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EX-32.2 - EXHIBIT 32.2 - Atlas Financial Holdings, Inc.ye2018exhibit322.htm
EX-32.1 - EXHIBIT 32.1 - Atlas Financial Holdings, Inc.ye2018exhibit321.htm
EX-31.2 - EXHIBIT 31.2 - Atlas Financial Holdings, Inc.ye2018exhibit312.htm
EX-31.1 - EXHIBIT 31.1 - Atlas Financial Holdings, Inc.ye2018exhibit311.htm
EX-23.2 - EXHIBIT 23.2 - Atlas Financial Holdings, Inc.bdoconsent10-k2018.htm
EX-23.1 - EXHIBIT 23.1 - Atlas Financial Holdings, Inc.bakertillyconsent10-k2018.htm
EX-21 - EXHIBIT 21 - Atlas Financial Holdings, Inc.listofsubsidiaries12-2018.htm
EX-10.25 - EXHIBIT 10.25 - Atlas Financial Holdings, Inc.ye2018exhibit1025.htm
EX-4.10 - EXHIBIT 4.10 - Atlas Financial Holdings, Inc.exhibit410descriptionof662.htm
EX-4.9 - EXHIBIT 4.9 - Atlas Financial Holdings, Inc.exhibit49descriptionofordi.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended:
 
COMMISSION FILE NUMBER:
December 31, 2018
 
000-54627
atlaslogonewa13.jpg
ATLAS FINANCIAL HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CAYMAN ISLANDS
  
27-5466079
(State or other jurisdiction of
  
(I.R.S. Employer
incorporation or organization)
  
Identification No.)
 
 
953 AMERICAN LANE, 3RD FLOOR
  
60173
Schaumburg, IL
  
(Zip Code)
(Address of principal executive offices)
  
 
Registrant’s telephone number, including area code: (847) 472-6700
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading Symbol(s)
 
Name of each exchange on which registered
Common, $0.003 par value per share
 
AFH
 
Nasdaq Capital Market
6.625% Senior Unsecured Notes due 2022
 
AFHBL
 
OTC Markets - Pink Sheets
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  ¨ No þ  
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes  ¨ No  þ
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  þ No  ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes  þ   No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
     Large Accelerated Filer ¨                            Accelerated Filer        þ
Non-Accelerated Filer ¨                            Smaller Reporting Company    þ
Emerging Growth Company    ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).     Yes  ¨   No  þ
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter.
There were 11,942,812 shares of the Registrant’s common stock outstanding as of March 8, 2019, all of which are ordinary voting common shares. There are no outstanding restricted voting common shares. As of the last business day of the Registrant’s most recently completed second fiscal quarter, the aggregate market value of the Registrant’s common equity held by non-affiliates of the Registrant was approximately $90.7 million (based upon the closing sale price of the Registrant’s common shares on June 30, 2018).
For purposes of the foregoing calculation only, which is required by Form 10-K, the Registrant has included in the shares owned by affiliates those shares owned by directors and officers of the Registrant, and such inclusion shall not be construed as an admission that any such person is an affiliate for any purpose.




Explanatory Note:

This Annual Report on Form 10-K for Atlas Financial Holdings, Inc. (the “Company”) relates to the fiscal year ended December 31, 2018. As previously disclosed, the Company has been unable to previously file this annual report due to delays in the year end audit process. Unless otherwise noted, disclosures in this annual report, including disclosures regarding the Company’s financial and operating condition, are as of December 31, 2018. An overview of certain developments that occurred since December 31, 2018 is included in ‘Item 1, 2019 Developments’ and “Risk Factors - Risks Related to 2019 Developments.” We expect to file our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2019, June 30, 2019 and September 30, 2019, as well as our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, as soon as practicable.




Atlas Financial Holdings, Inc.
Index to Annual Report on Form 10-K
December 31, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2019 Developments
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



Part I
Item 1. Business
Overview
Atlas Financial Holdings, Inc. (“Atlas” or “We” or “the Company”) is a financial services holding company whose subsidiaries specialize in the underwriting of commercial automobile insurance policies, focusing on the “light” commercial automobile sector. This sector includes taxi cabs, non-emergency para-transit, limousine, livery and business auto. With roots dating back to 1925 selling insurance for taxi cabs, we are one of the oldest insurers of taxi and livery businesses in the United States (“U.S.”). This heritage serves as the foundation of our hyper-focused specialty insurance business that embraces continuous improvement, analytics and technology. The expanding segment of commercially licensed drivers operating through transportation network companies (“TNCs”) are included in the livery product. Our goal is to be the preferred specialty insurance business in any geographic area where our value proposition delivers benefit to all stakeholders.
We were originally 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 Insurance Company, Inc. (“American Service”) and American Country Insurance Company (“American Country”), in exchange for the consideration set out below, were transferred to us by Kingsway America Inc. (“KAI”), a wholly owned subsidiary of Kingsway Financial Services Inc. (“KFSI”). Prior to the transaction, American Service and American Country were wholly owned subsidiaries of KAI. American Country commenced operations in 1979. In 1983, American Service began as a non-standard personal and commercial auto insurer writing business in the Chicago, Illinois area.
On December 31, 2010, following the reverse merger transaction described immediately hereafter, we filed a Certificate of Registration by Way of Continuation in the Cayman Islands to re-domesticate as a Cayman Islands company. In addition, on December 30, 2010 we filed a Certificate of Incorporation on Change of Name to change our name to Atlas Financial Holdings, Inc. Our current organization is a result of a reverse merger transaction involving the following companies:
(a)
JJR VI, sponsored by JJR Capital, a Toronto based merchant bank;
(b)
American Insurance Acquisition Inc. (“American Acquisition”), a corporation formed under the laws of Delaware as a wholly owned subsidiary of KAI; and
(c)
Atlas Acquisition Corp., a Delaware corporation wholly-owned by JJR VI and formed for the purpose of merging with and into American Acquisition.
In connection with the reverse merger transaction, KAI transferred 100% of the capital stock of each of American Service and American Country to American Acquisition in exchange for C$35.1 million of common shares and $18.0 million of preferred shares of American Acquisition and promissory notes worth C$7.7 million, aggregating C$60.8 million. In addition, American Acquisition raised C$8.0 million through a private placement offering of subscription receipts to qualified investors in both the U.S. and Canada at a price of C$6.00 per subscription receipt.
KAI received 4,601,621 restricted voting common shares of our company, then valued at $27.8 million, along with 18,000,000 non-voting preferred shares of our company, then valued at $18.0 million, and C$8.0 million cash for total consideration of C$60.8 million in exchange for 100% of the outstanding shares of American Acquisition and full payment of certain promissory notes. Investors in the American Acquisition private placement offering of subscription receipts received 1,327,834 of our ordinary voting common shares, plus warrants to purchase one ordinary voting common share of our company for each subscription receipt at C$6.00 at any time until December 31, 2013. Every 10 common shares of JJR VI held by the shareholders of JJR VI immediately prior to the reverse merger were, upon consummation of the merger, consolidated into one ordinary voting common share of JJR VI. Upon re-domestication in the Cayman Islands, these consolidated shares were then exchanged on a one-for-one basis for our ordinary voting common shares.
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. During 2011 and 2012, we disposed of non-core assets and placed into run-off certain non-core lines of business previously written by the insurance subsidiaries. Since disposing of these non-core assets and lines of business, our strategic focus has been the underwriting of specialty commercial insurance for users of “light” vehicles in the U.S.
On December 7, 2012, a shareholder meeting was held where a one-for-three reverse stock split was unanimously approved. When the reverse stock split took effect on January 29, 2013, it decreased the authorized and outstanding ordinary voting common shares and restricted voting common shares at a ratio of one-for-three. The primary objective of the reverse stock split was to increase the per share price of Atlas’ ordinary voting common shares to meet certain listing requirements of the NASDAQ Stock Market.

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Unless otherwise noted, all historical share and per share values in this Annual Report on Form 10-K reflect the one-for-three reverse stock split.
On January 2, 2013, we acquired Camelot Services, Inc. (“Camelot Services”), a privately owned insurance holding company, and its sole subsidiary, Gateway Insurance Company (“Gateway”), from an unaffiliated third party. This transaction was contractually deemed effective as of January 1, 2013. Gateway provides specialized commercial insurance products, including commercial automobile insurance to niche markets such as taxi, black car and sedan service owners and operators. Gateway also wrote contractor’s workers’ compensation insurance, which we ceased writing as part of the transaction. An indemnity reinsurance agreement was entered into pursuant to which 100% of Gateway’s workers’ compensation business was ceded to a third party captive reinsurer funded by the seller as part of the transaction.
Under the terms of the stock purchase agreement, the purchase price equaled the adjusted book value of Camelot Services as of December 31, 2012, subject to certain pre and post-closing adjustments, including, among others, the future development of Gateway’s actual claims reserves for certain lines of business and the utilization of certain deferred tax assets over time. The total purchase price for all of Camelot Services’ outstanding shares was $14.3 million, consisting of a combination of cash and Atlas preferred shares. Consideration consisted of a $6.0 million dividend paid by Gateway immediately prior to the closing, $2.0 million of Atlas preferred shares (consisting of a total of 2,000,000 preferred shares) and $6.3 million in cash. Pursuant to the terms of the stock purchase agreement, the Company issued an additional 940,500 preferred shares due to the favorable development of Gateway’s actual claims reserves for certain lines of business during the first quarter of 2015. During the first quarter of 2016, the Company canceled 401,940 preferred shares pursuant to the Gateway stock purchase agreement due to the unfavorable development of Gateway’s actual claims reserves for certain lines of business. During the third quarter of 2016, the Company and the former owner of Camelot Services agreed to settle the additional consideration related to future claims development and utilization of certain tax assets. Atlas redeemed all 2,538,560 of the remaining preferred shares issued to the former owner of Gateway.
On February 11, 2013, an aggregate of 4,125,000 Atlas ordinary voting common shares were offered in Atlas’ initial public offering in the U.S. 1,500,000 ordinary voting common shares were offered by Atlas and 2,625,000 ordinary voting common shares were sold by KAI at a price of $5.85 per share. Atlas also granted the underwriters an option to purchase up to an aggregate of 618,750 additional shares at the public offering price of $5.85 per share to cover over-allotments, if any. On March 11, 2013, the underwriters exercised this option and purchased an additional 451,500 shares. After underwriting and other expenses, total proceeds of $9.8 million were realized on the issuance of the shares. Since that time, Atlas’ shares have traded on the NASDAQ under the symbol “AFH.” The principal purposes of the initial offering in the U.S. were to create a public market in the U.S. for Atlas’ ordinary voting common shares and thereby enable future access to the public equity markets in the U.S. by Atlas and its shareholders, and to obtain additional capital.
On June 5, 2013, Atlas delisted from the Toronto Stock Exchange.
On August 1, 2013, Atlas used the net proceeds from the U.S. initial public offering to partially fund the repurchase of 18,000,000 of its outstanding preferred shares owned by KAI for $16.2 million. These preferred shares had accrued dividends on a cumulative basis at a rate of $0.045 per share per year (4.5%) and were convertible into 2,286,000 common shares at the option of the holder after December 31, 2015. These shares were redeemed in their entirety for $0.90 for every dollar of outstanding face value plus accrued interest.
On May 13, 2014, an aggregate of 2,000,000 Atlas ordinary voting common shares were offered in a subsequent public offering in the U.S. at a price of $12.50 per share. Atlas also granted the underwriters an option to purchase up to an aggregate of 300,000 additional shares at the public offering price of $12.50 per share to cover over-allotments, if any. On May 27, 2014, the underwriters exercised this option and purchased an additional 161,000 shares. After underwriting and other expenses, total proceeds of $25.0 million were realized on the issuance of the shares. A portion of the net proceeds from the offering was used to support the acquisition of Anchor Holdings Group, Inc. and its affiliated entities as described further below.
During the fourth quarter of 2014, Camelot Services was merged into American Acquisition.
On March 11, 2015, we acquired Anchor Holdings Group, Inc. (“Anchor Holdings”), a privately owned insurance holding company, and its wholly owned subsidiary, Global Liberty Insurance Company of New York (“Global Liberty”), along with its affiliated entities, Anchor Group Management Inc. (“AGMI”), Plainview Premium Finance Company, Inc. (“Plainview Delaware”) and Plainview Delaware’s wholly owned subsidiary, Plainview Premium Finance Company of California, Inc. (“Plainview California”, and together with Anchor Holdings, Global Liberty, AGMI, and Plainview Delaware, “Anchor,”) from an unaffiliated third party for a total purchase price of $23.2 million, consisting of a combination of cash and Atlas preferred shares that was approximately 1.3 times combined U.S. GAAP book value. Consideration consisted of approximately $19.2 million in cash and $4.0 million of Atlas preferred shares (consisting of a total of 4,000,000 preferred shares at $1.00 per preferred share). Anchor provides specialized commercial insurance products, including commercial automobile insurance to niche markets such as taxi, black car and sedan service owners and operators primarily in the New York market. During the fourth quarter of 2016, the company canceled 4,000,000 preferred shares pursuant to the Anchor stock purchase agreement due to unfavorable development of Global Liberty’s pre-acquisition claims reserves. Although the re-issuance of preferred shares to the former owner of Anchor may be highly unlikely,

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the contingent consideration terms of the Anchor stock purchase agreement will remain in effect for a period of five years from the date of acquisition.
Our core business is the underwriting of commercial automobile insurance policies, focusing on the “light” commercial automobile sector, which is carried out through American Country, American Service and Gateway (collectively, the “ASI Pool Companies”) and Global Liberty (together with the ASI Pool Companies, our “Insurance Subsidiaries”), along with our wholly owned managing general agency, AGMI. As previously announced, certain Insurance Subsidiaries have been in rehabilitation since July 8, 2019. See ‘Item 1, 2019 Developments’ for certain developments with respect to the Company and the Insurance Subsidiaries subsequent to December 31, 2018.
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 pricing deemed to be adequate based on historical results and subsequent estimations of future outcomes. While the commercial automobile insurance market has generally faced loss related challenges in recent years, we believe that we are able to adapt to changing market needs through our strategic commitment, the use of technology, analytics and operating scale. We endeavor to develop and deliver superior specialty insurance products and services to meet our customers' needs with a focus on innovation.
There are a limited number of competitors specializing in these lines of business. Management believes a strong value proposition is very important to attract new business and can result in desirable retention levels as policies renew on an annual basis.
Strong market presence with recognized brands and long-standing distribution relationships.
Our Insurance Subsidiaries have a long heritage as insurers of taxi, livery and para-transit businesses. All of our Insurance Subsidiaries have strong brand recognition and long-standing distribution relationships in target markets. Our understanding of the markets we serve remains current through regular interaction between AGMI and our independent retail agents. Our Insurance Subsidiaries are currently licensed in more states than those in which we have currently elected to do business, and we routinely re-evaluate all markets to assess future potential opportunities and risks. There are also a relatively limited number of agents who specialize in these lines of business. As a result, strategic relationships with independent retail agents are important to ensure efficient distribution. AGMI’s policy system enables point of sale interface with our distribution channel providing operating efficiency and customer service benefits.
Underwriting and claims handling experience.
Atlas has extensive experience with respect to underwriting and claims management in our specialty area of insurance. Our underwriting and claims 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 informs our product and pricing decisions. The Company’s recent results include a re-estimation of claim related reserves primarily for older accident years. We believe our underwriting and claims handling activities will result in enhanced risk selection, high quality service to our customers and greater control over claims costs. We are committed to continuous improvement related to this underwriting and claims handling experience as a core competency, especially in light of the challenges facing the commercial automobile insurance industry in general. In recent years, we invested significantly in the use of machine learning based predictive analytics in both our underwriting and claims areas to further leverage this heritage.
Scalable operations.
Significant changes have been made in aligning our organization’s infrastructure cost base to our expected revenue and strategic direction going forward. The core functions of our Insurance Subsidiaries were integrated into a common operating platform. We believe that our business is well positioned to support proportionate market share of approximately 20% in all of the markets in which we operate. As a result of our shift to a Managing General Agency (“MGA”) focused strategy, our business model is dependent on support from unrelated insurance underwriting partners. Our business can also operate efficiently at smaller scale. Commercial automobile insurance is a cyclical business and our priority will always be to increase or decrease market share based on expected underwriting results rather than top line revenue. We plan to continue to evaluate, and where beneficial, deploy, new technologies and analytics to maximize efficiency and scalability.

