Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended:
 
COMMISSION FILE NUMBER:
March 31, 2015
 
000-54627
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.)
 
 
150 NW POINT BOULEVARD
  
60007
Elk Grove Village, IL
  
(Zip Code)
(Address of principal executive offices)
  
 
Registrant’s telephone number, including area code: (847) 472-6700

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes   þ    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:
      Large Accelerated Filer ¨                              Accelerated Filer          þ
        
Non-Accelerated Filer ¨                              Smaller Reporting Company     ¨
(do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes   ¨    No   þ

There were 11,978,993 shares of the Registrant's common stock outstanding as of May 7, 2015 , of which 11,846,130 are ordinary voting common shares and 132,863 are restricted voting common shares. Of the Registrant's ordinary voting common shares outstanding, 10,596,219 shares as of May 7, 2015 were held by non-affiliates of the Registrant.

For purposes of the foregoing calculation only, 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.


Table of Contents

ATLAS FINANCIAL HOLDINGS, INC.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
March 31, 2015

 
 
 
 
 
 
 
 
 
 
 
 
 
Item 3. Quantitative and Qualitative Disclosures About Market Risk
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




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Table of Contents

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.

ATLAS FINANCIAL HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(in '000s of US dollars, except for share and per share data)

March 31, 2015 (unaudited)
December 31,
2014
Assets
 
 
Investments, available for sale
 
 
     Fixed income securities, at fair value (amortized cost $167,873 and $126,701)
$
169,713

$
126,949

     Equity securities, at fair value (cost $2,970 and $2,220)
2,848

2,093

     Other investments
15,080

14,366

          Total Investments
187,641

143,408

Cash and cash equivalents
24,149

36,586

Accrued investment income
1,024

660

Accounts receivable and other assets (net of allowance of $705 and $560)
75,113

49,770

Reinsurance recoverables on amounts paid
3,198

2,230

Reinsurance recoverables on amounts unpaid
29,156

18,421

Prepaid reinsurance premiums
9,128

3,628

Deferred policy acquisition costs
11,201

8,166

Deferred tax asset, net
17,393

17,317

Intangible assets
5,916

740

Software and office equipment, net
2,683

2,819

Assets held for sale
166

166

          Total Assets
$
366,768

$
283,911

 
 
 
Liabilities
 
 
Claims liabilities
$
130,440

$
102,430

Unearned premiums
92,718

58,950

Due to reinsurers and other insurers
7,349

2,456

Note payable
2,000

—

Other liabilities and accrued expenses
16,298

10,676

          Total Liabilities
$
248,805

$
174,512

 
 
 
Shareholders’ Equity
 
 
Preferred shares, par value per share $0.001, 100,000,000 shares authorized, 6,940,500 shares issued and outstanding at March 31, 2015 and 2,000,000 shares issued and outstanding at December 31, 2014. Liquidation value $1.00 per share
$
6,941

$
2,000

 
 
 
Ordinary voting common shares, par value per share $0.003, 266,666,667 shares authorized, 11,846,130 shares issued and outstanding at March 31, 2015 and 11,638,723 shares issued and outstanding at December 31, 2014
36

34

 
 
 
Restricted voting common shares, par value per share $0.003, 33,333,334 shares authorized, 132,863 shares issued and outstanding at March 31, 2015 and December 31, 2014
—

—

 
 
 
Additional paid-in capital
196,510

196,079

Retained deficit
(86,657
)
(88,794
)
Accumulated other comprehensive income, net of tax
1,133

80

          Total Shareholders’ Equity
$
117,963

$
109,399

          Total Liabilities and Shareholders’ Equity
$
366,768

$
283,911


See accompanying Notes to Condensed Consolidated Financial Statements.

1
Table of Contents



ATLAS FINANCIAL HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(in '000s of US dollars, except for share and per share data)
 
Three Month Periods Ended
 
March 31, 2015 (unaudited)
March 31, 2014 (unaudited)
Net premiums earned
$
30,167

$
21,954

Net investment income
520

779

Net realized investment gains (losses)
137

(11
)
Other income
32

2

Total revenue
30,856

22,724

Net claims incurred
16,932

13,919

Acquisition costs
3,918

3,090

Other underwriting expenses
4,554

3,523

Expenses incurred related to Anchor acquisition and Gateway stock purchase agreement
1,692

—

Total expenses
27,096

20,532

Income from operations before income tax expense
3,760

2,192

Income tax expense
1,623

—

Net income attributable to Atlas
2,137

2,192

Less: Preferred share dividends
35

23

Net income attributable to common shareholders
$
2,102

$
2,169

 
 
 
Basic weighted average common shares outstanding
11,850,848

9,498,995

Earnings per common share, basic
$
0.18

$
0.23

Diluted weighted average common shares outstanding
12,624,789

9,883,555

Earnings per common share, diluted
$
0.17

$
0.22

 
 
 
Consolidated Statements of Comprehensive Income
 
 
 
 
 
Net income attributable to Atlas
$
2,137

$
2,192

 
 
 
Other comprehensive income (loss):
 
 
Changes in net unrealized investment gains
1,590

1,268

Reclassification to income of net realized investment gains
6

38

Effect of income tax
(543
)
(444
)
Other comprehensive income for the period
1,053

862

Total comprehensive income
$
3,190

$
3,054


See accompanying Notes to Condensed Consolidated Financial Statements.


