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EX-23.4 - CONSENT - Atlas Financial Holdings, Inc.bswconsent.htm

As filed with the Securities and Exchange Commission on November 16, 2012
Registration No.: 333-183276

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Pre-Effective Amendment No. 2 to
Form S-1

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

ATLAS FINANCIAL HOLDINGS, INC.
(Exact name of registrant as specified in its charter)

Cayman Islands
   
   
   
6331
   
27-5466079
(State or other jurisdiction of
incorporation or organization)
   
   
   
(Primary Standard Industrial
Classification Code Number)
   
(I.R.S. Employer
Identification Number)
 
150 NW Point Boulevard
Elk Grove Village, IL 60007
(847) 472-6700
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)

Scott D. Wollney
President, Chief Executive Officer and Director
Atlas Financial Holdings, Inc.
150 NW Point Boulevard
Elk Grove Village, IL 60007
(847) 472-6700
(Name, address, including zip code, and telephone number, including
area code, of agent for service)

Copies to:
Douglas S. Ellenoff, Esq.
 
Brian J. Fahrney, Esq.
Adam S. Mimeles, Esq.
 
Sean M. Carney, Esq.
Ellenoff Grossman & Schole LLP
 
Sidley Austin LLP
150 East 42nd Street
 
One South Dearborn Street
New York, New York 10017
 
Chicago, Illinois 60603
(212) 370-1300
 
(312) 853-7000
(212) 370-7889 - Facsimile
 
(312) 853-7036 - Facsimile

Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of the registration statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box: [  ]

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: [  ]



If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: [  ]

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: [  ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.

Large accelerated filer [  ]
   
Accelerated filer [  ]
   
Non-accelerated filer [ ]
(Do not check if a smaller
reporting company)
   
Smaller reporting company [X]

CALCULATION OF REGISTRATION FEE
Title of Each Class of
Securities to be Registered
Amount to be
Registered (1)
Proposed
Maximum
Offering Price
per Ordinary Share (1)
 
Proposed
Maximum
Aggregate
Offering Price (1)
 
Amount of
Registration Fee (6)
Ordinary shares, $.001 par value (2) (3) (4) (5)
16,468,000
 
$
2.05
 
$
33,759,400

$
4,604.78

 
(1)
 
Estimated solely for the purpose of calculating the registration fee.
 
 
 
(2)
 
Pursuant to Rule 416, there are also being registered an indeterminable number of additional securities as may be issued to prevent dilution resulting from stock splits, stock dividends or similar transactions.
 
 
 
(3)
 
Includes those shares being registered on behalf of Kingsway America, Inc.
 
 
 
(4)
 
The 9,320,000 restricted voting shares sold by Kingsway America, Inc. convert automatically into ordinary shares upon the sale contemplated by this registration statement.
 
 
 
(5)
 
Includes ordinary shares that the underwriter has the option to purchase to cover over-allotments, if any.
 
 
 
(6)
 
$4,417.83 previously paid.


The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.




The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

Subject to Completion, Preliminary Prospectus dated November 16, 2012

14,320,000 Ordinary Shares



This is the initial public offering in the United States of the ordinary shares of Atlas Financial Holdings, Inc.

An aggregate of 14,320,000 shares are being offered in this prospectus. We are offering 5,000,000 of our ordinary shares and the selling shareholder named in this prospectus is offering 9,320,000 of our ordinary shares. We will not receive any proceeds from the sale of the ordinary shares being offered by the selling shareholder. To date, our ordinary shares have been exclusively listed on the TSX Venture Exchange (“TSXV”) under the symbol “AFH” since January 6, 2011. We have applied to have our ordinary shares listed for trading on the Nasdaq Capital Market, or NASDAQ, under the symbol “AFH.”

As of [•], 2012, the last reported sale price of our ordinary shares on the TSXV was C$[•] (or $[•], based on assumed exchange rate of C$[•] per $1 U.S.).

We are an “emerging growth company” under the federal securities laws and will be subject to reduced public company reporting requirements. Investing in our ordinary shares involves a high degree of risk. See “Risk Factors” beginning on page 8 of this prospectus for certain risk factors that you should consider before making a decision to invest in our ordinary shares.
 
 
 
Per Share
 
 
Total
Initial public offering price
$
[•]
 
$
[•]
Underwriting discounts, and commissions (1)
$
[•]
 
$
[•]
Proceeds, before expenses, to Atlas Financial Holdings, Inc.
$
[•]
 
$
[•]
Proceeds, before expenses, to selling shareholder
$
[•]
 
$
[•]

(1) See “Underwriting” beginning on page 86.

The selling shareholder has granted the underwriters a 30-day option to purchase up to an additional 2,148,000 ordinary shares from the selling shareholder at the public offering price, less the underwriting discount specified above, to cover over-allotments, if any.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined whether this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

Sandler O'Neill + Partners, L.P., on behalf of the underwriters, expects to deliver the shares to purchasers against payment on or about [•], 2012.


SANDLER O'NEILL + PARTNERS, L.P.




The date of this Prospectus is [•] ,2012





TABLE OF CONTENTS
 
Page
 1
 7
 9
 24
 25 
 25 
 26
Selling Shareholder
 27
 28
 29
 30
 38
 59
 66
 71
Beneficial Ownership of Ordinary Shares and Selling Shareholder
 76
 78
 80
U.S. Tax Considerations
 86
 90
 93
 94
 94
 94
 96

You should rely only on the information contained in this prospectus. Neither we nor the underwriters have authorized any other person to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. Neither we nor the underwriters are making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should assume that the information appearing in this prospectus is accurate only as of the date on the front cover of this prospectus. Our business, financial condition, results of operation and prospects may have changed since that date.

We use market data, demographic data, industry forecasts and projections throughout this prospectus. We have obtained certain market and industry data from publicly available industry publications. These sources generally state that the information they provide has been obtained from sources believed to be reliable, but that the accuracy and completeness of the information are not guaranteed. The forecasts and projections are based on historical market data, and there is no assurance that any of the projected amounts will be achieved. We believe that the market and industry research others have performed are reliable, but we have not independently verified this information.


i



PROSPECTUS SUMMARY
 
Our Business

We are a financial services holding company incorporated under the laws of the Cayman Islands. Our core business is the underwriting of commercial automobile insurance policies, focusing on the “light” commercial automobile sector, which is carried out through our insurance subsidiaries, American Country Insurance Company, or American Country, and American Service Insurance Company, Inc., or American Service, together with American Country, which we refer to as our “insurance subsidiaries”. This sector includes taxi cabs, non-emergency para-transit, limousine, livery and business auto. Our goal is to be the preferred specialty commercial transportation insurer in any geographic areas where our value proposition delivers benefit to all stakeholders.

We were formed as JJR VI, a Canadian capital pool company, on December 21, 2009 under the laws of Ontario, Canada. On December 31, 2010, we completed a reverse merger wherein American Service and American Country were transferred to us by Kingsway America Inc., or KAI, a wholly owned subsidiary of Kingsway Financial Services Inc., or KFSI, a Canadian public company whose shares are traded on the Toronto and New York Stock Exchanges. Prior to the transaction, each of American Service and American Country were wholly owned subsidiaries of KAI. American Country commenced operations in 1979. With roots dating back to 1925 selling insurance for taxi cabs, American Country is one of the oldest insurers of U.S. taxi and livery business. In 1983, American Service began as a non-standard personal and commercial auto insurer writing business in the Chicago, Illinois area.

In connection with the acquisition of American Service and American Country, we streamlined the operations of the insurance subsidiaries to focus on the “light” commercial automobile lines of business we believe will produce favorable underwriting results. Over the past two years, we have disposed of non-core assets and placed into run-off certain non-core lines of business previously written by the insurance subsidiaries. Our focus going forward is the underwriting of commercial automobile insurance in the U.S.

Substantially all of our new premiums written are in “light” commercial automobile lines of business. Our core commercial automobile line of business accounted for 92.6% of our gross written premium in the nine month period ended September 30, 2012, compared with 44.0% of our gross written premium in the nine month period ended September 30, 2011. For the same period, the gross written premium from our core commercial automobile line of business increased by 183% relative to the nine month period ended September 30, 2011.

We are committed to the light commercial automobile lines of business. The insurance subsidiaries distribute their products through a network of independent retail agents, and are actively writing insurance in 31 states as of September 30, 2012. Together, American Country and American Service are licensed to write property and casualty, or P&C, insurance in 47 states in the United States. American Country and American Service will actively write commercial automobile insurance in more states during 2012 than in any prior year.

Competitive Strengths

Our value proposition is driven by our competitive strengths, which include the following:

Focus on niche commercial insurance business. We target niche markets that support adequate pricing and believe we are able to adapt to changing market needs ahead of our competitors through our strategic focus and increasing scale. We develop and deliver superior specialty commercial automobile insurance products priced to meet our customers' needs and strive to generate consistent underwriting profit for our insurance subsidiaries. We have experienced a favorable trend in loss ratios in 2012 attributable to the increased composition of commercial auto as a percentage of the total written premium. We expect the loss ratio to continue decreasing as we complete the transition away from non-standard automobile insurance and other non-core lines of business.

Strong market presence with recognized brands and long-standing distribution relationships. American Country and American Service have a long heritage as insurers of taxi, livery and para-transit businesses. Both of the insurance subsidiaries have strong brand recognition and long-standing distribution relationships in our target markets. Through regular interaction with our retail producers, we strive to thoroughly understand each of the markets we serve in order to deliver strategically priced products to the right market at the right time.

Sophisticated underwriting and claims handling expertise. Atlas has extensive experience and expertise with respect to underwriting and claims management in our specialty area of insurance. Our well-developed underwriting and claims

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infrastructure includes an extensive data repository, proprietary technologies, deep market knowledge and established market relationships. Analysis of the substantial data available through our operating companies drives our product and pricing decisions. We believe that our underwriting and claims handling expertise provides enhanced risk selection, high quality service to our customers and greater control over claims expenses. We are committed to maintaining this underwriting and claims handling expertise as a core competency as our volume of business increases.

Scalable operations positioned for growth. Significant progress has also been made in aligning our cost base to our expected revenue base going forward. The core functions of the insurance subsidiaries were integrated into a common operating platform. Consequently, we believe that both insurance subsidiaries are well positioned to begin returning to the volume of premium they wrote in the recent past with better than industry level profitability from the efficient operating infrastructure honed in 2011.

Experienced management team. We have a talented and experienced management team led by our President and Chief Executive Officer, Scott Wollney, who has more than 21 years of experience in the property and casualty insurance industry. Our senior management team has worked in the property and casualty industry for an average of 21 years and with the insurance subsidiaries, directly or indirectly, for an average of 12 years.

Strategy

We seek to deploy our capital to maximize the return for our shareholders, either by investing in growing our operations or by pursuing other capital initiatives, depending upon insurance and capital market conditions. We focus on our key strengths and seek to expand our geographic footprint and products only to the extent these activities support our vision and mission. We will identify and prioritize market expansion opportunities based on the comparative strength of our value proposition relative to competitors, the market opportunity and the legal and regulatory environment.

We intend to continue to grow profitably by undertaking the following:

Re-establish legacy distribution relationships. We are focused on re-establishing relationships with independent agents that have been our distribution partners in the past. We seek to develop and maintain strategic distribution relationships with a relatively small number of independent agents, with substantial market presence, in each state in which we currently operate. We expect to continue to increase the distribution of our core products in the 31 states where we are actively writing insurance and re-capture insurance premium historically written by the insurance subsidiaries.

Expand our market presence. We are committed to continuing to diversify geographically by leveraging our experience, historical data and market research to expand our business in previously untapped geographic markets. Utilizing our established brands and market relationships we have made significant inroads in new states where we had no presence in 2011. We will continue to expand into additional states where we are licensed, but not currently active, and states where we are not currently licensed to the extent that our market expansion criteria is met in a given state.

Acquire complementary books of business and insurance companies. We plan to opportunistically pursue acquisitions of complementary books of business and insurance companies provided market conditions support this activity. We will evaluate each acquisition opportunity based on its expected economic contribution to our results and support of our market expansion initiatives.

Our Challenges
As part of your evaluation of our business, you should take into account the challenges we face in implementing our strategies, including the following:
Estimating Our Loss Reserves. We maintain loss reserves to cover our estimated ultimate liability for unpaid losses and loss adjustment expenses for reported and unreported claims incurred as of the end of each accounting period. These reserves represent management's estimates of what the ultimate settlement and administration of claims will cost and are not reviewed by an independent actuary. Setting reserves is inherently uncertain and there can be no assurance that current or future reserves will prove adequate. If our loss reserves are inadequate, it will have an unfavorable impact on our results. A summary of the favorable and unfavorable developments in our loss reserves in the previous 10-year period is on page 54.
Reliance on Independent Agents. We rely on independent agents and other producers to bind insurance policies and collect premiums. We have very limited oversight over these agents and other producers and in the event an independent agent

2



exceeds their authority by binding us to a risk that does not comply with our underwriting guidelines or fails to collect or remit premiums to us, our results of operations could be adversely affected.
Maintaining Our Financial Strength Ratings. In January 2012, A.M. Best affirmed the financial strength rating of “B” to our insurance subsidiaries. To maintain these ratings, our insurance company subsidiaries must maintain their capitalization and operating performance at a level consistent with projections provided to A.M. Best, as well as satisfy various other rating requirements. If A.M. Best downgrades our ratings, it is likely that we will not be able to compete as effectively and our ability to sell insurance policies could decline. As a result, our financial results would be adversely affected.
Attracting, Developing and Retaining Experienced Personnel. To sustain our growth as a property/casualty insurance company operating in specialty and niche markets, we must continue to attract, develop and retain management, marketing, distribution, underwriting, customer service and claims personnel with expertise in the products we offer. The loss of key personnel, or our inability to recruit, develop and retain additional qualified personnel, could materially and adversely affect our business, growth and profitability.
For further discussion of these and other challenges, see “Risk Factors.”
Recent Developments

2012 Third Quarter Financial Results

On November 12, 2012 we announced our 2012 third quarter financial results. Our third quarter financial results reflect our strategic focus on specialty commercial automobile lines of insurance and the winding down of certain non-core lines of business.

Gross premium written related to our core commercial automobile line of business was $22.1 million in the three month period ended September 30, 2012, representing a 313.4% increase relative to the three month period ended September 30, 2011. The increase in our commercial auto gross premium written was a result of the strategic focus on these core lines of business coupled with positive response from new and existing agents.

Our combined ratio for the three month period ended September 30, 2012 improved to 97.6%, compared to 119.7% for the three month period ended September 30, 2011 and 111.5% for the three month period ended June 30, 2012. The improvement in the combined ratio was attributable to reductions in the loss ratio, acquisition cost ratio and other underwriting expense ratio. These reductions were primarily due to the shift away from non-core lines of business and several recent cost saving initiatives.

Our basic and diluted earnings per common share in the three month period ended September 30, 2012 was $0.08. Book value per basic and diluted common share increased by $0.10 in the quarter and was $2.15 at the period ended September 30, 2012. This resulted in an annualized return on common equity of 11.4% for the three month period ended September 30, 2012.

For further discussion of our 2012 third quarter financial results, see “Management's Discussion and Analysis of Financial Condition and Results of Operations.”

Reverse Stock Split
On October 29, 2012 we announced a shareholder meeting to approve a one-for-three reverse stock split. The reverse stock split will decrease our authorized ordinary shares and restricted voting shares at a ratio of one-for-three. The primary objective of the reverse stock split is to increase the per share price of our ordinary shares to meet certain listing requirements of the NASDAQ Capital Market. The Board of Atlas unanimously recommends the approval of the reverse stock split and related corporate actions. The shareholder meeting will be held on December 7, 2012.

Acquisition of Gateway Insurance Company

On October 25, 2012 we entered into a definitive acquisition agreement with Hendricks Holding Company, Inc., an unaffiliated third party, to acquire Camelot Services, Inc., or Camelot Services, a privately owned insurance holding company, and its sole subsidiary, Gateway Insurance Company, or Gateway. Gateway provides specialized commercial insurance products, including commercial automobile insurance to niche markets such as taxicab, black car and sedan service owners and operators.


3



Gateway is a St. Louis, Missouri-based insurance company that currently underwrites approximately $10.0 million of annual taxi and limousine net written premium. Gateway is an admitted carrier in 46 states plus the District of Columbia. Upon closing, our acquisition of Gateway will expand our core commercial automobile lines to 39 states and the District of Columbia, including California, Hawaii, Montana, Nebraska, North Dakota, South Dakota, Washington, and West Virginia.

Under the terms of the acquisition agreement, the purchase price, which we estimate to be approximately $20.9 million, will equal the tangible GAAP book value of Camelot Services at December 31, 2012, subject to certain adjustments. The tangible book value of Camelot Services could be materially affected by a number of factors including, among others, any dividends paid by Camelot Services on or before December 31, 2012 and Gateway's actual loss experience and loss development between signing of the acquisition agreement and December 31, 2012. Additional consideration may be paid to or received from the seller depending upon, among other things, the development of Gateway's actual loss reserves for certain lines of business and the utilization of certain deferred tax assets over time. Gateway also writes workers' compensation insurance, which we are not acquiring as part of the transaction. An indemnity reinsurance agreement will be entered into pursuant to which 100% of Gateway's workers' compensation business will be ceded to an affiliate of the seller as part of the transaction.