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Experienced management team.
We have a talented and experienced management team who have decades of experience in the property and casualty (“P&C”) insurance industry. Our senior management team has worked in the P&C industry for an average of more than 25 years and with the Insurance Subsidiaries, directly or indirectly, for an average of 15 years. We believe our team has the necessary experience and commitment to address current challenges and produce improved results going forward.
Strategic Focus
Vision
To always be the preferred specialty insurance business in any geographic areas where our value proposition delivers benefit to all stakeholders.
Mission
To develop and deliver superior specialty insurance products and services to meet our customers’ needs with a focus on innovation and the effective use of technology and analytics to deliver consistent operating profit for the insurance businesses we own.
We seek to achieve our vision and mission through the design, sophisticated underwriting and efficient delivery of specialty insurance products and services. Our understanding of the markets we serve will remain current through interaction with our retail producers. Analysis of the substantial data available through our operating companies will drive product and pricing decisions. We intend to focus on our key strengths and leverage our geographic footprint, products and services only to the extent that these activities support our vision and mission. We will target niche markets that are expected to support adequate pricing and will be best able to adapt to changing market needs ahead of our competitors due to our scale, business partnerships and strategic commitment.
Outlook
Through infrastructure re-organization, dispositions and by placing certain lines of business into run-off, our Insurance Subsidiaries have streamlined operations to focus on the lines of business we believe will leverage our core competencies and produce favorable underwriting results going forward. We have aligned the organization’s infrastructure cost base to our expected revenue stream. We integrated the core functions of our insurance businesses into a common, best practice based, operating platform. Management believes that our insurance businesses are well-positioned to support proportionate market share of approximately 20% in all of the markets in which we operate with better than industry level profitability. Based on current market conditions, coupled with underwriting and claim related initiatives implemented in recent years, we believe future underwriting results should improve. Our insurance businesses have a long heritage with respect to our core lines of business and will benefit from the efficient operating infrastructure currently in place. Through its Insurance Subsidiaries and AGMI, Atlas actively wrote business in 42 states and the District of Columbia during 2018.
We believe that the most significant opportunities going forward are: (i) continually managing our independent retail agency and customer relationships, (ii) increasing or decreasing premium volume in business segments and geographic markets based on underwriting results and anticipated future outcomes and (iii) evaluating and implementing strategic activities to optimize the value of our infrastructure and experience. Primary potential risks related to these activities include: (a) the impact of prior year reserve strengthening on our Insurance Subsidiaries, (b) not being able to achieve the expected support from reinsurance or distribution partners, and (c) insurance market conditions becoming or remaining “soft” for a sustained period of time.
We intend to 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 improve profitability by undertaking the following:
Focus on most profitable business.
In the past, we have identified and exited segments that are under-performing on our overall book of business. We are committed to continuing to make this a high priority with a focus on geographic, line of business level and competitive analysis. As the market environment evolves, our objective is to react as quickly as possible to address under performing segments and focus on more profitable ones.
Maintain legacy distribution relationships.
We continue to build upon relationships with independent retail agents that have been our Insurance Subsidiaries’ distribution partners for several years. We develop and maintain strategic distribution relationships with a relatively small number of independent retail 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 states where we are actively writing insurance.

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Expand our market presence.
We are committed to diversification by leveraging our experience, historical data and market research to expand our business into previously untapped markets to the extent incremental markets meet our criteria. A significant portion of the Company’s business in recent years relates to the expansion and evolution of TNC operators. We will continue to expand into additional states or product lines where we are licensed, but not currently active, to the extent that our market expansion criteria is met in a given state or business line. Such potential expansion is also subject to availability of capital or reinsurance support. In the alternative, we will endeavor to quickly adjust our pricing and underwriting or reduce our exposure to potentially under-performing products.
Develop and maintain new or existing strategic partnerships.
We plan to continue to leverage our relationships with reinsurers and other existing or new business partners. The combination of Insurance Subsidiaries and our wholly owned managing general agency provide flexibility in terms of both capital support as well as partnership structures and revenue streams.
Market
Our primary target market is made up of small to mid-size taxi, limousine, other livery, including TNC drivers/operators, and non-emergency para-transit operators. The “light” commercial automobile policies we underwrite provide coverage for lightweight commercial vehicles typically with the minimum limits prescribed by statute, municipal or other regulatory requirements. The majority of our policyholders are individual owners or small fleet operators. In certain jurisdictions like Illinois, Louisiana, Nevada and New York, we have also been successful working with larger operators who retain a meaningful amount of their own risk of loss through higher retentions, self-insurance or self-funded captive insurance entity arrangements. In these cases, we provide support in the areas of day-to-day policy administration and claims handling consistent with the value proposition we offer to all of our insureds, generally on a fee for service basis. We may also provide excess coverage above the levels of risk retained by the insureds where a better than average loss ratio is expected. Through these arrangements, we are able to effectively utilize the significant specialized operating infrastructure we maintain to generate revenue from business segments that may otherwise be more price sensitive.
The “light” commercial automobile sector is a subset of the broader commercial automobile insurance industry segment, which over the long term has been historically profitable. In more recent years, the commercial automobile insurance industry has seen profitability pressure. Data compiled by S&P Global also indicates that in 2018 the total market for commercial automobile liability insurance was approximately $40.4 billion. The size of the commercial automobile insurance market can be affected significantly by many factors, such as the underwriting capacity and underwriting criteria of automobile insurance carriers and general economic conditions. Historically, the commercial automobile insurance market has been characterized by periods of excess underwriting capacity and increased price competition followed by periods of reduced underwriting capacity and higher premium rates.
We believe that 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. Our target market has changed in recent years as a result of TNC and other trends related to mobility. The significant expansion of TNC has resulted in a reduction in taxi vehicles available to insure; however, it has increased the number of livery operators. Market research also suggests that the combined addressable markets between traditional taxi, livery and TNC companies expanded during this period.
Currently, we distribute our products only in the U.S. Through our Insurance Subsidiaries, we are licensed to write P&C insurance in 49 states plus the District of Columbia. The following table reflects, in percentages, the principal geographic distribution of gross premiums written in 2018. No other jurisdiction accounted for more than 5%. AGMI is also licensed on a nationwide basis.
Distribution of Gross Premiums Written by Jurisdiction
New York
38.4
%
California
16.2


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The diagram below outlines the states where we are focused on actively writing new insurance policies and where we believe the comparative strength of our value proposition, the market opportunity, and the legal and regulatory environment will provide favorable results going forward (the blue states in the below diagram). 
a20161017atlasactivestates30.jpg

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Agency Relationships
Independent retail agents are recruited by us directly utilizing marketing efforts targeting the specialty niche upon which we focus. Interested agents are evaluated based on their experience, expertise and ethical dealing. Typically, our Company enters into distribution relationships with approximately one out of every ten agents seeking an agency contract. Our independent agent partners contract with AGMI through which business can be written with our Insurance Subsidiaries or strategic partners. We do not provide exclusive territories to our independent retail agents, nor do we expect to be their only insurance market. We are generally interested in acting as one of a relatively small number of insurance partners with whom our independent retail agents place business and are also careful not to oversaturate the distribution channel in any given geographic market. This helps to ensure that we are able to receive the maximum number of submissions for underwriting evaluation without unnecessary downstream pressure from agents to write business that does not fit our underwriting model.
Agents receive commission as a percentage of premiums (generally 10%) as their primary compensation from us. Larger agents may also be eligible for profit sharing based on the growth and underwriting profitability related to their book of business with us. The quality of business presented and written by each independent retail agent is evaluated regularly by our underwriters and is also reviewed quarterly by senior management. Key metrics for evaluation include overall accuracy and adequacy of underwriting information, performance relative to agreed commitments, support with respect to claims presented by their customers (as applicable) and overall underwriting profitability of the agent’s book of business. The re-estimation of claims related reserves impacts the evaluation of underwriting results and profit sharing commissions. While we rely on our independent retail agents for distribution and customer support, underwriting and claims handling responsibilities are retained by us. As shown in the charts below, many of our agents have had direct relationships with our Insurance Subsidiaries for a number of years.
chart-980be0e4dbdb7b10e23.jpgchart-5e9774509ef1b7b8661.jpg
agencyrelationshipslegenda01.jpg
Seasonality
Our P&C insurance business is seasonal in nature. Our ability to generate written premium is also impacted by the timing of policy effective periods in the states in which we operate, while our net premiums earned generally follow a relatively smooth trend from quarter to quarter. Changes in the amount of quota share or other reinsurance that we may use will also impact net earned premiums period over period. Also, our gross premiums written are impacted by certain common renewal dates in larger metropolitan markets for the light commercial risks that represent our core lines of business. For example, January 1st and March 1st are common taxi cab renewal dates in Illinois and New York, respectively. Our New York “excess taxi program” has an annual renewal date in the third quarter. Net underwriting income is driven mainly by the timing and nature of claims, coupled with actuarial estimation of future claim liabilities, which can vary widely.

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Competition
The insurance industry is competitive in all markets in which the Insurance Subsidiaries operate. Our Company strives to generate better than industry underwriting profit. While historic results have been challenging, we have implemented rate changes, analytics based underwriting and claim processes and shifted our business mix significantly. We believe these activities are important to produce more profitable business, especially in a changing environment.
Our Company competes on a number of factors, such as brand and distribution strength, pricing, agency relationships, policy support, claims service and market reputation. In our core commercial automobile lines, the primary offerings are policies at the minimum prescribed limits in each state, as established by statutory, municipal and other regulations. We believe our Company differentiates itself from many larger companies competing for this specialty business by exclusively focusing on these lines of insurance. We believe our exclusive focus results in the deployment of underwriting and claims professionals who are more familiar with issues common in specialty insurance businesses and provides our customers with better service. We leverage machine learning based predictive analytics and other technologies, such as telematics, to further differentiate ourselves from our competitors.
Our competitors generally fall into two categories. The first is made up of large generalist insurers who often sell their products to our niche through intermediaries, such as managing general agents or wholesalers. The second consists primarily of smaller local insurance companies. These smaller companies may focus primarily on one or more of our niche markets. Or, as is typical in the majority of geographic areas where we compete, they have a broader focus, often writing a significant amount of non-standard lines of business.
Regulation
We are subject to extensive regulation, particularly at the state level. The method, extent and substance of such regulation varies by state, but generally has its source in statutes and regulations that establish standards and requirements for conducting the business of insurance and that delegate regulatory authority to state insurance regulatory agencies. Insurance companies can also be subject to so-called “desk drawer rules” of state insurance regulators, which are regulatory rules or best practices that have not been codified or formally adopted through regulatory proceedings. In general, such regulation is intended for the protection of those who purchase or use insurance products issued by our Insurance Subsidiaries, not the holders of securities issued by us. These laws and regulations have a significant impact on our business and relate to a wide variety of matters including accounting methods, agent and company licensure, claims procedures, corporate governance, examinations, investing practices, policy forms, pricing, trade practices, reserve estimation and underwriting standards.
In recent years, the state insurance regulatory framework has come under increased federal scrutiny. Most recently, pursuant to the Dodd-Frank Regulatory Reform Act of 2010, the Federal Insurance Office was formed for the purpose of, among other things, examining and evaluating the effectiveness of the current insurance and reinsurance regulatory framework. In addition, state legislators and insurance regulators continue to examine the appropriate nature and scope of state insurance regulation.
Many state laws require insurers to file insurance policy forms and/or insurance premium rates and underwriting rules with state insurance regulators. In some states, such rates, forms and/or rules must be approved prior to use. While these requirements vary from state to state, generally speaking, regulators review premium rates to ensure they are not excessive, inadequate or unfairly discriminatory.
As a result, the speed with which an insurer can change prices in response to competition or increased costs depends, in part, on whether the premium rate laws and regulations (i) require prior approval of the premium rates to be charged, (ii) permit the insurer to file and use the forms, rates and rules immediately, subject to further review, or (iii) permit the insurer to immediately use the forms, rates and/or rules and to subsequently file them with the regulator. When state laws and regulations significantly restrict both underwriting and pricing, it can become more difficult for an insurer to make adjustments quickly in response to changes, which could affect profitability. Historical results and actuarial work related thereto are often required to support rate changes and may limit the magnitude of such changes in a given period.
Insurance companies are required to report their financial condition and results of operations in accordance with statutory accounting principles prescribed or permitted by state insurance laws and regulations and the National Association of Insurance Commissioners (“NAIC”). As a result, industry data is available that enables comparisons between insurance companies, including competitors who are not subject to the requirement to prepare financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). We frequently use industry publications containing statutory financial information to assess our competitive position. State insurance laws and regulations also prescribe the form and content of statutory financial statements, require the performance of periodic financial examinations of insurers, establish standards for the types and amounts of investments insurers may hold and require minimum capital and surplus levels. Additional requirements include risk-based capital (“RBC”) rules, thresholds intended to enable state insurance regulators to assess the level of risk inherent in an insurance company’s business and consider items such as asset risk, credit risk, underwriting risk and other business risks relevant to its

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operations. The NAIC RBC formula generates the regulatory minimum amount of capital that a company is required to maintain to avoid regulatory action. There are four levels of action that a company can trigger under the formula: company action, regulatory action, authorized control and mandatory control levels. Each RBC level requires some particular action on the part of the regulator, the company, or both. For example, an insurer that breaches the Company Action Level must produce a plan to restore its RBC levels. As of December 31, 2018, the total adjusted capital of three of our Insurance Subsidiaries exceeded the minimum levels required under RBC requirements, while one subsidiary breached the Company Action Level. We are working with the appropriate regulators to address this RBC breach. We do not expect that this situation will impede our ability to execute on strategic plans.
It is difficult to predict what specific measures at the state or federal level will be adopted or what effect any such measures would have on us or our Insurance Subsidiaries. See “Risk Factors - Risks Related to 2019 Developments - Regulatory Developments” for certain developments with respect to the Insurance Subsidiaries subsequent to December 31, 2018.
Employees
As of December 31, 2018, we had 286 full-time employees working within three main departments: Underwriting, Claims, and Corporate and Other. The Corporate and Other category includes executive, information technology, finance, facilities management and human resources. The Claims category includes in-house legal.
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Available Information About Atlas
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 953 American Lane, 3rd Floor, Schaumburg, Illinois 60173, 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 Annual Report on Form 10-K. Atlas files with the Securities and Exchange Commission (“SEC”) and makes available free of charge on its website the Annual Report on Form 10-K, Quarterly Reports on Form10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act (15 U.S.C. 78m(a) or 78o(d)) as soon as reasonably practicable after those reports are electronically filed with, or furnished to, the SEC. To access these filings, go to the Company website, using the “Investor Relations” heading. These reports are also available on the SEC’s website at http://www.sec.gov.

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2019 Developments
As previously disclosed, since December 31, 2018, the Company was unable to timely file this Annual Report on Form 10-K for the fiscal year ended December 31, 2018 and its Quarterly Reports on Form 10-Q for the periods ended March 31, June 30, and September 30, 2019 due to delays in the year end audit process. As a result, the Company received a number of delinquency notices from Nasdaq related to these filings as well as other matters. Nasdaq granted the Company’s request to move from the Nasdaq Global Market to the Nasdaq Capital Market and granted the Company an extension to regain compliance with its listing obligations. The Company’s ordinary shares continue to trade on the Nasdaq Capital Market, while the Company’s 6.625% Senior Unsecured Notes due 2022 moved to the OTC Pink Sheets on October 17, 2019. There can be no assurance that the Company will be able to regain compliance with Nasdaq listing requirements.
On April 29, 2019, RSM US, LLP ("RSM") was dismissed as the Corporation’s independent registered public accounting firm. At the time RSM was dismissed, the Corporation had not yet engaged a successor independent registered public accounting firm. On October 31, 2019, Baker Tilly Virchow Krause, LLP (“Baker Tilly”) was engaged as the Company’s independent registered public accounting firm to audit the Company’s financial statements commencing with the fiscal year ended December 31, 2018.
Throughout 2019, the Company has been exploring strategic alternatives, including, but not limited to, further strengthening its processes, reviewing its capital allocation and opportunities, a potential sale of the Company or certain assets, and balance sheet strengthening options with the goal of facilitating shareholder value generation. Atlas concluded that the utilization of its wholly owned MGA operation to work with strategic external insurance and reinsurance partners will enable the Company to leverage its focus, experience and infrastructure to create value for stakeholders. A definitive agreement was executed effective June 10, 2019 between Atlas and American Financial Group, Inc. (NYSE: AFG), under which Atlas will act as an underwriting manager for AFG’s National Interstate (“NATL”) subsidiary and transition new and renewal paratransit business to NATL paper for this book of business. The Company is working on additional arrangements with the objective of establishing MGA relationships in connection with the Company’s other lines of business as well. The Company agreed that should it choose to sell its MGA operations, 49% of the proceeds from any future sale of AGMI would be provided to the ASI Pool Companies to facilitate the rehabilitation process. There can be no assurance that any portion of the proceeds allocated to the ASI Pool Companies would be available for distribution to the Company.
During 2019, the Illinois Department of Insurance (the “Department”) placed all three of the ASI Pool Companies (after Gateway was redomesticated in Illinois) into rehabilitation with the Director of the Department as the statutory rehabilitator. While in rehabilitation, the operations of such insurance subsidiaries will be overseen by the statutory rehabilitator although Atlas continues to maintain its legal ownership of the stock of the ASI Pool Companies. Management’s overriding strategic plan continues to include a transition of business from these insurance companies to alternative markets within a reasonable period of time utilizing the existing platform of the MGA to work with strategic external insurance and reinsurance partners.
Effective August 15, 2019, no new business was written by the ASI Pool Companies, and only New York area new business was written by Global Liberty, which is focusing its resources on New York area business to leverage the subsidiary’s heritage in this large and specific market. The ASI Pool Companies and Global Liberty continued to write renewal business that met their underwriting standards during 2019. Non-renewals related to ASI Pool Companies’ insurance policies began towards the end of 2019.
On January 22, 2020, the Company announced a non-binding letter of intent with Buckle, a technology-driven financial services company, to purchase the stock of Atlas’ indirect subsidiary Gateway Insurance Company (“Gateway”) and its corporate charter and forty-seven (47) state insurance licenses as well as state statutory deposits, subject to regulatory and other necessary approvals, for $4.7 million plus the value of all purchased deposits, such amount to be paid to the Rehabilitator for the benefit of the rehabilitation estate of Gateway, with a tentative closing date in March of 2020. The Company anticipates that Buckle will engage the MGA and certain other subsidiaries of the Company to provide services to Buckle and that Buckle will lease space at the Company’s headquarters and its Melville, NY office.
The transaction will be subject to court approval and a bid process established by the Rehabilitator and approved by the court, and there can be no assurance that the transaction will be consummated on the terms described herein or at all.
The Company’s numerous Current Reports on Form 8-K and press releases since December 31, 2018 provide more detailed disclosures regarding the above events.