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Table of Contents


ATLAS FINANCIAL HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(in '000s of US dollars, except for share and per share data)
 
Preferred Shares
Ordinary Voting Common Shares
Restricted Voting Common Shares
Additional Paid-in Capital
Retained Deficit
Accumulated Other Comprehensive Income/(Loss)
Total
Balance December 31, 2013
$
2,000

$
28

$
—

$
169,595

$
(106,496
)
$
(1,429
)
$
63,698

Net income
 
 
 
 
2,192

 
2,192

Other comprehensive income
 
 
 
 
 
862

862

Share-based compensation
 
1

 
642

 
 
643

Balance March 31, 2014 (unaudited)
$
2,000

$
29

$
—

$
170,237

$
(104,304
)
$
(567
)
$
67,395

 
 
 
 
 
 
 
 
Balance December 31, 2014
$
2,000

$
34

$
—

$
196,079

$
(88,794
)
$
80

$
109,399

Net income
 
 
 
 
2,137

 
2,137

Issuance of preferred shares
4,941

 
 
 
 
 
4,941

Other comprehensive income
 
 
 
 
 
1,053

1,053

Share-based compensation
 
2

 
431

 
 
433

Balance March 31, 2015 (unaudited)
$
6,941

$
36

$
—

$
196,510

$
(86,657
)
$
1,133

$
117,963


See accompanying Notes to Condensed Consolidated Financial Statements.


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Table of Contents

ATLAS FINANCIAL HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in '000s of US dollars, except for share and per share data)
 
Three Month Periods Ended
 
March 31, 2015 (unaudited)
 
March 31, 2014 (unaudited)
Operating activities:
 
 
 
Net income
$
2,137

 
$
2,192

Adjustments to reconcile net income to net cash (used in) provided by operating activities:
 
 
 
Amortization of fixed assets
200

 
217

Share-based compensation expense
433

 
642

Amortization of deferred gain on sale of headquarters building
(11
)
 
(11
)
Deferred income taxes
(11
)
 
(415
)
Net realized (gains) losses
(137
)
 
11

Gain in equity of investees
(28
)
 
(137
)
Amortization of bond premiums and discounts
291

 
230

Subsequent costs related to Gateway acquisition
941

 
—

Net changes in operating assets and liabilities (net of acquisition):
 
 
 
Accounts receivable and other assets, net
(12,110
)
 
(7,191
)
Due from reinsurers and other insurers
676

 
867

Deferred policy acquisition costs
(1,206
)
 
(866
)
Other assets and accrued investment income
(1
)
 
(19
)
Claims liabilities
(2,722
)
 
(1,206
)
Unearned premiums
10,791

 
7,069

Due to reinsurers and other insurers
110

 
(48
)
Accounts payable and accrued liabilities
(296
)
 
792

Net cash flows (used in) provided by operating activities
(943
)
 
2,127

 
 
 
 
Investing activities:
 
 
 
Purchase of subsidiary (net of cash acquired)
(10,956
)
 
—

Purchases of:
 
 
 
Fixed income securities
(7,421
)
 
(4,850
)
Equity securities
(750
)
 
—

Other investments
(686
)
 
(2,000
)
Property, equipment and other
(41
)
 
(416
)
Proceeds from sale and maturity of:
 
 
 
Fixed income securities
6,360

 
5,654

Equity securities
—

 
12

Property, equipment and other
—

 
10

Net cash flows used in investing activities
(13,494
)
 
(1,590
)
 
 
 
 
Financing activities:
 
 
 
Proceeds from notes payable
2,000

 
—

Share-based compensation
—

 
1

Net cash flows provided by financing activities
2,000

 
1

 
 
 
 
Net change in cash and cash equivalents
(12,437
)
 
538

 
 
 
 
Cash and cash equivalents, beginning of period
36,586

 
9,811

Cash and cash equivalents, end of period
$
24,149

 
$
10,349


4
Table of Contents

 
 
 
 
Supplemental disclosure of cash information (in '000's):
 
 
 
 
 
 
 
Cash paid for:
 
 
 
Income taxes
$
10

 
$
100

 
 
 
 
Supplemental disclosure of noncash investing and financing activities (in '000's):
 
 
 
Issuance of preferred shares related to Anchor acquisition
$
4,000

 
$
—

Issuance of preferred shares related to Gateway stock purchase agreement
941

 
—

See accompanying Notes to Condensed Consolidated Financial Statements.

