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ATLAS FINANCIAL HOLDINGS, INC. – 10-K/A – Management’s Discussion and Analysis (“MD&A”) of Financial Condition and Results of Operations
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Section Description Page I. Consolidated Performance 26 II. Application of Critical Accounting Estimates 27 III. Operating Results 28 IV. Financial Condition 33 24
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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
• 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
• 2011 non-operating expenses totaled
includes a one-time
settlement of the American Country Pension Plan , a
tax) fourth quarter reserve strengthening charge related to pre-Atlas
periods, and non-recurring expenses incurred in Q1 2011 of
of tax) related to transaction costs and restructuring.
• The above non-operating expenses had an unfavorable impact of
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
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
The following financial data is derived from Atlas' consolidated financial statements for the years ended
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
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. 26 -------------------------------------------------------------------------------- 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 ofDecember 31, 2011 and were$45,167 lower thanDecember 31, 2010 , resulting primarily from the payment of claim settlements. This reduction in cash and invested assets is in line with expectations as Atlas rebuilds its book of business (see page 27 below). Overall, Atlas generated a net loss of$(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
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 -------------------------------------------------------------------------------- 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 28 -------------------------------------------------------------------------------- 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 endedDecember 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 endedDecember 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 ofIllinois and 76.0% came from the three states currently producing the most year-to-date premium volume (Illinois ,Indiana andMichigan ), 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 endedDecember 31, 2011 versus the year endedDecember 31, 2010 inIllinois andIndiana 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 endedDecember 31, 2011 compared with$14,201 for the year endedDecember 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. 30 --------------------------------------------------------------------------------
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
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)
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
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 inElk 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
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 32 --------------------------------------------------------------------------------
provided for the years ended
Table 7 Income tax benefit reconciliation
Year endedDecember 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 onDecember 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 atDecember 31, 2011 as compared to$2.30 atDecember 31, 2010 . The settlement of the American Country Pension Plan had no significant impact on book value per share. IV. FINANCIAL CONDITION 33
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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
$ 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
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 atDecember 31, 2011 andDecember 31, 2010 . Liquidation value$1.00 per share $ 18,000
4 4
Restricted voting common shares, par value per share
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
34 -------------------------------------------------------------------------------- AtDecember 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
Liquidity andCash Flow Risk 35
-------------------------------------------------------------------------------- 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 % AtDecember 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 -------------------------------------------------------------------------------- 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 atDecember 31, 2011 compared to 97.4% as atDecember 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 endedDecember 31, 2011 andDecember 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 ofDecember 31, 2011 andDecember 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 ofDecember 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 atDecember 31, 2011 , Atlas had$8,044 recoverable from third party reinsurers (exclusive of amounts prepaid) and other insurers as compared to$4,277 as atDecember 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 areGreat American Insurance Company ("Great American"), a subsidiary of American Financial Group, Inc. andGen Re , a subsidiary of Berkshire Hathaway, Inc. Great American has a financial strength rating of A+ from Standard & Poor's, whileGen 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
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 atDecember 31, 2011 andDecember 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 ofDecember 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 atDecember 31, 2010 , Atlas had five properties held for sale with an aggregate carrying value of$15,004 , including its headquarters building inElk 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. AtDecember 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 ofDecember 31, 2011 . Atlas expects to re-invest the proceeds from the sale of real estate in its investment portfolio. TheElk Grove Village building and property were previously owned by KAI and were contributed to Atlas as a capital contribution inJune 2010 . The other three properties, all located inAlabama , were assets ofSouthern United Fire Insurance Company which was merged into American Service inFebruary 2010 . OnJune 8, 2011 , theMobile, Alabama office building was sold for$2,100 , which was the same as its carrying value as ofDecember 31, 2010 . OnNovember 2, 2011 , land inSaraland, Alabama held for sale as ofDecember 31, 2010 was sold for$336 . Its carrying value on the date of sale was$296 . In 2011, bank financing for commercial properties in theChicago 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 -------------------------------------------------------------------------------- 31, 2011 andDecember 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 toDecember 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
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 ofDecember 31, 2011 : Cumulative (redundancy) deficiency $ 1,690 $ 7,865 $ 9,131 $ 5,417 $
1,229 $ (19,403 ) $ (11,747 )
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
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
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
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 -------------------------------------------------------------------------------- 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 EndedDecember 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 EndedDecember 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
42
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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
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 afterDecember 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 ofUS$1.00 per share plus accrued and unpaid dividends commencing at the earlier ofDecember 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
43
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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. AtDecember 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