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Item 1A. Risk Factors
You should read the following risk factors carefully in connection with evaluating our business and the forward-looking information contained in this Annual Report on Form 10-K. Any of the following risks could materially and adversely affect our business, operating results, financial condition and the actual outcome of matters as to which forward-looking statements are made in this Annual Report on Form 10-K. While we believe we have identified and discussed below the key risk factors affecting our business, there may be additional risks and uncertainties that are not presently known or that are not currently believed to be significant that may adversely affect our business, operating results or financial condition in the future.
Risks Related to 2019 Developments
Continued delays in the filing of our periodic reports with the SEC could result in the delisting of our common stock, which would materially and adversely affect our stock price, financial condition and/or results of operations.
As a result of the need for additional time to complete our year-end audit process for the fiscal year ended December 31, 2018, we were unable to file this Annual Report on Form 10-K with the SEC on a timely basis. We also have yet to file our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2019, June 30, 2019 and September 30, 2019, as we could not file such Quarterly Reports until this Annual Report on Form 10-K was filed. As a result, we remain non-compliant with Nasdaq Listing Rule 5250(c)(1) requiring the timely filing of periodic reports, which may result in the delisting of our common stock should we fail to file such reports within a time-frame acceptable to Nasdaq. In addition, the Company is not in compliance with Nasdaq Listing Rule 5450(a)(1), because the closing bid price of our common stock for the last 30 consecutive business days was below the minimum bid price of $1 per share, which may result in the delisting of our common stock should we fail to regain compliance by June 2, 2020 (the deadline set forth in the extension granted by Nasdaq). To regain compliance, the Company’s common stock must have a closing bid price of at least $1 per share for a minimum of ten consecutive business days during the compliance period, thus the Company may need to effect a reverse stock split to regain compliance. The Company is also not in compliance with Nasdaq Listing Rule 5620(a) as a result of the Company’s failure to hold an annual general meeting of shareholders during 2019.
It is the Company’s intent to hold an annual general meeting of shareholders in 2020 and to fully regain compliance with all applicable Nasdaq listing standards as soon as practicable, although there can be no assurance that it will be able to do so. Delisting would likely have a material adverse effect on us by, among other things, reducing:
The liquidity of our common stock;
The market price of our common stock;
The number of institutional and other investors that will consider investing in our common stock;
The number of market makers in our common stock;
The availability of information concerning the trading prices and volume of our common stock;
The number of broker-dealers willing to execute trades in shares of our common stock;
Our ability to access the public markets to raise debt or equity capital;
Our ability to use our equity as consideration in any merger transaction; and
The effectiveness of equity-based compensation plans for our employees used to attract and retain individuals important to our operations.
Regulatory Developments
As previously disclosed, during 2019, the ASI Pool Companies were subject to an agreed order of rehabilitation with the Illinois insurance regulator following discussions of reserve levels, and the operations of the ASI Pool Companies are currently overseen by the statutory rehabilitator. In addition, no new business is being written by the ASI Pool Companies, certain of their state insurance licenses have been revoked, and other states have taken or may take action to suspend or terminate the licenses of the Insurance Companies. Therefore, the performance and financial results of the Company are more reliant on the results of AGMI. There are cost sharing and other arrangements in place between AGMI and the Insurance Subsidiaries related to support for the rehabilitation of the ASI Pool Companies, which are subject to regulatory approval and could be restricted in the future. In addition, the Company agreed that should it choose to sell its MGA operations, 49% of the proceeds from any future sale of AGMI would be provided to the ASI Pool Companies to facilitate the rehabilitation process. There can be no assurance that any portion of the proceeds allocated to the ASI Pool Companies would be available for distribution to the Company.

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Reserve and Exposure Risks
The Insurance Subsidiaries’ provisions for unpaid claims and claims adjustment expenses 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 we write. We establish reserves to cover our estimated liability for the payment of claims 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 and claims adjustment expenses 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 and claims adjustment expenses 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 independent third party actuarial firms to assist us in estimating the provision for unpaid claims and claims adjustment expenses. 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 claim costs and the original provision for unpaid claims and claims adjustment expenses. The development of the provision for unpaid claims and claims adjustment expenses is shown by the difference between estimates of claims liabilities 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.
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 and claims adjustment expenses cause 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. See “Risk Factors - Risks Related to 2019 Developments - Regulatory Developments” for certain developments with respect to the Insurance Subsidiaries subsequent to December 31, 2018.

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For the companies that we acquired or will acquire, the provisions for unpaid claims and claims adjustment expenses may be inadequate at the time of purchase, which would result in a reduction in our net income and might adversely affect our financial condition.
We cannot guarantee that the provisions for unpaid claims and claims adjustment expenses of the companies that we acquired are or will be adequate. We became or will become responsible for the historical claims reserves established by the acquired company’s management upon completion of acquisitions. While the stock purchase agreement provides for certain protections in this regard, there can be no assurances they will be sufficient to offset any adverse development to the acquired company’s historical claims reserves. Any unfavorable development in an acquired company’s claims reserves would reduce our net income and have an adverse effect on our financial position to the extent it exceeds the protections provided for in the stock purchase agreement related to each acquisition.
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 claims, claims adjustment 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 claims 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;
underlying trends or changes affecting risk and loss costs;
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 to 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 U.S. The producers submit business through our wholly owned subsidiary AGMI. 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. Although underwriting controls and audit procedures are in place with the objective of providing control over this process, such procedures may not be successful, and 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 claims 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.

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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. During 2018, we had ceded premiums written of $86.4 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 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 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 underwriting practices or reduce our underwriting commitments, which could adversely affect our results of operations.
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 December 31, 2018, we had an aggregate of $81.2 million of reinsurance recoverables, of which $69.1 million were unsecured. In addition, our reinsurance agreements are subject to specified limits, and we would not have reinsurance coverage to the extent that those limits are exceeded.
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 profitability.
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 claims 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 claims and claims adjustment 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 P&C insurance contains some exposure to catastrophic claims. 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 claims from catastrophes could be substantial. In addition, it is possible that we may experience an unusual frequency of smaller claims in a particular period. In either case, the consequences could have a substantially volatile effect on our financial condition or results of operations for any fiscal quarter or year, which could have a material adverse effect on our ability to write new business. These claims 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 claims from catastrophic events in recent years, and we expect that those factors will increase the

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severity of catastrophe claims in the future. It is also possible that catastrophic claims could have an impact on our investment portfolio.
The risk models we use to quantify catastrophe exposures and risk accumulations may prove inadequate in predicting all outcomes from potential catastrophe events.
We rely on widely accepted and industry-recognized catastrophe risk modeling, primarily in conjunction with our reinsurance partners, 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 Insurance Subsidiaries. As a result, our only sources of income are dividends and other distributions from our subsidiaries. We will be limited by the earnings of those subsidiaries, and the distribution or other payment of such earnings to them 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 the states of domicile of our Insurance Subsidiaries, 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. Prior to entering into any loan or certain other agreements between one or more of our Insurance Subsidiaries 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. See “Risk Factors - Risks Related to 2019 Developments - Regulatory Developments” for certain developments with respect to the Insurance Subsidiaries subsequent to December 31, 2018.
Our Insurance Subsidiaries are subject to minimum capital and surplus requirements. Failure to meet these requirements may subject us to regulatory action.
Atlas’ Insurance Subsidiaries are subject to minimum capital and surplus requirements imposed under laws of the states in which the companies are domiciled as well as in the states where we conduct business. Any failure by one of our Insurance Subsidiaries to meet minimum capital and surplus requirements imposed by applicable state law may 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 Subsidiaries, which we may not be able to do. See “Risk Factors - Risks Related to 2019 Developments - Regulatory Developments” for certain developments with respect to the Insurance Subsidiaries subsequent to December 31, 2018.
We are subject to assessments and other surcharges from state guaranty funds and mandatory state insurance facilities, which may reduce our profitability.
Virtually all states require insurers licensed to do business therein to bear a portion of contingent and incurred claims handling expenses and the unfunded amount of “covered” claims and unearned premium obligations of impaired or insolvent insurance companies, either up to the policy’s limit, the applicable guaranty fund covered claims obligation cap, or 100% of statutorily defined workers’ compensation benefits, subject to applicable deductibles. These obligations are funded by assessments, made on a retrospective, prospective or pre-funded basis, which are levied by guaranty associations within the state, up to prescribed limits (typically 2% of “net direct premiums written”), on all member insurers in the state on the basis of the proportionate share of the

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premiums written by member insurers in certain covered lines of business in which the impaired, insolvent or failed insurer was engaged. Accordingly, the total amount of 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 (and within the jurisdiction of some local governments), insurance companies are subject to or required to participate in various premium or claims based insurance-related assessments, including mandatory (a/k/a “involuntary”) insurance pools, underwriting associations, workers’ compensation second-injury funds, reinsurance funds and other state insurance facilities. Although we may be entitled to take premium tax credit (or offsets), recover policy surcharges or include assessments in future premium rate structures for payments we make under these facilities, the effect of these assessments and insurance-related 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 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 investment grade fixed income securities. Despite the Company’s best efforts, we cannot predict which industry sectors or specific investments in which we maintain investments may suffer losses as a result of potential declines in commercial and economic activity. Accordingly, adverse fluctuations in the fixed income or equity markets could adversely impact profitability, financial condition or cash flows. 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 realize investment losses on those securities when that determination was made. We could also experience a loss of principal in fixed and non-fixed income investments. In addition, certain of our investments, including our investments in limited partnerships owning income producing properties, are illiquid and difficult to value.
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 liquidity in such markets, the level and volatility of interest rates and, consequently, the value of fixed maturity securities. Should the economy experience a recession in the future, we expect price volatility of our securities to increase.
Difficult conditions in the economy generally may materially and adversely affect our business, results of operations and statement of financial position, and these conditions may not improve in the near future.
Potential for 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.
Sources of economic and market instability include, but are not limited to, the impact of the United Kingdom European Union membership referendum (“Brexit”), a potential economic slowdown in Europe, China or the U.S., the impact of trade negotiations, and reduced accommodation from the Federal Reserve and other Central Banks.
Risks from these events, or other currently known or unknown events could lead to worsening economic conditions, widening of credit spreads or bankruptcies which could negatively impact the financial position of the company.
Atlas’ portfolio is managed by an SEC registered investment adviser specializing in the management of insurance company portfolios. 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 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 market outlook 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.
Our Insurance Subsidiaries may rely on a fronting reinsurance arrangement to market some of its insurance products. Under a fronting reinsurance arrangement, we generally enter into a 100% quota share reinsurance agreement whereby we assume from the ceding reinsurer substantially all of its gross liability under the policies issued by them and on behalf of us. We are generally entitled to 100% of the net premiums received on policies reinsured, less the ceding fee to the ceding reinsurer, the commission paid to the general agent and premium taxes on the policies. We assume and are liable for substantially all losses incurred in connection with the risks under the reinsurance agreement, including judgments and settlements. The ceding insurance company may require us to post substantial collateral to secure the reinsured risks. Certain trust accounts for the benefit of the ceding insurance company and other unaffiliated 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,

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putting the subsidiary or subsidiaries in breach of the agreement. Effective October 1, 2019, this program started the non-renewal process and is in run-off.
We may not have access to capital in the future.
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 the U.S. 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.
We do not anticipate paying any cash dividends on our common stock 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 voting common shares. As a result, capital appreciation in the price of our ordinary voting common shares, if any, will be the only source of gain on an investment in our ordinary voting common shares. We have never declared or paid cash dividends on our common stock since Atlas’ inception in 2010. Any future determination to pay dividends on our common 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. In addition, the insurance laws and regulations governing our Insurance Subsidiaries contain restrictions on the ability to pay dividends, or to make other distributions to Atlas, which may limit Atlas’ ability to pay dividends to its common shareholders.
Unlike the holders of our ordinary voting common shares, 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 voting common shares. We paid $409,000 of preferred dividends during 2016 on the preferred shares held by the former owner of Gateway. All of the preferred shares held by the former owner of Gateway were repurchased on September 30, 2016, and therefore, no additional dividends have accrued or will accrue on those preferred shares. During the fourth quarter of 2016, Atlas canceled the 4,000,000 preferred shares held by the former owner of Anchor. As of December 31, 2016, the paid claims development on Global Liberty’s pre-acquisition claims reserves was in excess of $4,000,000, and as a result, pursuant to the terms of the Anchor stock purchase agreement, dividends will no longer accrue to the former owner of Anchor. As of December 31, 2016, there were no preferred shares outstanding. Although the re-issuance of preferred shares to the former owner of Anchor may be highly unlikely, the contingent consideration terms of the Anchor stock purchase agreement will remain in effect for a period of five years from the date of acquisition. During 2018, Atlas paid $333,000 in dividends earned on the preferred shares to the former owner of Anchor, the cumulative amount to which they were entitled through December 31, 2017, leaving no accrued or unpaid dividends.
Risks Related to the Company’s Senior Unsecured Notes
If Atlas incurs additional debt or liabilities, or if we are unable to maintain a level of cash flows from operating activities, Atlas’ ability to pay its obligations on its senior unsecured notes (“Senior Unsecured Notes”) could be adversely affected. Although the Senior Unsecured Notes are “senior notes,” they would be subordinate to any senior secured indebtedness the Company may incur and structurally subordinate to all liabilities of Atlas’ subsidiaries, which increases the risk that Atlas will be unable to meet its obligations on the Senior Unsecured Notes when they mature. Atlas’ ability to pay interest on the Senior Unsecured Notes as it comes due and the principal of the Senior Unsecured Notes at their maturity may be limited by regulatory constraints, including, without limitation, state insurance laws that limit the ability of Atlas’ insurance company subsidiaries to pay dividends. Especially in the context of rehabilitation, certain of our Insurance Subsidiaries are restricted from distributing capital to the holding company, which could impact the ability to pay debt obligations in the future. See “Item 1A, Risk Factors - Risks Related to 2019 Developments - Regulatory Developments” for certain developments with respect to the Insurance Subsidiaries subsequent to December 31, 2018. Although the Senior Unsecured Notes are listed on the OTC Pink Sheets, moving from Nasdaq effective October 17, 2019, there can be no assurance that an active trading market for the Senior Unsecured Notes will develop, or if one does develop, that it will be maintained. The price at which holders will be able to sell their Senior Unsecured Notes prior to maturity will depend on a number of factors and may be substantially less than the amount originally invested. Holders of the Senior Unsecured Notes will have limited rights if there is an event of default. Atlas may redeem the Senior Unsecured Notes before maturity, and holders of the redeemed Senior Unsecured Notes may be unable to reinvest the proceeds at the same or a higher rate of return.

