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ATLAS FINANCIAL HOLDINGS, INC. - 10-Q/A - Management's Discussion and Analysis of Financial Condition and Results of Operations.(Edgar Glimpses Via Acquire Media NewsEdge) Section Description Page I. Overview 18 II. Consolidated Performance 21 III. Application of Critical Accounting Estimates 22 IV. Operating Results 24 V. Financial Condition 29 17-------------------------------------------------------------------------------- Table of Contents MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes that appear elsewhere in this document. In this discussion and analysis, the term "common share" refers to the summation of restricted voting common shares and ordinary voting common shares when used to describe loss or book value per common share. Forward-looking statements This report contains "forward-looking statements," within the meaning of the Private Securities Litigation Reform Act of 1995, which may include, but are not limited to, statements with respect to estimates of future expenses, revenue and profitability; trends affecting financial condition, 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 Gateway; the impact of losing one or more senior executives or failing to attract additional key personnel; and other factors referenced in this report. Often, but not always, forward-looking statements can be identified by the use of words such as "plans", "expects", "is expected", "budget", "scheduled", "estimates", "forecasts", "intends", "anticipates", or "believes" or variations (including negative variations) of such words and phrases, or state that certain actions, events or results "may", "could", "would", "might" or "will" be taken, occur or be achieved. Forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of Atlas to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Such factors include, among others, general business, economic, competitive, political, regulatory and social uncertainties. Although Atlas has attempted to identify important factors that could cause actual actions, events or results to differ materially from those described in forward-looking statements, there may be other factors that cause actions, events or results to differ from those anticipated, estimated or intended. Factors that could cause or contribute to these differences include those discussed below and elsewhere, particularly in the "Risk Factors" section of our Annual Report on Form 10-K for the year ended December 31, 2013. 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. This sector includes taxi cabs, non-emergency para-transit, limousine, livery and business auto. Our goal is to always be the preferred specialty commercial transportation insurer in any geographic areas where our value proposition delivers benefit to all stakeholders. We are licensed to write property and casualty, or P&C, insurance in 49 states and the District of Columbia in the United States. The insurance subsidiaries distribute their products through a network of independent retail agents, and actively write insurance in 40 states and the District of Columbia. Our core business is the underwriting of commercial automobile insurance policies, focusing on the "light" commercial automobile sector. Over the past three years, we have disposed of non-core assets, consolidated infrastructure and placed into run-off certain non-core lines of business previously written by the insurance subsidiaries. Our focus going forward is the underwriting of commercial automobile insurance in the U.S. Substantially all of our new premiums written are in "light" commercial automobile lines of business. Commercial Automobile Our primary target market is made up of small to mid-size taxi, limousine 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 and New York, we have also been successful working with larger operators who retain a meaningful amount of their own risk of loss through self-insurance or self-funded captive insurance entity arrangements. In these cases, we provide support in the areas of day to day policy administration and claims handling consistent with the value proposition we offer to all of our insureds, generally on a fee for service basis. We may also provide excess coverage above the levels of risk retained by the insureds where a better than average loss ratio is expected. Through these arrangements, we are able to effectively utilize the significant specialized operating infrastructure we maintain to generate revenue from business segments that may otherwise be more price sensitive in the current market environment. 18-------------------------------------------------------------------------------- Table of Contents The "light" commercial automobile sector is a subset of the historically profitable commercial automobile insurance industry segment. Commercial automobile insurance has outperformed the overall P&C industry in each of the past ten years based on data compiled by A.M. Best. Recent data from A.M. Best estimates the total U.S. market for commercial automobile liability insurance to be approximately $24 billion. The size of the commercial automobile insurance market can be affected significantly by many factors, such as the underwriting capacity and underwriting criteria of automobile insurance carriers and general economic conditions. Historically, the commercial automobile insurance market has been characterized by periods of excess underwriting capacity and increased price competition followed by periods of reduced capacity and higher premium rates. We believe that there is a positive correlation between the economy and commercial automobile insurance in general. Operators of "light" commercial automobiles may be less likely than other business segments within the commercial automobile insurance market to take vehicles out of service as their businesses and business reputations rely heavily on availability. With respect to certain business lines such as the taxi line, there are also other factors such as the cost and limited supply of medallions which may discourage a policyholder from taking vehicles out of service in the face of reduced demand for the use of the vehicle. Non-Standard Automobile Non-standard automobile insurance is principally provided to individuals who do not qualify for standard automobile insurance coverage because of their payment history, driving record, place of residence, age, vehicle type or other factors. Such drivers typically represent higher than normal risks and pay higher insurance rates for comparable coverage. Consistent with Atlas' focus on commercial automobile insurance, Atlas has transitioned away from the non-standard auto line. 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. Surety Our surety program primarily consists of U.S. Customs bonds. We engage a former affiliate, Avalon Risk Management, to help coordinate customer service and claim handling for the surety bonds written. This non-core program is 100% reinsured to an unrelated third party and is being transitioned to another carrier. We anticipate the program will be fully transitioned during 2014. Other The other line of business is comprised of Gateway's truck and workers' compensation programs, Atlas' non-standard personal lines business, other liability and assigned risk business. The Gateway truck and workers' compensation programs were put into run-off during 2012. The truck program had little earned premium during 2012 and the workers' compensation program is 100% reinsured retrospectively and prospectively to an unrelated third party. Revenues We derive our revenues primarily from premiums from our insurance policies and income from our investment portfolio. Our underwriting approach is to price our products to generate consistent underwriting profit for the insurance companies we own. As with all P&C insurance companies, the impact of price changes is reflected in our financial results over time. Price changes on our in-force policies occur as they are renewed. 