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
Inthe 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 ofDecember 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$36,402 . 44 --------------------------------------------------------------------------------
Item 8. Financial Statements and Supplementary Data
Page Consolidated Statement of Comprehensive Income 46 Consolidated Statements of Financial Position 47 Consolidated Statements of Shareholders' Equity 48 Consolidated Statements of Cash Flows 49 Notes to Consolidated Financial Statements 50 Reports of Independent Registered Public Accounting Firm 72 45
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Table of Contents ATLAS FINANCIAL HOLDINGS, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
($ 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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Table of Contents
ATLAS FINANCIAL HOLDINGS, INC. CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
($ in thousands)December 31, 2011 2010 Assets
Investments, available for sale Fixed income securities, at fair value (Amortized cost
$ 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
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 atDecember 31, 2011 andDecember 31, 2010 . Liquidation value $1.00 per share $ 18,000 $
18,000
Ordinary voting common shares, par value per share
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. 47
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Table of Contents
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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Table of Contents
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 theBusiness Atlas Financial Holdings, Inc. ("Atlas", or "The Company") is a financial services holding company formed onDecember 31, 2010 in a transaction amongst: (a)JJR VI Acquisition Corporation ("JJR VI"), aCanadian Capital Pool Company sponsored byJJR Capital , aToronto based merchant bank,
(b)
formed under the laws of
subsidiary of Kingsway Financial Services Inc. ("KFSI"), a Canadian public
company formed under the laws of
(c)
Prior to the transaction, KAI transferred 100% of the capital stock ofAmerican Service Insurance Company ("American Service") andAmerican 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 aggregatingC$60,780 . In addition, American Acquisition raisedC$7,967 through a private placement offering of subscription receipts to qualified investors at a price ofC$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 andC$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 atC$2.00 at any time untilDecember 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 onDecember 31, 2010 . Atlas ordinary voting common shares have been listed on theTSX Venture Exchange ("TSXV") under the symbol "AFH" sinceJanuary 6, 2011 . The primary business of Atlas is commercial automobile insurance inthe 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 inthe United States . The management and operating infrastructure of American Country is integrated with that of American Service. OnFebruary 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. 50
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Summary of Significant Accounting Policies Basis of presentation - These statements have been prepared in conformity with accounting principles generally accepted inthe 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 theDecember 31, 2010 merger date, shareholders' equity atDecember 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 onDecember 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. 51
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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 atDecember 31, 2011 andDecember 31, 2010 , respectively. Bad debt expense of$248 and$2,766 was incurred in the years endedDecember 31, 2011 andDecember 31, 2010 , respectively. Atlas' allowance for bad debt primarily relates to a single agent. Settlement proceedings with this agent were ongoing as ofDecember 31, 2011 . The entire receivable balance from this agency was fully reserved as ofDecember 31, 2011 . A settlement executed inApril 2012 , which resulted in a minor recovery of previously reserved amounts, will be reflected in Atlas' financial statements for the six month period endedJune 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. 52
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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. 53
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Deferred policy acquisition costs for the years ended
2011 2010
Balance, beginning 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 54
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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 55
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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 afterDecember 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 - InMay 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 afterDecember 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 andDecember 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 afterDecember 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 56
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Table of Contents 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 endedDecember 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 endedDecember 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 57
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The following table summarizes the components of net investment gains for the years endedDecember 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 endedDecember 31, 2011 orDecember 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 ofDecember 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 ofU.S. Government bonds) as well as through ongoing 58
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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 orMoody'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 %
$ 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. 59
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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 endedDecember 31, 2011 andDecember 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
- - - - 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$(497) respectively for the year endedDecember 31, 2011 (unaudited), versus$(1,451) and$(5,351) for the year endedDecember 31, 2010 (unaudited). Statutory capital and surplus of the insurance subsidiaries was$49,954 (unaudited) and$45,560 atDecember 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 theNational 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 ofDecember 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 ofDecember 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 . 60
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5. INCOME TAXES The effective tax rate was (32.0)% and 13.4% for the years endedDecember 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 theU.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
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
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
Deferred tax liabilities: Investment securities 740 1,863
Deferred policy acquisition costs 1,027 1,293 Other
294 218
Total gross deferred tax liabilities
$ 6,775 $ 6,399
Amounts and expiration dates of the operating loss carry forwards as of
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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 atDecember 31, 2011 andDecember 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 onDecember 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
? 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
American Country Pension Plan (see Note 10 below); (2) a
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 62