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Compliance Risks
We are subject to comprehensive regulation, and our results may be unfavorably impacted by these regulations.
As a holding company that owns insurance companies domiciled in the U.S., we and our Insurance Subsidiaries are subject to comprehensive laws, regulations and rules. These laws, regulations and rules 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, but not limited to:
rate setting;
RBC ratio and solvency requirements;
restrictions on the amount, type, nature, quality and quantity of securities and other investments in which insurers may invest;
the maintenance of adequate reserves for unearned premiums and unpaid, and incurred but not reported, 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;
requirements to comply with medical privacy laws as a result of our administration of Gateway’s run-off and American Country’s transportation workers’ compensation business;
underwriting requirements related to Global Liberty’s run-off property insurance program;
the licensing of insurers and their agents;
limitations on dividends and transactions with affiliates;
approval of certain reinsurance transactions;
insolvency proceedings;
ability to enter and exit certain insurance markets, cancel policies or non-renew policies; and
data privacy.
Such laws, regulations and rules increase our legal and financial compliance costs and make some activities more time-consuming and costly. Any failure to monitor and address any internal control issues could adversely impact operating results. In addition, the Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect and correct misstatements on a timely basis. A significant deficiency is a deficiency, or combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. A material weakness is a deficiency, or combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity’s financial statements will not be prevented, or detected and corrected, on a timely basis.
State insurance departments 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, regulations and rules 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 laws, regulations and rules. Changes in the level of regulation of the insurance industry or changes in laws, regulations and rules themselves or interpretations thereof by regulatory authorities could have a material adverse effect on our operations. Because we are subject to insurance laws, regulations and rules of many jurisdictions that are administered by different regulatory and governmental authorities, there is also a risk that one authority’s interpretation of a legal or regulatory issue may conflict with another authority’s interpretation of the same issue. Insurance companies are also subject to “desk drawer rules” of state insurance regulators, which are regulatory rules that have not been codified or formally adopted through regulatory proceedings. In addition, we could face

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individual, group and class-action lawsuits by our policyholders and others for alleged violations of certain state laws, regulations and rules. Each of these regulatory risks could have an adverse effect on our profitability.
As a result of our administration of Gateway’s run-off and American Country’s transportation workers’ compensation business, we are required to comply with state and federal laws governing the collection, transmission, security and privacy of health information that result in significant compliance costs, and any failure to comply with these laws could result in material criminal and civil penalties. These laws and rules are subject to administrative interpretation and many are derived from the privacy provisions in the Federal Gramm-Leach-Bliley Act of 2002. The Gramm-Leach-Bliley Act, which, among other things, protects consumers from the unauthorized dissemination of certain personal information, and various state laws and regulations addressing privacy issues, require us to maintain appropriate procedures for managing and protecting certain personal information of our customers and to fully disclose our privacy practices to our customers. Given the complexity of these privacy regulations, the possibility that the regulations may change, and the fact that the regulations are subject to changing and potentially conflicting interpretation, our ability to maintain compliance with the privacy requirements of state and federal law is uncertain and the costs of compliance are significant.
Most states have adopted either statutes or regulations or have issued bulletins or informal rules that regulate the anticipated withdrawal of a product, line or sub-line of insurance business from the insurance marketplace in their state. While what constitutes a “withdrawal” or its equivalent under each state’s statutory or regulatory scheme varies, our Insurance Subsidiaries can be subjected to regulatory requirements in connection with any withdrawal, including, but not limited to, making notice and/or plan filings with the applicable insurance regulator in certain states and possibly requiring the prior approval of the applicable state regulator. A failure by our Insurance Subsidiaries to comply with and satisfy these regulatory requirements in connection with any withdrawals could lead to regulatory fines, cause a distraction for management requiring us to continue to administer withdrawn business for longer than anticipated and could result in our Insurance Subsidiaries continuing to write undesirable business, which could have an adverse impact on our reserves, results of operations and financial condition.
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 enacted in the future will not be more restrictive than existing laws, regulations and rules. New or more restrictive laws, regulations and rules, including changes in current tax or other regulatory interpretations, could make it more expensive for us to conduct our businesses, restrict or reduce the premiums our Insurance Subsidiaries are able to charge or otherwise change the way we do 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. See “Risk Factors - Risks Related to 2019 Developments - Regulatory Developments” for certain developments with respect to the Insurance Subsidiaries subsequent to December 31, 2018.
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 or our Insurance Subsidiaries have acted in bad faith in the administration of claims by our policyholders;
disputes regarding sales practices, disclosure, policy issuance and cancellation, premium refunds, licensing, regulatory compliance, setting of appropriate reserves and compensation arrangements;
limitations on the conduct of our business;
disputes with our agents, producers or network providers over compensation or the termination of our contracts with such agents, producers or network providers, including any alleged claim that they may make against us in connection with a dispute whether in the scope of their agreements or otherwise;
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 us to change our practices. The effects of unforeseen emerging claims 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 or other types of claims. Multi-party or class action claims may present additional exposure to substantial economic, non-economic or punitive damage awards. An unfavorable result with respect to 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 that could

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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.
From time to time, the Company is subject to governmental or administrative investigations and proceedings. We can be subject to regulatory action, restrictions or heightened compliance or reporting requirements in certain states. If we are not able to successfully comply with or lift the heightened compliance or disclosure requirements applicable in one or more of these states or any new requirements that a state may impose in the future, we may not be able to expand our operations in such state in accordance with our growth strategy or we could be subject to additional regulatory requirements that could impose a material burden on our expansion strategy or limit or prohibit our ability to write new and renewal insurance policies in such state. Any such limitation or prohibition could have a material adverse effect on our results of operations and financial condition and on our ability to execute our strategy in the future. The result of these inquiries could lead to additional requirements, restrictions or limitations being placed on us or our Insurance Subsidiaries, any of which could increase our costs of regulatory compliance and could have an adverse effect 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 and adversely affect our results of operations and financial condition. In addition, we have experienced difficulties with our relationships with regulatory bodies in various jurisdictions, and if such difficulties arise in the future, they 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.
The insurance industry is subject to changing political, economic and regulatory influences. These influences affect the practices and operation of insurance and reinsurance organizations. Legislatures in the U.S. 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 laws, regulations and rules may result in increased governmental involvement in or supervision of 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 our 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.
Failure to maintain the security of personal data and the availability of critical systems may result in lost business, reputation damage, legal costs and regulatory fines.
Our Insurance Subsidiaries obtain and store vast amounts of personal data that can present significant risks to the Company and its customers and employees. Various laws and regulations govern the use and storage of such data, including, but not limited to, social security numbers, credit card and banking data. The Company’s data systems are vulnerable to security breaches due to the sophistication of cyber-attacks, viruses, malware, hackers and other external hazards, as well as inadvertent errors, equipment and system failures, and employee misconduct. The Company also relies on the ability of its business partners to maintain secure systems and processes that comply with legal requirements and protect personal data. These risks and regulatory requirements related to personal data security expose the Company to potential data loss, damage to our reputation, compliance and litigation, regulatory investigation and remediation costs. In the event of non-compliance with the Payment Card Industry Data Security Standard, an information security standard for organizations that handle cardholder information for the major debit, credit, prepaid, e-purse, ATM and point-of-sale cards, such organizations could prevent our subsidiaries from collecting premium payments from customers by way of such cards and impose significant fines on our subsidiaries. There can be no assurances that our preventative actions will be sufficient to prevent or mitigate the risk of cyber-attacks.
The Company’s business operations rely on the continuous availability of its computer systems. In addition to disruptions caused by cyber-attacks or other data breaches, such systems may be adversely affected by natural and man-made catastrophes. The Company’s failure to maintain business continuity in the wake of such events may prevent the timely completion of critical processes across its operations, including, but not limited to, insurance policy administration, claims processing, billing and payroll. These failures could result in significant loss of business, fines and litigation, and there can be no assurances that our cyber risk insurance coverage will be sufficient in the event of a cyber incident.

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The requirements of being a U.S. public company may strain our resources and divert management’s attention.
As a U.S. public company, we are 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 increases our legal and financial compliance costs, makes some activities more difficult, time-consuming or costly and increases demand on our systems and resources, which may increase now that 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 U.S. 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.
As a result of disclosure of information in this Annual Report on Form 10-K and in filings required of a public company in the U.S., 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.
Strategic and Operational Risks
Our geographic concentration ties our performance to the business, economic, regulatory and other conditions of certain states.
Some jurisdictions 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 P&C 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.
The level of earned premiums generated by our business impacts profitability, especially in the near-term. We may experience difficulty in managing historic and future growth, which could adversely affect our results of operations and financial condition.
Maintaining and/or increasing our current level of earned premiums would require geographic expansion and increased 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. Incremental merger and acquisition activities could affect our minimum efficient scale. Alternatively, a reduction in earned premiums creates potential challenges in terms of expense ratios and other factors that impact profit.

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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 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 earned premiums 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.
Acquisitions of similar insurance providers have been a material component of our growth strategy. From time to time, subject to availability of suitable opportunities, market conditions and capital needs or support, we have and, in the future, 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 or other type of business combination, our share price may fall depending on numerous factors, including, but not limited to, the intended target, 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 common 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 and claims adjustment expenses;
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 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 our 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.

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Provisions in our organizational documents, corporate laws and the insurance laws of Illinois, New York 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 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 include, among others:
requiring a vote of holders of 5% of the ordinary voting common 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 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 and may adversely affect the prevailing market price of our shares if they are viewed as discouraging takeover attempts.
In addition, insurance 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, Missouri and New York law). These requirements would 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 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, we 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 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.
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

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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 or current 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 we have. 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; claims 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.
Changes in the nature of the markets we serve could impact the size of our market and/or the market share available to us.
The industry we serve is being impacted by the introduction of mobile applications, including, but not limited to, TNCs, on-line dispatch and tracking, in-vehicle technologies and other technology-related changes. These technologies could change the size of the overall addressable market we serve and may also impact the nature of the risks we insure.
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.

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If we are unable to maintain our claims-paying ratings or negotiate fronting reinsurance arrangements, 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 June 15, 2018, A.M. Best downgraded the financial strength ratings of American Country, American Service and Gateway to “C” and Global Liberty to “C++.” On March 20, 2019, A.M. Best affirmed rating of the ASI Pool Companies and downgraded Global Liberty to “C+”. Concurrently A.M. Best withdrew these ratings as the Insurance Subsidiaries requested to no longer participate in A.M. Best’s interactive rating process. Most of our business is not sensitive to the A.M. Best rating. However, there is a limited amount of business that, due to airport or port authority requirements, require an A.M. Best rating in excess of those assigned to our companies. We have endeavored to mitigate the impact of those requirements through arrangements with unaffiliated insurance and reinsurance companies with a higher rating, but there can be no assurance that this will be successful. If our companies fail to maintain the existing or negotiate a new fronting reinsurance arrangement, it could result in a substantial loss of business to other competitors with higher ratings, causing premiums and earnings to decrease. Futhermore, our withdrawal from A.M. Best’s rating process may inhibit our ability to secure new business if potential customers do not want to engage an insurance company without an A.M. Best rating.
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. Our ability to generate written premium is also impacted by the timing of policy effective periods in the states in which we operate, while our net premiums earned generally follow a relatively smooth trend from quarter to quarter. Also, our gross premiums written are impacted by certain common renewal dates in larger metropolitan markets for the light commercial risks that represent our core lines of business. For example, January 1st and March 1st are common taxi cab renewal dates in Illinois and New York, respectively. Our New York “excess taxi program” has an annual renewal date in the third quarter. Net underwriting income is driven mainly by the timing and nature of claims, which can vary widely. 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.
Our ability to manage our exposure to underwriting risks depends on the availability and cost of reinsurance coverage.
Reinsurance is the practice of transferring part of an insurance company’s liability and premium under an insurance policy to another insurance company. We use reinsurance arrangements to limit and manage the amount of risk we retain, to stabilize our underwriting results and to increase our underwriting capacity. The availability and cost of reinsurance are subject to current market conditions and may vary significantly over time. Any decrease in the amount of our reinsurance will increase our risk of loss. We may be unable to maintain our desired reinsurance coverage or to obtain other reinsurance coverage in adequate amounts and at favorable rates. If we are unable to renew our expiring coverage or obtain new coverage, it will be more difficult for us to manage our underwriting risks and operate our business profitably.
It is also possible that the losses we experience on risks that we have reinsured will exceed the coverage limits on the reinsurance. If the amount of our reinsurance coverage is insufficient, our insurance losses could increase substantially.
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 (“IRC”), the reverse merger agreement relating to the reverse merger transaction described below provides that the parties intend to treat our company as a

25


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 was 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 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 carryforwards (“NOLs”) 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.
Our ability to utilize the NOLs is subject to the rules of Section 382 of the IRC. 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 percent (5%) or more of our common stock or are otherwise treated as five percent (5%) 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 NOLs. 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 equity issuances, which have included the issuance of various classes of convertible securities and warrants, uncertainty existed as to whether we may have undergone an ownership change in the past or as a result of our 2013 U.S. public offering. Based upon management’s assessment, it was determined that at the date of the U.S. public offering there was not an “ownership change” as defined by Section 382. However, on July 22, 2013, as a result of shareholder activity, a “triggering event” as determined under IRC Section 382 was reached. As a result, under IRC Section 382, the use of the Company’s NOLs and other carryforwards generated prior to the “triggering event” will be limited as a result of this “ownership change” for tax purposes, which is defined as a cumulative change of more than 50% during any three-year period by shareholders of the Company’s shares.
Net Operating Loss Carryforward as of December 31, 2018 by Expiry
($ in ‘000s)
 
 
Year of Occurrence
Year of Expiration
Amount
2001
2021
$
5,007

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
4,166

2012
2032
9,236

2015
2035
1

2017
2037
27,313

2018
2038
47,653

2018
Indefinite
4,106

Total
 
$
120,602

 
 
 
NOLs and other carryforwards generated in 2017 and 2018 are not limited by IRC Section 382.
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.

26


Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Our corporate headquarters is located at 953 American Lane, 3rd Floor, Schaumburg, Illinois 60173, USA. The Company-owned facility consists of one three-story office building with approximately 110,000 square feet. An unaffiliated tenant currently leases one floor of the building. We believe that the Schaumburg facility will be sufficient space to support the growth and expansion of our business.
We also lease four additional office spaces to support regional underwriting, claims, and corporate and other operations. The St. Louis, Missouri lease is 4,375 square feet of office space and effective through June 2021. The Manhattan, New York lease is 1,796 square feet of office space and effective through February 2020. Upon completion of the Anchor acquisition, we assumed a lease for 25,396 square feet of office space in Melville, New York, which is effective through March 2022. The Scottsdale, Arizona lease is 2,107 square feet of office space and effective through November 2020.
We own one property in Alabama, which comprises approximately 13.6 acres of land and is currently held for sale.
Item 3. Legal Proceedings
On March 5, 2018, a complaint was filed in the U.S. District Court for the Northern District of Illinois asserting claims under the federal securities laws against the Company and two of its executive officers on behalf of a putative class of purchasers of the Company’s securities, styled Fryman v. Atlas Financial Holdings, Inc., et al., No. 1:18-cv-01640 (N.D. Ill.). Plaintiffs filed an amended complaint on July 30, 2018. Defendants filed a motion to dismiss, which was fully briefed as of December 12, 2018.  On April 1, 2019, before the Court had addressed defendants’ pending motion to dismiss, the plaintiffs filed a motion for leave to amend their complaint to include allegations relating to the Company’s press release dated March 4, 2019 disclosing a further increase in its loss reserves.  The Court subsequently granted plaintiffs leave to file a second amended complaint, which plaintiffs filed on April 9, 2019.  On June 5, 2019, before the defendants had responded to the second amended complaint, plaintiffs filed a motion for leave to file a third amended complaint to add allegations relating to developments occurring after the Company’s March 4, 2019 press release.  The Court subsequently granted the motion for leave, and plaintiffs filed the third amended complaint on June 12, 2019.  In the third amended complaint, the plaintiffs asserts claims on behalf of a putative class consisting of purchasers of the Company’s securities between February 22, 2017 and April 30, 2019. The complaint alleges that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder by making allegedly false and misleading statements or failing to disclose certain information regarding the adequacy of the Company’s reserves. The complaint seeks, among other remedies, unspecified damages, attorneys’ fees and other costs, equitable and/or injunctive relief, and such other relief as the court may find just and proper. Defendants filed a motion to dismiss the amended complaint on July 17, 2019, and briefing on that motion was completed on October 31, 2019. The motion remains pending before the Court. Under the federal securities laws, discovery and other proceedings automatically will be stayed during the pendency of the motion to dismiss.
In addition, in connection with our operations, we are, from time to time, named as defendants in actions for damages and costs allegedly sustained by plaintiffs in connection with claims against the insurance policies we underwrite. While it is not possible to estimate the outcome of the various proceedings at this time, such actions have generally been resolved with minimal damages or expense in excess of amounts provided, and the Company does not believe that it will incur any significant additional loss or expense in connection with such actions.
Item 4. Mine Safety Disclosures
Not applicable.

27


Part II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
As of March 8, 2019, there were approximately 1755 shareholders of record of our ordinary voting common shares. Our ordinary voting common shares have been listed on the NASDAQ under the symbol “AFH” since February 12, 2013 and were previously listed on the Toronto Stock Exchange - Venture (“TSXV”) under the same symbol beginning January 6, 2011. On June 5, 2013, the Company delisted from the TSXV. As of March 8, 2019, there were 11,942,812 ordinary voting common shares and no restricted voting common shares outstanding.
On March 21, 2017, the Company’s Board of Directors approved a Share Repurchase Program of up to 650,000 shares of common stock. The repurchases could have been made from time to time in open market transactions, privately-negotiated transactions, block purchases, or otherwise in accordance with securities laws at the discretion of the Company’s management until March 21, 2018. The Share Repurchase Program was not extended. The Company’s decisions around the timing, volume, and nature of share repurchases, and the ultimate amount of shares repurchased, was dependent on market conditions, applicable securities laws, and other factors. The share repurchase program and the Board’s authorization of the program could have been modified, suspended, or discontinued at any time. During 2018, 255,505 shares were repurchased under this Share Repurchase Program.
During 2017, the 128,191 restricted voting common shares that were beneficially owned or controlled by KFSI (including its subsidiaries and affiliated companies, “Kingsway”) were sold to non-affiliates of Kingsway. The Kingsway-owned restricted voting common shares automatically converted to ordinary voting common shares upon their sale to non-affiliates of Kingsway.
Due to insurance regulations there are restrictions on our Insurance Subsidiaries (American Country, American Service, Gateway and Global Liberty) that limit the Company’s ability to pay dividends. We did not pay any dividends to our common shareholders during 2017, 2018, 2019, or to date in 2020 and we have no current plans to pay dividends to our common shareholders. See ‘Part II, Item 7, Management’s Discussion and Analysis, Liquidity and Capital Resources’ for further discussion of regulatory dividend restrictions.