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 capital and income to supplement underwriting income. The goals of our investment policy are to protect capital while optimizing investment income and capital appreciation and maintaining appropriate liquidity. We follow a formal investment policy and the Board of Directors reviews the portfolio performance at least quarterly for compliance with the established guidelines. The Investment Committee of the Board of Directors provides interim guidance and analysis with respect to asset allocation, as deemed appropriate. Expenses Net claims incurred expenses are a function of the amount and type of insurance contracts we write and of the loss experience of the underlying risks. We record net claims incurred based on an actuarial analysis of the estimated losses we expect to be reported on contracts written. We seek to establish case reserves at the maximum probable exposure based on our historical claims experience. Our ability to estimate net claims incurred accurately at the time of pricing our contracts is a critical factor in determining our profitability. The amount reported under net claims incurred in any period includes payments in the period net of the change in the value of the reserves for net claims incurred between the beginning and the end of the period. Commissions and other underwriting expenses consist principally of brokerage and agent commissions and to a lesser extent premium taxes. The brokerage and agent commissions are reduced by ceding commissions received from assuming reinsurers that represent a percentage of the premiums on insurance policies and reinsurance contracts written and vary depending upon the amount and types of contracts written. 19-------------------------------------------------------------------------------- Table of Contents Other operating and general expenses consist primarily of personnel expenses (including salaries, benefits and certain costs associated with awards under our equity compensation plans, such as stock compensation expense) and other general operating expenses. Our personnel expenses are primarily fixed in nature and do not vary with the amount of premiums written. Atlas' management incentive compensation plan is based on a return on equity ("ROE") target set annually by the Company's board of directors. The Company has reached its previously communicated minimum efficient operating scale of an annualized $50 to $60 million in earned premium and, therefore, anticipates that it is likely that the 2014 ROE targets will be reached and bonuses will be paid. As a result, the Company intends to begin bonus accruals based on projected future payments that will be made throughout the year. Atlas' executive management team received 100% of their bonuses for 2013 in stock, as opposed to cash, in the first quarter of 2014. 20-------------------------------------------------------------------------------- Table of Contents II. CONSOLIDATED PERFORMANCE First Quarter 2014 Financial Performance Summary (comparisons to First Quarter 2013 unless otherwise noted): • Gross premium written increased by 39.7%, which included an increase of 46.1% in our core commercial auto business • Premium related to core products was written in 39 states during the three month period ended March 31, 2014 • The combined ratio improved by 4.6 percentage points to 93.5% • Underwriting results improved by $1.1 million • Operating income was $2.2 million for the three month period ended March 31, 2014 compared to $911,000 for the three month period ended March 31, 2013 • Diluted earnings per common share was $0.22 • Book value per common share on March 31, 2014 was $6.79, compared to $6.54 at December 31, 2013 and $6.20 at March 31, 2013 The following financial data is derived from Atlas' consolidated financial statements for the three month periods ended March 31, 2014 and March 31, 2013. Selected financial information (in '000s, except per share values) Three Month Period Ended March 31, 2014 March 31, 2013 Gross premium written $ 31,224 $ 22,354 Net premium earned 21,954 15,888 Losses on claims 13,919 10,261 Acquisition costs 3,090 2,270 Other underwriting expenses 3,523 2,722 Underwriting expenses related to the integration of Gateway - 337 Net underwriting income 1,422 298 Net investment income 779 613 Income from operating activities, before tax 2,201 911 Less: Legal/professional fees incurred related to Gateway acquisition - 406 Realized (losses)/gains and other income (9 ) 97 Net income before tax 2,192 602 Income tax expense - - Net income $ 2,192 $ 602 Key Financial Ratios: Loss ratio 63.4 % 64.6 % Acquisition cost ratio 14.1 % 14.3 % Other underwriting expense ratio 16.0 % 19.2 % Combined ratio 93.5 % 98.1 % Return on equity (annualized) 13.4 % 3.7 % Return on common equity (annualized) 13.7 % 2.9 % Operating income per common share $ 0.22 $ 0.13 Diluted earnings per common share $ 0.22 $ 0.05 Book value per common share, basic and diluted $ 6.79 $ 6.20 Operating income is an internal performance measure used in the management of the Company's operations. It represents after-tax operational results excluding, as applicable, net realized gains or losses, net impairment charges recognized in earnings and other items. These amounts are more heavily influenced by market opportunities and other external factors. Operating income should not be viewed as a substitute for U.S. GAAP net income. 21-------------------------------------------------------------------------------- Table of Contents First Quarter 2014 compared to First Quarter 2013: Atlas' combined ratio for the three month period ended March 31, 2014 was 93.5%, compared to 98.1% for the three month period ended March 31, 2013. For the three month period ended March 31, 2014, we incurred $827,000 of expense related to discretionary management incentive compensation which was paid in the first quarter of 2014, $500,000 of which was an amount in excess of the first quarter 2014 bonus accrual. The amount in excess of the accrual had an effect of approximately 2.3% on the underwriting expense and combined ratios for the three month period ended March 31, 2014. There was a 46.1% increase in gross premium written related to core commercial lines for the three month period ended March 31, 2014 compared to the three month period ended March 31, 2013. The increased proportion of commercial auto policies, which historically have had more favorable overall underwriting results, coupled with pricing activity were the primary drivers for loss ratio improvement in 2014. The overall loss ratio for the three month period ended March 31, 2014 improved to 63.4% from 64.6% in the three month period ended March 31, 2013. Atlas generated net investment income of $779,000 for the three month period ended March 31, 2014, as well as $9,000 of realized losses net of other income. This resulted in a 2.2% annualized yield for the three month period ended March 31, 