Atlas will purchase all outstanding common shares of Camelot Services for a combination of cash and Atlas preferred shares. The amount of Atlas preferred shares issued to the seller will be determined prior to the closing of the transaction based on, among other things, Gateway's claims reserves at December 31, 2012 which are estimated to be between $4.0 million and $7.0 million. See "Description of Securities - Preferred Shares."

The transaction is expected to close in the first quarter of 2013 subject to the receipt of regulatory approvals and other customary closing conditions.

Corporate Information

The address of our registered office is Cricket Square, Hutchins Drive, PO Box 2681, Grand Cayman, KY1-1111, Cayman Islands. Our operating headquarters are located at 150 Northwest Point Boulevard, Elk Grove Village, Illinois 60007, USA. We maintain a website at http://www.atlas-fin.com. Information on our website or any other website does not constitute a part of this prospectus.



4



The Offering

Ordinary shares offered by Atlas
5,000,000 shares
 
 
Ordinary shares offered by selling shareholder
9,320,000 shares, assuming no exercise of the over-allotment option
 
 
Total offering
14,320,000 shares, assuming no exercise of the over-allotment option
 
 
Ordinary shares outstanding prior to this offering
18,433,153 sharesa
 
 
Ordinary shares outstanding after this offering
23,433,153 shares
 
 
Over-allotment option
The underwriters have an option to purchase a maximum of 2,148,000 additional shares from the selling shareholder to cover over-allotments. The underwriters can exercise this option at any time within 30 days from the date of this prospectus. We will not receive any proceeds from the exercise of this option.
 
 
Use of proceeds
We estimate that our net proceeds from the sale of the ordinary shares that we are offering will be approximately $[•] million, based on an assumed offering price of $[•] per share, after deducting underwriting discounts and commissions and estimated offering expenses payable by us (the U.S. dollar equivalent of the last reported sale price of our ordinary shares on the TSXV based on an assumed exchange rate of C$[•] per $1 U.S.).

We will not receive any proceeds from the sale of ordinary shares being offered by the selling shareholder.
The principal purposes of our initial offering in the United States are to create a public market for our ordinary shares and thereby enable future access to the public equity markets by us and our shareholders, and to obtain additional capital. We intend to use the net proceeds to us from our offering for working capital, to acquire complementary businesses or other assets, including Gateway, to repurchase preferred shares or for other general corporate purposes; however we do not have any specific uses of the net proceeds planned.

See “Use of Proceeds"
 
 
Dividend Policy
We did not declare or pay cash dividends on our capital stock during 2010, 2011 or to date in 2012. We currently intend to retain any future earnings for use in the operation of our business and do not intend to declare or pay any cash dividends in the foreseeable future. Any future determination to pay dividends on our capital stock will be at the discretion of our board of directors, subject to applicable laws, and will depend on our financial condition, results of operations, capital requirements, general business conditions, and other factors that our board of directors considers relevant.
 
 
Proposed NASDAQ Trading Symbol
We have applied for listing of our ordinary shares on the NASDAQ Capital Market (“NASDAQ”) under the symbol "AFH."
 
 
TSX Venture Exchange Symbol
"AFH"
 
 
Risk factors
Investing in our ordinary shares involves substantial risk. You should carefully consider all the information in this prospectus prior to making a decision to invest in our ordinary shares. In particular, we urge you to consider carefully the factors set forth in the section of this prospectus entitled “Risk Factors” beginning on page 8.

a - Ordinary shares outstanding prior to this offering includes 11,662,407 restricted voting shares owned by Kingsway America Inc.

5



Unless otherwise indicated, all information in this prospectus relating to the number of ordinary shares to be outstanding immediately after the completion of this offering:
excludes 3,983,502 warrants, all of which are exercisable within sixty days of the date hereof, 401,849 options, 216,974 of which are exercisable within sixty days of the date hereof, and 18,000,000 non-voting preferred shares;
excludes [•] restricted voting common shares that will remain issued and outstanding following completion of this offering (or [•] restricted voting common shares if the underwriters exercise in full the over-allotment option), which rank equally with the ordinary shares as to dividends;
assumes no exercise by the underwriter of its option to purchase up to 2,148,000 additional shares, as such shares will be drawn from the selling shareholder's previously outstanding shares; and
excludes the amount of Atlas preferred shares issued in the acquisition of Camelot Services.



6




SUMMARY CONSOLIDATED FINANCIAL DATA
 
The following table summarizes our consolidated financial data. We have derived the unaudited quarterly results for the years 2010 and 2011 from our audited consolidated financial statements for those years included elsewhere in this prospectus. The consolidated statements of income data for the nine months ended September 30, 2012 have been derived from our unaudited consolidated financial statements for that period appearing elsewhere in this prospectus. In our opinion, such financial statements include all adjustments, consisting only of normal recurring adjustments, that we consider necessary for a fair presentation of the financial information set forth in those statements. Our historical results are not necessarily indicative of our results in any future period. The summary of our consolidated financial data set forth below should be read together with our consolidated financial statements and the related notes, as well as the section entitled “Management's Discussion and Analysis of Financial Condition and Results of Operations,” included elsewhere in this prospectus.
(all amounts in '000s of USD, except per share data)
 
 
 
 
 
 
 
 
 
 
 
2012
 
2011
 
2010
 
Q3
Q2
Q1
 
Q4
Q3
Q2
Q1
 
Q4
Q3
Q2
Q1
Gross Premium Written
$
23,353

$
9,242

$
11,754

 
$
9,081

$
10,928

$
7,856

$
14,166

 
$
9,273

$
10,163

$
8,558

$
18,704

Net Premium Earned
10,934

7,552

8,310

 
9,079

8,797

9,062

8,809

 
11,595

10,192

12,515

19,301

Underwriting income/(loss)
264

(868
)
(617
)
 
(6,325
)
(1,729
)
(1,278
)
(1,906
)
 
(4,723
)
(2,393
)
(12,805
)
(4,061
)
Net income/(loss) attributable to Atlas
1,657

130

135

 
(3,024
)
1,066

193

(705
)
 
(11,430
)
(664
)
(8,135
)
(1,583
)
Net income/(loss) attributable to common shareholders(1)
1,455

(72
)
(64
)
 
(3,228
)
862

(9
)
(905
)
 
(11,430
)
(664
)
(8,135
)
(1,583
)
Basic earnings/(loss) per common share(1)
$
0.08

$

$

 
$
(0.18
)
$
0.05

$

$
(0.05
)
 
$
(0.62
)
$
(0.04
)
$
(0.44
)
$
(0.09
)
Diluted earnings/(loss) per common share(1)
$
0.08

$

$

 
$
(0.18
)
$
0.05

$

$
(0.05
)
 
$
(0.62
)
$
(0.04
)
$
(0.44
)
$
(0.09
)

(1) References to “common shares” and “common shareholders” refer to both the ordinary shares and restricted voting common shares and the shareholders of each. The restricted voting common shares rank equally with the ordinary shares as to dividends.


7



 
Nine Months Ended September 30,
Year Ended December 31,
 
2012
2011
2011
2010
Gross Premium Written
$
44,349

$
32,951

$
42,031

$
46,698

Net Premium Earned
26,795

26,668

35,747

53,603

Underwriting loss
(1,222
)
(4,913
)
(11,238
)
(23,984
)
Net income/(loss) attributable to Atlas
1,922

555

(2,470
)
(21,812
)
Net income/(loss) attributable to common shareholders (1)
1,316

(51
)
(3,280
)
(21,812
)
Basic earnings/(loss) per common share (1)
$
0.07

$

$
(0.18
)
$
(1.19
)
Diluted earnings/(loss) per common share (1)
0.07


(0.18
)
(1.19
)


(1) References to “common shares” and “common shareholders” refer to both the ordinary shares and restricted voting common shares and the shareholders of each. The restricted voting common shares rank equally with the ordinary shares as to dividends.


8




RISK FACTORS
Investing in our ordinary shares involves a high degree of risk. You should consider carefully the risks and uncertainties described below, together with all of the other information in this prospectus, including the financial statements and the related notes included elsewhere in this prospectus, before deciding whether to invest in our ordinary shares. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, may also become important factors that adversely affect our business. If any of the following risks actually occurs, our business, financial condition, results of operations, and future prospects could be materially and adversely affected. In that event, the market price of our ordinary shares could decline, and you could lose part or all of your investment.
The insurance subsidiaries' provisions for unpaid claims may be inadequate, which would result in a reduction in our net income and might adversely affect our financial condition.

Our success depends upon our ability to accurately assess and price the risks covered by the insurance policies that we write. We establish reserves to cover our estimated liability for the payment of losses and expenses related to the administration of claims incurred on the insurance policies we write. Establishing an appropriate level of reserves is an inherently uncertain process. Our provisions for unpaid claims do not represent an exact calculation of actual liability, but are estimates involving actuarial and statistical projections at a given point in time of what we expect to be the cost of the ultimate settlement and administration of known and unknown claims. The process for establishing the provision for unpaid claims reflects the uncertainties and significant judgmental factors inherent in estimating future results of both known and unknown claims and as such, the process is inherently complex and imprecise. We utilize a third party actuarial firm to assist us in estimating the provision for unpaid claims. These estimates are based upon various factors, including:

actuarial and statistical projections of the cost of settlement and administration of claims reflecting facts and circumstances then known;
historical claims information;
assessments of currently available data;
estimates of future trends in claims severity and frequency;
judicial theories of liability;
economic factors such as inflation;
estimates and assumptions regarding judicial and legislative trends, and actions such as class action lawsuits and judicial interpretation of coverages or policy exclusions; and
the level of insurance fraud.

Most or all of these factors are not directly quantifiable, particularly on a prospective basis, and the effects of these and unforeseen factors could negatively impact our ability to accurately assess the risks of the policies that we write. In addition, there may be significant reporting lags between the occurrence of the insured event and the time it is actually reported to the insurer and additional lags between the time of reporting and final settlement of claims. Unfavorable development in any of these factors could cause the level of reserves to be inadequate. The following factors may have a substantial impact on future claims incurred:

the amounts of claims payments;
the expenses that the insurance subsidiaries incur in resolving claims;
legislative and judicial developments; and
changes in economic conditions, including inflation.

As time passes and more information about the claims becomes known, the estimates are adjusted upward or downward to reflect this additional information. Because of the elements of uncertainty encompassed in this estimation process, and the extended time it can take to settle many of the more substantial claims, several years of experience may be required before a meaningful comparison can be made between actual losses and the original provision for unpaid claims. The development of the provision for unpaid claims is shown by the difference between estimates of claims as of the initial year end and the re-estimated liability at each subsequent year end. Favorable development (reserve redundancy) means that the original claims estimates were higher than subsequently determined or re-estimated. Unfavorable development (reserve deficiency) means that the original claims estimates were lower than subsequently determined or re-estimated.

For example, 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

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adjusted at that time by approximately $2.3 million to account for these changes, primarily during the second and third quarters of 2010. This review continued into 2011 and Atlas recorded a $1.8 million adjustment to further strengthen its reserves for claims related to policies issued while the insurance subsidiaries were under previous ownership in years preceding 2010. We cannot guarantee that we will not have additional unfavorable reserve developments in the future. Upon successful completion of the Gateway acquisition, we will become responsible for the historical loss reserves established by their management. While the definitive acquisition agreement provides for certain protections in this regard, there can be no assurances that they will be sufficient to offset any adverse development to Gateway's historical loss reserves. In addition, we have entered into an agreement to acquire Gateway with established reserves and we may in the future acquire other insurance companies. We cannot guarantee that the provisions for unpaid claims of the companies that we acquire are or will be adequate. Government regulators could require that we increase reserves if they determine that provisions for unpaid claims are understated. Increases to the provision for unpaid claims causes a reduction in our insurance subsidiaries' surplus which could cause a downgrading of our insurance subsidiaries' ratings. Any such downgrade could, in turn, adversely affect their ability to sell insurance policies.

Our success depends on our ability to accurately price the risks we underwrite.
Our results of operations and financial condition depend on our ability to underwrite and set premium rates accurately for a wide variety of risks. Adequate rates are necessary to generate premiums sufficient to pay losses, loss settlement expenses and underwriting expenses and to earn a profit. To price our products accurately, we must collect and properly analyze a substantial amount of data; develop, test and apply appropriate pricing techniques; closely monitor and timely recognize changes in trends; and project both severity and frequency of losses with reasonable accuracy. Our ability to undertake these efforts successfully, and as a result price our products accurately, is subject to a number of risks and uncertainties, some of which are outside our control, including:
the availability of sufficient reliable data and our ability to properly analyze available data;
the uncertainties that inherently characterize estimates and assumptions;
our selection and application of appropriate pricing techniques; and
changes in applicable legal liability standards and in the civil litigation system generally.
Consequently, we could under price risks, which would adversely affect our profit margins, or we could overprice risks, which could reduce our sales volume and competitiveness. In either case, our profitability could be materially and adversely affected.
Our insurance subsidiaries rely on independent agents and other producers to bind insurance policies on and to collect premiums from our policyholders, which exposes us to risks that our producers fail meet their obligations to us.

Our insurance subsidiaries market and distribute automobile insurance products through a network of independent agents and other producers in the United States. Gateway also relies on independent agents to distribute its insurance products and we do not have existing relationships with many of Gateway's independent agents. We rely, and will continue to rely, heavily on these producers to attract new business. Independent producers generally have the ability to bind insurance policies and collect premiums on our behalf, actions over which we have a limited ability to exercise preventative control. In the event that an independent agent exceeds their authority by binding us on a risk that does not comply with our underwriting guidelines, we may be at risk for that policy until we effect a cancellation. Any improper use of such authority may result in losses that could have a material adverse effect on our business, results of operations and financial condition. In addition, in accordance with industry practice, policyholders often pay the premiums for their policies to producers for payment to us. These premiums may be considered paid when received by the producer and thereafter the customer is no longer liable to us for those amounts, whether or not we have actually received these premium payments from the producer. Consequently, we assume a degree of risk associated with our reliance on independent agents in connection with the settlement of insurance premium balances.

Our insurance subsidiaries may be unable to mitigate their risk or increase their underwriting capacity through reinsurance arrangements, which could adversely affect our business, financial condition and results of operations. If reinsurance rates rise significantly or reinsurance becomes unavailable or reinsurers are unable to pay our claims, we may be adversely affected.

In order to reduce underwriting risk and increase underwriting capacity, our insurance subsidiaries transfer portions of our insurance risk to other insurers through reinsurance contracts. We generally purchase reinsurance from third parties in order to reduce our liability on individual risks. Reinsurance does not relieve us of our primary liability to our insurance subsidiaries' insureds. Through the nine month period ended September 30, 2012, we had ceded premium written of $4.9 million to our reinsurers. The availability, cost and structure of reinsurance protection are subject to prevailing market conditions that are outside of our control and which may affect our level of business and profitability. Our company's ability to provide insurance at competitive premium rates and coverage limits on a continuing basis depends in part upon the extent to which we can obtain

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adequate reinsurance in amounts and at rates that will not adversely affect our competitive position. There are no assurances that we will be able to maintain our current reinsurance facilities, which generally are subject to annual renewal. If we are unable to renew any of these facilities upon their expiration or to obtain other reinsurance facilities in adequate amounts and at favorable rates, we may need to modify our company's underwriting practices or reduce our company's underwriting commitments, which could adversely affect our results of operations.

Effective immediately after the close of the Gateway transaction, we will enter into a reinsurance agreement with a third party reinsurer, which will cover all in force premium and loss reserves for Gateway's workers' compensation program. Along with the reserves, any go-forward premium written for the workers' compensation program will be ceded in its entirety to this third party reinsurer under the terms of this reinsurance agreement. While Gateway will remain liable to its insureds, we expect to have no net exposure to any losses related to this workers' compensation business subsequent to the effective date of the acquisition.

Our insurance subsidiaries are subject to credit risk with respect to the obligations of reinsurers and certain of our insureds. The inability of our risk sharing partners to meet their obligations could adversely affect our profitability.

Although the reinsurers are liable to us to the extent of risk ceded to them, we remain ultimately liable to policyholders on all risks, even those reinsured. As a result, ceded reinsurance arrangements do not limit our ultimate obligations to policyholders to pay claims. We are subject to credit risks with respect to the financial strength of our reinsurers. We are also subject to the risk that their reinsurers may dispute their obligations to pay our claims. As a result, we may not recover sufficient amounts for claims that we submit to reinsurers, if at all. As of September 30, 2012, we had an aggregate of $7.0 million of unsecured reinsurance recoverables. In addition, our reinsurance agreements are subject to specified limits and we would not have reinsurance coverage to the extent that it exceeds those limits.

With respect to insurance programs, the insurance subsidiaries are subject to credit risk with respect to the payment of claims and on the portion of risk exposure either ceded to captives established by their clients or deductibles retained by their clients. No assurance can be given regarding the future ability of these entities to meet their obligations. The inability of our risk sharing partners to meet their obligations could adversely affect our mprofitability.

The exclusions and limitations in our policies may not be enforceable.
 