28


Performance Graph
The following graph shows the cumulative five-year total return on $100 invested on December 31, 2013 in (i) Atlas common stock, (ii) the Russell 2000 Index and (iii) the S&P Global Financial U.S. Insurance P&C Index, in each case with dividends reinvested. The comparisons in the graph below are based on historical data and are not intended to forecast the possible future performance of Atlas common stock.
chart-11f7f04dc5325a85b83.jpg
Company/Index
12/31/13
12/31/14
12/31/15
12/31/16
12/31/17
12/31/18
Atlas Financial Holdings
$
100.00

$
110.87

$
135.19

$
122.62

$
139.61

$
54.96

Russel 2000 Index
$
100.00

$
104.89

$
100.26

$
121.63

$
139.44

$
124.09

S&P Global U.S. Insurance P&C Index
$
100.00

$
114.85

$
118.80

$
140.21

$
160.30

$
154.12

Equity Compensation Plan Information
 
Number of securities to be issued upon exercise of outstanding options, warrants and rights (a)2
Weighted average exercise price of outstanding options, warrants and rights (b)3
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))4 (c)
Equity compensation plans approved by security holders1
402,195
791,502
1 
The Company has no equity compensation plans that were not approved by its security holders.
2 
Sum of 402,195 shares outstanding under the January 18, 2011, March 6, 2014 and the March 12, 2015 equity compensation plans.
3 
Average price not computed due to currency differences.
4 
Equal to the remainder allowable according to the 2013 Equity Incentive Plan (10% of issued and outstanding ordinary voting common shares).
Purchases of Equity Securities
No unregistered securities were sold during 2018. No repurchases of equity securities were made during the three month period ended December 31, 2018.

29


Item 6. Selected Financial Data
The following table has selected financial information for the periods ended and as of the dates indicated. These historical results are not necessarily indicative of the results to be expected from any future period and should be read in conjunction with our consolidated financial statements and the related notes and the section of this Annual Report on Form 10-K entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
($ in ‘000s, except for share and per share data)
2018
2017
2016
2015
2014
Net premiums earned
$
218,218

$
215,771

$
171,058

$
152,064

$
98,124

Total revenue
221,766

221,975

177,579

156,851

101,618

Net (loss) income attributable to common shareholders
(80,012
)
(38,810
)
2,365

14,154

17,608

(Loss) earnings per common share basic
$
(6.67
)
$
(3.22
)
$
0.20

$
1.18

$
1.61

(Loss) earnings per common share diluted
$
(6.67
)
$
(3.22
)
$
0.19

$
1.13

$
1.56

Combined ratio
129.0
%
122.5
%
102.9
%
88.2
%
91.4
%
 
 
 
 
 
 
Cash and invested assets
$
200,610

$
243,483

$
224,779

$
233,304

$
179,994

Total assets
470,338

482,503

423,577

411,292

283,911

Notes payable
24,255

24,031

19,187

17,219


Total liabilities
464,639

391,858

296,235

281,670

174,512

Mezzanine equity



6,941

2,000

Total shareholders’ equity
5,699

90,645

127,342

122,681

107,399

Common and restricted shares issued
12,192,475

12,164,041

12,023,295

12,015,888

11,771,586

Common and restricted shares outstanding
11,936,970

12,164,041

12,023,295

12,015,888

11,771,586

Book value per common share outstanding
$
0.48

$
7.42

$
10.54

$
10.15

$
9.08

These results include the acquisition of Anchor on March 11, 2015, which will affect the comparability of the data. See ‘Part II, Item 8, Note 3, Goodwill and Intangible Assets,’ in the Notes to Consolidated Financial Statements for further discussion of the impact of this acquisition.

30


Item 7. Management’s Discussion and Analysis (“MD&A”) of Results of Operations and Financial Condition
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 report. In this discussion and analysis, the term “common share” refers to the summation of restricted voting common shares, ordinary voting common shares and participative restricted stock units when used to describe earnings (loss) or book value per common share. All amounts are in U.S. dollars, except for amounts preceded by “C” as Canadian dollars, share and per share amounts.
Forward-Looking Statements
In addition to the historical consolidated financial information, this report contains “forward-looking statements,” within the meaning of the Private Securities Litigation Reform Act of 1995, which may include, but are not limited to, statements with respect to estimates of future expenses, revenue and profitability; trends affecting financial condition, cash flows and results of operations; the availability and terms of additional capital; dependence on key suppliers and other strategic partners; industry trends; the competitive and regulatory environment; the successful integration of acquisitions; the impact of losing one or more senior executives or failing to attract additional key personnel; and, other factors referenced in this report. Factors that could cause or contribute to these differences include those discussed below and elsewhere, particularly in ‘Part I, Item 1A, Risk Factors.’
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,” “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.
I. 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, American Service, Gateway and Global Liberty) in conjunction with our wholly owned managing general agency, AGMI. This sector includes taxi cabs, non-emergency para-transit, limousine, livery, including certain transportation network companies (“TNCs”) drivers/operators, and business auto. Our goal is to always be the preferred specialty insurance business in any geographic areas where our value proposition delivers benefit to all stakeholders. During 2018, our Insurance Subsidiaries were licensed to write property and casualty (“P&C”) insurance in 49 states and the District of Columbia in the United States (“U.S.”). During the 2018 fiscal year, the Insurance Subsidiaries distributed their products through a network of independent retail agents, and actively wrote insurance in 42 states and the District of Columbia. We embrace continuous improvement, analytics and technology as a means of building on the strong heritage our subsidiary companies cultivated in the niche markets we serve.
Since Atlas’ formation in 2010, we have disposed of non-core assets, consolidated infrastructure and placed into run-off certain non-core lines of business previously written by our 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. See ‘Item 1, 2019 Developments’ and “Risk Factors - Risk Related to 2019 Developments - Regulatory Developments” for certain developments with respect to the Company and the Insurance Subsidiaries subsequent to December 31, 2018.

31


Commercial Automobile
Our primary target market is made up of small to mid-size taxi, limousine, other livery, including TNC drivers/operators, and non-emergency para-transit operators. The “light” commercial automobile policies we underwrite provide coverage for lightweight commercial vehicles typically with the minimum limits prescribed by statute, municipal or other regulatory requirements. The majority of our policyholders are individual owners or small fleet operators. In certain jurisdictions like Illinois, Louisiana, Nevada and New York, we have also been successful working with larger operators who retain a meaningful amount of their own risk of loss through higher retentions, self-insurance or self-funded captive insurance entity arrangements. In these cases, we provide support in the areas of day-to-day policy administration and claims handling consistent with the value proposition we offer to all of our insureds, generally on a fee for service basis. We may also provide excess coverage above the levels of risk retained by the insureds where a better than average loss ratio is expected. Through these arrangements, we are able to effectively utilize the significant specialized operating infrastructure we maintain to generate revenue from business segments that may otherwise be more price sensitive.
The “light” commercial automobile sector is a subset of the broader commercial automobile insurance industry segment, which over the long term has been historically profitable. In more recent years, the commercial automobile insurance industry has seen profitability pressure. Data compiled by S&P Global also indicates that in 2018 the total market for commercial automobile liability insurance was approximately $40.4 billion. The size of the commercial automobile insurance market can be affected significantly by many factors, such as the underwriting capacity and underwriting criteria of automobile insurance carriers and general economic conditions. Historically, the commercial automobile insurance market has been characterized by periods of excess underwriting capacity and increased price competition followed by periods of reduced underwriting capacity and higher premium rates.
We believe that 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. Our target market has changed in recent years as a result of TNC and other trends related to mobility. The significant expansion of TNC has resulted in a reduction in taxi vehicles available to insure; however, it has increased the number of livery operators. Market research also suggests that the combined addressable markets between traditional taxi, livery and TNC companies expanded during this period.
Other Lines of Business
Other lines of business is comprised of our surety program, Gateway’s truck and workers’ compensation programs, American Service’s non-standard personal lines business, Atlas’ workers’ compensation related to taxi, other liability, Global Liberty’s homeowners program and assigned risk pool business. All of the other lines of business are currently in run-off except for other liability and assigned risk pool business.
Our surety program primarily consisted of U.S. Customs bonds. We engage a former affiliate, Avalon Risk Management, to help coordinate customer service and claims handling for the surety bonds written as this program runs-off. This non-core program is 100% reinsured to an unrelated third party and has been transitioned to another carrier.
The Gateway truck and workers’ compensation programs were put into run-off during 2012. The workers’ compensation program was 100% reinsured retrospectively and prospectively to an unrelated third party. The workers’ compensation reinsurance agreement was terminated during 2017.
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. Our Insurance Subsidiaries ceased writing new and renewal policies of this type in 2011, and earned premium discontinued in 2012, allowing surplus and resources to be devoted to the expected growth of the commercial automobile business.
Global Liberty’s homeowners program, which is substantially reinsured, was placed into run-off prior to Atlas’ acquisition.There is a relatively small book of business, which is substantially reinsured, that is still in run-off.
Atlas’ workers’ compensation related to taxi and other liability are ancillary products that are offered only to insureds who purchase our commercial automobile insurance products. The workers’ compensation program was non-renewed in 2018 due to limited demand.
Assigned risk pools are established by state governments to cover high-risk insureds who cannot purchase insurance through conventional means.

32


II. Application of Critical Accounting Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“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 of financial assets;
Impairment of financial assets;
Deferred policy acquisition costs;
Claims liabilities;
Valuation of deferred tax assets; and
Reinsurance.
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 ‘Part II, Item 8, Note 1, Nature of Operations and Basis of Presentation,’ in the Notes to Consolidated Financial Statements.
Fair Value of Financial Assets
Atlas has used the following methods and assumptions in estimating fair value:
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. Atlas employs a fair value hierarchy to categorize the inputs it uses in valuation techniques to measure the fair value. The hierarchy is comprised of quoted prices in active markets (Level 1), third party pricing models using available trade, bid and market information (Level 2) and internal models without observable market information (Level 3). The Company recognizes transfers between levels of the fair value hierarchy at the end of the period in which events occur impacting the availability of inputs to the fair value methodology. Typically, transfers from Level 2 to Level 3 occur due to collateral performance.
Atlas’ fixed income portfolio is managed by a Securities and Exchange Commission (“SEC”) registered investment adviser specializing in the management of insurance company portfolios. Management works directly with them to ensure that Atlas benefits from their expertise and also evaluates investments as well as specific positions independently using internal resources. Atlas’ investment adviser 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 and market data (credit spread, equity prices, trends in this data for the issuer and the issuer’s industry). Reviews also consider industry trends and the macro-economic environment. This analysis is continuous, integrating new information as it becomes available. As of December 31, 2018, this process did not generate any significant difference in the rating assessment between Atlas’ review and the rating agencies.
Atlas employs specific control processes to determine the reasonableness of the fair value of its financial assets. These processes are designed to supplement those performed by our external portfolio manager 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 our external portfolio manager 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.
Changes in inflation can influence the interest rates which can impact the fair value of our available-for-sale fixed income portfolio and yields on new investments. The Investment Committee of the Board of Directors considers inflation when providing guidance and analyzing the investment portfolio to provide a stable source of income to supplement underwriting income.

33


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 (loss) income and comprehensive (loss) 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 (loss) income and comprehensive (loss) income to the extent that the fair value is less than the amortized cost basis; any difference between fair value and the new amortized cost basis (net of the credit loss) is reflected in accumulated other comprehensive (loss) income, net of applicable income taxes.
For equity securities, the Company evaluates its ability to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. Evidence considered to determine anticipated recovery are analysts’ reports on the near-term prospects of the issuer and the financial condition of the issuer or the industry, in addition to the length and extent of the market value decline. If an OTTI is identified, the equity security is adjusted to fair value through a charge to earnings.
See ‘Part II, Item 8, Note 5, Investments’ in the Notes to Consolidated Financial Statements for further discussion of OTTI.
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. The other underwriting and marketing costs include a percentage of salary and related expense, payroll taxes and travel of our marketing and underwriting employees. The percentage is derived from an annual persistency rate study using policy and vehicle counts to compute a hit ratio. The deferred costs are then expensed as the related premiums are earned. The method followed in determining the deferred policy acquisition costs (“DPAC”) 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 DPAC. Atlas’ DPAC are reported net of deferred ceding commissions.
Claims Liabilities
The provision for unpaid claim and claim adjustment expenses represent the estimated liabilities for reported claims, plus those incurred but not yet reported (“IBNR”), and the related estimated claim adjustment expenses. Unpaid claim expenses are determined using case-basis evaluations and statistical analyses, including insurance industry claims 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 claim and claim adjustment expenses 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.
Atlas considers the impact of inflation when establishing adequate rates and estimating the provision for unpaid claim and claim adjustment expenses. We establish reserves to cover our estimated liability for the payment of claims and expenses related to the administration of claims incurred on the insurance policies we write. Inflation has a larger impact the longer the time between the issuance of the policy and the final settlement of claims. Greater than expected claims costs above the established reserves will require an increase in claims reserves and reduce the earnings in the period the deficiency was established. We consider the impact of inflation on these reserves when establishing policy rates.
Management utilizes independent actuaries to provide guidance for the establishment of the Company’s liabilities for unpaid claim, claim adjustment expenses, and IBNR. In establishing the ultimate claims liability, actuarial judgment is relied upon in order to make appropriate assumptions to determine a best estimate of ultimate claim liabilities. There are inherent uncertainties associated with this estimation process, especially when a company is undergoing changes in its claim settlement practices or when behaviors of policyholders are influenced by external factors and/or market dynamics. As an example, during calendar year 2016, the Company introduced predictive analytics in addition to making significant efforts to reduce claim tail risk by accelerating claim closure rates. These changes have had a material impact on claim development as described further in ‘Part II, Item 8, Note 11, Claims Liabilities’ in the Notes to Consolidated Financial Statements.
At any given point in time, the recorded claim liabilities represent our best estimate of the ultimate settlement and administration cost of insured claims incurred and unpaid. Since the process of estimating claim and claim adjustment liabilities requires significant judgment due to a number of variables, such as fluctuations in inflation, judicial decisions, legislative changes and changes in

34


claim handling procedures, the ultimate liability may exceed or be less than these estimates. Claim liabilities are revised as additional information becomes available, and adjustments, if any, are reflected in earnings in the periods in which they are determined.
In selecting development factors and averages described in ‘Part II, Item 8, Note 11, Claims Liabilities’ in the Notes to Consolidated Financial Statements, due consideration is given to how the historical experience patterns change from one year to the next over the course of several consecutive years of recent history. Predictions surrounding these patterns drive the estimates that are produced by each method and are based on statistical techniques that follow standard actuarial practices.
In compliance with annual statutory reporting requirements, our appointed independent actuaries provide a Statement of Actuarial Opinion (“SAO”) indicating that carried claim liabilities recorded at each annual balance sheet date make a reasonable provision for the Insurance Subsidiaries’ claim liabilities obligations under the term of contracts and agreements with our policyholders. Recorded claim liabilities are compared to the indicated range provided in the actuary’s report accompanying the SAO. At December 31, 2018, the recorded amount for claim liabilities falls within the range determined by the appointed independent actuaries.
The methods employed by actuaries include a range of estimated claim liabilities, each reflecting a level of uncertainty. Projections of claim liabilities are subject to potentially large variability in the estimation process since the ultimate disposition of claims incurred prior to the financial statement date, whether reported or not, is subject to the outcome of events that have not yet occurred. Examples of these events include jury decisions, court interpretations, legislative changes, and economic conditions. Any estimate of future costs is subject to the inherent limitation on one’s ability to predict the aggregate course of future events. It should therefore be expected that the actual emergence of claim liabilities will vary, perhaps materially, from any estimate.
We believe our claim liability reserves are appropriately established based on available methodology, facts, technology, laws and regulations. We calculate and record a single best reserve estimate, in conformance with generally accepted actuarial standards, for reported and unreported claim liabilities.
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 assets (“DTAs”) or deferred tax liabilities (“DTLs”).
DTAs 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. DTAs and DTLs 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 DTAs. Atlas performs an assessment of recoverability of its DTAs on a quarterly basis. If, based on the weight of available evidence, it is more likely than not the DTAs will not be realized, a valuation allowance is recognized in income in the period that such determination is made. As of December 31, 2018, Atlas has a valuation allowance of $29.4 million recorded against the Company’s DTAs. The Company had no valuation allowance as of December 31, 2017.
Reinsurance
As part of Atlas’ insurance risk management policies, portions of its insurance risk is ceded to reinsurers. Reinsurance premiums and claims adjustment expenses are accounted for on a basis consistent with those used in accounting for the original policies issued and the terms of the reinsurance contracts. Premiums and claims and claims adjustment expenses ceded to other companies have been reported as a reduction of premium revenue and incurred claims. Commissions paid to Atlas by reinsurers on business ceded have been accounted for as a reduction of the related policy acquisition costs. Reinsurance recoverables are recorded for that portion of paid and unpaid claims and claims adjustment expenses that are ceded to other companies. Prepaid reinsurance premiums are recorded for unearned premiums that have been ceded to other companies.