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Table of Contents

ATLAS FINANCIAL HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

1.
NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Atlas Financial Holdings, Inc. ("Atlas" or the "Company") commenced operations on December 31, 2010. The primary business of Atlas is underwriting commercial automobile insurance in the United States, with a niche market orientation and focus on insurance for the “light” commercial automobile sector. This sector includes taxi cabs, non-emergency para-transit, limousine, livery and business autos. Automobile insurance products provide insurance coverage in three major areas: liability, accident benefits and physical damage. Liability insurance provides coverage, subject to policy terms and conditions where the insured is determined to be responsible and/or liable for an automobile accident, for the payment for injuries and property damage to third parties. Accident benefit policies or personal injury protection policies provide coverage for loss of income, medical and rehabilitation expenses for insured persons who are injured in an automobile accident, regardless of fault. Physical damage coverage subject to policy terms and conditions provides for the payment of damages to an insured automobile arising from a collision with another object or from other risks such as fire or theft. In the short run, automobile physical damage and liability coverage generally provides more predictable results than automobile accident benefit or personal injury insurance.
Atlas' business is carried out through its insurance subsidiaries: American Country Insurance Company (“American Country”), American Service Insurance Company, Inc. (“American Service”), Gateway Insurance Company ("Gateway"), and as of March 11, 2015, Global Liberty Insurance Company of New York ("Global Liberty"), Anchor Group Management, Inc. ("Anchor Management"), 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 Plainview Delaware, "Plainview").
The Insurance Subsidiaries distribute their insurance products through a network of retail independent agents. Together, the Insurance Subsidiaries are licensed to write property and casualty insurance in 49 states and the District of Columbia in the United States. Atlas' core products are actively distributed in 40 of those states plus Washington, D.C. The Insurance Subsidiaries share common management and operating infrastructure.
Atlas' ordinary voting common shares were previously listed on the TSX Venture Exchange (“TSXV”) under the symbol “AFH” from January 6, 2011 to June 4, 2013, when Atlas' application for the voluntary delisting of its ordinary voting common shares from the TSXV was approved.
Atlas ordinary voting common shares became listed on the NASDAQ stock exchange on February 11, 2013, under the same symbol, AFH.
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' common shares to meet certain listing requirements of the NASDAQ Capital Market. Unless otherwise noted, all historical share and per share values in this Quarterly Report on Form 10-Q reflect the one-for-three reverse stock split.
Basis of presentation - These statements have been prepared in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP"). All significant intercompany accounts and transactions have been eliminated. It is the opinion of management that these financial statements reflect all adjustments necessary for a fair statement of the interim results.
The results for the three month period ended March 31, 2015 are not necessarily indicative of the results expected for the full calendar year.
The accompanying unaudited condensed consolidated financial statements, in accordance with Securities and Exchange Commission (“SEC”) rules for interim periods, do not include all of the information and notes required by accounting principles generally accepted in the United States of America for complete financial statements and should be read in conjunction with the Atlas' Annual Report on Form 10-K for the year ended December 31, 2014 , which provides a more complete understanding of the Company’s accounting policies, financial position, operating results, business properties, and other matters.
Seasonality - The property and casualty (P&C) insurance business is seasonal in nature. While Atlas' net premiums earned are generally stable from quarter to quarter, Atlas' gross premiums written follow the common renewal dates for the "light" commercial risks that represent its core lines of business. For example, January 1 and March 1 are common taxi cab renewal dates in Illinois and New York, respectively. Additionally, we implemented our New York “excess taxi program” in the third quarter of 2012, which 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.
The accounting policies followed in these unaudited condensed consolidated financial statements are comparable to those applied in Atlas' audited annual consolidated financial statements in the Annual Report on Form 10-K for the period ended December 31, 2014 . Atlas has consistently applied the same accounting policies throughout all periods presented.