Many of the policies we issue include exclusions or other conditions that define and limit coverage, which exclusions and conditions are designed to manage our exposure to certain types of risks and expanding theories of legal liability. In addition, many of our policies limit the period during which a policyholder may bring a claim under the policy, which period in many cases is shorter than the statutory period under which these claims can be brought by our policyholders. While these exclusions and limitations help us assess and control our loss exposure, it is possible that a court or regulatory authority could nullify or void an exclusion or limitation, or legislation could be enacted modifying or barring the use of these exclusions and limitations. This could result in higher than anticipated losses and claims handling expenses by extending coverage beyond our underwriting intent or increasing the number or size of claims, which could have a material adverse effect on our operating results. In some instances, these changes may not become apparent until some time after we have issued the insurance policies that are affected by the changes. As a result, the full extent of liability under our insurance contracts may not be known for many years after a policy is issued.

The occurrence of severe catastrophic events may have a material adverse effect on our financial results and financial condition.

Although our business strategy generally precludes us from writing significant amounts of catastrophe exposed business, most property and casualty insurance contains some exposure to catastrophic loss. We have only limited exposure to natural and man-made disasters, such as hurricane, typhoon, windstorm, flood, earthquake, acts of war, acts of terrorism and political instability. While we carefully manage our aggregate exposure to catastrophes, modeling errors and the incidence and severity of catastrophes, such as hurricanes, windstorms and large-scale terrorist attacks are inherently unpredictable, and our losses from catastrophes could be substantial. In addition, it is possible we may experience an unusual frequency of smaller losses in a particular period. In either case, the consequences could be substantial volatility in our financial condition or results of operations for any fiscal quarter or year, which could have a material adverse effect on our our ability to write new business. These losses could deplete our shareholders' equity. Increases in the values and geographic concentrations of insured property and the effects of inflation have resulted in increased severity of industry losses from catastrophic events in recent years and we expect that those factors will increase the severity of catastrophe losses in the future. Though we built an expanded presence in New York during the third quarter of 2012, we do not believe our exposure in that state to Hurricane Sandy to be material.


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The risk models we use to quantify catastrophe exposures and risk accumulations may prove inadequate in predicting all outcomes from potential catastrophe events.

We use widely accepted and industry-recognized catastrophe risk modeling programs to help us quantify our aggregate exposure to any one event. As with any model of physical systems, particularly those with low frequencies of occurrence and potentially high severity of outcomes, the accuracy of the model's predictions is largely dependent on the accuracy and quality of the data provided in the underwriting process and the judgments of our employees and other industry professionals. These models do not anticipate all potential perils or events that could result in a catastrophic loss to us. Furthermore, it is often difficult for models to anticipate and incorporate events that have not been experienced during or as a result of prior catastrophes. Accordingly, it is possible for us to be subject to events or contingencies that have not been anticipated by our catastrophe risk models and which could have a material adverse effect on our reserves and results of operations.

Financial Risks

We are a holding company dependent on the results of operations of our subsidiaries and their ability to pay dividends and other distributions to us.

Atlas is a holding company with no significant operations of its own and a legal entity separate and distinct from our company's insurance subsidiaries. As a result, our company's only sources of income are dividends and other distributions from our insurance subsidiaries. We will be limited by the earnings of those subsidiaries, and the distribution or other payment of such earnings to it in the form of dividends, loans, advances or the reimbursement of expenses. The payment of dividends, the making of loans and advances or the reimbursement of expenses by our insurance subsidiaries is contingent upon the earnings of those subsidiaries and is subject to various business considerations and various statutory and regulatory restrictions imposed by the insurance laws of the domiciliary jurisdiction of such subsidiaries. In Illinois, the insurance subsidiaries' state of domicile, dividends may only be paid out of earned surplus and cannot be paid when the surplus of the company fails to meet minimum requirements or when payment of the dividend or distribution would reduce its surplus to less than the minimum amount. The state insurance regulator must be notified in advance of the payment of an extraordinary dividend and be given the opportunity to disapprove any such dividend. Our insurance subsidiaries cannot currently pay any dividends to Atlas without regulatory approval. In addition, prior to entering into any loan or certain other agreements between one or more of our insurance companies and Atlas or our other affiliates, advance notice must be provided to the state insurance regulator and the insurance regulator has the opportunity to disapprove such loan or agreement. Additionally, insurance regulators have broad powers to prevent reduction of statutory capital and surplus to inadequate levels and could refuse to permit the payment of dividends calculated under any applicable formula. As a result, we may not be able to receive dividends or other distributions from our insurance subsidiaries at times and in amounts necessary to meet our operating needs, to pay dividends to shareholders or to pay corporate expenses. The inability of our insurance subsidiaries to pay dividends or make other distributions could have a material adverse effect on our business and financial condition.

Our insurance subsidiaries are subject to minimum capital and surplus requirements. Failure to meet these requirements could subject us to regulatory action.
 
Our insurance company subsidiaries are subject to minimum capital and surplus requirements imposed under the laws of Illinois and each state in which they issue policies. Any failure by one of our insurance subsidiaries to meet minimum capital and surplus requirements imposed by applicable state law will subject it to corrective action, which may include requiring adoption of a comprehensive financial plan, revocation of its license to sell insurance products or placing the subsidiary under state regulatory control. Any new minimum capital and surplus requirements adopted in the future may require us to increase the capital and surplus of our insurance company subsidiaries, which we may not be able to do. Upon the successful completion of the Gateway acquisition, we will also be subject to minimum capital and surplus requirements imposed under the laws of Missouri and the additional states where Gateway writes business.
 
We are subject to assessments and other surcharges from state guaranty funds, mandatory reinsurance arrangements and state insurance facilities, which may reduce our profitability.
 
Virtually all states require insurers licensed to do business therein to bear a portion of the unfunded obligations of impaired or insolvent insurance companies. These obligations are funded by assessments, which are levied by guaranty associations within the state, up to prescribed limits, on all member insurers in the state on the basis of the proportionate share of the premiums written by member insurers in the lines of business in which the impaired, insolvent or failed insurer was engaged. Accordingly, the assessments levied on us by the states in which we are licensed to write insurance may increase as we increase our premiums written. In addition, as a condition to the ability to conduct business in certain states, insurance companies are

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required to participate in mandatory reinsurance funds. The effect of these assessments and mandatory reinsurance arrangements, or changes in them, could reduce our profitability in any given period or limit our ability to grow our business.

Market fluctuations, changes in interest rates or a need to generate liquidity could have significant and negative effects on our investment portfolio. We may not be able to realize our investment objectives, which could significantly reduce our net income.

We depend on income from our securities portfolio for a substantial portion of our earnings. Investment returns are an important part of our overall profitability. A significant decline in investment yields in the securities portfolio or an impairment of securities owned could have a material adverse effect on our business, results of operations and financial condition. We currently maintain and intend to continue to maintain a securities portfolio comprised primarily of fixed income securities. As of September 30, 2012, our investment portfolio was invested in fixed income securities. We cannot predict which industry sectors in which we maintain investments may suffer losses as a result of potential declines in commercial and economic activity, or how any such decline might impact the ability of companies within the affected industry sectors to pay interest or principal on their securities and cannot predict how or to what extent the value of any underlying collateral might be affected. Accordingly, adverse fluctuations in the fixed income or equity markets could adversely impact profitability, financial condition or cash flows. Historically, we have not had the need to sell our investments to generate liquidity. If we are forced to sell portfolio securities that have unrealized losses for liquidity purposes rather than holding them to maturity or recovery, we would recognize investment losses on those securities when that determination was made.

Our ability to achieve our investment objectives is affected by general economic conditions that are beyond our control. General economic conditions can adversely affect the markets for interest rate sensitive securities, including the extent and timing of investor participation in such markets, the level and volatility of interest rates and, consequently, the value of fixed maturity securities. U.S. and global markets have been experiencing volatility since mid-2007. Initiatives taken by the U.S. and foreign governments have helped to stabilize the financial markets and restore liquidity to the banking system and credit markets. In addition, markets in the United States and around the world experienced volatility in 2011 due, in part, to sovereign debt downgrades. Although economic conditions and financial markets have somewhat stabilized, if market conditions were to deteriorate, our investment portfolio could be adversely affected.

Difficult conditions in the economy generally may materially adversely affect our business, results of operations, and statement of financial position and these conditions may not improve in the near future.

Current market conditions and the instability in the global financial markets present additional risks and uncertainties for our business. In particular, deterioration in the public debt markets could lead to additional investment losses and an erosion of capital as a result of a reduction in the fair value of investment securities. The severe downturn in the public debt and equity markets, reflecting uncertainties associated with the mortgage crisis, worsening economic conditions, widening of credit spreads, bankruptcies and government intervention in large financial institutions, created significant unrealized losses in our securities portfolio at certain stages in 2009.

Economic uncertainty has recently been exacerbated by the increased potential for default by one or more European sovereign debt issuers, the potential partial or complete dissolution of the Eurozone and its common currency and the negative impact of such events on global financial institutions and capital markets generally. Actions or inactions of European governments may impact these actual or perceived risks. In the U.S. during 2011, one rating agency downgraded the U.S.'s long-term debt credit rating from AAA. Future actions or inactions of the United States government, including a shutdown of the federal government, could increase the actual or perceived risk that the U.S. may not ultimately pay its obligations when due and may disrupt financial markets.

We and our investment manager consider these issues in connection with current asset allocation decisions with the object of avoiding them going forward. However, depending on market conditions going forward, we could again incur substantial realized and additional unrealized losses in future periods, which could have an adverse impact on the results of operations and financial condition. There can be no assurance that the current market conditions will improve in the near future. We could also experience a reduction in capital in the insurance subsidiaries below levels required by the regulators in the jurisdictions in which we operate. Certain trust accounts for the benefit of related companies and third parties have been established with collateral on deposit under the terms and conditions of the relevant trust agreements. The value of collateral could fall below the levels required under these agreements putting the subsidiary or subsidiaries in breach of the agreement.

We may not have access to capital in the future.


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We may need new or additional financing in the future to conduct our operations, or expand our business. However, we may be unable to raise capital on favorable terms, or at all, including as a result of disruptions, uncertainty and volatility in the global credit markets, or due to any sustained weakness in the general economic conditions and/or financial markets in Canada, the United States or globally. From time-to-time, we may rely on access to financial markets as a source of liquidity for operations, acquisitions and general corporate purposes.

The limited public float and trading volume for our shares may have an adverse impact on the share price or make it difficult to liquidate.

Our securities are held by a relatively small number of shareholders. Future sales of substantial amounts of our shares in the public market, or the perception that these sales could occur, may adversely impact the market price of our shares and our shares could be difficult to liquidate.

Our ordinary shares may be listed on both the TSXV and the NASDAQ which may increase the volatility of our ordinary share price on both exchanges.

Upon completion of the offering, we expect our ordinary shares to be dual listed on NASDAQ and the TSX Venture Exchange. However, once our ordinary shares are dual listed, the trading volume of our ordinary shares on each particular exchange may decrease. As a result of this diminished trading volume, the stock price of our ordinary shares may be more volatile.

Our business depends upon key employees, and if we are unable to retain the services of these key employees or to attract and retain additional qualified personnel, our business may suffer.
Our operations depend, to a great extent, upon the ability of executive management and other key employees to implement our business strategy and our ability to attract and retain additional qualified personnel in the future. The loss of the services of any of our key employees, or the inability to identify, hire and retain other highly qualified personnel in the future, could adversely affect the quality and profitability of our business operations. In addition, our company must forecast volume and other factors in changing business environments with reasonable accuracy and adjust our hiring and employment levels accordingly. Our failure to recognize the need for such adjustments, or our failure or inability to react appropriately on a timely basis, could lead our company either to over-staffing (which could adversely affect our cost structure) or under-staffing (which could impair our ability to service current product lines and new lines of business). In either event, our financial results and customer relationships could be adversely affected.

Compliance Risks
We are subject to comprehensive regulation, and our results may be unfavorably impacted by these regulations.

As a holding company which owns insurance companies domiciled in the United States, we and our insurance subsidiaries are subject to comprehensive laws and regulations. These laws and regulations generally delegate regulatory, supervisory and administrative powers to state insurance regulators. Insurance regulations are generally designed to protect policyholders rather than shareholders, and are related to matters including:

rate setting;
the National Association of Insurance Commissioner's Risk Based Capital (RBC) ratio and solvency standards, as adopted by the state insurance departments which regulate our subsidiaries;
restrictions on the amount, type, nature, quality and quantity of securities in which insurers may invest;
the maintenance of adequate reserves for unearned premiums and unpaid claims;
restrictions on the types of terms that can be included in insurance policies;
standards for accounting;
marketing practices;
claims settlement practices;
the examination of insurance companies by regulatory authorities, including periodic financial and market conduct examinations;
the licensing of insurers and their agents;
limitations on dividends and transactions with affiliates;
approval of certain reinsurance transactions; and
insolvency proceedings.


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Such rules and regulations are expected to increase our legal and financial compliance costs and to make some activities more time-consuming and costly. A significant amount of resources have been committed to monitor and address any internal control issues, and failure to do so could adversely impact operating results. State insurance departments also conduct periodic examinations of the affairs of insurance companies and require filing of annual and other reports relating to the financial condition of insurance companies, holding company issues and other matters. Our business depends on compliance with applicable laws and regulations and our ability to maintain valid licenses and approvals for our operations. Regulatory authorities may deny or revoke licenses for various reasons, including violations of regulations. Changes in the level of regulation of the insurance industry or changes in laws or regulations themselves or interpretations by regulatory authorities could have a material adverse affect on our operations. In addition, we could face individual, group and class-action lawsuits by our policyholders and others for alleged violations of certain state laws and regulations. Each of these regulatory risks could have an adverse effect on our profitability. It is not possible to predict the future impact of changing federal and state regulation on our operations, and there can be no assurance that laws and regulations enacted in the future will not be more restrictive than existing laws and regulations. New or more restrictive regulations, including changes in current tax or other regulatory interpretations affecting an alternative risk transfer insurance model, could make it more expensive for our company to conduct our businesses, restrict the premiums our subsidiaries are able to charge or otherwise change the way it does business. In addition, economic and financial market turmoil or other conditions, circumstances or events may result in U.S. federal oversight of the insurance industry in general.

Our business is subject to risks related to litigation and regulatory actions.

We may from time-to-time be subject to a variety of legal and regulatory actions relating to our current and past business operations, including, but not limited to:

disputes over coverage or claims adjudication, including claims alleging that we have acted in bad faith in the administration of claims by our policyholders;
disputes regarding sales practices, disclosure, premium refunds, licensing, regulatory compliance and compensation arrangements;
limitations on the conduct of our business;
disputes with our agents, producers or network providers over compensation and termination of contracts and related claims;
disputes with taxing authorities regarding tax liabilities; and
disputes relating to certain businesses acquired or disposed of by us.

As insurance industry practices and regulatory, judicial and industry conditions change, unexpected and unintended issues related to pricing, claims, coverage and business practices may emerge. Plaintiffs often target P&C insurers in purported class action litigation relating to claims handling and insurance sales practices. The resolution and implications of new underwriting, claims and coverage issues could have a negative effect on our business by extending coverage beyond our underwriting intent, increasing the size of claims or otherwise requiring them to change their practices. The effects of unforeseen emerging claim and coverage issues could negatively impact revenues, results of operations and reputation. Current and future court decisions and legislative activity may increase our exposure to these types of claims. Multi-party or class action claims may present additional exposure to substantial economic, non-economic or punitive damage awards. The loss of even one of these claims, if it resulted in a significant damage award or a judicial ruling that was otherwise detrimental, could create a precedent in the industry that could have a material adverse effect on our results of operations and financial condition. This risk of potential liability may make reasonable settlements of claims more difficult to obtain. We cannot determine with any certainty what new theories of recovery may evolve or what their impact may be on our business.

We have been and may be subject to governmental or administrative investigations and proceedings in the context of our highly regulated sectors of activity. For example, our insurance subsidiaries have been subject to numerous inquiries related to the substantial ownership interest in us held by KAI. The result of these inquiries could lead to additional requirements being placed on us or our insurance subsidiaries or other conditions, any of which could increase our costs of regulatory compliance and could have an adverse affect on our ability to operate our business. As a general matter, we cannot predict the outcome of regulatory investigations, proceedings and reviews, and cannot guarantee that such investigations, proceedings or reviews or related litigation or changes in operating policies and practices would not materially adversely affect our results of operations and financial condition. In addition, if we were to experience difficulties with our relationship with a regulatory body in a given jurisdiction, it could have a material adverse effect on our ability to do business in that jurisdiction.

Our business could be adversely affected as a result of changing political, regulatory, economic or other influences.


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The insurance industry is subject to changing political, economic and regulatory influences. These factors affect the practices and operation of insurance and reinsurance organizations. Legislatures in the United States and other jurisdictions have periodically considered programs to reform or amend their respective insurance and reinsurance regulatory systems. Recently, the insurance and reinsurance regulatory framework has been subject to increased scrutiny in many jurisdictions. Changes in current insurance regulation may result in increased governmental involvement in the insurance industry or may otherwise change the business and economic environment in which insurance industry participants operate. Historically, the automobile insurance industry has been under pressure from time to time from regulators, legislators or special interest groups to reduce, freeze or set rates at levels that are not necessarily related to underlying costs or risks, including initiatives to reduce automobile and other commercial line insurance rates. These changes may limit the ability of the insurance subsidiaries to price automobile insurance adequately and could require us to discontinue unprofitable product lines, make unplanned modifications of our products and services, or result in delays or cancellations of sales of our products and services.
Strategic Risks
Our geographic concentration ties our performance to the business, economic, regulatory and other conditions of certain states.