35


III. Operating Results
Highlights
Gross premiums written were $286.6 million in 2018, an increase of 3.9% from $276.0 million in 2017.
In-force premium was $286.1 million as of December 31, 2018, an increase of $17.6 million from $268.5 million as of December 31, 2017.
Total revenue was $221.8 million in 2018 compared to $222.0 million in 2017.
Underwriting loss was $63.2 million in 2018 compared to an underwriting loss of $48.5 million in 2017.
The combined ratio was 129.0% in 2018, an increase of 6.5 points, compared to 122.5% in 2017.
Net loss was $80.0 million, or $6.67 loss per common share diluted, in 2018 compared to a net loss of $38.8 million, or $3.22 loss per common share diluted, in 2017, representing a decrease in earnings per common share diluted of $3.45.
Book value per common share decreased $6.94 to $0.48 as of December 31, 2018 from $7.42 as of December 31, 2017.
Return on equity was a negative 166.1% in 2018 as compared to a negative 35.6% in 2017.

36


Consolidated Performance
($ in ‘000s, except per share data)
Year ended December 31,
 
2018
2017
2016
Gross premiums written
$
286,614

$
275,961

$
225,095

Net premiums earned
218,218

215,771

171,058

Net claims incurred
220,662

203,873

134,746

Underwriting expense:
 
 
 
Acquisition costs
26,115

27,885

18,803

Share-based compensation
1,201

1,176

1,552

Expenses recovered related to acquisitions and stock purchase agreements
(520
)

(6,297
)
DPAC amortization
(225
)
806

(746
)
Other underwriting expenses
34,139

30,548

27,983

Total underwriting expenses
60,710

60,415

41,295

Underwriting loss
(63,154
)
(48,517
)
(4,983
)
Net investment income
2,647

4,897

4,824

Goodwill impairment loss
(2,726
)


Loss from operating activities, before income taxes
(63,233
)
(43,620
)
(159
)
Interest expense
(1,869
)
(1,840
)
(1,026
)
Loss from change in fair value of equity securities
(198
)


Realized gains and other income
1,099

1,307

1,697

Net (loss) income before income taxes
(64,201
)
(44,153
)
512

Income tax expense (benefit)
15,811

(5,343
)
(2,134
)
Net (loss) income
$
(80,012
)
$
(38,810
)
$
2,646

 
 
 
 
Key Financial Ratios1
 
 
 
Loss ratio
101.1
 %
94.5
 %
78.8 %

Underwriting expense ratio:
 
 
 
Acquisition cost ratio
12.0

12.9

11.0

Share-based compensation ratio
0.6

0.5

0.9

Expenses recovered related to acquisitions and stock purchase agreements ratio
(0.2
)

(3.7
)
DPAC amortization ratio
(0.1
)
0.4

(0.4
)
Other underwriting expense ratio
15.6

14.2

16.3

Total underwriting expense ratio
27.9

28.0

24.1

Combined ratio
129.0
 %
122.5
 %
102.9
 %
(Loss) earnings per common share diluted
$
(6.67
)
$
(3.22
)
$
0.19

Book value per common share
$
0.48

$
7.42

$
10.54

Return on equity
(166.1)
 %
(35.6)
 %
2.1
 %
1 
Ratios are calculated as a percentage of net premiums earned.

37


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 with the objective of generating underwriting profit for the insurance companies we own. The Company’s philosophy is to prioritize improvement in underwriting margin over top line growth. As with all P&C insurance companies, the impact of price changes and other underwriting activities is reflected in our financial results over time. Underwriting changes on our in-force policies occur as they are renewed. This cycle 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 to maintain appropriate liquidity. We follow a formal investment policy, and the Board of Directors reviews the portfolio performance at least quarterly for compliance with the established guidelines. The Investment Committee of the Board of Directors provides interim guidance and analysis with respect to asset allocation, as deemed appropriate.
Expenses
Net claims incurred expenses are a function of the amount and type of insurance contracts we write and of the claims experience of the underlying risks. We record net claims incurred based on an actuarial analysis of the estimated claims we expect to be reported on contracts written. We seek to establish case reserves at the maximum probable exposure, based on our historical claims experience and, beginning in 2016, the use of claim related predictive analytics. 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, as well as estimation of potential future trends or changes. While the Company relies on independent actuarial professionals and internal controls in this regard, the estimation of reserves is inherently uncertain. We are committed to continuous improvement in this area of our business.
Acquisition costs 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 underwriting expenses consist primarily of personnel related expenses (including salaries, benefits and certain costs associated with awards under our equity compensation plans, such as share-based compensation expense) and other general operating expenses. We believe that because a portion of our personnel expenses are relatively fixed in nature, changes in premium writings may impact our operating scale and operating expense ratios.
Gross Premiums Written
Gross Premiums Written by Line of Business
($ in ‘000s)
Year ended December 31,
% Change
 
2018
2017
2016
2018 vs. 2017
2017 vs. 2016
Commercial automobile
$
283,907

$
274,705

$
223,801

3.3
%
22.7
 %
Other
2,707

1,256

1,294

115.5

(3.0
)
Total
$
286,614

$
275,961

$
225,095

3.9
%
22.6
 %
 
 
 
 
 
 
Gross premiums written were $286.6 million in 2018 compared to $276.0 million in 2017, representing an increase of 3.9%. The increase is primarily due to growth in our para-transit and livery/TNC lines, primarily in New York and California, partially offset by a decrease in taxi gross premiums written. The decrease in taxi business resulted from the non-renewal of one large Illinois account and the loss of airport business in certain states due to the lowering of the A.M. Best ratings of American Country, American Service and Gateway, or collectively, the “ASI Pool Subsidiaries.”
Gross premiums written were $276.0 million in 2017 compared to $225.1 million in 2016, representing a 22.6% increase. The increase primarily resulted from growth in livery/limousine and para-transit gross premiums written, primarily in New York, California and New Jersey, offset by a decrease in taxi gross premiums written in Louisiana and Nevada and in all lines in Minnesota and Michigan.
New premium business on our core lines represented approximately 31.6%, 40.7% and 33.9% of the total gross premiums written in 2018, 2017 and 2016, respectively. The decrease in new business premium growth from 2017 to 2018 occurred due to smaller fleet size in our livery/TNC business and less taxi business. The increase in new business growth from 2016 to 2017 primarily resulted from one large New York livery/TNC account written and growth in all products in the states of California and New Jersey.

38


In-force premium was $286.1 million, $268.5 million and $224.6 million as of December 31, 2018, 2017 and 2016, respectively. Gross unearned premium reserves were $134.0 million and $128.0 million as of December 31, 2018 and 2017, respectively. The increase in gross unearned premium reserves and in-force premium since December, 31, 2017 primarily resulted from growth in our para-transit and livery/TNC lines during the second half of 2018. Gross unearned premium reserves were $128.0 million and $113.2 million as of December 31, 2017 and 2016, respectively. The increase in gross unearned premium reserves and in-force premium since December 31, 2016 primarily resulted from growth in the states of California, New Jersey and New York, offset by a reduction in business in the states of Louisiana, Michigan and Minnesota.
Geographic Concentration
Gross Premiums Written by State
 
 
($ in ‘000s)
Year ended December 31,
 
2018
2017
2016
New York
$
110,031

38.4
%
$
99,374

36.0
%
$
69,737

31.0
%
California
46,566

16.2

42,165

15.3

29,784

13.2

New Jersey
12,465

4.3

11,090

4.0

4,881

2.2

Illinois
11,599

4.0

15,664

5.7

12,398

5.5

Virginia
10,009

3.5

8,704

3.2

7,940

3.5

Louisiana
7,526

2.6

6,140

2.2

10,337

4.6

Ohio
7,335

2.6

7,204

2.6

5,942

2.6

Texas
7,045

2.5

8,511

3.1

7,881

3.5

Nevada
5,947

2.1

6,449

2.3

7,966

3.5

Minnesota
5,862

2.0

6,453

2.3

9,542

4.3

Other
62,229

21.8

64,207

23.3

58,687

26.1

Total
$
286,614

100.0
%
$
275,961

100.0
%
$
225,095

100.0
%
 
 
 
 
 
 
 
As illustrated by the table above, 38.4%, 36.0% and 31.0% of Atlas’ gross premiums written in 2018, 2017 and 2016, respectively, came from New York. The five states currently producing the most premium volume accounted for 66.4% of gross premiums written in 2018, as compared to 64.2% and 55.4% in 2017 and 2016, respectively. In 2018, the increase in New York gross premiums written came from growth in the livery/TNC line, and the increase in California gross premiums written resulted from growth in all products. In 2017, approximately 62.5% of the increase in New York gross premiums written came from one new large limousine fleet account.
Ceded Premiums Written
Ceded premiums written is equal to premiums ceded under the terms of Atlas’ in force reinsurance treaties. Atlas generally purchases reinsurance in an effort to limit net exposure on any one claim to a maximum amount of $500,000 with respect to commercial automobile liability claims. This Excess of Loss reinsurance is primarily secured through General Reinsurance Corporation (“Gen Re”), a subsidiary of Berkshire Hathaway, Inc. Atlas also purchases reinsurance from Gen Re in an effort to protect against awards in excess of its policy limits. Effective July 1, 2014, Atlas implemented a quota share reinsurance agreement with Swiss Reinsurance America Corporation (“Swiss Re”) for its commercial auto and general liability lines of business (“Quota Share”) written by the ASI Pool Subsidiaries. The Quota Share agreement had an initial cession rate of 5%, which was increased to 15% effective April 1, 2015 and then was decreased to 5% effective July 1, 2016. Effective April 1, 2018, the Quota Share cession rate was increased to 30%. The Quota Share provides the Company with financial flexibility to manage expected growth and the timing of potential future capital raising activities. Global Liberty has a 25% quota share reinsurance agreement with Swiss Re for its commercial auto and general liability lines of business (“Global Quota Share”). The cession rate of the Global Quota Share remained at 25% for 2018, 2017 and 2016.
Ceded premiums written increased 92.8% to $86.4 million in 2018 compared to $44.8 million in 2017, primarily due to the increase in the Quota Share cession rate. Ceded premiums written decreased 0.5% to $44.8 million in 2017 compared to $45.0 million in 2016, primarily due to reductions in the cession rates of the Quota Share agreement and Global Liberty’s commercial automobile excess of loss reinsurance contracts, offset by premium growth as compared to the prior year period. As our limousine and para-transit business grows, we expect ceded premiums written to increase, because, under the current market conditions, the reinsurance costs are more expensive for these products.

39


Net Premiums Written
Net premiums written is equal to gross premiums written less the ceded premiums written under the terms of Atlas’ in-force reinsurance treaties. Net premiums written totaled $200.2 million in 2018, a decrease of 13.4% from $231.1 million in 2017, following an increase of 28.4% in 2017 from $180.1 million in 2016. The changes are attributed to the combined effects of the reasons cited in the ‘Gross Premiums Written’ and ‘Ceded Premiums Written’ sections above.
Net Premiums Earned
Premiums are earned ratably over the term of the underlying policy. Net premiums earned totaled $218.2 million in 2018, an increase of 1.1% compared to $215.8 million in 2017, following an increase of 26.1% in 2017 compared to $171.1 million in 2016. The changes are attributed to the combined effects of the reasons cited in the ‘Gross Premiums Written’ and ‘Ceded Premiums Written’ sections above.
Net Claims Incurred
The loss ratio relating to the net claims incurred was 101.1%, 94.5% and 78.8 % in 2018, 2017 and 2016, respectively. The loss ratio increase in 2018 was primarily the result of the reserve strengthening on prior accident years between 2013 and 2017, which created a 6.6% increase in the loss ratio for 2018. The loss ratio increase in 2017 was primarily the result of the Company’s re-estimation of its unpaid claims liabilities on prior accident years, creating a 15.7% increase in the loss ratio in 2017.
We experienced unfavorable reserve development of $82.7 million, $75.4 million and $32.6 million in 2018, 2017 and 2016, respectively, which is reported by accident year and line of business in the tables below.
Reserve Development for the Years Ended December 31,
2018:
Year-end 2018 reserve estimates for the Insurance Subsidiaries were strengthened to the high point of the actuarial range established by the outside independent actuaries for each entity based on December 31, 2018 data, claim settlement activities, and other factors evaluated subsequent to the receipt of the 2018 actuarial opinions. While the Company believes that the changes made to its claim process will result in better outcomes than would have otherwise been the case, uncertainty regarding the ultimate outcome exists, and it cannot be assumed that reserve estimates will be adequate. Primarily as a result of regulatory concerns regarding reserve levels, the ASI Pool Companies were placed into rehabilitation in 2019. See ‘Item 1, 2019 Developments’ and “Item 1A, Risk Factors - Risks Related to 2019 Developments - Regulatory Developments” for certain developments with respect to the Company and the Insurance Subsidiaries subsequent to December 31, 2018. Incremental claim outcomes and other factors could result in future adjustments to reserves and reserve estimates.
2017:
Atlas identified that claim expenses in Michigan were significantly outpacing other states and took a significant charge in 2016. Although exposure in Michigan was reduced to approximately 1.4% of the Company’s insured vehicles in force by year end 2017, payments for claims in this state continued to be disproportionate to historic premiums earned.
Remaining liability for non-New York Global Liberty business written prior to 2016 was expected to settle for greater amounts than previously expected.
Overall, the actuarially determined liability for remaining claims related to accident years 2015 and prior in general was indicated to be significantly higher than carried reserves.
Risk selection and pricing precision supported by predictive modeling in underwriting beginning in 2015 appears to have contributed improvement in expected loss ratio for premiums earned in 2016 and 2017.
Payment activity in calendar year 2017 attributed to the use of predictive modeling in claims was accelerated as expected. The Company believes that this represents an ultimate reduction in future expected losses, but it appears to be too early for credit to be given to this potential outcome from an actuarial perspective.
While the Company did see positive trends relating to more recent accident years in which predictive modeling had an impact, based on year-end work, the challenges from the past outpaced more recent benefits.
Based on year-end 2017 actuarial work, Atlas determined that this significant reserve increase was necessary to ensure sufficient IBNR levels to extinguish the remaining claims especially for older accident years.

40


2016:
The unfavorable development was primarily from our core commercial automobile liability line.
Excluding pre-acquisition Global Liberty reserve development, the development of our core lines on prior accident years was $23.2 million in 2016.
Michigan commercial automobile claims accounted for approximately 62.5% of this $23.2 million development.
Pre-acquisition Global Liberty claims reserve development was $7.9 million in 2016.
The remaining unfavorable prior year development of $1.5 million in 2016 is attributable to assigned risk pools and run-off of non-core business.
Atlas intends to only write its products in areas where it believes the Company can generate an above average underwriting profit. As a specialty insurer, Atlas puts a priority on addressing changes in our market in a nimble way. Despite industry challenges that have impacted our results in recent years, Atlas enhanced and initiated numerous underwriting and claim related processes designed to leverage our experience in the specialty light commercial auto sector, including the elevated use of predictive analytics. We have proactively compressed settlement time, particularly with respect to larger claims, providing earlier visibility into potentially changing claim trends. Atlas endeavored to maintain operating efficiency and improve loss ratios through appropriate underwriting and pricing, disciplined claims handling, as well as further leveraging the investments it has made in predictive analytics. However, the impact of such improvement will only be recognized if positive results are reflected in future loss settlements. In the meantime, overall reserve levels are being set based on the estimates provided by the Insurance Subsidiaries’ outside independent actuaries and include strengthening related to prior accident years. Under the MGA focused strategy implemented in 2019, the Company expects to create value for its stakeholders through partnerships with unrelated risk bearing insurers and reinsurers.
Claims and Claims Adjustment Expenses Incurred, Net of Reinsurance
($ in ‘000s)
 
Accident Year
Commercial Auto Liability
Other
Total
 
Year ended December 31, 2018
2013 and prior
$
7,390

$
(69
)
$
7,321

2014
8,349

352

8,701

2015
26,642

(600
)
26,042

2016
17,594

32

17,626

2017
21,572

1,484

23,056

2018
123,017

14,899

137,916

 Total
$
204,564

$
16,098

$
220,662

 
 
 
 
 
Year ended December 31, 2017
2012 and prior
$
3,402

$
(456
)
$
2,946

2013
9,209

30

9,239

2014
23,037

603

23,640

2015
30,025

1,020

31,045

2016
7,693

834

8,527

2017
114,531

13,945

128,476

 Total
$
187,897

$
15,976

$
203,873

 
 
 
 
 
Year ended December 31, 2016
2011 and prior
$
3,374

$
1,323

$
4,697

2012
4,348

101

4,449

2013
10,764

131

10,895

2014
16,946

148

17,094

2015
(4,930
)
408

(4,522
)
2016
90,713

11,420

102,133

 Total
$
121,215

$
13,531

$
134,746

 
 
 
 

41


Acquisition Costs
Acquisition costs represent commissions and taxes incurred on net premiums earned, offset by ceding commission on business reinsured. Acquisition costs were $26.1 million, $27.9 million and $18.8 million in 2018, 2017 and 2016, respectively, representing 12.0%, 12.9% and 11.0% of net premiums earned, respectively.
Acquisition Cost Impact on the Combined Ratio
($ in ‘000s, percentages to net premiums earned)
Year ended December 31,
 