2014. Overall, Atlas generated net income of $2.2 million for the three month period ended March 31, 2014. After the dilutive impact of the convertible preferred shares, warrants (2013 only) and stock options, diluted earnings per common share in the three month period ended March 31, 2014 was $0.22. This compares to net income of $602,000 or diluted earnings per common share of $0.05 in the three month period ended March 31, 2013. Eliminating the impact of the discretionary management incentive compensation expenses in excess of amounts accrued in the first quarter of 2014, on a pro-forma Non-GAAP basis, Atlas generated $0.27 of diluted earnings per share for the three month period ended March 31, 2014. III. APPLICATION OF CRITICAL ACCOUNTING ESTIMATES The preparation of financial statements in conformity with U.S. GAAP requires management to adopt accounting policies and make estimates and assumptions that affect amounts reported in the consolidated financial statements. The most critical estimates include those used in determining: • Fair value and impairment of financial assets; • Deferred policy acquisition costs recoverability; • Reserve for property-liability insurance claims and claims expense estimation; and • Deferred tax asset valuation. In making these determinations, management makes subjective and complex judgments that frequently require estimates about matters that are inherently uncertain. Many of these policies, estimates and related judgments are common in the insurance and financial services industries; others are specific to our businesses and operations. It is reasonably likely that changes in these items could occur from period to period and result in a material impact on our consolidated financial statements. A brief summary of each of these critical accounting estimates follows. For a more detailed discussion of the effect of these estimates on our consolidated financial statements, and the judgments and assumptions related to these estimates, see the referenced sections of this document. For a complete summary of our significant accounting policies, see the notes to the condensed consolidated financial statements and our Annual Report on Form 10-K for the fiscal year ended December 31, 2013. Fair values of financial instruments - Atlas has used the following methods and assumptions in estimating its fair value disclosures: Fair values for bonds and equity securities are based on quoted market prices, when available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments or values obtained from independent pricing services through a bank trustee. Atlas' fixed income portfolio is managed by a SEC registered investment advisor 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 advisor has a team of credit analysts for all investment grade fixed income sectors. The investment process begins with an independent analyst review of each security's credit worthiness using both quantitative tools and qualitative review. At the issuer level, this includes reviews of past financial data, trends in financial stability, projections for the future, reliability of the management team in place, market data (credit spread, equity prices, trends in this data for the issuer and the issuer's industry). Reviews also consider industry trends and the macro-economic environment. This analysis is continuous, integrating new information as it becomes available. In short, Atlas does not rely on rating agency ratings to make investment decisions, but instead, with the support of its independent investment advisors, performs an independent fundamental credit analysis to find the best securities possible. Together with its investment advisor, Atlas found that over time this process creates an ability to sell securities prior to rating agency downgrades or to buy 22-------------------------------------------------------------------------------- Table of Contents securities before upgrades. As of March 31, 2014, 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 investment advisor to ensure that the values received from them are accurately recorded and that the data inputs and the valuation techniques utilized are appropriate, consistently applied, and that the assumptions are reasonable and consistent with the objective of determining fair value. For example, on a continuing basis, Atlas assesses the reasonableness of individual security values which have stale prices or whose changes exceed certain thresholds as compared to previous values received from our investment advisor or to expected prices. The portfolio is reviewed routinely for transaction volumes, new issuances, any changes in spreads, as well as the overall movement of interest rates along the yield curve to determine if sufficient activity and liquidity exists to provide a credible source for market valuations. When fair value determinations are expected to be more variable, they are validated through reviews by members of management or the Board of Directors who have relevant expertise and who are independent of those charged with executing investment transactions. Impairment of financial assets - Atlas assesses, on a quarterly basis, whether there is objective evidence that a financial asset or group of financial assets is impaired. An investment is considered impaired when the fair value of the investment is less than its cost or amortized cost. When an investment is impaired, the Company must make a determination as to whether the impairment is other-than-temporary. Under U.S. GAAP, with respect to an investment in an impaired debt security, other-than temporary impairment (OTTI) occurs if (a) there is intent to sell the debt security, (b) it is more likely than not it will be required to sell the debt security before its anticipated recovery, or (c) it is probable that all amounts due will be unable to be collected such that the entire cost basis of the security will not be recovered. If Atlas intends to sell the debt security, or will more likely than not be required to sell the debt security before the anticipated recovery, a loss in the entire amount of the impairment is reflected in net realized gains (losses) on investments in the consolidated statements of comprehensive income. If Atlas determines that it is probable it will be unable to collect all amounts and Atlas has no intent to sell the debt security, a credit loss is recognized in net realized gains (losses) on investments in the consolidated statements of comprehensive income to the extent that the present value of expected cash flows is less than the amortized cost basis; any difference between fair value and the new amortized cost basis (net of the credit loss) is reflected in other comprehensive income (losses), net of applicable income taxes. 