Some jurisdictions (including, most notably New York, Illinois, Michigan, and Louisiana) generate a more significant percentage of our total premiums than others. Our revenues and profitability are subject to the prevailing regulatory, legal, economic, political, demographic, competitive, weather and other conditions in the principal states in which we do business. Changes in any of these conditions could make it less attractive for us to do business in such states and would have a more pronounced effect on us compared to companies that are more geographically diversified. In addition, our exposure to severe losses from localized perils, such as earthquakes, hurricanes, tropical storms, tornadoes, wind, ice storms, hail, fires, terrorism, riots and explosions, is increased in those areas where we have written significant numbers of property/casualty insurance policies. Given our geographic concentration, negative publicity regarding our products and services could have a material adverse effect on our business and operations, as could other regional factors impacting the local economies in that market.

In order to operate in a profitable manner, we need to maintain our current level of premiums written. We may experience difficulty in managing historic and future growth, which could adversely affect our results of operations and financial condition.

We believe that, given our fixed costs associated with underwriting and administering our insurance operations, our insurance subsidiaries must maintain annual net written premiums in excess of approximately $50 million in order to achieve our targeted levels of profitability. In order to maintain and increase this level of premiums written, we intend to expand geographically and increase our market share via our expanded distribution network. Continued growth could impose significant demands on management, including the need to identify, recruit, maintain and integrate additional employees. Growth may also place a strain on management systems and operational and financial resources, and such systems, procedures and internal controls may not be adequate to support operations as they expand.

The integration and management of acquired books of business, acquired businesses and other growth initiatives involve numerous risks that could adversely affect our profitability, and are contingent on many factors, including:

expanding our financial, operational and management information systems;
managing our relationships with independent agents, brokers, and legacy program managers including maintaining adequate controls;
expanding our executive management and the infrastructure required to effectively control our growth;
maintaining ratings for certain of our insurance subsidiaries;
increasing the statutory capital of our insurance subsidiaries to support growth in written premiums;
accurately setting claims provisions for new business where historical underwriting experience may not be available;
obtaining regulatory approval for appropriate premium rates where applicable; and
obtaining the required regulatory approvals to offer additional insurance products or to expand into additional states or other jurisdictions.

Our failure to grow our premiums written or to manage our growth effectively could have a material adverse effect on our business, financial condition or results of operations.

Engaging in acquisitions involves risks and, if we are unable to effectively manage these risks our business may be materially harmed.

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Acquisitions of similar insurance providers are expected to be a material component of our growth strategy, subject to availability of suitable opportunities and market conditions. From time-to-time we may engage in discussions concerning acquisition opportunities and, as a result of such discussions, may enter into acquisition transactions. Upon the announcement of an acquisition, our share price may fall depending on the size of the acquisition, the purchase price and the potential dilution to existing shareholders. It is also possible that an acquisition could dilute earnings per share. Acquisitions entail numerous risks, including the following:

difficulties in the integration of the acquired business;
assumption of unknown material liabilities, including deficient provisions for unpaid claims;
diversion of management's attention from other business concerns;
failure to achieve financial or operating objectives; and
potential loss of policyholders or key employees of acquired companies.

We may be unable to integrate or profitably operate any business, operations, personnel, services or products that we may acquire in the future, which may result in our inability to realize expected revenue increases, cost savings, increases in geographic or product presence, and other projected benefits from the acquisition. Integration may result in the loss of key employees, disruption to the existing businesses or the business of the acquired company, or otherwise harm our ability to retain customers and employees or achieve the anticipated benefits of the acquisition. Time and resources spent on integration may also impair our ability to grow our existing businesses. Also, the negative effect of any financial commitments required by regulatory authorities or rating agencies in acquisitions or business combinations may be greater than expected. It is too early to predict whether the integration of Gateway will have any of these effects on Atlas.

Various factors may inhibit potential acquisition bids that could be beneficial to shareholders.

Regulatory provisions may delay, defer or prevent a takeover attempt that shareholders may consider in their best interest. For example, under applicable state statutes, subject to limited exceptions, no person or entity may, directly or indirectly, acquire control of a domestic insurer without the prior approval of the state insurance regulator. Under the insurance laws, "control" (including the terms "controlling," "controlled by" and "under common control with") is generally defined to include acquisition of a certain percentage or more of an insurer's voting securities (such as 10% or more under Illinois law). These requirements may require a potential bidder to obtain prior approval from the insurance departments of the states in which the insurance subsidiaries are domiciled and commercially domiciled and may require pre-acquisition notification in other states. Obtaining these approvals could result in material delays or deter any such transaction. Regulatory requirements could make a potential acquisition of our company more difficult and may prevent shareholders from receiving the benefit from any premium over the market price of our shares offered by a bidder in a takeover context. Even in the absence of a takeover attempt, the existence of these provisions may adversely affect the prevailing market price of our shares if they are viewed as discouraging takeover attempts in the future. Our acquisition of Gateway is in the early stages of regulatory approval.

Provisions in our organizational documents, corporate laws and the insurance laws of Illinois and other states could impede an attempt to replace or remove management or directors or prevent or delay a merger or sale, which could diminish the value of our shares.

Our Memorandum of Association, Articles of Association and Code of Regulations and the corporate laws and the insurance laws of various states contain, or are anticipated to contain, provisions that could impede an attempt to replace or remove management or directors or prevent the sale of the insurance subsidiaries that shareholders might consider to be in their best interests. These provisions may include, among others:

requiring a vote of holders of 5% of the ordinary shares to call a special meeting of shareholders;
requiring a two-thirds vote to amend the Articles of Association;
requiring the affirmative vote of a majority of the voting power of shares represented at a special meeting of shareholders; and
statutory requirements prohibiting a merger, consolidation, combination or majority share acquisition between the insurance subsidiaries and an interested shareholder or an affiliate of an interested shareholder without regulatory approval.

These provisions may prevent shareholders from receiving the benefit of any premium over the market price of our shares offered by a bidder in a potential takeover. In addition, the existence of these provisions may adversely affect the prevailing market price of our shares if they are viewed as discouraging takeover attempts. The applicable insurance laws require prior notice or regulatory approval of direct or indirect changes in control of an insurance company or any person or entity that

17



controls an insurance company. The insurance laws of the State of Illinois, where the insurance subsidiaries are domiciled, provide that no corporation or other person may acquire direct or indirect control of a domestic insurance company unless it has given notice to such insurance company and obtained prior written approval of the relevant insurance regulatory authorities. Under Illinois law, a purchaser of 10% or more of our voting securities could become subject to these regulations and could be required to file notices and reports with, and obtain written approval from, the applicable regulatory authorities prior to such acquisition. In addition, the existence of these provisions may adversely affect the prevailing market price of our shares if they are viewed as discouraging takeover attempts.

Market and Competition Risks
Because the insurance subsidiaries are commercial automobile insurers, conditions in that industry could adversely affect their business.
The majority of the gross premiums written by our insurance subsidiaries are generated from commercial automobile insurance policies. Adverse developments in the market for commercial automobile insurance, including those which could result from potential declines in commercial and economic activity, could cause our results of operations to suffer. The commercial automobile insurance industry is cyclical. Historically, the industry has been characterized by periods of price competition and excess capacity followed by periods of higher premium rates and shortages of underwriting capacity. These fluctuations in the business cycle have negatively impacted and could continue to negatively impact the revenues of our company. The results of the insurance subsidiaries, and in turn, us, may also be affected by risks, to the extent they are covered by the insurance policies we issue, that impact the commercial automobile industry related to severe weather conditions, floods, hurricanes, tornadoes, earthquakes and tsunamis, as well as explosions, terrorist attacks and riots. The insurance subsidiaries' commercial automobile insurance business may also be affected by cost trends that negatively impact profitability, such as a continuing economic downturn, inflation in vehicle repair costs, vehicle replacement parts costs, used vehicle prices, fuel costs and medical care costs. Increased costs related to the handling and litigation of claims may also negatively impact profitability. Legacy business previously written by us also includes private passenger auto, surety and other P&C insurance business. Adverse developments relative to previously written business could have a negative impact on our results.

The insurance and related businesses in which we operate may be subject to periodic negative publicity which may negatively impact our financial results.

The products and services of the insurance subsidiaries are ultimately distributed to individual and business customers. From time-to-time, consumer advocacy groups or the media may focus attention on insurance products and services, thereby subjecting the industry to periodic negative publicity. We also may be negatively impacted if participants in one or more of our markets engage in practices resulting in increased public attention to our business. Negative publicity may also result in increased regulation and legislative scrutiny of practices in the P&C insurance industry as well as increased litigation. These factors may further increase our costs of doing business and adversely affect our profitability by impeding our ability to market our products and services, requiring us to change our products or services or by increasing the regulatory burdens under which we operate.

The highly competitive environment in which we operate could have an adverse effect on our business, results of operations and financial condition.

The commercial automobile insurance business is highly competitive and, except for regulatory considerations, there are relatively few barriers to entry. Many of our competitors are substantially larger and may enjoy better name recognition, substantially greater financial resources, higher ratings by rating agencies, broader and more diversified product lines and more widespread agency relationships than us. Our underwriting profits could be adversely impacted if new entrants or existing competitors try to compete with our products, services and programs or offer similar or better products at or below our prices. Insurers in our markets generally compete on the basis of price, consumer recognition, coverages offered, claims handling, financial stability, customer service and geographic coverage. Although pricing is influenced to some degree by that of our competitors, it is not in our best interest to compete solely on price, and we may from time-to-time experience a loss of market share during periods of intense price competition. Our business could be adversely impacted by the loss of business to competitors offering competitive insurance products at lower prices. This competition could affect our ability to attract and retain profitable business. Pricing sophistication and related underwriting and marketing programs use a number of risk evaluation factors. For auto insurance, these factors can include but are not limited to vehicle make, model and year; driver age; territory; years licensed; loss history; years insured with prior carrier; prior liability limits; prior lapse in coverage; and insurance scoring based on credit report information. We believe our pricing model will generate future underwriting profits, however past performance is not a perfect indicator of future driver performance.


18




If we are not able to attract and retain independent agents and brokers, our revenues could be negatively affected.

We market and distribute our insurance programs exclusively through independent insurance agents and specialty insurance brokers. As a result, our business depends in large part on the marketing efforts of these agents and brokers and on our ability to offer insurance products and services that meet the requirements of the agents, the brokers and their customers. However, these agents and brokers are not obligated to sell or promote our products and many sell or promote competitors' insurance products in addition to our products. Some of our competitors have higher financial strength ratings, offer a larger variety of products, set lower prices for insurance coverage and/or offer higher commissions than we do. Therefore, we may not be able to continue to attract and retain independent agents and brokers to sell our insurance products. The failure or inability of independent agents and brokers to market our insurance products successfully could have a material adverse impact on our business, financial condition and results of operations.

If we are unable to maintain our claims-paying ratings, our ability to write insurance and to compete with other insurance companies may be adversely impacted. A decline in rating could adversely affect our position in the insurance market, make it more difficult to market our insurance products and cause our premiums and earnings to decrease.

Financial ratings are an important factor influencing the competitive position of insurance companies. Third party rating agencies assess and rate the claims-paying ability of insurers and reinsurers based upon criteria that they have established. Periodically these rating agencies evaluate the business to confirm that it continues to meet the criteria of the ratings previously assigned. Financial strength ratings are an important factor in establishing the competitive position of insurance companies and may be expected to have an effect on an insurance company's premiums. The insurance subsidiaries are rated by A.M. Best, which issues independent opinions of an insurer's financial strength and its ability to meet policyholder obligations. A.M. Best ratings range from “A++” (Superior) to “F” (In Liquidation), with a total of 16 separate rating categories. The objective of A.M. Best's rating system is to provide potential policyholders and other interested parties an opinion of an insurer's financial strength and ability to meet ongoing obligations, including paying claims.

On January 30, 2012, A.M. Best Co. affirmed the financial strength rating of American Country and American Service as “B” and the outlook assigned to all ratings is “Stable.” There is a risk that A.M. Best will not maintain these ratings in the future. If the insurance subsidiaries' ratings are reduced by A.M. Best, their competitive position in the insurance industry could suffer and it could be more difficult to market their insurance products. A downgrade could result in a significant reduction in the number of insurance contracts written by the subsidiaries and in a substantial loss of business to other competitors with higher ratings, causing premiums and earnings to decrease. Rating agencies evaluate insurance companies based on financial strength and the ability to pay claims, factors that may be more relevant to policyholders than to investors. Financial strength ratings by rating agencies are not ratings of securities or recommendations to buy, hold or sell any security and should not be relied upon as such.

Our ability to generate written premiums is impacted by seasonality which may cause fluctuations in our operating results and to our stock price.
 
The P&C insurance business is seasonal in nature. While our net premiums earned are generally stable from quarter to quarter, our gross premiums written follow the common renewal dates for the “light” commercial risks that represent our core lines of business. For example, January 1 and March 1 are common taxi cab renewal dates in Illinois and New York, respectively. Net underwriting income is driven mainly by the timing and nature of claims, which can vary widely. Our ability to generate written premiums is also impacted by the timing of policy periods in the states in which we operate. As a result of this seasonality, investors may not be able to predict our annual operating results based on a quarter-to-quarter comparison of our operating results. Additionally, this seasonality may cause fluctuations in our stock price. We believe seasonality will have an ongoing impact on our business.
U.S. Tax Risks
If our company were not to be treated as a U.S. corporation for U.S. federal income tax purposes, certain tax inefficiencies would result and certain adverse tax rules would apply.
Pursuant to certain “expatriation” provisions of the U.S. Internal Revenue Code of 1986, as amended, the reverse merger agreement relating to the reverse merger transaction described below provides that the parties intend to treat our company as a U.S. corporation for U.S. federal income tax purposes. The expatriation provisions are complex, are largely unsettled and subject to differing interpretations, and are subject to change, perhaps retroactively. If our company were not to be treated as a U.S. corporation for U.S. federal income tax purposes, certain tax inefficiencies and adverse tax consequences and reporting requirements would result for both our company and the recipients and holders of stock in our company, including that

19



dividend distributions from our insurance subsidiaries to us would be subject to 30% U.S. withholding tax, with no available reduction and that members of the consolidated group may not be permitted to file a consolidated U.S. tax return resulting in the acceleration of cash tax outflow and potential permanent loss of tax benefits associated with net operating loss carry-forwards that could have otherwise been utilized.
Our use of losses may be subject to limitations and the tax liability of our company may be increased.
Generally, a change of more than 50% in the ownership of a corporation's stock, by value, over a three-year period constitutes an ownership change for U.S. federal income tax purposes. An ownership change generally limits a U.S. corporation's ability to use net operating loss carry-forwards, or NOLs, attributable to the period prior to the change. Both the insurance subsidiaries experienced ownership changes in connection with the private placement and reverse merger transaction completed in the last quarter of 2010, such that the use of their net operating loss carry-forwards will be subject to limitation. 
Our ability to utilize the NOLs is subject to the rules of Section 382 of the Internal Revenue Code. Section 382 generally restricts the use of NOLs after an “ownership change.” An ownership change occurs if, among other things, the stockholders (or specified groups of stockholders) who own or have owned, directly or indirectly, five (5%) percent or more of our common stock or are otherwise treated as five (5%) percent stockholders under Section 382 and the regulations promulgated thereunder increase their aggregate percentage ownership of our stock by more than 50 percentage points over the lowest percentage of the stock owned by these stockholders over a three-year rolling period. In the event of an ownership change, Section 382 imposes an annual limitation on the amount of taxable income a corporation may offset with NOL carryforwards. This annual limitation is generally equal to the product of the value of our stock on the date of the ownership change, multiplied by the long-term tax-exempt rate published monthly by the Internal Revenue Service. Any unused annual limitation may be carried over to later years until the applicable expiration date for the respective NOL carryforwards.

The rules of Section 382 are complex and subject to varying interpretations. Because of our numerous capital raises, which have included the issuance of various classes of convertible securities and warrants, uncertainty exists as to whether we may have undergone an ownership change in the past or will undergo one as a result of this offering. Even if the rights offering does not cause an ownership change, it may increase the likelihood that we may undergo an ownership change in the future. Based on our recent stock prices, we believe any ownership change would severely limit our ability to utilize the portion of our NOLs that are currently not subject to limitation. Accordingly, no assurance can be given that our NOLs will be fully available. As a result, we could pay taxes earlier and in larger amounts than would be the case if the NOLs were available to reduce the federal income taxes without restriction. Future sales of stock by KAI could conceivably trigger another ownership change according to Section 382.

Atlas has the following total net operating loss carry-forwards as of the period ended September 30, 2012:
Net operating loss carry-forward by expiry (in '000s)
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

2012
2032
1,074

Total
 
$
46,706

Further limitations on the utilization of losses may apply because of the “dual consolidated loss” rules, which will also require our company to recapture into income the amount of any such utilized losses in certain circumstances. As a result of the application of these rules, the future tax liability of our company and our insurance subsidiaries could be significantly increased. In addition, taxable income may also be recognized by our company or our insurance subsidiaries in connection with the 2010 reverse merger transaction.
Risks Related to this Offering
There has been no public market the United States for our ordinary shares prior to this offering and an active trading market for our ordinary shares may not develop, continue or be liquid following this offering.