2018
2017
2016
Net premiums earned
$
218,218

100.0
 %
$
215,771

100.0
 %
$
171,058

100.0
 %
Gross commissions incurred excluding profit sharing
30,599

14.0

28,416

13.2

21,993

12.9

Gross profit sharing commissions incurred
1,917

0.9

3,458

1.6

2,618

1.5

Premium and other taxes incurred
8,117

3.7

7,315

3.4

6,257

3.6

Total gross commissions and taxes incurred
40,633

18.6

39,189

18.2

30,868

18.0

Ceded commissions incurred excluding profit sharing
(14,976
)
(6.8
)
(9,447
)
(4.4
)
(10,966
)
(6.4
)
Ceded profit sharing commissions incurred
458

0.2

(1,857
)
(0.9
)
(1,099
)
(0.6
)
 Total ceded commissions incurred
(14,518
)
(6.6
)
(11,304
)
(5.3
)
(12,065
)
(7.0
)
Total
$
26,115

12.0
 %
$
27,885

12.9
 %
$
18,803

11.0
 %
 
 
 
 
 
 
 
Gross commissions incurred excluding profit sharing commissions increased by $2.2 million in 2018 compared to 2017. The increase resulted from higher than average acquisition costs on reinsurance business assumed, partially offset by certain TNC business underwritten at zero commissions. Gross profit sharing commissions incurred decreased by $1.5 million in 2018 compared to 2017, primarily as a result of fewer agents being eligible for profit sharing commissions. Gross profit sharing commissions are awarded based on the combination of developed loss experience and premium growth. Premium and other taxes incurred increased by $802,000 in 2018 compared to 2017 as a result of premium growth in jurisdictions with higher premium tax rates, offset by attrition in states with lower rates.
Gross commissions incurred excluding profit sharing commissions increased by $6.4 million in 2017 compared to 2016. The increase resulted from premium growth in business where higher commission rates applied. Gross profit sharing commissions incurred increased by $840,000 in 2017 compared to 2016 primarily as a result of new agents becoming eligible for profit sharing commissions and premium growth. Premium and other taxes incurred increased by $1.1 million in 2017 compared to 2016 as a result of premium growth.
Ceded commissions incurred excluding profit sharing commissions increased by $5.5 million in 2018 compared to 2017, primarily due to the increase in the Quota Share cession rate. Ceded profit sharing commissions incurred decreased by $2.3 million in 2018 compared to 2017. Ceded profit sharing commissions are based on loss experience. The decrease in ceded profit sharing commissions resulted from unfavorable loss ratios on the Quota Share and Global Quota Share.
Ceded commissions incurred excluding profit sharing commissions decreased by $1.5 million in 2017 compared to 2016 primarily due to the decrease in ceded premiums written for the Quota Share. Ceded profit sharing commissions incurred increased by $758,000 in 2017 compared to 2016. The increase in ceded profit sharing commissions resulted from favorable loss ratios on Atlas’ excess of loss reinsurance agreements and the Global Quota Share, offset by unfavorable loss ratios on the Quota Share.
Other Underwriting Expenses
The other underwriting expense ratio (including share-based compensation expenses and expenses incurred related to stock purchase agreements) was 16.0%, 15.1% and 13.1% in 2018, 2017 and 2016, respectively.

42


2018 vs. 2017:
Other underwriting expenses increased by approximately $2.1 million over the prior year period.
Depreciation, leasehold improvement amortization and facility costs increased by $599,000 compared to the prior year period because Atlas’ new headquarters building operated for a full year in 2018.
Salary, payroll taxes and employee benefit costs increased by $0.1 million.
DPAC amortization decreased by $1.0 million compared to the prior year period due to an increase in the percentage applied to deferrable expenses.
Expenses recovered pursuant to stock purchase agreements were $520,000. During 2017, there were no expenses recovered pursuant to stock purchase agreements.
Maintenance costs related to Atlas’ enterprise policy management software increased by approximately $1.0 million.
Professional fees increased by $1.1 million primarily due to an increase in legal fees.
Bank fees increased by $952,000 over the prior year period due to an increase in charges related to processing customer payments.
2017 vs. 2016:
Other underwriting expenses increased by approximately $10.0 million over the prior year period.
Depreciation, leasehold improvement amortization and facility costs related to Atlas’ new headquarters building increased by $806,000 compared to the prior year period.
Salary, payroll taxes and employee benefit costs decreased by $581,000.
Because salary, payroll taxes and employee benefit costs decreased and gross premiums written and gross unearned premium reserves increased, DPAC amortization increased by $1.6 million.
There were no expenses recovered pursuant to stock purchase agreements. During 2016, there were $6.3 million in expenses recovered pursuant to stock purchase agreements.
The termination of Gateway’s workers’ compensation retroactive reinsurance agreement increased expenses by $1.7 million.
Directors fees increased by $30,000 over the prior year period due to the addition of a new board member.
Expenses Related to Stock Purchase Agreements
Atlas recovered $520,000 of expenses pursuant to the contingent adjustments of the Anchor stock purchase agreements related to the claim reserve contingency in 2018. Atlas did not incur or recover any expenses pursuant to stock purchase agreements in 2017. Atlas recovered $6.3 million of expenses pursuant to the contingent adjustments of the Gateway and Anchor stock purchase agreements that included the redemption and cancellation of preferred shares in 2016.
Combined Ratio
Atlas’ combined ratio was 129.0%, 122.5% and 102.9% in 2018, 2017 and 2016, respectively.
Underwriting profitability, as opposed to overall profitability or net earnings, is measured by the combined ratio. The combined ratio is the sum of the claims and claims adjustment expense ratio, the acquisition cost ratio and the underwriting expense ratio. The change in the combined ratio is attributable to the factors described in the ‘Net Premiums Earned,’ ‘Net Claims Incurred,’ ‘Acquisition Costs’ and ‘Other Underwriting Expenses’ sections above.
Net Investment Income
Net investment income is primarily comprised of interest income, dividend income and income from other invested assets, net of investment expenses, which are comprised of investment management fees, custodial fees and allocated salaries. Net investment income, net of investment expenses, was $2.6 million in 2018, a decrease of 45.9%, compared to $4.9 million in 2017, following an increase of 1.5% in 2017 compared to $4.8 million in 2016. These amounts are primarily comprised of interest income. In 2018, the decrease resulted from lower returns on equity method investments and less interest income from collateral loans due to loan pay-offs, partially offset by higher interest income on our fixed income securities portfolio. In 2017, the increase was primarily due to an increase in interest income from fixed income securities with higher coupon rates and a decrease in investment manager costs. The gross yield on our fixed income securities was 2.6%, 2.3% and 2.2% in 2018, 2017 and 2016, respectively. The gross yield on our cash and cash equivalents was 0.7%, 0.3% and 0.1% in 2018, 2017 and 2016, respectively. In 2018, the increase in the gross yield on our cash investments was due to higher interest rates on certain accounts and higher balances in accounts earning

43


greater interest. In 2017, the increase in gross yield on our cash investments was due to higher interest rates on certain new accounts and higher balances in accounts earning greater interest. Equity method investments and collateral loans generated investment losses of $470,000 in 2018 and investment income of $1.9 million in both 2017 and 2016.
Goodwill Impairment Loss
The Company performed an assessment of the recoverability of goodwill related to Anchor Group Holdings, Inc. as of December 31, 2018. As a result of continued poor results driven from reserve development, declining premium base, and its March 2019 withdrawal from the A.M. Best interactive rating process, the Company concluded that it should impair the goodwill associated with the acquisition of Anchor Group Holdings, Inc. The resulting assessment reduced the carrying value of goodwill to $0, which resulted in a goodwill impairment loss of $2.7 million for 2018. There were no goodwill impairment losses during 2017 and 2016.
Interest Expense
On April 26, 2017, Atlas issued $25 million of five-year 6.625% senior unsecured notes and received net proceeds of approximately $23.9 million after deducting underwriting discounts and commissions and other offering expenses. A portion of the net proceeds from this issuance, together with cash on hand, were used to repay all outstanding borrowings under the Loan Agreement, as defined below in the ‘Liquidity and Capital Resources’ section. Interest expense was $1.9 million, $1.8 million and $1.0 million in 2018, 2017 and 2016, respectively. The increase in interest expense from 2017 to 2018 was due to a full year’s worth of interest expense in 2018 on the senior unsecured notes, partially offset by the decrease in amortization of debt issuance costs upon the repayment of outstanding amounts under the Loan Agreement in 2017. The increase in interest expense from 2016 to 2017 primarily resulted from the accelerated amortization of debt issuance costs upon the repayment of outstanding amounts under the Loan Agreement and higher interest rate related to the senior unsecured notes.
Loss from Change in Fair Value of Equity Securities
Beginning January 1, 2018, Atlas adopted Accounting Standards Update 2016-01, which requires changes in the unrealized market value of equities held at fair value to be recorded through net income. In 2018, Atlas recorded losses of $198,000 through net income related to the changes in the unrealized amounts on equities held at fair value.
Net Realized Investment Gains
Net realized investment gains is comprised of the gains and losses from the sales of investments. Net realized investment gains decreased 34.3% to $573,000 in 2018 from $872,000 in 2017, due to losses from the sale of fixed income securities, partially offset by gains from the sale of equity securities. Net realized investment gains decreased 29.1% to $872,000 in 2017 from $1.2 million in 2016, due to lower gains from the sale of fixed income securities, partially offset by higher gains on the sale of equity securities and equity method investments.
Other Income
Atlas recorded other income of $526,000, $435,000 and $467,000 in 2018, 2017 and 2016, respectively.
(Loss) Income before Income Taxes
Atlas generated pre-tax loss of $64.2 million and $44.2 million in 2018 and 2017, respectively, and pre-tax income of $512,000 in 2016. The causes of these changes are attributed to the combined effects of the reasons cited in the ‘Net Premiums Earned,’ ‘Net Claims Incurred,’ ‘Acquisition Costs,’ ‘Other Underwriting Expenses,’ ‘Net Investment Income,’ ‘Goodwill Impairment Loss,’ ‘Interest Expense,’ ‘Loss from Change in Fair Value of Equity Securities,’ ‘Net Realized Investment Gains’ and ‘Other Income’ sections above.

44


Income Taxes
Atlas recognized tax expense of $15.8 million in 2018 and income tax benefits of $5.3 million and $2.1 million in 2017 and 2016, respectively.
Tax Rate Reconciliation
($ in ‘000s)
Year ended December 31,
 
2018
2017
2016
Provision for taxes at U.S. statutory marginal income tax rate
$
(13,482
)
21.0
 %
$
(15,453
)
35.0
 %
$
179

35.0
 %
Provision for deferred tax assets deemed unrealizable (valuation allowance)
28,830

(44.9
)




Nondeductible expenses
62

(0.1
)
51

(0.1
)
24

4.7

Tax-exempt income
(12
)

(23
)
0.1

(39
)
(7.6
)
State tax (net of federal benefit)
(2
)

(2
)

28

5.5

Stock compensation
(42
)
0.1

(458
)
1.0



Nondeductible goodwill
572

(0.9
)




Nondeductible acquisition accounting adjustment
(109
)
0.2



(2,204
)
(430.5
)
Change in statutory tax rate


10,542

(23.9
)


Other
(6
)



(122
)
(23.9
)
Provision for income taxes for continuing operations
$
15,811

(24.6
)%
$
(5,343
)
12.1
 %
$
(2,134
)
(416.8
)%
 
 
 
 
 
 
 
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (“Tax Act”) was signed into law. Among other things, beginning with the 2018 tax year, the Tax Act reduced the Company’s corporate federal tax rate from a marginal rate of 35% to a flat 21%, eliminated the corporate Alternative Minimum Tax (“AMT”), changed reserving and other aspects of the computation of taxable income for insurance companies, and modified the net operating loss carryback and carryforward provisions for all entities in the group except for those subject to tax as P&C companies. The modified net operating loss provisions no longer allow a carryback to prior years to recover past taxes, but now allow an indefinite carryforward period subject to a yearly utilization limit. As discussed above, any net operating losses with respect to the insurance entities taxed as P&C companies retain the current net operating loss carryback and carryover provisions, which are two years carryback and 20 years carryforward. As of December 31, 2016, the Company measured its deferred tax items at the enacted rate in effect of 35%. Due to the Tax Act’s enactment, the Company’s deferred tax assets and liabilities as of December 31, 2017 were re-measured at the new enacted tax rate of 21%. In 2017, the Company recognized income tax expense of $10.5 million related to reduction in the net deferred tax asset as a result of this re-measurement.
Upon the transaction forming Atlas on December 31, 2010, a yearly limitation as required by Internal Revenue Code (“IRC”) Section 382 that applies to changes in ownership on the future utilization of Atlas’ net operating loss carryforwards was calculated. The Insurance Subsidiaries’ prior parent retained those tax assets previously attributed to the Insurance Subsidiaries that could not be utilized by Atlas as a result of this limitation. As a result, Atlas’ ability to recognize future tax benefits associated with a portion of its deferred tax assets generated during prior years have been permanently limited to the amount determined under IRC Section 382. The result is a maximum expected net deferred tax asset, which Atlas has available after the merger and believed more-likely-than-not to be utilized in the future, after consideration of a valuation allowance.
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.
Positive evidence evaluated when considering the need for a valuation allowance includes:
management’s expectations of future profit with vehicles in-force at their highest levels and steady new and renewal business;
anticipated ability to increase prices in core lines as the commercial auto market is firming;
predictive modeling in underwriting and claims, which we believe are generating better priced risks that are expected to create overall profitability over time; and
positive growth trends in gross premiums written in each year since formation.

45


Negative evidence evaluated when considering the need for a valuation allowance includes:
net losses generated in the three most recent years; and
yearly limitation as required by IRC Section 382 on net operating loss carryforwards generated prior to 2013.
Net (Loss) Income and (Loss) Earnings per Common Share
Atlas had net loss of $80.0 million and $38.8 million in 2018 and 2017, respectively, and net income of $2.6 million in 2016. Loss per common share diluted was $6.67 and $3.22 in 2018 and 2017, respectively. After taking the impact of the liquidation preference of the preferred shares into consideration, earnings per common share diluted were $0.19 in 2016.
Potential Dilutive Common Shares
 
Year ended December 31,
 
2018
2017
2016
Basic weighted average common shares outstanding
11,992,808

12,064,880

12,045,519

Dilutive potential ordinary shares:
 
 
 
Dilutive stock options


177,364

Diluted weighted average common shares outstanding
11,992,808

12,064,880

12,222,883

 
 
 
 
The effects of convertible instruments are excluded from the computation of earnings per common share diluted in periods in which the effect would be anti-dilutive. Convertible preferred shares are anti-dilutive when the amount of dividend declared or accumulated in the current period per common share obtainable upon conversion exceeds earnings per common share basic. In 2018 and 2017, all exercisable stock options were deemed to be anti-dilutive. The potentially dilutive impact for all exercisable stock options excluded from the calculation due to anti-dilution is 16,372 and 71,475 common shares for 2018 and 2017, respectively. In 2016, all exercisable stock options were deemed to be dilutive and all of the convertible preferred shares were deemed to be anti-dilutive. The potentially dilutive impact for the convertible preferred stock excluded from the calculation due to anti-dilution is 441,357 common shares for 2016.