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 OTTI is identified, the equity security is adjusted to fair value through a charge to earnings. Deferred policy acquisition costs - Atlas defers brokers' commissions, premium taxes and other underwriting and marketing costs directly relating to the successful acquisition of premiums written to the extent they are considered recoverable. These costs are then expensed as the related premiums are earned. The method followed in determining the deferred policy acquisition costs limits the deferral to its realizable value by giving consideration to estimated future claims and expenses to be incurred as premiums are earned. Changes in estimates, if any, are recorded in the accounting period in which they are determined. Anticipated investment income is included in determining the realizable value of the deferred policy acquisition costs. Atlas' deferred policy acquisition costs are reported net of deferred ceding commissions. Claims liabilities - The provision for unpaid claims represents the estimated liabilities for reported claims, plus those incurred but not yet reported and the related estimated loss adjustment expenses. Unpaid claims expenses are determined using case-basis evaluations and statistical analyses, including insurance industry loss data, and represent estimates of the ultimate cost of all claims incurred. Although considerable variability is inherent in such estimates, management believes that the liability for unpaid claims is adequate. The estimates are continually reviewed and adjusted as necessary; such adjustments are included in current operations and are accounted for as changes in estimates. Valuation of deferred tax assets - Deferred taxes are recognized using the asset and liability method of accounting. Under this method the future tax consequences attributable to temporary differences in the tax basis of assets, liabilities and items recognized directly in equity and the financial reporting basis of such items are recognized in the financial statements by recording deferred tax liabilities or deferred tax assets. Deferred tax assets related to the carry-forward of unused tax losses and credits and those arising from temporary differences are recognized only to the extent that it is probable that future taxable income will be available against which they can be utilized. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on future tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the date of enactment or substantive enactment. In assessing the need for a valuation allowance, Atlas considers both positive and negative evidence related to the likelihood of realization of the deferred tax assets. If, based on the weight of available evidence, it is more likely than not the deferred tax assets will not be realized, a valuation allowance is recorded. 23-------------------------------------------------------------------------------- Table of Contents IV. OPERATING RESULTS Three month period ended March 31, 2014 compared to three month period ended March 31, 2013: Gross Premium Written The following table summarizes gross premium written by line of business. Gross premium written by line of business (in '000s) Three Month Period Ended March 31, 2014 March 31, 2013 % Change Commercial automobile $ 30,146 $ 20,639 46.1 % Surety 951 1,088 (12.6 )% Other 127 627 (79.8 )% $ 31,224 $ 22,354 39.7 % First Quarter 2014 For the three month period ended March 31, 2014, gross premium written was $31.2 million compared to $22.4 million in the three month period ended March 31, 2013 and $22.1 million in the three month period ended December 31, 2013, representing a 39.7% increase and 41.5% increase, respectively. In the three month period ended March 31, 2014, gross premium written from commercial automobile was $30.1 million, representing an increase of 46.1% relative to the three month period ended March 31, 2013 and a 41.7% increase relative to the three month period ended December 31, 2013. The $8.9 million improvement since first quarter of 2013 is attributable to Atlas' expansion of core lines of business in several key states, and a continuing positive response from both new and existing agents to Atlas' value proposition. The increase from the three month period ended December 31, 2013 can be attributed to seasonality of renewals in our key markets. As our book of business continues to grow and become more diversified, the impact of seasonality will be reduced. As a percentage of the insurance subsidiaries' overall book of business, commercial auto gross premium written represented 96.5% of gross premium written in the three month period ended March 31, 2014 compared to 92.3% during the three month period ended March 31, 2013 and 96.4% in the three month period ended December 31, 2013. Commercial automobile insurance has outperformed the overall P&C industry in each of the past ten years based on data compiled by the National Association of Insurance Commissioners (NAIC). Each of the specialty business lines on which Atlas' strategy is focused is a subset of this industry segment. Geographic Concentration Gross premium written by state ($ in '000s) Three Month Period Ended March 31, 2014 March 31, 2013 Illinois $ 9,696 31.0 % $ 6,822 30.5 % New York 5,044 16.2 % 2,495 11.2 % Michigan 2,934 9.4 % 2,060 9.2 % Minnesota 1,503 4.8 % 832 3.7 % Georgia 1,328 4.3 % 1,236 5.5 % Texas 1,175 3.8 % 819 3.7 % Ohio 1,134 3.6 % 658 2.9 % California 947 3.0 % 1,022 4.6 % Virginia 779 2.5 % 522 2.3 % Louisiana 739 2.4 % 622 2.8 % Other 5,945 19.0 % 5,266 23.6 % Total $ 31,224 100.0 % $ 22,354 100.0 % First Quarter 2014 Illinois had the most gross premium written during the three month period ended March 31, 2014, with 31% of Atlas' gross premium written. Although Atlas' core lines of business are becoming increasingly diversified from a geographic standpoint on an annual basis, in the first quarter as a result of the significant volume of business written in Illinois, which is our most mature market and 24-------------------------------------------------------------------------------- Table of Contents has a common January 1 renewal date for taxi business, 65.7% of gross premium written was generated in our five highest-volume states. This illustrates the geographically balanced growth of our gross premium written this year. Compared to the three month period ended March 31, 2013, we experienced growth in gross premium written in 39 states in the three month period ended March 31, 2014. In 14 of those 39 states, we experienced quarter over quarter growth of greater than 100% due to our continued marketing and underwriting efforts. Ceded Premium Written Ceded premium written is equal to premium ceded under the terms of Atlas' in force reinsurance treaties. Ceded premium written decreased 71.6% to $2.0 million for the three month period ended March 31, 2014 compared with $7.1 million for the three month period ended March 31, 2013 and increased 20.2% compared to $1.7 million for the three month period ended December 31, 2013. The reduction from the prior year first quarter is primarily due to the workers' compensation reinsurance agreement entered into as a result of the Gateway acquisition which ceded $5.3 million of premium related to the Gateway workers' compensation program. Net Premium Written Net premium written is equal to gross premium written less the ceded premium written under the terms of Atlas' in force reinsurance treaties. Net premium written increased 91.2% to $29.2 million for the three month period ended March 31, 2014 compared with $15.3 million for the three month period ended March 31, 2013 and increased 43.2% compared to the three month period ended December 31, 2013. As a percentage of the insurance subsidiaries' overall book of business, virtually 100% of net premium written related to commercial auto. These changes are attributed to the combined effects of the issues cited in the 'Gross Premium Written' and 'Ceded Premium Written' sections above. Net Premium Earned Premiums are earned ratably over the term of the underlying policy. Net premium earned was $22.0 million in the three month period ended March 31, 2014, a 38.2% increase compared