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Prior to this offering, our ordinary shares have been exclusively listed on the TSXV under the symbol “AFH”, and there has been no public market for them in the United States. There is a risk that no active trading market will develop, continue or be liquid in the United States and that our ordinary shares will not be resold at or above our public offering price. Prior to the effective date of this offering, we have applied to have our ordinary shares listed on the NASDAQ Capital Market under the symbol “AFH.” The public offering price of our ordinary shares has been determined by agreement among us and the underwriters, but there is a risk that our ordinary shares will trade below the public offering price following the completion of this offering. See “Underwriting.” The market value of our ordinary shares could be substantially affected by general market conditions, including the extent to which a secondary market develops for our ordinary shares following the completion of this offering, the extent of institutional investor interest in us, our financial and operating performance and general stock and bond market conditions. In addition, we may not have coverage by security analysts, which could serve to limit the distribution of news and limit investor interest in our shares.
Assuming an active market for our ordinary shares develops, the market price and trading volume of our ordinary shares may be volatile following this offering.
Even if an active trading market develops for our ordinary shares, their per share trading price may be volatile due in part to the limited public float and trading volume for our shares and the fact that our ordinary shares will be dual listed on NASDAQ and the TSX Venture Exchange. In addition, the trading volume in our ordinary shares may fluctuate and cause significant price variations to occur. If the per share trading price of our ordinary shares declines significantly, you may be unable to resell your shares at or above the public offering price. There is a risk that the per share trading price of our ordinary shares will fluctuate or decline significantly in the future.
Some of the factors that could negatively affect our share price or result in fluctuations in the price or trading volume of our ordinary shares include:
actual or anticipated variations in our quarterly operating results;
changes in our cash flows from operations or earnings estimates;
publication of research reports about us or the insurance industry;
changes in market valuations of similar companies;
adverse market reaction to any additional debt we incur or equity we may issue in the future;
additions or departures of key management personnel;
actions by institutional shareholders;
speculation in the press or investment community;
our underlying asset value;
the extent of investor interest in our securities;
investor confidence in the stock and bond markets, generally;
changes in tax laws;
failure to meet earnings estimates;
changes in our claims-paying ratings;
general market and economic conditions; and
future sales of substantial amounts of our shares in the public market, or the perception that these sales could occur.

In the past, securities class action litigation has often been instituted against companies following periods of volatility in the price of their shares. This type of litigation could result in substantial costs and divert our management's attention and resources, which could have an adverse effect on our financial condition, results of operations, cash flow and per share trading price of our ordinary shares.
We do not anticipate paying any cash dividends for the foreseeable future.
We currently intend to retain our future earnings, if any, for the foreseeable future, for working capital and other general corporate purposes. We do not intend to pay any dividends to holders of our ordinary shares. As a result, capital appreciation in the price of our ordinary shares, if any, will be your only source of gain on an investment in our ordinary shares. We did not declare or pay cash dividends on our capital stock during 2010, 2011 or to date in 2012. We currently intend to retain any future earnings for use in the operation of our business and do not intend to declare or pay any cash dividends in the foreseeable future. Any future determination to pay dividends on our capital stock will be at the discretion of our board of directors, subject to applicable laws, and will depend on our financial condition, results of operations, capital requirements, general business conditions, and other factors that our board of directors considers relevant. Holders of our preferred shares are entitled to dividends on a cumulative basis whether or not declared by our board of directors, at a rate of $0.045 per preferred share per

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year, which must be paid or declared and set apart before any dividend may be paid on our ordinary shares. In addition, the insurance laws and regulations governing our insurance company subsidiaries contain restrictions on the ability to pay dividends, or to make other distributions to us, which may limit our ability to pay dividends to our shareholders.

Purchasers in this offering will experience immediate and substantial dilution in the book value of their investment.
The public offering price of our ordinary shares is substantially higher than the net tangible book value per share of our ordinary shares at September 30, 2012, after giving effect to this offering. Therefore, if you purchase our ordinary shares in this offering, you will incur an immediate dilution of $[•] (or [•]%) in net tangible book value per share from the price you paid, based upon the public offering price of $[•] per share. The exercise of outstanding warrants and options and the conversion of preferred shares will result in further dilution of your investment. In addition, if we raise funds by issuing additional ordinary shares, the newly issued shares would dilute your ownership interest.
The requirements of being a United States public company may strain our resources and divert management's attention.
As a United States public company, we will be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (which we refer to herein as the Exchange Act), the Sarbanes-Oxley Act, the Dodd-Frank Act, the listing requirements of The NASDAQ Stock Market and other applicable securities rules and regulations. Compliance with these rules and regulations will increase our legal and financial compliance costs, make some activities more difficult, time-consuming or costly and increase demand on our systems and resources, particularly after we are no longer an “emerging growth company.” The Exchange Act requires, among other things, that we file annual, quarterly and current reports with respect to our business and operating results. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. In order to maintain and, if required, improve our disclosure controls and procedures and internal control over financial reporting to meet this standard, significant resources and management oversight may be required. As a result, management's attention may be diverted from other business concerns, which could adversely affect our business and operating results. We may need to hire more employees in the future or engage outside consultants to comply with these requirements, which will increase our costs and expenses.
In addition, changing laws, regulations and standards in the United States relating to corporate governance and public disclosure are creating uncertainty for public companies, increasing legal and financial compliance costs and making some activities more time consuming. These laws, regulations and standards are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We intend to invest resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expenses and a diversion of management's time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to their application and practice, regulatory authorities may initiate legal proceedings against us and our business and operating results may be adversely affected.
For as long as we remain an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012 (which we refer to herein as the JOBS Act), we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies,” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a non-binding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. We may take advantage of these reporting exemptions until we are no longer an “emerging growth company.”
We will remain an “emerging growth company” for up to five years, although if the market value of our ordinary shares that is held by non-affiliates exceeds $700 million as of any June 30 before that time, we would cease to be an “emerging growth company” as of the following December 31.
As a result of disclosure of information in this prospectus and in filings required of a public company in the United States, our business, results of operations, cash flows and financial condition will become more visible, which may result in threatened or actual litigation, including by competitors and other third parties. If such claims are successful, our business and operating results could be adversely affected, and even if the claims do not result in litigation or are resolved in our favor, these claims, and the time and resources necessary to resolve them, could divert the resources of our management and adversely affect our business and operating results.

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We are an “emerging growth company” and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our ordinary shares less attractive to investors.
We are an “emerging growth company,” as defined in the JOBS Act, and we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including, but not limited to, not being required to comply with the auditor attestation requirements of section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a non-binding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. We cannot predict if investors will find our ordinary shares less attractive because we may rely on these exemptions. If some investors find our ordinary shares less attractive as a result, there may be a less active trading market for these shares and our stock price may be more volatile.
Section 107 of the JOBS Act provides that an “emerging growth company” can take advantage of an extended transaction period for complying with new or revised accounting standards. However, we are choosing to “opt out” of such extended transition period, and as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.



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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. All statements contained in this prospectus other than statements of historical fact, including statements regarding our future results of operations and financial position, our business strategy and plans, and our objectives for future operations, are forward-looking statements. The words “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “expect,” and similar expressions are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in the “Risk Factors” section. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the future events and trends discussed in this prospectus may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.
You should not rely upon forward-looking statements as predictions of future events. The events and circumstances reflected in the forward-looking statements may not be achieved or occur. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. We are under no duty to update any of these forward-looking statements after the date of this prospectus or to conform these statements to actual results or revised expectations.
Important factors that could cause actual results to differ materially from those in the forward-looking statements include the matters described under "Risk Factors," changes in local, regional, national or global political, economic, business, competitive, market (supply and demand) and regulatory conditions and the following:

expectations regarding our potential growth;
our inability to have our securities listed for trading on the NASDAQ Capital Market or another national securities exchange, or once initially listed, to maintain such listings;
our financial performance;
our competitive position;
the introduction and proliferation of competitive products;
an inability to achieve sustained profitability;
failure to implement our short- or long-term growth strategies;
operating and capital expenditures by us and the insurance and reinsurance industry;
the cost of retaining and recruiting our key personnel or the loss of such key personnel;
risks associated with the expansion of our business in size and geography;
operational risk;
geopolitical events and regulatory changes;
changing interpretations of generally accepted accounting principles;
general economic conditions;
our ability to obtain additional financing, if necessary;
the adverse effect our the ordinary shares issued pursuant to this offering may have on the market price of our ordinary shares;
our business strategies;
compliance with applicable laws; and
our liquidity.

Any forward-looking statement made by us in this prospectus speaks only as of the date on which we make it, and is expressly qualified in its entirety by the foregoing cautionary statements. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise.


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USE OF PROCEEDS
We estimate that our net proceeds from the sale of the ordinary shares that we are offering will be approximately $[•] million, based on an assumed offering price of $[•] per share (the U.S. dollar equivalent of the last reported sale price of our ordinary shares on the TSXV based on an assumed exchange rate of C$[•] per $1 U.S.), after deducting underwriting discounts and commissions and estimated offering expenses payable by us.
We will not receive any of the proceeds from the sale of the ordinary shares being offered by the selling shareholder, including any shares sold pursuant to the underwriters' exercise of the over-allotment option.
The principal purposes of our initial offering in the United States are to create a public market for our ordinary shares and thereby enable future access to the public equity markets by us and our shareholders, and to obtain additional capital. We intend to use the net proceeds to us from our offering for working capital, to acquire complementary businesses or other assets, including Gateway, to repurchase preferred shares or for other general corporate purposes; however we do not have any specific uses of the net proceeds planned.
Pending other uses, we intend to invest the proceeds to us in investment-grade, interest-bearing securities such as money market funds, certificates of deposit, or direct or guaranteed obligations of the U.S. government, or hold as cash. We cannot predict whether the proceeds invested will yield a favorable return. Our management will have broad discretion in the application of the net proceeds we receive from our offering, and investors will be relying on the judgment of our management regarding the application of the net proceeds.
DIVIDEND POLICY
We did not declare or pay cash dividends on our capital stock during 2010, 2011 or to date in 2012. We currently intend to retain any future earnings for use in the operation of our business and do not intend to declare or pay any cash dividends in the foreseeable future. Any future determination to pay dividends on our capital stock will be at the discretion of our board of directors, subject to applicable laws, and will depend on our financial condition, results of operations, capital requirements, general business conditions, and other factors that our board of directors considers relevant. Holders of our preferred shares are entitled to dividends on a cumulative basis whether or not declared by our board of directors, at a rate of $0.045 per preferred share per year, which must be paid or declared and set apart before any dividend may be paid on our ordinary shares. In addition, the insurance laws and regulations governing our insurance company subsidiaries contain restrictions on the ability to pay dividends, or to make other distributions to us, which may limit our ability to pay dividends to our shareholders.

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DILUTION
If you invest in our ordinary shares, your ownership interest will experience immediate book value dilution to the extent of the difference between the initial public offering price per ordinary share and the net tangible book value per ordinary share after this offering. Dilution results from the fact that the initial public offering price per ordinary share is substantially in excess of the net tangible book value per ordinary share attributable to the existing shareholders for the presently outstanding ordinary shares. Net tangible book value per share represents the amount of our total tangible assets less our total liabilities, divided by the number of ordinary shares outstanding.
Our pro-forma net tangible book value as of September 30, 2012 was $39.7 million, or $2.15 per ordinary share. After giving effect to our sale of shares in this offering, assuming an initial public offering price of $[•]  per ordinary share (the U.S. dollar equivalent of the last reported sale price of our ordinary shares on the TSXV as of [•], 2012 based on an assumed exchange rate of C$[•] per $1 U.S.), and the application of the estimated net proceeds as described under “Use of Proceeds,” our as adjusted net tangible book value at September 30, 2012 would have been approximately $[•] million, or $[•] per ordinary share. This represents an immediate decrease in net tangible book value per share of $[•] to existing shareholders and an immediate and substantial dilution of $[•] per share to new investors. Because the underwriters' over-allotment option will be drawn from the selling shareholder's previously outstanding ordinary shares, exercise of the over-allotment option would have no effect on the pro-forma net tangible book value. The following table illustrates this dilution per share.
The following table illustrates this per share dilution (amounts in $000's of U.S. dollars).
Assumed initial public offering price per ordinary share
 
Net tangible book value per share at September 30, 2012
$2.15
Decrease per ordinary share attributable to new investors in the offering
 [•]
Pro forma net tangible book value per ordinary share after this offering
 
Dilution per ordinary share to new investors
 [•]

A $1.00 increase (decrease) in the assumed initial public offering price of $[•] per ordinary share would decrease (increase) our pro-forma net tangible book value deficiency after giving effect to the offering by $[•] million, or by $[•] per ordinary share, assuming no change to the number of ordinary shares offered by us as set forth on the cover page of this prospectus, and after deducting the estimated underwriting discounts and estimated expenses.
The following table sets forth on the pro forma basis described above, as of September 30, 2012, the number of ordinary shares purchased from us, the total consideration paid to us and the average price per share paid by existing shareholders and to be paid by new investors purchasing ordinary shares in this offering, before deducting underwriting discounts and commissions and estimated offering expenses.
 
Shares Purchased
Total Consideration
 
 
Number
Percent
Amount (in thousands)
Percent
Average Price Per Share
Existing Shareholders
[•]
[•]
[•]
[•]
$[•]
New investors
[•]
[•]
[•]
[•]
[•]
Total
[•]
100%
[•]
100%
[•]
Exercise of the over-allotment option would have no effect on the percentage of ordinary shares held by existing shareholders or the percentage of ordinary shares held by new investors because the over-allotment option will be sold solely out of the selling shareholder's previously outstanding ordinary shares.




26



SELLING SHAREHOLDER
The following table sets forth information as of the date of this prospectus, to our knowledge, about the beneficial ownership of our ordinary shares by the selling shareholder, KAI, both before and immediately after the offering.
We believe that the selling shareholder has sole voting and investment power with respect to all of the ordinary shares beneficially owned by it.
The percent of beneficial ownership for the selling shareholder is based on 11,662,407 restricted voting shares outstanding as of the date of this prospectus. Pursuant to Rules 13d-3 and 13d-5 of the Exchange Act, securities held by the selling shareholder that are currently exercisable or exercisable within 60 days of the date of this prospectus for ordinary shares are considered outstanding and beneficially owned by the selling shareholder for the purpose of computing its percentage ownership but are not treated as outstanding for the purpose of computing the percentage ownership of any other shareholder.

Information about the selling shareholder may change over time. Any changed information will be set forth in an amendment to the registration statement or supplement to this prospectus, to the extent required by law.
 
Restricted Voting Shares Beneficially Owned Prior to the Offering
 
 
Restricted Voting Shares Beneficially Owned After the Offering(1)
Name of Selling Shareholder
Number(2)
Percent(2)(4)
Ordinary Shares Offered by this Prospectus(3)
Shares being Offered in Over-Allotment
Number
Percent(5)
Kingsway America Inc. 150 Pierce Road, Suite 600 Itasca, Illinois 60143
11,662,407

100.0%
9,320,000
2,148,000
194,407
100%

(1)    Assumes the sale of all shares offered under this prospectus (shares issued under our stock option plan not included).
(2)
Includes 1,577,941 restricted voting shares owned by Mendota Insurance Company, and 1,881,365 restricted voting shares owned by Universal Casualty Company, both of which are wholly owned subsidiaries of KAI. Also assumes the September 28, 2012 sale of 1,621,621 restricted shares to Magnolia will meet regulatory approval prior to the offering.
(3)
Restricted voting shares offered by the selling shareholder are automatically converted into ordinary shares pursuant to this offering.
(4)
Percentage ownership is based on 11,662,407 restricted voting shares outstanding as of the date of this prospectus.


27




MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
As of September 30, 2012, there were 100 shareholders of record of our ordinary shares, of which 4,628,292 were issued and outstanding. Additionally, there were 13,804,861 restricted voting shares outstanding, all of which convert to ordinary shares upon the sale of such shares by KAI. Our ordinary shares have been exclusively listed on the TSXV under the symbol “AFH” since January 6, 2011. There is currently no established public trading market for our ordinary shares in the United States.
Set forth below are the high and low listing prices of the ordinary shares during the four quarters of 2011 and the first three quarters of 2012 per the TSXV (in Canadian dollars):
Summary of Share Prices
 
High
Low
2012
 
 
Fourth Quarter (through filing date of November 16, 2012)
C$2.00
C$1.85
Third Quarter
C$2.00
C$1.20
Second Quarter
C$1.85
C$0.82
First Quarter
C$2.00
C$1.25
2011
 
 
Fourth Quarter
C$2.03
C$1.10
Third Quarter
C$1.90
C$1.25
Second Quarter
C$2.00
C$1.48
First Quarter
C$2.00
C$1.60

During 2011 or 2012, we did not repurchase any of our equity securities. We also did not pay any dividends during 2011 or to date in 2012 and have no current plans to pay dividends to our ordinary shareholders. The cumulative amount of dividends to which the preferred shareholders are entitled upon liquidation (or sooner, if we declare dividends), is $1.42 million as of September 30, 2012.
For more information regarding dividends, refer to "Dividend Policy" section of this prospectus.