46


IV. Financial Condition
Consolidated Statements of Financial Condition
 
 
($ in ‘000s, except for share and per share data)
December 31,
 
2018
2017
Assets
 
 
Investments, available for sale
 
 
Fixed income securities, available for sale, at fair value (amortized cost $133,213 and $158,411)
$
129,991

$
157,984

Equity securities, at fair value (cost $5,650 and $7,969)
5,929

8,446

Short-term investments
4,745


Other investments
25,043

31,438

Total investments
165,708

197,868

Cash and cash equivalents
34,902

45,615

Accrued investment income
749

1,248

Premiums receivable (net of allowance of $5,115 and $3,418)
88,596

79,664

Reinsurance recoverables on amounts paid
12,388

7,982

Reinsurance recoverables on amounts unpaid
68,771

53,402

Prepaid reinsurance premiums
36,898

12,878

Deferred policy acquisition costs
7,309

14,797

Deferred tax asset, net

16,985

Goodwill, net

2,726

Intangible assets, net
3,755

4,145

Property and equipment, net
31,363

24,439

Other assets
19,899

20,754

Total assets
$
470,338

$
482,503

 
 
 
Liabilities
 
 
Claims liabilities
$
273,496

$
211,648

Unearned premium reserves
134,040

128,043

Due to reinsurers
15,849

8,411

Notes payable, net
24,255

24,031

Other liabilities and accrued expenses
16,999

19,725

Total liabilities
$
464,639

$
391,858

 
 
 
Shareholders' equity
 
 
Ordinary voting common shares, $0.003 par value, 266,666,667 shares authorized, shares issued: December 31, 2018 - 12,192,475 and December 31, 2017 - 12,164,041; shares outstanding: December 31, 2018 - 11,936,970 and December 31, 2017 - 12,164,041
$
36

$
36

Restricted voting common shares, $0.003 par value, 33,333,334 shares authorized, shares issued and outstanding: December 31, 2018 and December 31, 2017 - 0


Additional paid-in capital
202,298

201,105

Treasury stock, at cost: December 31, 2018 - 255,505 and December 31, 2017 - 0 shares of ordinary voting common shares
(3,000
)

Retained deficit
(190,503
)
(110,535
)
Accumulated other comprehensive (loss) income, net of tax
(3,132
)
39

Total shareholders' equity
$
5,699

$
90,645

Total liabilities and shareholders' equity
$
470,338

$
482,503

 
 
 

47


Investments
Overview and Strategy
Atlas aligns its securities portfolio to support the liabilities and operating cash needs of the Insurance Subsidiaries, to preserve capital and to generate investment returns. Atlas invests predominantly in corporate and government bonds with a portion of the portfolio in relatively short durations that correlate with the payout patterns of Atlas’ claims liabilities. Atlas also invests opportunistically in selective direct investments with favorable return attributes. A third-party investment management firm manages Atlas’ investment portfolio pursuant to the Company’s investment policies and guidelines as approved by its Board of Directors. Atlas monitors the third-party investment manager’s performance and its compliance with both its mandate and Atlas’ investment policies and guidelines.
Atlas’ investment guidelines stress the preservation of capital, market liquidity to support payment of liabilities and the diversification of risk. With respect to fixed income securities, Atlas generally purchases securities with the expectation of holding them to their maturities; however, the securities are available for sale if liquidity needs arise. To the extent that interest rates increase or decrease, unrealized gains or losses may result. We believe that our investment philosophy and approach significantly mitigate the likelihood of such gains or losses being realized.
Carrying Value of Investments, including Cash and Cash Equivalents
($ in ‘000s)
As of December 31,
 
2018
2017
Fixed income securities:
 
 
U.S. Treasury and other U.S. government obligations
$
20,196

$
21,186

States, municipalities and political subdivisions
8,843

13,243

Corporate
 
 
Banking/financial services
13,124

21,382

Consumer goods
9,790

9,679

Capital goods
3,547

7,992

Energy
6,812

7,515

Telecommunications/utilities
8,323

11,215

Health care
755

1,059

Total corporate
42,351

58,842

Mortgage-backed
 
 
Agency
25,128

30,613

Commercial
19,622

22,587

Total mortgage-backed
44,750

53,200

Other asset-backed
13,851

11,513

Total fixed income securities
$
129,991

$
157,984

Equities
5,929

8,446

Short-term investments
4,745


Other investments
25,043

31,438

Total investments
$
165,708

$
197,868

Cash and cash equivalents
34,902

45,615

Total
$
200,610

$
243,483

 
 
 
Portfolio Composition
Atlas held securities, short-term investments and other investments with a carrying value of $165.7 million and $197.9 million as of December 31, 2018 and 2017, respectively, which were primarily comprised of fixed income securities. The decrease resulted from the net sales of fixed income securities and equities, the repayment of two collateral loans, return of capital of certain equity method investments and negative changes in market values.
The securities held by the Insurance Subsidiaries must comply with applicable regulations that prescribe the type, quality and concentration of securities. These regulations in the various jurisdictions in which the Insurance Subsidiaries are domiciled permit investments in government, state, municipal and corporate bonds, preferred and common equities, and other high quality

48


investments, within specified limits and subject to certain qualifications. The Company’s use of quota share reinsurance can impact the relationship between invested assets and premiums written over time as well as the desired duration of the portfolio.
Most of the Company’s holdings are impacted by the U.S. economy, and we anticipate a moderate impact from the effect of global economic conditions on the domestic economy. Global economic conditions may create brief periods of market volatility, but we do not believe it will meaningfully alter the fundamental outlook of the Company’s investment holdings.
Short-Term Investments
Atlas’ short-term investments are comprised of bonds and money market funds. As of December 31, 2018, short-term investments totaled $4.7 million. Atlas had no short-term investments as of December 31, 2017.
Other Investments
Atlas’ other investments are comprised of collateral loans and various limited partnerships that invest in income-producing real estate, equities or insurance linked securities. Atlas accounts for these limited partnership investments using the equity method of accounting. The carrying values of these other investments were $25.0 million and $31.4 million as of December 31, 2018 and 2017, respectively. The carrying values of the equity method limited partnerships were $24.0 million and $25.3 million as of December 31, 2018 and 2017, respectively. The decrease in the carrying value of the limited partnerships was primarily due to the return of capital offset by contributions to other equity method limited partnerships. The carrying value of these investments is Atlas’ share of the net book value for each limited partnership, an amount that approximates fair value. Atlas receives payments on a routine basis that approximates the income earned on one of the limited partnerships that invest in income-producing real estate. The carrying values of the collateral loans were $1.0 million and $6.2 million as of December 31, 2018 and 2017, respectively. The decrease was due to the repayment of two collateral loans.
Equity Method Investments by Type
($ in ‘000s)
As of December 31,
 
2018
2018
2017
 
Unfunded Commitments
Carrying Value
Real estate
$
2,887

$
11,085

$
10,660

Insurance linked securities

6,694

9,073

Activist hedge funds

3,911

4,367

Venture capital
3,070

2,015

853

Other joint venture

325

325

Total equity method investments
$
5,957

$
24,030

$
25,278

 
 
 
 
Due to the timing of financial information of the Company’s equity method investments, certain investments are recorded on a financial reporting lag of one to three months.
Liquidity and Cash Flow Risk
As of December 31, 2018, 26.1% of the fixed income securities, including treasury bills, bankers’ acceptances, government bonds and corporate bonds had contractual maturities of five years or less, compared to 28.4% as of December 31, 2017. Actual maturities may differ from contractual maturities, because certain issuers have the right to call or prepay obligations with or without call or prepayment penalties. Atlas holds cash and high grade short-term assets, which, along with fixed income security maturities, management believes are sufficient for the payment of claims on a timely basis. In the event that additional cash is required to meet obligations to policyholders, Atlas believes that a high quality securities portfolio provides us with sufficient liquidity. As of December 31, 2018, the fixed income securities had a weighted average life of 4.8 years and a duration of 3.8 years, compared to a weighted average life of 4.9 years and a duration of 3.9 years as of December 31, 2017. Changes in interest rates may have a modest market value impact on the Atlas portfolio relative to longer duration portfolios. Atlas can and typically does hold bonds to maturity by matching duration with the anticipated liquidity needs.

49


Amortized Cost and Fair Value of Fixed Income Securities by Contractual Maturity Date
($ in ‘000s)
As of December 31,
 
2018
2017
 
Amortized Cost
Fair Value
%
Amortized Cost
Fair Value
%
Due in less than one year
$
5,573

$
5,546

4.3
%
$
11,149

$
11,141

7.0
%
Due in one through five years
29,000

28,324

21.8

33,941

33,857

21.4

Due after five through ten years
33,790

32,724

25.2

41,542

41,538

26.3

Due after ten years
5,100

4,796

3.7

6,614

6,735

4.3

Total contractual maturity
73,463

71,390

55.0

93,246

93,271

59.0

Total mortgage and asset-backed
59,750

58,601

45.0

65,165

64,713

41.0

Total
$
133,213

$
129,991

100.0
%
$
158,411

$
157,984

100.0
%
 
 
 
 
 
 
 
The debt-to-equity ratio is the sum of the Company’s long-term debt and interest payable divided by total shareholders’ equity. The Company’s debt-to-equity ratio as of December 31, 2018 and 2017 was 430.5% and 26.8%, respectively. The increase is the result of the decrease in shareholders’ equity. See the ‘Shareholders’ Equity’ and ‘Liquidity and Capital Resources’ subsections of the ‘Financial Condition’ section for further information.
Credit Risk
Credit risk is defined as the risk of financial loss due to failure of the other party to a financial instrument to discharge an obligation. Atlas is exposed to credit risk principally through its investments and balances receivable from policyholders, agents and reinsurers. It monitors concentration and credit quality risk through policies designed to limit and monitor its exposure to individual issuers or related groups (with the exception of U.S. government bonds) as well as through ongoing review of the credit ratings of issuers in the securities portfolio. Credit exposure to any one individual policyholder is not material. The Company’s insurance policies, however, are distributed by agents who may manage cash collection on its behalf pursuant to the terms of their agency agreement. Atlas has protocols to evaluate the financial condition of its reinsurers and monitors concentrations of credit risk arising from similar geographic regions, activities or economic characteristics of the reinsurers to minimize its exposure to significant losses from reinsurers’ insolvency. The fixed income securities portfolio consists of predominantly investment grade securities in corporate and government bonds with 99.5% rated ‘BBB’ or better as of December 31, 2018 compared to 99.3% as of December 31, 2017.
Credit Ratings1 of Fixed Income Securities Portfolio
($ in ‘000s)
As of December 31,
 
2018
2017
 
Fair Value
% of Total
Fair Value
% of Total
AAA/Aaa
$
38,478

29.6
%
$
42,978

27.2
%
AA/Aa
50,273

38.7

58,173

36.8

A/A
20,729

16.0

27,384

17.3

BBB/Baa
19,808

15.2

28,348

18.0

BB
557

0.4

875

0.6

B


226

0.1

CCC
146

0.1



Total fixed income securities
$
129,991

100.0
%
$
157,984

100.0
%
 
 
 
 
 
1 
Ratings assigned by Fitch, S&P or Moody’s Investors Service.
Other-Than-Temporary Impairment
Atlas recognizes losses on securities for which a decline in market value was deemed to be other-than-temporary. Management performs a quarterly analysis of the securities holdings to determine if declines in market value are other-than-temporary. Atlas did not recognize any charges for securities impairments that were considered other-than-temporary in 2018, 2017 or 2016.
The length of time securities may be held in an unrealized loss position may vary based on the opinion of the appointed investment manager and their respective analyses related to valuation and to the various credit risks that may prevent us from recapturing the principal investment. In cases of securities with a maturity date where the appointed investment manager determines that there is little or no risk of default prior to the maturity of a holding, Atlas would elect to hold the security in an unrealized loss position

50


until the price recovers or the security matures. In situations where facts emerge that might increase the risk associated with recapture of principal, Atlas may elect to sell securities at a loss.
The total fair value of the securities in an unrealized loss position was $115.4 million as of December 31, 2018 compared to $108.1 million as of December 31, 2017. Unrealized losses were $3.4 million and $1.4 million as of December 31, 2018 and 2017, respectively. The increase in unrealized losses primarily resulted from negative changes in market values (see ‘Part II, Item 8, Note 5, Investments’ in the Notes to Consolidated Financial Statements). Atlas has the ability and intent to hold the securities in an unrealized loss position until their fair value is recovered. Therefore, Atlas does not expect the market value loss position of these investments to be realized in the near term.
Allowance for Bad Debt
As of December 31, 2018, Atlas’ allowance for bad debt was $5.1 million, compared to $3.4 million as of December 31, 2017. The increase in the allowance for bad debt resulted from an analysis of certain past due balances during 2018.
Due from Reinsurers
Atlas purchases reinsurance from third parties in order to reduce its liability on individual risks and its exposure to large claims. Reinsurance is coverage purchased by one insurance company from another for part of the risk originally underwritten by the purchasing (ceding) insurance company. The practice of ceding insurance to reinsurers allows an insurance company to reduce its exposure to claims by size, geographic area and type of risk, or on a particular policy. An effect of ceding insurance is to permit an insurance company to write additional insurance for risks in greater numbers or in larger amounts than it would otherwise insure independently, based on its statutory capital, risk tolerance and other factors.
Atlas generally purchases reinsurance to limit net exposure to a maximum amount on any one loss of $500,000 with respect to commercial automobile liability claims. Atlas also purchases reinsurance to protect against awards in excess of its policy limits. Atlas continually evaluates and adjusts its reinsurance needs based on business volume, mix and supply levels. As a result, the Company has entered into the Quota Share with Swiss Re for ASI Pool Subsidiaries and the Global Quota Share with Swiss Re for Global Liberty. Under the Quota Share, cessions can be increased at our election should we want to utilize it as a means of deleveraging. This gives us flexibility in terms of the timing and approach to potential future capital raising activities in light of anticipated increased operating leverage.
Reinsurance ceded does not relieve Atlas of its ultimate liability to its insureds in the event that any reinsurer is unable to meet their obligations under its reinsurance contracts. Therefore, Atlas enters into reinsurance contracts with only those reinsurers deemed to have sufficient financial resources to provide the requested coverage. Reinsurance treaties are generally subject to cancellation by the reinsurers or Atlas on the anniversary date and are subject to renegotiation annually. Atlas regularly evaluates the financial condition of its reinsurers and monitors the concentrations of credit risk to minimize its exposure to significant claims as a result of the insolvency of a reinsurer. Atlas believes that the amounts it has recorded as reinsurance recoverables are appropriately established. Estimating amounts of reinsurance recoverables, however, is subject to various uncertainties, and the amounts ultimately recoverable may vary from amounts currently recorded. As shown in the below table, Atlas had $81.2 million recoverable from third party reinsurers (exclusive of amounts prepaid) as of December 31, 2018 compared to $61.4 million as of December 31, 2017. The increase in the amount recoverable from third party reinsurers resulted from an increase in ceded case and IBNR reserves and the timing of the collection of amounts recoverable on paid claims.
Estimating amounts of reinsurance recoverables is also impacted by the uncertainties involved in the establishment of provisions for unpaid claims and claims adjustment expenses. As underlying reserves potentially develop, the amounts ultimately recoverable may vary from amounts currently recorded. Atlas’ reinsurance recoverables are generally unsecured. Atlas regularly evaluates its reinsurers, and the respective amounts recoverable, and an allowance for uncollectible reinsurance is provided for, if needed.
Reinsurance Recoverables on Amounts Paid and Unpaid by Reinsurer
($ in ‘000s)
A.M. Best Financial Strength Rating
As of December 31,
 
2018
2017
General Reinsurance Corporation
A++
$
47,592

$
32,505

Swiss Reinsurance America Corporation
A+
28,241

22,241

Other
 
5,326

6,638

Total
 
$
81,159

$
61,384

 
 
 
 
During 2019, the Company received notice from General Reinsurance Corporation that effective July 31, 2019, the XOL reinsurance coverage for the ASI Pool Companies would terminate on a cut-off basis. Additionally, effective September 30, 2019, the ASI Pool Companies Quota Share contract with Swiss Reinsurance America Corporation was terminated on a run-off basis.


51


Deferred Tax Asset
Components of Deferred Tax
($ in ‘000s)
As of December 31,
 
2018
2017
Gross deferred tax assets:
 
 
Losses carried forward
$
25,326

$
13,313

Claims liabilities and unearned premium reserves
5,949

6,171

Bad debts
1,009


Tax credits

1,172

Commissions

623

Stock compensation
760

602

Other
418

1,094

Valuation allowance
(29,416
)

Total gross deferred tax assets
4,046

22,975

 
 
 
Gross deferred tax liabilities:
 
 
Deferred policy acquisition costs
1,535

3,107

Investments
189

213

Fixed assets
1,371

847

Intangible assets
633

715

Other
318

1,108

Total gross deferred tax liabilities
4,046

5,990

Net deferred tax assets
$

$
16,985

 
 
 
Deferred tax assets are recognized only to the extent that it is probable that future taxable income will be available against which they can be utilized. When considering the extent of the valuation allowance on Atlas’ DTA, weight is given by management to both positive and negative evidence. U.S. GAAP states that a cumulative loss in recent years is a significant piece of negative evidence that is difficult to overcome in determining that a valuation allowance is not needed against DTAs. Based on Atlas’ cumulative loss in recent years, Atlas has established a valuation allowance of $29.4 million for its gross future deferred tax assets as of December 31, 2018. The Company had no valuation allowance as of December 31, 2017.
On July 22, 2013, as a result of shareholder activity, a “triggering event” as determined under IRC Section 382 occurred. As a result, the use of the Company’s net operating loss and other carry-forwards generated prior to the “triggering event” will be limited as a result of this “ownership change” for tax purposes, which is defined as a cumulative change of more than 50% during any three-year period by shareholders owning 5% or greater portions of the Company’s shares.
Due to this triggering event, the Company estimates that it will retain total tax effected federal net operating loss carryforwards (“NOLs”) of approximately $25.3 million as of December 31, 2018. NOLs and other carryforwards generated in 2017 and 2018 are not limited by IRC Section 382.

52


Net Operating Loss Carryforward as of December 31, 2018 by Expiry
($ in ‘000s)
 
 
Year of Occurrence
Year of Expiration
Amount
2001
2021
$
5,007

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
4,166

2012
2032
9,236

2015
2035
1

2017
2037
27,313

2018
2038
47,653

2018
Indefinite
4,106

Total
 
$
120,602

 
 
 
Buildings and Land
In the fourth quarter of 2016, Atlas purchased a building and land for $9.3 million to serve as its corporate headquarters. The Company purchased furnishings and made improvements to this building of $1.1 million, $11.3 million and $139,00 in 2018, 2017 and 2016, respectively. See ‘Part II, Item 8, Note 9, Property and Equipment’ in the Notes to Consolidated Financial Statements for further discussion of the new corporate headquarters.
Claims Liabilities
Provision for Unpaid Claims by Type, Gross of Reinsurance
($ in ‘000s)
As of December 31,
 
 
2018
2017
% Change
Case reserves
$
78,191

$
62,769

24.6
%
IBNR
195,305