with $15.9 million in the three month period ended March 31, 2013 and a 7.0% increase relative to the three month period ended December 31, 2013. These increases are a result of the continued growth in our gross premiums written. Net premiums earned related to core commercial lines increased by 42.0% in the three month period ended March 31, 2014 versus the three month period ended March 31, 2013 and 7.1% since the three month period ended December 31, 2013. Claims Incurred The loss ratio relating to the claims incurred in the three month period ended March 31, 2014 was 63.4% compared to 64.6% in the three month period ended March 31, 2013. Loss ratios improved in the three month period ended March 31, 2014 relative to prior periods primarily due to the increased percentage of commercial auto, which has historically had a better overall underwriting result, relative to total written premium. In both years, the excess taxi program contributed significantly to favorable loss results in the year as we expect better than average claim experience from this program. We believe that our extensive experience and expertise with respect to underwriting and claims management in all our commercial lines will allow us to continue this decreasing trend since we expect 100% of net premium earned to be related to core lines of business moving forward. The Company is committed to retain this claim handling expertise as a core competency as the volume of business increases. The increased proportion of commercial auto business in the past year, which historically has had more favorable overall underwriting results, coupled with price and underwriting initiatives, are the primary drivers for loss ratio improvement in 2014. Acquisition Costs Acquisition costs represent commissions and taxes incurred on net premium earned. Acquisition costs were $3.1 million in the three month period ended March 31, 2014 or 14.1% of net premium earned, as compared to 14.3% in the three month period ended March 31, 2013 and 14.7% in the three month period ended December 31, 2013. These changes in acquisition costs are the result of the geographic and business mix of our gross premiums written as commission and tax rates vary. Other Underwriting Expenses The other underwriting expense ratio was 16.0% in the three month period ended March 31, 2014 compared to 19.2% in the three month period ended March 31, 2013 and 13.4% for the three month period ended December 31, 2013. For the three month period ended March 31, 2013, we incurred $337,000 of severance costs related to former Gateway employees who were severed from Atlas during 2013. This had an effect of approximately 2.1% on the underwriting expense ratio on three month period ended March 31, 2013. For the three month period ended March 31, 2014, we incurred $827,000 of expense related to discretionary management incentive compensation which was paid in the first quarter of 2014, $500,000 of which was an amount in excess of the first quarter 2014 discretionary bonus accrual. These expenses are included in the other underwriting expenses. The amount in excess of the accrual had an effect of approximately 2.3% on the underwriting expense ratio for the three month period ended March 31, 2014. 25-------------------------------------------------------------------------------- Table of Contents The other underwriting expense ratio in 2013 excludes $406,000 in transaction costs incurred in conjunction with the acquisition of Gateway. Net Investment Income Investment Results (in '000s) Three Month Period Ended March 31, 2014 March 31, 2013 Average securities at cost $ 142,858 $ 130,576 Interest income after expenses $ 592 $ 609 Percent earned on average investments (annualized) 1.7 % 1.9 % Net realized (losses) gains $ (11 ) $ 93 Dividend income - 4 Equity in investee 187 - Net investment income $ 768 $ 706 Total realized yield (annualized) 2.2 % 2.2 % Investment income (excluding net realized gains) increased by 27.2% to $779,000 in the three month period ended March 31, 2014, compared to $613,000 in the three month period ended March 31, 2013. These amounts are primarily comprised of interest income. The annualized realized yield on invested assets was 2.2% for the three month periods ended March 31, 2014 and March 31, 2013 and 1.2% for the three month period ended December 31, 2013. Combined Ratio Underwriting profitability, as opposed to overall profitability or net earnings, is measured by the combined ratio. The combined ratio is the sum of the loss and loss adjustment expense (LAE) ratios, the acquisition cost ratio and the underwriting expense ratio. For the three month period ended March 31, 2014, we incurred $827,000 of expense related to discretionary management incentive compensation which was paid in the first quarter of 2014, $500,000 of which was an amount in excess of the first quarter 2014 discretionary bonus accrual. The amount in excess of the accrual had an effect of approximately 2.3% on the underwriting expense and combined ratios for the three month period ended March 31, 2014. Atlas' combined ratio for the three months ended March 31, 2014 and 2013 are summarized in the table below. 2014 combined ratio improvement is attributable to the factors described in the 'Claims Incurred', 'Acquisition Costs', 'Other Underwriting Expenses' and 'Net Premium Earned' sections above. Combined Ratios (in '000s) Three Month Period Ended March 31, 2014 March 31, 2013 Net premium earned $ 21,954 $ 15,888 Underwriting expenses 1 20,531 15,590 Combined ratio 93.5 % 98.1 % 1 - Underwriting expenses are the combination of claims incurred, acquisition costs, and other underwriting expenses Operating Income Operating income is an internal performance measure used in the management of the Company's operations. It represents after-tax operational results excluding, as applicable, net realized gains or losses, net impairment charges recognized in earnings and other non-recurring items. These amounts are more heavily influenced by market opportunities and other external factors. Operating income should not be viewed as a substitute for U.S. GAAP net income. Atlas' operating income for the three months ended March 31, 2014 and 2013 are summarized in the table below: 26-------------------------------------------------------------------------------- Table of Contents Operating Income (in '000's) Three Month Period Ended March 31, 2014 March 31, 2013 U.S. GAAP net income $ 2,192 $ 602 Add: Expenses incurred related to Gateway acquisition - 406 Less: Net realized (losses) gains (11 ) 93 Less: Other income 2 4 Operating Income $ 2,183 $ 911 The increase in operating income is attributable to the factors described in the 'Claims Incurred', 'Acquisition Costs', 'Other Underwriting Expenses' and 'Net Premium Earned' sections above. Net Realized Investment Gains (Losses) Net realized investment losses in the three month period ended March 31, 2014 were $11,000 compared to net realized gains of $93,000 in the three month period ended March 31, 2013 and $8,000 of net realized gains in the three month period ended December 31, 2013. The difference is the result of management's decision to sell certain securities in the first quarter of 2013 to take advantage of favorable market conditions. Other Income Atlas recorded other income in the three month period ended March 31, 2014 of $2,000 compared to $4,000 for the three month period ended March 31, 2013. Income/Loss before Income Taxes Atlas generated pre-tax income