28




CAPITALIZATION
The following table sets forth a summary of our capitalization on an historical basis as of September 30, 2012, and should be read in conjunction with our interim consolidated financial statements and notes included in this prospectus. The table also summarizes our capitalization on an as adjusted basis assuming: (1) the completion of this initial public offering at an assumed initial public offering price of $[•] per ordinary share (the U.S. dollar equivalent of the last reported sale price as of [•], 2012 of our ordinary shares on the TSXV based on an assumed exchange rate of C$[•] to $1 U.S.); (2) net proceeds to us from this initial public offering of $[•] after payment of estimated underwriting discounts, commissions and related expenses of $[•]; and (3) the intended application of the net proceeds of this offering.
(all amounts in $000's except share and per share data)
September 30, 2012
Shareholders’ Equity
Actual
Adjusted
Preferred shares, par value per share $0.001, 100,000,000 shares authorized, 18,000,000 shares issued and outstanding actual, and [ ] issued and outstanding as adjusted. Liquidation value $1.00 per share.
$
18,000

 
Ordinary shares, par value per share $0.001, 800,000,000 shares authorized, 4,628,292 shares issued and outstanding actual, and [ ] issued and outstanding as adjusted
4

 
Restricted voting common shares, par value per share $0.001, 100,000,000 shares authorized, 13,804,861 shares issued and outstanding actual, and [ ] issued and outstanding as adjusted
14

 
Additional paid-in capital
152,739

 
Retained deficit
(113,919
)
 
Accumulated other comprehensive income, net of tax
2,265

 
Total Shareholders’ Equity
$
59,103

 




29



UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA

The following unaudited condensed consolidated pro forma financial statements are based on the historical financial statements of Atlas Financial Holdings, Inc. and Camelot Services, Inc., after giving effect to the acquisition of Camelot Services, which is expected to be consummated in the first quarter of 2013 and remains subject to regulatory approval. These estimates and assumptions are subject to change upon the finalization of valuations, which are contingent upon final appraisals, identifiable intangible assets and any other adjustments until the consummation of the acquisition. Revisions to the preliminary purchase price allocation could result in significant deviation from the accompanying pro forma information. Atlas' management believes that its assumptions provide a reasonable basis for presenting all of the significant effects of the transactions contemplated and that the pro forma adjustments give appropriate effect to those assumptions and are properly applied in the unaudited condensed consolidated pro forma financial information.
The following unaudited pro forma condensed consolidated financial statements and explanatory notes present how the financial statements of Atlas may have appeared had the acquisition occurred on January 1, 2011 (with respect the results of statements of comprehensive income) or as of September 30, 2012 (with respect to statement of financial position information). Certain amounts from Camelot Services' historical financial statements have been reclassified to conform to Atlas' presentation.

These unaudited pro forma condensed consolidated financial statements have been derived from and should be read together with the historical financial statements and related notes of Atlas included in its annual report on Form 10-K for the year ended December 31, 2011 and its quarterly report on Form 10-Q for the nine month period ended September 30, 2012, both of which have been filed with the Securities and Exchange Commission.

The unaudited pro forma condensed consolidated financial information has been prepared by management, are presented for illustrative purposes only, and do not purport to represent what the results of operations or financial position of Atlas would have been had the acquisition actually occurred as of the dates indicated, nor is it indicative of future financial position or results of operations for any period.


30



UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

 
September 30, 2012
($ in thousands)
Historical
 
Pro Forma
 


Atlas
Camelot
Adjustments
Notes
Combined
Assets
 
 
 
 
 
Investments, available for sale
 
 
 
 
 
Fixed income securities, at fair value
$
109,555

$
35,608

$
(11,946
)
4.a.
$
133,217

Equity securities, at fair value

3,076


 
3,076

Cash and cash equivalents
12,151

8,931

(15,005
)
3.a.
6,077

Accrued investment income
807

228


 
1,035

Accounts receivable and other assets
24,811

10,589


 
35,400

Reinsurance recoverables, net
6,983

5,741

12,857

4.a.
25,581

Prepaid reinsurance premiums
2,219



 
2,219

Deferred policy acquisition costs
4,501

1,676

(1,676
)
2.b., 4.a
4,501

Deferred tax asset, net
6,343


208

7.b.
6,551

Software and office equipment, net
1,157

979

(784
)
2.c.
1,352

Assets held for sale
166



 
166

Investment in investees
1,250



 
1,250

Total Assets
$
169,943

$
66,828

$
(16,346
)
 
$
220,425

 
 
 
 
 
 
Liabilities
 
 
 
 
 
Claims liabilities
$
73,574

$
30,871

$

 
$
104,445

Unearned premiums
28,325

11,946


 
40,271

Due to reinsurers and other insurers
4,658



 
4,658

Other liabilities and accrued expenses
4,283

3,557


 
7,840

Notes Payable

1,051

(1,051
)
2.a.

Total Liabilities
$
110,840

$
47,425

$
(1,051
)
 
$
157,214

 
 
 
 
 
 
Shareholders’ Equity
 
 
 
 
 
Preferred shares, par value per share $0.001, 100,000,000 shares authorized, 18,000,000 shares issued and outstanding at September 30, 2012
$
18,000

$

$
5,900

3.b.
$
23,900

Ordinary voting common shares, par value per share $0.001, 800,000,000 shares authorized, 4,628,292 shares issued and outstanding at September 30, 2012
4

1


 
5

Restricted voting common shares, par value per share $0.001, 100,000,000 shares authorized, 13,804,861 shares issued and outstanding at September 30, 2012
14



 
14

Additional paid-in capital
152,739

30,928

(20,905
)
3.a, 3.b.
162,762

Retained deficit
(113,919
)
(13,491
)
317

2.a.,2.b.,2.c., 7.b.
(127,093
)
Accumulated other comprehensive income, net of tax
2,265

1,965

(607
)
4.b., 4.c.
3,623

Total Shareholders’ Equity
$
59,103

$
19,403

$
(15,295
)
 
$
63,211

Total Liabilities and Shareholders’ Equity
$
169,943

$
66,828

$
(16,346
)
 
$
220,425


See accompanying notes to unaudited condensed consolidated pro forma financial statements.


31



CONDENSED CONSOLIDATED PRO FORMA STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
($ in thousands, except share data)
Nine Months Ended September 30, 2012
 
Historical
 
Pro Forma
 
 
Atlas
Camelot
 Adjustments
Notes
Combined
Net premiums earned
$
26,795

$
19,148

$
(11,260
)
4.d., 5
$
34,683

Net investment income
1,878

930

(404
)
4.b.
2,404

Net investment gains (losses)
1,098

(90
)
920

4.c.
1,928

Other income
169

(200
)
74

2.a
43

Total revenue
29,940

19,788

(10,670
)
 
39,058

Net claims incurred
18,477

19,109

(14,269
)
4.d., 5, 6.a.
23,317

Other underwriting expenses
9,541

7,496

(5,809
)
4.d., 5
11,228

Total expenses
28,018

26,605

(20,078
)
 
34,545

Income from operations before income tax (benefit)/expense
1,922

(6,817
)
9,408

 
4,513

Income tax expense

2,641

(2,641
)
7.a., 7.b.

Net income attributable to parent
1,922

(9,458
)
12,049

 
4,513

Less: Preferred share dividends
606


199

8
805

Net income/(loss) attributable to common shareholders
$
1,316

$
(9,458
)
$
11,850

 
$
3,708

 
 
 
 
 
 
Other comprehensive income/(loss) related to Available for Sale Securities:
 
 
 
 
 
Changes in net unrealized (losses)/gains
$
1,899

$
1,053

$

 
$
2,952

Reclassification to income of net gains
(632
)
136

(920
)
 
(1,416
)
Effect of income tax
(427
)
(404
)
313

 
(518
)
Other comprehensive income/(loss) for the period
840

785

(607
)
 
1,018

Total comprehensive income/(loss)
$
2,156

$
(8,673
)
$
11,243

 
$
4,726

 
 
 
 
 
 
 
 
 
 
 
 
Basic weighted average common shares outstanding
18,438,537

 
 
 
18,438,537

Earnings/(loss) per common share, basic
$
0.08

 
 
 
$
0.19

Diluted weighted average common shares outstanding
18,451,755

 
 
 
18,438,537

Earnings/(loss) per common share, diluted
$
0.08

 
 
 
$
0.19


See accompanying notes to unaudited condensed consolidated pro forma financial statements.



32



CONDENSED CONSOLIDATED PRO FORMA STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

($ in thousands, except per share data)
Year Ended December 31, 2011
 
Historical
 
Pro Forma
 
 
Atlas
Camelot
Adjustments
Notes
Combined
Net premiums earned
$
35,747

$
23,989

$
(11,796
)
4.d., 5
$
47,940

Net investment income
3,280

1,231

(470
)
4.b.
4,041

Net investment gains
4,201

227

553

4.c.
4,981

Other income
124

(188
)
120

2.a.
56

Total revenue
43,352

25,259

(11,593
)
 
57,018

Net claims incurred
28,994

20,440

(9,873
)
4.d., 5, 6.b.
39,561

Other underwriting expenses
17,991

9,520

(6,103
)
4.d., 5
21,408

Total expenses
46,985

29,960

(15,976
)
 
60,969

Income from operations before income tax (benefit)/expense
(3,633
)
(4,701
)
4,383

 
(3,951
)
Income tax expense
(1,163
)
(1,570
)
1,570

7.a., 7.b.
(1,163
)
Net income attributable to parent
(2,470
)
(3,131
)
2,813

 
(2,788
)
Less: Preferred share dividends
810

 
266

8
1,076

Net loss attributable to common shareholders
$
(3,280
)
$
(3,131
)
$
2,547

 
$
(3,864
)
 
 
 
 
 
 
Other comprehensive income/(loss) related to Available for Sale Securities:
 
 
 
 
 
Changes in net unrealized (losses)/gains
$
154

$
1,667

$

 
$
1,821

Reclassification to income of net gains
(3,469
)
(344
)
(553
)
 
(4,366
)
Settlement of pension plan
2,473



 
2,473

Effect of income tax
(789
)
(450
)
188

 
(1,051
)
Other comprehensive income/(loss) for the period
(1,631
)
873

(365
)
 
(1,123
)
Total comprehensive income/(loss)
$
(4,911
)
$
(2,258
)
$
2,182

 
$
(4,987
)
 
 
 
 
 
 
 
 
 
 
 
 
Basic weighted average common shares outstanding
18,373,624

 
 
 
18,373,624

Earnings/(loss) per common share, basic
$
(0.18
)
 
 
 
$
(0.21
)
Diluted weighted average common shares outstanding
18,373,624

 
 
 
18,373,624

Earnings/(loss) per common share, diluted
$
(0.18
)
 
 
 
$
(0.21
)



33



Atlas Financial Holdings, Inc.
Notes to Unaudited Condensed Consolidated Pro Forma Financial Statements
Basis of Presentation
The unaudited condensed consolidated pro forma financial information gives effect to the acquisition of Camelot Services as if it had occurred (i) on September 30, 2012 for the purposes of the unaudited condensed consolidated pro forma statement of financial position and (ii) on January 1, 2011 for the purposes of the unaudited condensed consolidated pro forma statements of comprehensive income for the year ended December 31, 2011 and for the nine months ended September 30, 2012. The unaudited condensed consolidated pro forma financial information has been prepared by Atlas' management. Certain amounts from Camelot Services' historical consolidated financial statements have been reclassified to conform to Atlas' presentation.
General
This unaudited condensed consolidated pro forma financial information has been prepared in conformity with generally accepted accounting principles in the United States (“GAAP”). The unaudited condensed consolidated pro forma statement of financial position as of September 30, 2012 and the unaudited condensed consolidated pro forma statements of comprehensive income for the year ended December 31, 2011 and the nine months ended September 30, 2012 have been prepared using the following information:
Unaudited historical consolidated financial statements of Atlas as of September 30, 2012 and for the nine months ended September 30, 2012;
Unaudited historical consolidated financial statements of Camelot as of September 30, 2012 and for the nine months ended September 30, 2012;
Audited historical consolidated financial statements of Atlas for the year ended December 31, 2011;
Audited historical consolidated financial statements of Camelot for the year ended December 31, 2011; and,
Such other supplementary information as considered necessary to reflect the proposed acquisition in the unaudited pro forma condensed consolidated financial information.

Purchase Price and Related Considerations
On October 25, 2012, Atlas announced it had entered into a definitive acquisition agreement for the acquisition of Camelot Services from Hendricks Holding Company, Inc., or Hendricks. Such agreement was entered into on October 24, 2012, by and among Atlas and Hendricks.
Under the terms of the acquisition agreement and subject to regulatory approval, the Company will acquire Camelot Services and its wholly owned subsidiary, Gateway Insurance Company. Gateway is a property and casualty insurance company domiciled in Missouri. For the purposes of these pro forma financial statements, we have estimated that the total purchase consideration for this acquisition will be approximately $20.9 million.
Gateway has historically underwritten other commercial insurance products that will not be underwritten by Atlas following completion of the transaction. Gateway currently writes workers' compensation insurance, which we are not acquiring as part of the transaction. An indemnity reinsurance agreement will be entered into pursuant to which 100% of Gateway's workers' compensation business will be ceded to an affiliate of the seller as part of the transaction. Under the terms of the acquisition agreement, certain other underwriting expenses associated with the workers' compensation business are being assumed by the seller. In May 2012 Gateway ceased underwriting commercial automobile liability insurance for long-haul truck operators.

Atlas expects to begin consolidating Camelot Services on the planned consummation date of January 1, 2013. The purchase consideration will be allocated to the assets acquired and liabilities assumed, including separately identified intangible assets, based on their fair values as of the close of the acquisition. Direct costs of the acquisition are accounted for separately from the business combination and are expensed as incurred. As the values of certain assets and liabilities are preliminary in nature, they are subject to adjustment as additional information is obtained, including, but not limited to, valuation of separately identifiable intangibles, fixed assets, deferred taxes and loss reserves. The valuations will be finalized within six months of the close of the acquisition. When the valuations are finalized, any changes to the preliminary valuation of assets acquired or liabilities assumed may result in adjustments to separately identifiable intangible assets and goodwill.
For a complete description of the acquisition, refer to the acquisition agreement, which was attached as Exhibit 10.1 on Form 8-K, filed on October 29, 2012, and is incorporated herein by reference.

34



For purposes of presentation in the unaudited condensed consolidated pro forma financial information, the allocation of the purchase consideration is assumed to be as follows:
Estimated purchase consideration (in '000s)
 
Cash
$
15,005

Preferred Stock
5,900

Total
$
20,905

 
 
Pro Forma Preliminary Allocation of Purchase Price
 
 
 
Cash & Investments
$
47,615

Other current assets
18,558

Property and equipment
195

Deferred policy acquisition costs
911

Total Assets
$
67,279

 
 
Claims liabilities
$
30,871

Unearned premiums
11,946

Accounts payable and other liabilities
3,557

Total Liabilities
$
46,374


2. Adjustments to book value of the acquired assets and liabilities are as follows:

a.
Effective prior to the closing balance sheet, Hendricks will forgive Camelot's note related to a software purchase for its worker's compensation business in the amount of $1.1 million. The related interest expense of $74,000 and $120,000 has been eliminated from the pro forma statements of comprehensive income for September 30, 2012 and December 31, 2011, respectively.

b.
Deferred acquisition costs of $765,000 related to the taxi and truck lines of business will be eliminated from Camelot's book value according to the purchase price calculations of the definitive agreement.

c.
Software related to the workers' compensation line of business of $784,000 will be eliminated from Camelot's book value and is not being acquired under the terms of the definitive agreement.

3. The total estimated purchase consideration of $20.9 million will consist of cash, in the estimated amount of $15.0 million, and Atlas preferred shares, in the estimated amount of $5.9 million. The details of this consideration are as follows:
a.
Cash of $9.0 million will be derived from an extraordinary dividend from Atlas' insurance subsidiaries and cash of $6.0 million will be derived from an extraordinary dividend from Gateway. These extraordinary dividends are subject to regulatory approval and will be distributed according to the terms of the Agreement.

b.
$5.9 million of Atlas preferred shares will be issued to Hendricks according to the terms of the Agreement. The preferred shares accrue dividends on a cumulative basis whether or not declared by the Board of Directors at the rate of $0.045 per share per year (4.5%) and may be paid in cash or in additional preferred shares at the option of Atlas. Upon liquidation, dissolution or winding-up of Atlas, holders of preferred shares receive the greater of $1.00 per share plus all declared and unpaid dividends or the amount they would receive in liquidation if the preferred shares had been converted to restricted voting common shares or ordinary voting common shares immediately prior to liquidation. Preferred shares are convertible into ordinary voting common shares at the option of the holder at any date that is after the five year anniversary date of issuance at the rate of 0.3808 ordinary voting common shares for each preferred share. The conversion rate is subject to change if the number of ordinary voting common shares or restricted voting common shares changes. The preferred shares are redeemable at the option of Atlas at a price of $1.00 per share plus accrued and unpaid dividends commencing at two years from the issuance date.