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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 endedDecember 31, 2011 or 2010. Tax years 2006 through 2010 are subject to examination by theInternal Revenue Service . 6. ASSETS HELD FOR SALE As atDecember 31, 2011 , Atlas had three properties held for sale with an aggregate carrying value of$13,634 , including its headquarters building inElk 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 ofDecember 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. TheElk Grove Village building and property were previously owned by KAI and were contributed to Atlas as a capital contribution inJune 2010 . The other two properties, all located inAlabama , were assets ofSouthern United Fire Insurance Company which was merged into American Service inFebruary 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 endedDecember 31 are as follows: 63
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Table of Contents 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 endedDecember 31, 2011 and 2010 were as follows: 2011 2010
Unpaid claims, beginning of period
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
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 64
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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 ofDecember 31, 2011 , the Company's carried reserves were within the range of reasonable reserves of its independent appointed actuary. As ofDecember 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
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
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 OnMarch 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 fromC$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 onMarch 18, 2010 have an aggregate intrinsic value of$39 , as ofDecember 31, 2011 . OnJanuary 6, 2011 , Atlas adopted a stock option plan in order to advance the interests of Atlas by providing incentives to eligible 65
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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. OnJanuary 18, 2011 , Atlas granted options to purchase 369,749 ordinary shares of Atlas stock to officers and directors at an exercise price ofC$2.00 per share. The options vest 25% at date of grant and 25% on each of the next three anniversary dates and expire onJanuary 18, 2021 . The weighted average grant date fair value of the options is$1.24 per share. As ofDecember 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 theJanuary 18, 2011 grant is$337 as ofDecember 31, 2011 which will be recognized ratably over the next three years. The weighted average exercise price of all the shares exercisable atDecember 31, 2011 is$1.71 . Warrants - OnNovember 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 forC$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 atDecember 31, 2011 and expire onDecember 31, 2013 . Atlas ordinary voting common shares were trading on the TSXV forC$1.60 onDecember 30, 2011 (the last trading day of the 2011 calendar year). 10. OTHER EMPLOYEE BENEFIT PLANS Defined Contribution Plan InJanuary 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 inMarch 2011 . Defined Benefit Plan - Prior toDecember 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 66
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generally to contribute amounts required to maintain minimum funding standards in accordance with the Employee Retirement Income Security Act. EffectiveDecember 31, 1997 , upon resolution by the board of directors, the pension plan was frozen. During 2010, American Country made an application to theU.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 endedDecember 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 inJune 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% 67
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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 byMay 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 ofDecember 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 ofDecember 31, 2010 . Also, from time to time, the Company pledges securities to third parties to collateralize liabilities incurred under its policies of insurance. AtDecember 31, 2011 , the amount of such pledged securities was$10,396 versus$1,629 atDecember 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 ofDecember 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 68
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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 ofUS$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 ofUS$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 atDecember 31, 2011 . 13. EARNINGS PER SHARE Earnings per ordinary and restricted voting common for the year endedDecember 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 )
Weighted average common shares outstanding 18,373,624 18,358,363
$ (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 endedDecember 31, 2011 , potential ordinary voting common shares were anti-dilutive due to the net loss attributable to common shareholders. 69
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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
As at year ended December 31, 2011 2010 Kingsway America, Inc. $ 291 $ 2,058
$ (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 forAtlas' Elk Grove Village headquarters building. That building was contributed to Atlas onJune 30, 2010 and rental payments ceased at that time. Management fees paid to KAI totaled approximately$0 and$2,643 for the year endedDecember 31, 2011 and 2010, respectively. Atlas' insurance subsidiaries received$158 in regularly scheduled monthly mortgage payments for the six months endedJune 30, 2010 under mortgage loan agreements with KAI which were secured by theElk Grove Village headquarters building. InJune 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 toUniversal Casualty Company relate primarily to claim handling services provided to Atlas. For the year endedDecember 31, 2011 and 2010, Atlas incurred$2,279 and$4,463 , respectively, in commissions toAvalon Risk Management, Inc. ("Avalon"). In the year endedDecember 31, 2011 and 2010, Atlas also incurred expenses of$137 and$125 respectively, for marketing services performed by Avalon. Avalon was a KFSI subsidiary throughOctober 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 70
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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
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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 ofDecember 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 thePublic 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 ofDecember 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 LLP Chicago, IL April 15, 2011 72
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Report of Independent Registered Public Accounting Firm The Board ofDirectors and Shareholders Atlas Financial Holdings, Inc. We have audited the accompanying consolidated statement of financial position of Atlas Financial Holdings, Inc. ("the Company") as ofDecember 31, 2011 , and the related consolidated statements of comprehensive income, shareholders' equity, and cash flows for the period endedDecember 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 thePublic 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 ofDecember 31, 2011 , and the results of its operations and its cash flows for the period endedDecember 31, 2011 , in conformity with accounting principles generally accepted inthe United States of America . /s/ Johnson Lambert & Co. LLPArlington Heights, Illinois March 26, 2012
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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 endedDecember 31, 2011 , replacingKPMG LLP as our independent auditors.KPMG LLP was discharged onJune 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 withKPMG 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 consultedJohnson 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. Item9B . Other Information None.
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