of $2.2 million in the three month period ended March 31, 2014, compared to pre-tax income of $0.6 million in the three month period ended March 31, 2013 and $2.2 million of income in the three month period ended December 31, 2013. Excluding the impact of the discretionary management incentive compensation expenses in excess of the amounts accrued of $500,000 which were paid in the first quarter of 2014, adjusted pre-tax income was $2.7 million for the three month period ended March 31, 2014. Income Tax Expense Atlas recognized no tax expense in the three month period ended March 31, 2014 and the three month period ended March 31, 2013 due to the reversal of the valuation allowance which has offset our tax expense for these periods. The following table reconciles the statutory U.S. Federal tax rate of 34.0% to the actual percentage of pre-tax income provided for the three month periods ended March 31, 2014 and 2013: Tax Rate Reconciliation (in '000s) Three Month Period Ended March 31, 2014 March 31, 2013 Amount % Amount % Provision for taxes at U.S. statutory marginal income tax rate of 34% $ 746 34.0 % $ 205 34.0 % Reversal of valuation allowance (748 ) (34.1 )% (345 ) (57.2 )% Nondeductible expenses 2 0.1 % 141 23.4 % Other - - % (1 ) (0.2 )% Total $ - - % $ - - % Net Income and Earnings per Common Share Atlas had net income of $2.2 million during the three month period ended March 31, 2014 versus $602,000 during the three month period ended March 31, 2013 and $2.2 million for the three month period ended December 31, 2013. After taking the impact of the liquidation preference of the preferred shares into consideration, diluted earnings per common share in the three month period ended March 31, 2014 was $0.22 versus $0.05 in the three month period ended March 31, 2013 and $0.22 in the three month period ended December 31, 2013. Eliminating the impact of the discretionary management incentive compensation expenses in excess of amounts accrued in the first quarter of 2014, on a pro-forma Non-GAAP basis, Atlas generated $0.27 of diluted earnings per share for the three month period ended March 31, 2014. 27-------------------------------------------------------------------------------- Table of Contents For the three month period ended March 31, 2014, there were 9,498,995 weighted average common shares outstanding used to compute basic earnings per share and 9,883,555 used for diluted earnings per share. The following chart illustrates Atlas' potential dilutive common shares: Three Month Period Ended March 31, 2014 March 31, 2013 Weighted average common shares outstanding 9,498,995 7,044,724 Dilutive potential ordinary shares: Dilutive stock options 130,560 6,439 Dilutive warrants - 11,246 Dilutive shares upon preferred share conversion 254,000 - Dilutive average common shares outstanding 9,883,555 7,062,409 In computing the diluted earnings per share for three month period ended March 31, 2013, the Company included the fully dilutive impact of the warrant using the "if-converted" method rather than the treasury stock method. This dilutive impact increased the denominator in the first quarter of 2013 diluted EPS computation by 1,316,588 shares; however, this has no impact on the actual earnings used for the numerator in the EPS computation. Excluding the dilutive impact of the warrants related to the "if-converted" method for the three month period ended March 31, 2013 and applying the treasury method, there were 7,044,724 weighted average common shares outstanding used to compute basic earnings per share and 7,062,409 for diluted earnings per share. The previously reported diluted earnings per share for the period ended March 31, 2013 was $0.04. 28-------------------------------------------------------------------------------- Table of Contents V. FINANCIAL CONDITION 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 relatively short durations that correlate with the payout patterns of Atlas' claims liabilities. A third-party investment management firm manages Atlas' investment portfolio pursuant to the Company's investment policies and guidelines as approved by its Board of Directors. Atlas monitors the third-party investment manager's performance and its compliance with both its mandate and Atlas' investment policies and guidelines. Atlas' investment guidelines stress the preservation of capital, market liquidity to support payment of liabilities and the diversification of risk. With respect to fixed income securities, Atlas generally purchases securities with the expectation of holding them to their maturities; however, the securities are available for sale if liquidity needs arise. Portfolio Composition Atlas held securities with a fair value of $132.5 million as of March 31, 2014, which were primarily comprised of fixed income securities. 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 investments, within specified limits and subject to certain qualifications. The amortized cost, gross unrealized gains and losses and fair value for Atlas' investments in fixed maturities and equity investments are as follows (all amounts in '000s): Fair value of securities portfolio (in '000s) Amortized Gross Unrealized Gross Unrealized As of March 31, 2014 Cost Gains Losses Fair Value Fixed Income: U.S. Government $ 21,978 $ 47 $ 397 $ 21,628 Corporate Banking/Financial Services 17,239 287 125 17,401 Consumer Goods 5,031 44 42 5,033 Capital Goods 14,195 282 98 14,379 Energy 4,703 1 50 4,654 Telecommunications/Utilities 3,856 82 14 3,924 Health Care 1,950 - 55 1,895 Total Corporate 46,974 696 384 47,286 Mortgage backed - Agency 27,912 134 622 27,424 Mortgage backed - Commercial 20,308 74 477 19,905 Total Mortgage Backed 48,220 208 1,099 47,329 Other Asset Backed 12,518 25 1 12,542 Total Fixed Income 129,690 976 1,881 128,785 Equities 252 46 - 298 Other 3,372 - - 3,372 Totals $ 133,314 $ 1,022 $ 1,881 $ 132,455 29-------------------------------------------------------------------------------- Table of Contents Amortized Gross Unrealized Gross Unrealized As of December 31, 2013 Cost Gains Losses Fair Value Fixed Income: U.S. Government $ 22,067 $ 36 $ 620 $ 21,483 Corporate Banking/Financial Services 16,656 238 248 16,646 Consumer Goods 5,044 28 77 4,995 Capital Goods 12,951 208 180 12,979 Energy 3,928 - 114 3,814 Telecommunications/Utilities 4,979 50 55 4,974 Health Care 2,025 - 87 1,938 Total Corporate 45,583 524 761 45,346 Mortgage backed - Agency 28,877 120 910 28,087 Mortgage backed - Commercial 22,131 53 614 21,570 Total Mortgage Backed 51,008 173 1,524 49,657 Other Asset Backed 12,093 15 9 12,099 Total Fixed Income 130,751 748 2,914 128,585 Equities 258 - - 258 Other 1,234 - - 1,234 Totals $ 132,243 $ 748 $ 2,914 $ 130,077 Liquidity and Cash Flow Risk The following table summarizes the fair value by contractual maturities of the fixed income securities portfolio, excluding cash and cash equivalents, at the dates indicated. Fair value of fixed income securities by contractual maturity date (in '000s) As of: March 31, 2014 December 31, 2013 Amount % Amount % Due in less than one year $ 8,561 6.6 % $ 7,571 5.9 % Due in one through five years 48,263 37.5 % 43,693 34.0 % Due after five through ten years 24,884 19.3 % 28,080 21.8 % Due after ten years 47,077 36.6 % 49,241 38.3 % Total $ 128,785 100.0 % $ 128,585 100.0 % As of the three month period ended March 31, 2014, 44.1% of the fixed income securities, including treasury bills, bankers' acceptances, government bonds and corporate bonds, had