4. Effective immediately after the close of the transaction, Atlas will enter into a reinsurance agreement with a third party reinsurer. The reinsurance agreement will cover all in force premium and loss reserves for Gateway's workers' compensation program. Along with the reserves, any go-forward premium written for the workers' compensation program will be ceded in its entirety to this third party reinsurer under the terms of this reinsurance agreement. While Gateway will remain liable to its insureds, Atlas

35



does not expect to have any net exposure to losses related to this workers' compensation business subsequent to the effective date of the acquisition.
The effects of the reinsurance agreement on the statement of financial position and statements of comprehensive income:
a.
These balances were adjusted to reflect assets that will be ceded to the third party reinsurer as collateral for the net liabilities associated with the workers' compensation premium, including loss reserves in the amount of $6.6 million, plus unearned premium reserves of $6.2 million, and less deferred policy acquisition costs of $911,000. The amount due from reinsurers and other insurers was increased by an equal amount to reflect the reinsurance recoverable from this third party reinsurer.
b.
There will be a reduction in net investment income of $404,000 for the nine months ended September 30, 2012 and $470,000 for the year ended December 31, 2011 to reflect the pro forma decrease in cash and cash equivalents by $15.0 million as a result of dividends paid from both Atlas and Camelot Services and the pro forma net reduction of Camelot Services' invested assets by $11.9 million as a result of the workers' compensation reinsurance agreement.
c.
Realization of gains of $920,000 for the nine months ended September 30, 2012 and $553,000 for the year ended December 31, 2011 to reflect the net reduction of Camelot Services' invested assets by $11.9 million in connection with the workers' compensation reinsurance agreement.
The effect on the statement of comprehensive income:
d.
The following table identifies the adjustments to the statement of comprehensive income as a result of removing the impacts of the workers' compensation lines of business as if the reinsurance transaction were in place as of January 1, 2011:
 
For the Nine Months Ended
For the Year Ended
($ in thousands)
September 30, 2012
December 31, 2011
Net premiums earned
$
(7,173
)
$
(7,133
)
Net claims incurred
(5,781
)
(6,318
)
Other underwriting expenses
(3,213
)
(3,500
)
Total expenses
(8,994
)
(9,818
)
Income from operations before income tax (benefit)/expense
$
1,821

$
2,685

5. Gateway announced during 2012 that it will exit its truck line of business and run-off claims related to this line of business. The following table identifies the adjustments to the statement of comprehensive income as a result of removing the impacts of the truck lines of business as if these lines were run-off as of January 1, 2011:
 
For the Nine Months Ended
For the Year Ended
($ in thousands)
September 30, 2012
December 31, 2011
Net premiums earned
$
(4,087
)
$
(4,663
)
Net claims incurred
(3,878
)
(5,357
)
Other underwriting expenses
(2,596
)
(2,603
)
Total expenses
(6,474
)
(7,960
)
Income from operations before income tax (benefit)/expense
$
2,387

$
3,297


6. Camelot recorded loss and loss adjustment expense development of $4.8 million in its September 30, 2012 financial statement that related to periods prior to 2012. The table below indicates the amount of loss and loss adjustment expense development by line of business:

36



($ in thousands)
2011
2010 & Prior
Total
Taxi
$
1,801

$
390

$
2,191

Truck
1,429

103

1,532

Contractors
1,029

58

1,087

Total
$
4,259

$
551

$
4,810

a.
A reduction to net claims incurred equal to $4.8 million was recorded in the September 30, 2012 pro forma statement of comprehensive income to remove the loss and loss adjustment expense development related to periods of 2011 and prior from the 2012 results.
b.
An adjustment equal to $1.8 million was made to increase the net claims incurred relating to the impact of 2011 taxi loss and loss adjustment expense development for year 2011. Since the workers' compensation and the truck lines of business were eliminated in items 4 and 5 above, no further adjustments to the 2011 net claims incurred were necessary.
7. Adjustments to income tax expense are as follows:
a.
Camelot recorded tax expense of $2.6 million in its September 30, 2012 statement of comprehensive income. This adjustment was made to establish an allowance against its deferred tax assets as it relates to the balance as of December 31, 2011. A reversal adjustment was made to the income tax line of the pro forma statement of comprehensive income for the nine months ended September 30, 2012 in the amount of $2.6 million to eliminate the impact of this adjustment. Also, an adjustment of $1.6 million was made to eliminate the income taxes in the December 31, 2011 statement of comprehensive income relating to the establishment of the deferred tax allowance as if it had occurred on January 1, 2011.
b.
Income tax adjustments related to the impact of adjustment 4.c. above of $28,000 and $180,000 for the nine months ended September 30, 2012 and the year ended December 31, 2012 were offset by decreases in the deferred tax allowance.
8. Accrued dividends were adjusted by $199,000 for the nine months ended September 30, 2012 and by $265,000 for the year ended December 31, 2011 to reflect the issuance of $5.9 million of Atlas preferred shares to Hendricks.

37



MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(All amounts in thousands of US dollars, except for amounts preceded by “C” as Canadian dollars, share and per share amounts)
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes that appear elsewhere in this prospectus. In addition to historical consolidated financial information, the following discussion contains forward-looking statements that may include, but are not limited to, statements with respect to estimates of future expenses, revenue and profitability; trends affecting financial condition, cash flows and results of operations; the availability and terms of additional capital; dependence on key suppliers, and other strategic partners; industry trends 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 prospectus. Our actual results could differ materially from those discussed in the forward-looking statements. Forward-looking statements contained herein are made as of the date of this prospectus and we disclaim any obligation to update any forward-looking statements, whether as a result of new information, future events or results, or otherwise. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this prospectus, particularly in “Risk Factors.”
In this discussion and analysis, the term "common share" refers to the summation of restricted voting shares and ordinary shares when used to describe loss or book value per common share.
Forward-looking statements
This report contains “forward-looking statements," within the meaning of the Private Securities Litigation Reform Act of 1995, which may include, but are not limited to, statements with respect to estimates of future expenses, revenue and profitability; trends affecting financial condition 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 report.
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 report 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.
Overview
We are a financial services holding company incorporated under the laws of the Cayman Islands. Our core business is the underwriting of commercial automobile insurance policies, focusing on the “light” commercial automobile sector, which is carried out through our insurance subsidiaries, American Country Insurance Company, or American Country, and American Service Insurance Company, Inc., or American Service, together with American Country, which we refer to as our “insurance subsidiaries”. This sector includes taxi cabs, non-emergency para-transit, limousine, livery and business auto. Our goal is to always be the preferred specialty commercial transportation insurer in any geographic areas where our value proposition delivers benefit to all stakeholders. We are licensed to write property and casualty, or P&C, insurance in 47 states in the United States. The insurance subsidiaries distribute their products through a network of independent retail agents, and are actively writing insurance in 31 states as of September 30, 2012.

Our core business is the underwriting of commercial automobile insurance policies, focusing on the “light” commercial automobile sector. Over the past two years, we have disposed of non-core assets and placed into run-off certain noncore lines of business previously written by the insurance subsidiaries. Our focus going forward is the underwriting of commercial automobile insurance in the U.S. Substantially all of our new premiums written are in “light” commercial automobile lines of business.



38



Commercial Automobile

The Company's primary target market is made up of taxi, limousine and non-emergency para-transit operators with one to ten units. The “light” commercial automobile policies we underwrite provide coverage for light weight commercial vehicles typically with the minimum limits prescribed by statute, municipal or other regulatory requirements. The majority of our policyholders are individual owner or small fleet operators. In certain jurisdictions like Illinois and New York, we have also been successful working with larger operators who retain a meaningful amount of their own risk of loss through self-insurance or self-funded captive insurance entity arrangements.  In these cases, we provide support in the areas of day to day policy administration and claims handling consistent with the value proposition we offer to all of our insureds, generally on a fee for service basis.  We may also provide excess coverage above the levels of risk retained by the insureds where a better than average loss ratio is expected.  Through these arrangements, we are able to effectively utilize the significant specialized operating infrastructure we maintain to generate revenue from business segments that may otherwise be more price sensitive in the current market environment.

The “light” commercial automobile sector is a subset of the historically profitable commercial automobile insurance industry segment. Commercial automobile insurance has outperformed the overall P&C industry in each of the past ten years based on data compiled by the NAIC. A recent survey by A.M. Best & Company estimates the total U.S. market for commercial automobile liability insurance to be $24 billion. The size of the commercial automobile insurance market can be affected significantly by many factors, such as the underwriting capacity and underwriting criteria of automobile insurance carriers and general economic conditions. Historically, the commercial automobile insurance market has been characterized by periods of price competition and excess capacity followed by periods of higher premium rates and shortages of underwriting capacity.

We believe that there is a positive correlation between the economy and commercial automobile insurance in general. Operators of “light” commercial automobiles may be less likely than other business segments within the commercial automobile insurance market to take vehicles out of service as their businesses and business reputations rely heavily on availability. With respect to certain business lines such as the taxi line, there are also other factors such as the cost and limited supply of medallions which may discourage a policyholder from taking vehicles out of service in the face of reduced demand for the use of the vehicle.

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 has transitioned away from the non-standard auto line in 2012. Atlas ceased renewals of policies of this type in 2011, allowing surplus and resources to be devoted to the expected growth of the commercial automobile business. The negative written premium within the non-standard auto line reflects policies canceled mid-term.
Other
This line of business is primarily comprised of Atlas’ surety business. Our surety program primarily consists of U.S. Customs bonds. We engage a former affiliate, Avalon Risk Management, to help coordinate marketing, customer service and claim handling for the surety bonds written. This program is 100% reinsured to an unrelated third party.
Revenues
We derive our revenues primarily from premiums from our insurance policies and income from our investment portfolio. Our underwriting approach is to price our products to generate consistent underwriting profit for the insurance companies we own. As with all P&C insurance companies, the impact of price changes is reflected in our financial results over time. Price changes on our in-force policies occur as they are renewed, which generally takes twelve months for our entire book of business and up to an additional twelve months to earn a full year of premium at the renewal rate.
We approach investment and capital management with the intention of supporting insurance operations by providing a stable source of income to supplement underwriting income. The goals of our investment policy are to protect capital while optimizing investment income and capital appreciation and maintaining appropriate liquidity. We follow a formal investment policy and the Board reviews the portfolio performance at least quarterly for compliance with the established guidelines.
Expenses
Net claims incurred expenses are a function of the amount and type of insurance contracts we write and of the loss experience of the underlying risks. We record net claims incurred based on an actuarial analysis of the estimated losses we expect to be

39



reported on contracts written. We seek to establish case reserves at the maximum probable exposure based on our historical claims experience. Our ability to estimate net claims incurred accurately at the time of pricing our contracts is a critical factor in determining our profitability. The amount reported under net claims incurred in any period includes payments in the period net of the change in the value of the reserves for net claims incurred between the beginning and the end of the period.
Commissions and other underwriting expenses consist principally of brokerage and agent commissions and to a lesser extent premium taxes. The brokerage and agent commissions are reduced by ceding commissions received from assuming reinsurers that represent a percentage of the premiums on insurance policies and reinsurance contracts written and vary depending upon the amount and types of contracts written.

Other operating and general expenses consist primarily of personnel expenses (including salaries, benefits and certain costs associated with awards under our equity compensation plans, such as stock compensation expense) and other general operating expenses. Our personnel expenses are primarily fixed in nature and do not vary with the amount of premiums written.

In this discussion and analysis, the term "common share" refers to the summation of restricted voting shares and ordinary shares when used to describe loss or book value per common share.


40



II. Consolidated Performance
Third Quarter 2012 Highlights (comparisons are to third quarter 2011 unless otherwise noted):
Gross premium written increased by 113.7%, which included an increase of 313.4% in our core commercial auto business.
We actively distributed our core products in 31 states during the three month period ended September 30, 2012.
The combined ratio improved by 22.1% to 97.6%, which represents the first quarter under 100% since our inception.
Underwriting results improved by $2.0 million and returned to underwriting probability.
Net income for the three month period ended September 30, 2012 was $1.7 million.
Basic and diluted earnings per ordinary common share was $0.08, net of accounting treatment for preferred shares.
Book value per diluted common share on September 30, 2012 was $2.15, compared to $2.05 at June 30, 2012.
In October, Atlas announced the acquisition of Camelot Services, Inc. and its sole insurance subsidiary, Gateway Insurance Company (“Gateway”) from Hendricks Holding Company, Inc. for a purchase price of approximately $23 million.
The following financial data is derived from Atlas’ unaudited condensed consolidated financial statements for the three and nine month periods ended September 30, 2012 and September 30, 2011:
Selected financial information (in '000s)
 
Three Month Periods Ended
 
Nine Month Periods Ended
 
September 30, 2012
September 30, 2011
 
September 30, 2012
September 30, 2011
Gross premium written
$
23,353

$
10,928

 
$
44,349

$
32,951

Net premium earned
10,934

8,797

 
26,795

26,668

Losses on claims
7,165

6,984

 
18,477

20,596

Acquisition costs
1,813

1,720

 
4,582

5,343

Other underwriting expenses
1,692

1,822

 
4,959

5,642

Net underwriting income/(loss)
264

(1,729
)
 
(1,222
)
(4,913
)
Net investment and other income
1,393

2,795

 
3,144

5,468

Net income before tax
1,657

1,066

 
1,922

555

Income tax expense


 


Net income
$
1,657

$
1,066

 
$
1,922

$
555

 
 
 
 
 
 
Key Financial Ratios:
 
 
 
 
 
Loss ratio
65.5
%
79.4
%
 
69.0
%
77.2
%
Acquisition cost ratio
16.6
%
19.6
%
 
17.1
%
20.0
%
Other underwriting expense ratio
15.5
%
20.7
%
 
18.5
%
21.2
%
Combined ratio
97.6
%
119.7
%
 
104.6
%
118.4
%
Return on equity (annualized)
11.4
%
7.2
%
 
4.4
%
1.2
%
Earnings/(loss) per common share, basic and diluted
$
0.08

$
0.05

 
$
0.07

$

Book value per common share, basic and diluted
$
2.15

$
2.19

 
$
2.15

$
2.19

Third Quarter 2012:
Atlas’ combined ratio for the three month period ended September 30, 2012 was 97.6%, compared to 119.7% for the three month period ended September 30, 2011 and 111.5% for the three month period ended June 30, 2012.
As planned, core commercial automobile lines continue to be the most 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 313.4% for the three month period ended September 30, 2012 as compared to the three month period ended September 30, 2011. As a result, the overall loss ratio for the three month period ended September 30, 2012 improved to 65.5% compared to 79.4% in the three month period ended September 30, 2011 and 71.6% for the three month period ended June 30, 2012.
Net investment and other income generated $1.4 million of income for the three month period ended September 30, 2012, of which $779,000 are realized gains. This resulted in a 4.6% annualized yield for the three month period ended September 30, 2012.
Overall, Atlas generated net income of $1.7 million for the three month period ended September 30, 2012. After taking the impact of the liquidation preference of the preferred shares into consideration, basic and diluted earnings per common share in the three month period ended September 30, 2012 was $0.08. This compares to net income of $1.1 million or earnings of $0.05 per common

41



share diluted in the three month period ended September 30, 2011 and income of $130,000 or a loss per share of $0.00 per common share diluted in the three month period ended June 30, 2012.
Year to Date September 30, 2012:
Atlas’ combined ratio for the nine month period ended September 30, 2012 was 104.6%, compared to 118.4% for the nine month period ended September 30, 2011. This improvement in the combined ratio was mostly attributable to the loss ratio reduction, from 77.2% to 69.0%, as a result of the exiting of the non-standard automobile lines. Our commercial automobile lines of business grew 183.0% during the nine month period ended September 30, 2012 versus the nine month period ended September 30, 2011.
Investment performance and other income generated $3.1 million of income for the nine month period ended September 30, 2012, of which $1.1 million are realized gains. This resulted in a 3.2% annualized yield for the nine month period ended September 30, 2012. Cash and invested assets were $121.7 million as of the period ended September 30, 2012 and were $6.2 million lower than December 31, 2011, resulting primarily from the payment of claim settlements. This reduction in cash and invested assets is in line with expectations.
Overall, Atlas generated net income of $1.9 million for the nine month period ended September 30, 2012. After taking the impact of the liquidation preference of the preferred shares into consideration, basic and diluted earnings per common share in the nine month period ended September 30, 2012 was $0.07. This compares to net income of $555,000 or a loss of $0.00 per common share diluted in the nine month period ended September 30, 2011.
Book value per common share diluted as of the period ended September 30, 2012 was $2.15, compared to $2.19 as of the period ended September 30, 2011 and $2.05 as at the three month period ended June 30, 2012.

III. 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 recoverability;
Reserve for property-liability insurance claims and claims expense estimation; and
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 items 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 and equity securities are based on quoted market prices, when available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments or values obtained from independent pricing services through a bank trustee.
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, does 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 the period ended September 30, 2012, this process did not generate any significant difference in the rating assessment between Atlas' review and the rating agencies.

