accountant as to a matter of accounting
principles or practices, financial statement disclosures, or auditing scope or
procedures, which disagreements if not resolved to their satisfaction would have
caused them to make reference to the subject matter of the disagreement in their
report, nor have there been any reportable events.
We have not consulted Johnson Lambert & Co LLP regarding the application of
accounting principles to a specified transaction, either completed or proposed;
nor the type of audit opinion that might be rendered on our financial
statements. They have not provided a written report to us nor oral advice which
was an important factor considered by us in reaching a decision as to any
accounting, auditing or financial reporting issue. They also have not been
consulted on any matter that was either the subject of a disagreement or a
reportable event since they were appointed.
Item 9B. Other Information
None.