contractual maturities of five years or less. Actual maturities may differ from contractual maturities because certain issuers have the right to call or prepay obligations with or without call or prepayment penalties. Atlas holds cash and high grade short-term assets which, along with fixed income security maturities, management believes are sufficient for the payment of claims on a timely basis. In the event that additional cash is required to meet obligations to policyholders, Atlas believes that high quality securities portfolio provides us with sufficient liquidity. With a weighted average duration of 3.9 years, changes in interest rates will have a modest market value impact on the Atlas portfolio relative to longer duration portfolios. Atlas can and typically does hold bonds to maturity by matching duration with the anticipated liquidity needs. Market Risk Market risk is the risk that Atlas will incur losses due to adverse changes in interest rates, currency exchange rates or equity prices. Having disposed of a majority of its asset backed securities, its primary market risk exposure in the fixed income securities portfolio is to changes in interest rates. Because Atlas' securities portfolio is comprised of primarily fixed income securities that are usually held to maturity, periodic changes in interest rate levels generally impact its financial results to the extent that the securities in its available for sale portfolio are recorded at market value. During periods of rising interest rates, the market value of the existing fixed income securities will generally decrease and realized gains on fixed income securities will likely be reduced. The reverse is true during periods of declining interest rates. Credit Risk Credit risk is defined as the risk of financial loss due to failure of the other party to a financial instrument to discharge an obligation. Atlas is exposed to credit risk principally through its investments and balances receivable from policyholders and reinsurers. It monitors concentration and credit quality risk through policies 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 30-------------------------------------------------------------------------------- Table of Contents 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 following table summarizes the composition of the fair value of the fixed income securities portfolio (excluding the bond which has been classified in Level 3 within the fair value hierarchy), excluding cash and cash equivalents, as of the dates indicated, by ratings assigned by Fitch, S&P or Moody's Investors Service. The fixed income securities portfolio consists of predominantly very high quality securities in corporate and government bonds with 87.3% rated 'A' or better as of the period ended March 31, 2014 compared to 88.3% as of the year ended December 31, 2013. Credit ratings of fixed income securities portfolio (in '000s) As of: March 31, 2014 December 31, 2013 Amount % of Total Amount % of Total AAA/Aaa $ 73,812 57.6 % $ 76,616 59.9 % AA/Aa 14,622 11.4 % 12,733 10.0 % A/A 23,434 18.3 % 23,624 18.4 % BBB/Baa 16,204 12.7 % 14,995 11.7 % Total Securities $ 128,072 100.0 % $ 127,968 100.0 % Other-than-temporary impairment Atlas recognizes realized losses on securities for which a decline in market value was deemed to be other-than-temporary. Management performs a quarterly analysis of the securities holdings to determine if declines in market value are other-than-temporary. Atlas did not recognize charges for securities impairments that were considered other-than-temporary for the three month period ended March 31, 2014 or the three month period ended March 31, 2013. The length of time securities may be held in an unrealized loss position may vary based on the opinion of the appointed investment manager and their respective analyses related to valuation and to the various credit risks that may prevent us from recapturing the principal investment. In cases of securities with a maturity date where the appointed investment manager determines that there is little or no risk of default prior to the maturity of a holding, Atlas would elect to hold the security in an unrealized loss position until the price recovers or the security matures. In situations where facts emerge that might increase the risk associated with recapture of principal, Atlas may elect to sell securities at a loss. The total fair value of the securities currently in an unrealized loss position is $70.4 million. Atlas has the ability and intent to hold these securities until their fair value is recovered. Therefore, Atlas does not expect the near term change in market value of these securities to be realized. Estimated impact of changes in interest rates and securities prices For Atlas' available-for-sale fixed income securities held as of the period ended March 31, 2014, a 100 basis point increase in interest rates on such held fixed income securities would have increased net investment income and income before taxes by approximately $66,000. Conversely, a 100 basis point decrease in interest rates on such held fixed income securities would have decreased net investment income and income before taxes by $30,000. A 100 basis point increase would have also decreased other comprehensive income by approximately $5.1 million due to "mark-to-market" requirements; however, holding investments to maturity would mitigate this impact. Conversely, a 100 basis point decrease would have increased other comprehensive income by the same amount. The impacts described here are approximately linear to the change in interest rates. Due from Reinsurers and Other Insurers Atlas purchases reinsurance from third parties in order to reduce its liability on individual risks and its exposure to large losses. Reinsurance is 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 loss by size, geographic area, and type of risk or on a particular policy. An effect of ceding insurance is to permit an insurance company to write additional insurance for risks in greater number or in larger amounts than it would otherwise insure independently, 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. 31-------------------------------------------------------------------------------- Table of Contents Reinsurance ceded does not relieve Atlas of its ultimate liability to its insured in the event that any reinsurer is unable to meet their obligations under its reinsurance contracts. Therefore, Atlas enters into reinsurance contracts with only those reinsurers deemed to have sufficient financial resources to provide the requested coverage. Reinsurance treaties are generally subject to cancellation by the reinsurers or Atlas on the anniversary date and are subject to renegotiation annually. Atlas regularly evaluates the financial condition of its reinsurers and monitors the concentrations of credit risk to minimize its exposure to significant losses as a result of the insolvency of a reinsurer. Atlas believes that the amounts it has recorded as reinsurance recoverables are appropriately established. Estimating amounts of reinsurance recoverables, however, is subject to various uncertainties and the amounts ultimately recoverable may vary from amounts currently recorded. Atlas had $18.5 million recoverable from third party reinsurers (exclusive of amounts prepaid) and other insurers as of the period ended March 31, 2014 as compared to $19.1 million as of the year ended December 31, 2013. The decrease is attributable to collections