42



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 AAM 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 AAM 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.
Impairment of financial assets - Atlas assesses, on a quarterly basis, whether there is objective evidence that a financial asset or group of financial assets is impaired. An investment is considered impaired when the fair value of the investment is less than its cost or amortized cost. When an investment is impaired, the Company must make a determination as to whether the impairment is other-than-temporary.
Under U.S. GAAP, with respect to an investment in an impaired debt security, other-than temporary impairment (OTTI) occurs if (a) there is intent to sell the debt security, (b) it is more likely than not it will be required to sell the debt security before its anticipated recovery, or (c) it is probable that all amounts due will be unable to be collected such that the entire cost basis of the security will not be recovered. If Atlas intends to sell the debt security, or will more likely than not be required to sell the debt security before the anticipated recovery, a loss in the entire amount of the impairment is reflected in net realized gains (losses) on investments in the consolidated statements of comprehensive income. If Atlas determines that it is probable it will be unable to collect all amounts and Atlas has no intent to sell the debt security, a credit loss is recognized in net realized gains (losses) on investments in the consolidated statements of comprehensive 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 successful acquisition of premiums written to the extent they are considered recoverable. These costs are then expensed as the related premiums are earned. The method followed in determining the deferred policy acquisition costs limits the deferral to its realizable value by giving consideration to estimated future claims and expenses to be incurred as premiums are earned. Changes in estimates, if any, are recorded in the accounting period in which they are determined. Anticipated investment income is included in determining the realizable value of the deferred policy acquisition costs. Atlas’ deferred policy acquisition costs are reported net of deferred ceding commissions.
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.
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.
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.

43



IV. Operating Results
Gross Premium Written
The following table summarizes gross premium written by line of business.
Gross premium written by line of business (in '000s)
 
Three Month Periods Ended
 
Nine Month Periods Ended
 
September 30, 2012
September 30, 2011
% Change
 
September 30, 2012
September 30, 2011
% Change
Commercial automobile
$
22,119

$
5,350

313.4
 %
 
$
41,045

$
14,504

183.0
 %
Non-standard automobile
(31
)
4,342

(100.7
)%
 
(540
)
14,012

(103.9
)%
Other
1,265

1,236

2.3
 %
 
3,843

4,435

(13.3
)%
 
$
23,353

$
10,928

113.7
 %
 
$
44,348

$
32,951

34.6
 %

Third Quarter 2012:
For the three month period ended September 30, 2012, gross premium written was $23.4 million compared to $10.9 million in the three month period ended September 30, 2011, and $9.2 million in the three month period ended June 30, 2012, representing a 113.7% increase and 152.7% increase, respectively. The increase relative to the three month period ended September 30, 2011 is due primarily to the substantial growth of the core commercial auto business, which offset the exit of the non-standard auto line of business. In the three month period ended September 30, 2012, we implemented a new business arrangement in New York to provide excess coverage above the levels of risk retained by the insured. Total premium related to this program was $12.4 million in the three month period ended September 30, 2012 and is included in the "commercial automobile" line of business. Below we will refer to the arrangement as the "excess taxi program" where it is relevant to explain certain variances. The increase relative to the three month period ended June 30, 2012 is primarily the result of the excess taxi program.
In the three month period ended September 30, 2012, gross premium written from commercial automobile was $22.1 million, representing a 313.4% increase relative to the three month period ended September 30, 2011 and a 169.5% increase compared to the three month period ended June 30, 2012. This substantial increase is primarily the result of the excess taxi program but also the planned expansion of the commercial auto business. Removing the impact of the excess taxi program, our traditional commercial automobile premium written was $9.7 million, an increase of 80.9% versus the three month period ended September 30, 2011 and 17.9% relative to the three month period ended June 30, 2012. The cessation of non-standard auto written premium allowed Atlas to focus its resources on its core line of business. As a percentage of the insurance subsidiaries’ overall book of business, commercial auto gross premium written represented 94.7% of gross premium written in the three month period ended September 30, 2012 compared to 49.0% during the three month period ended September 30, 2011 and 88.8% in the three month period ended June 30, 2012.
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 industry segment.
Year to Date September 30, 2012:
For the nine month period ended September 30, 2012, gross premium written was $44.3 million compared to $33.0 million in the nine month period ended September 30, 2011, representing a 34.6% increase. This increase was attributable to significant gains in commercial automobile premium. Our exit from the non-standard auto line of business is having a lesser impact on total premium written as the year goes forward.
In the nine month period ended September 30, 2012, gross premium written from commercial automobile was $41.0 million, representing a 183.0% increase relative to the nine month period ended September 30, 2011. As a percentage of the insurance subsidiaries’ overall book of business, commercial auto gross premium written represented 92.6% of gross premium written in the nine month period ended September 30, 2012 compared to 44.0% during the nine month period ended September 30, 2011.


44



Geographic Concentration
Gross premium written by state (in '000s)
 
Three Month Periods Ended
 
Nine Month Periods Ended
 
September 30, 2012
 
September 30, 2011
 
September 30, 2012
 
September 30, 2011
New York
$
12,991

55.6
%
 
$
323

3.0
%
 
$
15,324

34.6
%
 
$
1,487

4.5
%
Louisiana
2,436

10.4
%
 
1,388

12.7
%
 
2,739

6.2
%
 
1,391

4.2
%
Michigan
1,561

6.7
%
 
930

8.5
%
 
5,285

11.9
%
 
2,648

8.0
%
Illinois
1,538

6.6
%
 
5,303

48.5
%
 
8,551

19.3
%
 
20,618

62.6
%
Minnesota
566

2.4
%
 
663

6.1
%
 
2,160

4.9
%
 
1,745

5.3
%
Virginia
482

2.1
%
 
23

0.2
%
 
1,143

2.6
%
 
7

%
Texas
308

1.3
%
 
95

0.9
%
 
1,164

2.6
%
 
435

1.3
%
Indiana
253

1.1
%
 
710

6.5
%
 
368

0.8
%
 
2,330

7.1
%
Georgia
208

0.9
%
 

%
 
811

1.8
%
 

%
Other
3,010

12.9
%
 
1,493

13.6
%
 
6,803

15.3
%
 
2,290

7.0
%
Total
$
23,353

100.0
%
 
$
10,928

100.0
%
 
$
44,348

100.0
%
 
$
32,951

100.0
%
Third Quarter 2012:
As illustrated by the data in Table 3 above, 55.6% of Atlas’ gross premium written for the three month period ended September 30, 2012 came from New York and 72.7% came from the three states currently producing the most premium volume (New York, Louisiana, Michigan), as compared to 69.7% in the three month period ended September 30, 2011 (Illinois, Michigan, Louisiana) and 47.8% in the three month period ended June 30, 2012 (Illinois, Minnesota, Michigan). This is the first quarter where Atlas' largest top three states by premium volume did not include Illinois, further highlighting the results of its commitment to diversifying geographically by expanding in new areas of the country, and leveraging experience, historical data and research. Our increase in New York is primarily due to the excess taxi program. The decline in Illinois is primarily attributable to Atlas' exit from non-standard insurance lines as well as re-allocation of resources to pursuits in new markets.
Though we built an expanded presence in New York, we do not believe there was material exposure to our business due to Hurricane Sandy.
Year to Date September 30, 2012:
Atlas saw similar geographic diversification in the nine month period ended September 30, 2012 compared to the nine month period ended September 30, 2011. 65.8% of our premium volume came from the top three states (Michigan, Illinois, New York) in 2012, compared to 77.7% in 2011 (Illinois, Michigan, Indiana).
The decline of written premiums for the nine month period ended September 30, 2012 versus the nine month period ended September 30, 2011 in Illinois and Indiana is primarily attributable to Atlas’ exiting the non-standard automobile insurance lines as well as re-allocating resources to pursuits in new markets. The majority of the 2011 non-standard automobile written premiums came from those two states. This was mostly offset by gains in commercial auto premiums in other states, both in established markets such as Michigan and New York and new states.
Ceded Premium Written
Ceded premium written is equal to premium ceded under the terms of Atlas’ inforce reinsurance treaties. Ceded premium written increased 38.6% to $2.0 million for the three month period ended September 30, 2012 compared with $1.4 million for the three month period ended September 30, 2011, and increased 37.7% from $1.4 million for the three month period ended June 30, 2012. This change is the result of the business mix within our total premium base.
In the nine month period ended September 30, 2012, ceded premium written increased 6.5% to $4.9 million from $4.6 million for the nine month period ended September 30, 2011.
Net Premium Written
Net premium written is equal to gross premium written less the ceded premium written under the terms of Atlas’ inforce reinsurance treaties. Net premium written increased 124.9% to $21.4 million for the three month period ended September 30, 2012 compared with $9.5 million for the three month period ended September 30, 2011 and increased 173.7% versus the three month period ended June 30, 2012. These changes are attributed to the combined effects of the issues cited in the ‘Gross Premium Written’ and ‘Ceded Premium Written’ sections above.
The success of our focus on commercial auto insurance in 2012 is more pronounced when viewed in terms of net premium written. As a percentage of the total net premium written, commercial auto represented 100.1% for the three month period ended September 30, 2012 and 101.5% for the three month period ended June 30, 2012, versus only 53.3% in the three month period ended September

45



30, 2011. Premium credits in the non-standard personal lines caused the percentage of core commercial auto premium to exceed 100% of the total net written premium for each of the last two three month periods.
Similarly, in the nine month period ended September 30, 2012, commercial auto insurance comprised 101.0% of the total net premium written versus just 49.5% in the nine month period ended September 30, 2011. As indicated above, premium credits in the non-standard personal lines caused the percentage of core commercial auto premium to exceed 100% of the total net written premium for the nine month period ended September 30, 2012.
Net Premium Earned
Premiums are earned ratably over the term of the underlying policy. Net premium earned was $10.9 million in the three month period ended September 30, 2012, a 24.3% increase compared with $8.8 million in the three month period ended September 30, 2011 and a 44.8% increase versus the three month period ended June 30, 2012.
In the nine month period ended September 30, 2012, net premium earned was $26.8 million, a 0.5% increase compared to $26.7 million for the nine month period ended September 30, 2011.
The increase in net premiums earned is attributable to the excess taxi program and strong growth in commercial auto lines. Net earned premiums on our core lines were $10.5 million in the three month period ended September 30, 2012, a 161.8% increase compared with $4,013 in the three month period ended September 30, 2011 and a 68.8% increase versus the three month period ended June 30, 2012. Similarly, net earned premiums on our core lines for the nine month period ended September 30, 2012 were $21.9 million, a 91.7% increase compared to the nine month period ended September 30, 2011.
Claims Incurred
The loss ratio relating to the claims incurred in the three month period ended September 30, 2012 was 65.5% compared to 79.4% in the three month period ended September 30, 2011 and 71.6% for the three month period ended June 30, 2012.
For the nine month period ended September 30, 2012, the loss ratio was 69.0%, compared to 77.2% for the nine month period ended September 30, 2011.
Loss ratios improved in the three month period ended September 30, 2012 relative to prior periods. This is primarily attributable to the increased composition of commercial auto as a percentage of the total written premium, which has historically had a better overall underwriting result. Further, the excess taxi program also contributed significantly to favorable loss results in the three month period ended September 30, 2012. We believe that our extensive experience and expertise with respect to underwriting and claims management in all our commercial lines will allow us to continue this decreasing trend since we expect 100% of net earned premium to be related to core lines of business in 2013. 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 $1.8 million in the three month period ended September 30, 2012 or 16.6% of net premium earned, as compared to 19.6% in the three month period ended September 30, 2011 and 18.5% in the three month period ended June 30, 2012.
For the nine month period ended September 30, 2012, the ratio was 17.1% as compared to 20.0% in the nine month period ended September 30, 2011.
The favorable trend in acquisition costs is primarily due to the shift away from non-standard automobile insurance which carries higher commission rates.
Other Underwriting Expenses
The other underwriting expense ratio was 15.5% in the three month period ended September 30, 2012 compared to 20.7% in the three month period ended September 30, 2011 and 21.4% in the three month period ended June 30, 2012. This decline is attributable to a significant increase in premium earned in the three month period ended September 30, 2012 as well as a reduction in employee head count since 2011.
For the nine month period ended September 30, 2012, this ratio was 18.5%, as compared to 21.2% for the nine month period ended September 30, 2011. However, 2011 includes $627,000 in non-recurring expenses (detailed below) which unfavorably impacted the year-to-date ratio by 2.4%. After adjustment for these non-recurring expenses, other underwriting expenses remained static year over year.

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First Quarter 2011 Non-recurring Expenses (in '000s)
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

EDP expense
Decommissioning software expenses previously capitalized
84

Occupancy/Miscellaneous expense
Straight-line lease adjustment
50

Total non-recurring expenses
 
$
627

Net Investment Income
Investment Results (in '000s)
 
Three Month Periods Ended
 
Nine Month Periods Ended
 
September 30, 2012
 
September 30, 2011
 
September 30, 2012
 
September 30, 2011
Average securities at cost1
$
120,734

 
$
144,028

 
$
123,245

 
$
153,753

Interest income after expenses
613

 
719

 
1,878

 
2,651

Percent earned on average investments (annualized)
2.0
%
 
2.0
%
 
2.0
%
 
2.3
%
Net realized gains
$
779

 
$
1,962

 
$
1,098

 
$
2,813

Total investment income
1,392

 
2,681

 
2,976

 
5,464

Total realized yield (annualized)
4.6
%
 
7.4
%
 
3.2
%
 
4.7
%
1 - includes cash as well as the investment in Oak Street (see note 5 to condensed consolidated financial statements)
Investment income (excluding net realized gains) decreased by 14.7% to $613,000 in the three month period ended September 30, 2012, compared to $719,000 in the three month period ended September 30, 2011, and decreased by 6.8% from $657,000 for the three month period ended June 30, 2012. These amounts are primarily comprised of interest income. This is attributable to the timing of asset disposals and the mix of securities on hand. The annualized realized yield on invested assets (including net realized gains of $779,000) in the three month period ended September 30, 2012 decreased to 4.6% as compared with 7.4% in the three month period ended September 30, 2011 and increased compared to 3.2% for the three month period ended June 30, 2012. This is primarily due to the relative absence of realized gains during the three month period ended June 30, 2012 versus those periods.
On a year-to-date basis, interest income decreased by 29.2% to $1.9 million from $2.7 million for the nine month period ended September 30, 2011. This decrease correlates with a similar decline in the average securities held, which is consistent with our expectations for claim payout patterns. The annualized realized yield on invested assets (including realized gains) decreased to 3.2% from 4.7%, due primarily to a reduction in realized gains year over year.
Net Realized Investment Gains (Losses)
Net realized investment gains in the three month period ended September 30, 2012 were $779,000 compared to $2.0 million in the three month period ended September 30, 2011 and $291,000 during the three month period ended June 30, 2012. On a year-to-date basis, realized gains were $1.1 million in the nine month period ended September 30, 2011 compared to $2.8 million for the nine month period ended September 30, 2012. The difference is the result of management's decision to sell certain securities consistent with the Company's liquidity needs and expected duration of claim payment triangles during favorable market conditions.
Miscellaneous Income (Loss)
Atlas recorded miscellaneous income in the three month period ended September 30, 2012 of $1,000 compared to $113,000 for the three month period ended September 30, 2011 and $51,000 in the three month period ended June 30, 2012. Miscellaneous income prior to June 30, 2012 was primarily comprised of rental income from our corporate headquarters in Elk Grove Village, Illinois, which has subsequently been sold.
Combined Ratio
Underwriting profitability, as opposed to overall profitability or net earnings, is measured by the combined ratio. The combined ratio is the sum of the loss and loss adjustment (LAE) expense ratio, the acquisition cost ratio and the underwriting expense ratio. Atlas’ combined ratio for the three month periods ended September 30, 2012 and 2011 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. This is the first quarter that we have achieved a combined ratio below 100% since our inception in December 2010.

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Combined Ratios (in '000s)
Three Month Periods Ended
September 30, 2012
 
September 30, 2011
 
June 30, 2012
Net premium earned
$
10,934

 
$
8,797

 
$
7,552

Underwriting expenses *
10,670

 
10,526

 
8,420

Combined ratio
97.6
%
 
119.7
%
 
111.5
%
Nine Month Periods Ended
September 30, 2012
 
September 30, 2011
Net premium earned
$
26,795

 
$
26,669

Underwriting expenses *
28,018

 
31,582

Combined ratio
104.6
%
 
118.4
%
    
*Underwriting expenses are the combination of claims incurred, acquisition costs, and other underwriting expenses
Income/Loss before Income Taxes
Atlas generated pre-tax income of $1.7 million in the three month period ended September 30, 2012, compared to pre-tax income of $1.1 million in the three month period ended September 30, 2011 and pre-tax income of $130,000 in the three month period ended June 30, 2012.
In the nine month period ended September 30, 2012, Atlas generated pre-tax income of $1.9 million compared to income of $555,000 in the nine month period ended September 30, 2011.
Income Tax Benefit
Atlas recognized no tax expense in the three month period ended September 30, 2012, nor during the three month period ended September 30, 2011 or the three month period ended June 30, 2012. The following table reconciles tax benefit from applying the statutory U.S. Federal tax rate of 34.0% to the actual percentage of pre-tax income provided for the three month periods ended September 30, 2012 and 2011:
Tax Rate Reconciliation (in '000s)
 
Three Month Periods Ended
 
Nine Month Periods Ended
 
September 30, 2012
September 30, 2011
 
September 30, 2012
 
September 30, 2011
 
Amount
 
%
 
Amount
 
%
 
Amount
 
%
 
Amount
 
%
Expected income tax benefit at statutory rate
$
563

 
34.0
 %
 
$
362

 
34.0
 %
 
$
653

 
34.0
 %
 
$
(174
)
 
34.0
 %
Valuation allowance
(566
)
 
(34.2
)%
 
(384