during the first quarter of 2014. Estimating amounts of reinsurance recoverables is also impacted by the uncertainties involved in the establishment of provisions for unpaid claims. As underlying reserves potentially develop, the amounts ultimately recoverable may vary from amounts currently recorded. Atlas' reinsurance recoverables are generally unsecured, with the exception of the new reinsurance agreement established as a condition to close the Gateway acquisition, which is secured by a letter of credit valued at 150% of the claims reserves. Atlas regularly evaluates its reinsurers, and the respective amounts recoverable, and an allowance for uncollectible reinsurance is provided for, if needed. Atlas' largest reinsurance partners are Great American Insurance Company ("Great American"), a subsidiary of American Financial Group, Inc. and Gen Re, a subsidiary of Berkshire Hathaway, Inc. Great American has a financial strength rating of A+ from Standard & Poor's, while Gen Re has a financial strength rating of Aa1 from Moody's. Deferred Tax Asset Components of Deferred Tax (in '000s) As of: March 31, 2014 December 31, 2013 Deferred tax assets: Taxable loss carry-forwards $ 15,042 $ 15,265 Unpaid claims and unearned premiums 5,253 4,783 Bad debts 173 264 Other 1,249 1,446 Valuation allowance (8,699 ) (9,446 ) Total deferred tax assets, net of allowance $ 13,018 $ 12,312 Deferred tax liabilities: Deferred policy acquisition costs $ (2,564 ) $ (2,269 ) Investment securities (786 ) (345 ) Other (379 ) (379 ) Total gross deferred tax liabilities (3,729 ) (2,993 ) Net deferred tax assets $ 9,289 $ 9,319 Atlas established a valuation allowance of approximately $8.7 million and $9.4 million for its gross future deferred tax assets as of the period ended March 31, 2014 and as of the year ended December 31, 2013, respectively. In assessing the need for a valuation allowance, Atlas considers both positive and negative evidence related to the likelihood of realization of the deferred tax assets. If, based on the weight of available evidence, it is more likely than not the deferred tax assets will not be realized, a valuation allowance is recorded. The weight given to the positive and negative evidence is commensurate with the extent to which the evidence may be objectively verified. GAAP states that a cumulative loss in recent years is a significant piece of negative evidence that is difficult to overcome in determining that a valuation allowance is not needed against deferred tax assets. Atlas' assessment also considered the recent spin-off from prior ownership, the nature and extent of cumulative financial losses and trends in recent quarterly earnings. Atlas has the following total net operating loss carry-forwards as of the period ended March 31, 2014: 32-------------------------------------------------------------------------------- Table of Contents Net operating loss carry-forward by expiry (in '000s) Year of Occurrence Year of Expiration Amount 2001 2021 $ 10,722 2002 2022 4,317 2006 2026 7,825 2007 2027 3,763 2008 2028 1,949 2009 2029 1,949 2010 2030 2,296 2011 2031 10,183 2012 2032 1,237 Total $ 44,241 Claims Liabilities The table below shows the amounts of total case reserves and incurred but not reported ("IBNR") claims provision as of the period ended March 31, 2014 and as of the year ended December 31, 2013. The provision for unpaid claims decreased by 1.2% to $100.2 million as of the period ended March 31, 2014 compared to $101.4 million as of the year ended December 31, 2013. During the three month period ended March 31, 2014, case reserves increased by 4.3% compared to December 31, 2013, and IBNR reserves decreased by 17.0%. Overall, payments and settlements of claims from prior years outpaced current year incurred amounts. Provision for unpaid claims by type - gross ($ in '000s) As of: March 31, 2014 December 31, 2013 YTD% Change Case reserves $ 78,493 $ 75,260 4.3 % IBNR 21,686 26,125 (17.0 )% Total $ 100,179 $ 101,385 (1.2 )% Provision for unpaid claims by line of business - gross ($ in '000s) As of: March 31, 2014 December 31, 2013 YTD% Change Non-standard auto $ 2,112 $ 2,846 (25.8 )% Commercial auto 81,371 80,903 0.6 % Other 16,696 17,636 (5.3 )% Total $ 100,179 $ 101,385 (1.2 )% Provision for unpaid claims by line of business - net of reinsurance recoverables ($ in '000s) As of: March 31, 2014 December 31, 2013 YTD% Change Non-standard Auto $ 2,112 $ 2,846 (25.8 )% Commercial Auto 77,277 76,750 0.7 % Other 8,848 9,564 (7.5 )% Total $ 88,237 $ 89,160 (1.0 )% Claims liabilities - The changes in the provision for unpaid claims, net of amounts recoverable from reinsurers, for the three month periods ended March 31, 2014 and March 31, 2013 were as follows: 33-------------------------------------------------------------------------------- Table of Contents March 31, 2014 December 31, 2013 Unpaid claims, beginning of period $ 101,385 $ 70,067 Less: reinsurance recoverable 12,225 5,680 Net beginning unpaid claims reserves 89,160 64,387 Net reserves acquired - 29,923 Incurred related to: Current year 14,129 45,604 Prior years (210 ) 8 13,919 45,612 Paid related to: Current year 2,189 12,874 Prior years 12,653 37,888 14,842 50,762 Net unpaid claims, end of period 88,237 89,160 Add: reinsurance recoverable 11,942 12,225 Unpaid claims, end of period $ 100,179 $ 101,385 The process of establishing the estimated provision for unpaid claims is complex and imprecise as it relies on the judgment and opinions of a large number of individuals, on historical precedent and trends, on prevailing legal, economic, social and regulatory trends and on expectations as to future developments. The process of determining the provision necessarily involves risks that the actual results will deviate, perhaps substantially, from the best estimates made. The reduction of the provision for unpaid claims is consistent with the change in written premium in prior years. However, because the establishment of reserves is an inherently uncertain process involving estimates, current provisions may not be sufficient. Adjustments to reserves, both positive and negative, are reflected quarterly in the statement of income as estimates are updated. Due to Reinsurers The decrease in due to reinsurers is consistent with the payout patterns of the underlying claims liabilities. Restructuring We incurred $337,000 in one-time employee termination costs during the three month period ended March 31, 2013, plans for which were formulated in the same period. This expense is included in "Other Underwriting Expenses" on the Condensed Consolidated Statements of Income and Comprehensive Income. The objective of the restructuring is to eliminate managerial and staff positions deemed duplicative subsequent to the acquisition. $337,000 represents the entirety of the expected expense related to this plan. We expect the impact of the restructuring on future results of operations, liquidity and sources and uses of capital resources to be favorable. Off-balance sheet arrangements As of March 31, 2014, Atlas has the following cash obligations related to its operating leases: Operating Lease Commitments (in '000s) Year 2014 2015 2016 2017 2018 & Beyond Total Amount $ 873 $ 1,186 $ 845 $ 281 $ - $ 3,185 Shareholders' Equity The table below identifies changes in shareholders' equity for the three month periods ended March 31, 2014 and March 31, 2013: 34-------------------------------------------------------------------------------- Table of Contents |