6


2. NEW ACCOUNTING STANDARDS

Except for rules and interpretative releases of the SEC under authority of federal securities laws and a limited number of grandfathered standards, the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") is the sole source of authoritative U.S. GAAP recognized by the FASB that is applicable to the Company. All recently issued accounting pronouncements with effective dates prior to April 1, 2015 have been adopted by the Company. There were no adoptions in 2015 or 2014 that had a material impact on the Consolidated Financial Statements. All other recently issued accounting pronouncements with effective dates after March 31, 2015 are not expected to have a material impact on the Consolidated Financial Statements.
3. ACQUISITION OF ANCHOR HOLDINGS GROUP, INC. ET. AL.
On March 11, 2015, Atlas acquired Anchor Holdings Group, Inc., a privately owned insurance holding company, and its wholly owned subsidiary, Global Liberty, along with its affiliated entities, Anchor Management, and Plainview (collectively "Anchor"), from an unaffiliated third party. 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.
Global Liberty is a New York-based insurance company that was writing approximately $40.0 million of annual taxi and limousine net written premium in states deemed favorable to Atlas at the time of the acquisition. Global Liberty is an admitted carrier in 13 states plus the District of Columbia. Atlas' acquisition of Anchor will expand our distribution channel for core commercial automobile lines and provide incremental licensure as well as important infrastructure in the large New York market.
Under the terms of the stock purchase agreement, the purchase price was based on the combined U.S. GAAP book value of Anchor at December 31, 2014. Additional consideration, principally in the form of preferred shares, may be paid to the seller, or returned to us by the seller, depending upon the future development of Global Liberty’s actual loss reserves for certain lines of business over time.
The total purchase price for the combined entities of Anchor was approximately $23.2 million , consisting of a combination of cash and Atlas preferred shares, and is estimated at 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), subject to future price adjustments, as noted above. We have contractual protections to offset up to $4.0 million of future adverse reserve development. Global Liberty also wrote homeowners insurance in the northeast, which was non-renewed prior to the transaction.
The Anchor acquisition was accounted for using the purchase method. Atlas began consolidating Anchor on March 11, 2015. The following unaudited pro forma summary presents Atlas' consolidated financial information for the three month periods ended March 31, 2015 and 2014 as if Anchor had been acquired on January 1, 2014. These amounts have been calculated after applying the Company's accounting policies had the acquisition been completed on January 1, 2014. These results were prepared for comparative purposes only and do not purport to be indicative of the results of operations that may have actually resulted had the acquisition occurred on the indicated dates, nor are they indicative of potential future operating results of the Company.
(in '000s, except per share information)
Three Month Periods Ended
 
March 31, 2015
March 31, 2014
Revenue
$
36,316

$
31,321

Net income attributable to Atlas 1
$
2,976

$
2,782

Basic earnings per share 1
$
0.25

$
0.29

Diluted earnings per share 1
$
0.23

$
0.27

1 - Excludes expenses incurred in the connection with the Anchor acquisition
The value of certain assets and liabilities acquired are subject to adjustment as additional information is obtained, including, but not limited to, valuation of separately identifiable intangibles, the preferred stock issued to the seller, and deferred taxes. The valuations will be finalized within 12 months of the close of the acquisition (not including loss reserve consideration). The changes upon finalization to the preliminary valuation of assets and liabilities may result in an adjustment to identifiable intangible assets and goodwill. The following table presents assets acquired and liabilities assumed for the Anchor acquisition based on its estimated fair value on March 11, 2015.


7

(in $ '000s)
 
Purchase Consideration
 
Cash
$
19,199

Preferred stock
4,000

Total
$
23,199

 
 
Allocation of Purchase Price
 
 
 
Cash and investments
$
48,508

Other current assets
31,475

Property and equipment
22

Deferred policy acquisition costs
1,828

Deferred tax assets
608

Value of business acquired and identifiable intangibles
5,176

Total Assets
$
87,617

 
 
Claims liabilities
$
30,731

Unearned premiums
22,976

Accounts payable and other liabilities
10,711

Total Liabilities
$
64,418

 
 
Net assets acquired
$
23,199

The acquisition of Anchor resulted in the recognition of intangible assets valued at $5.2 million . Atlas recognized no amortization expense during the three month period ended March 31, 2015 related to intangible assets acquired in the Anchor transaction.
Atlas incurred $750,000 and $694,000 in transaction expenses related to the Anchor acquisition during the first quarter of 2015 and the fourth quarter of 2014, respectively.
4. EARNINGS PER SHARE
Earnings per ordinary voting common share and restricted voting common share (collectively, the "common shares") for the three month periods ended March 31, 2015 and 2014 are as follows:
 
 
Three Month Periods Ended
(in $000's except for share and per share amounts)
March 31, 2015
March 31, 2014
Basic:
 
 
Net income attributable to Atlas
$
2,137

$
2,192

Less: Preferred share dividends
35

23

Net income attributable to common shareholders
$
2,102

$
2,169

 
Weighted average basic common shares outstanding
11,850,848

9,498,995

Basic earnings per common share
$
0.18

$
0.23

Diluted:
 
 
 
Weighted average basic common shares outstanding
11,850,848

9,498,995

Add:




 
Dilutive stock options outstanding
200,497

130,560

 
Preferred shares
573,444

254,000

Dilutive average common shares outstanding
12,624,789

9,883,555

Dilutive earnings per common share
$
0.17

$
0.22

Earnings per diluted common share is computed by dividing net income attributable to Atlas by the weighted average number of common shares outstanding each period plus the incremental number of shares added as a result of converting dilutive potential ordinary voting common shares, calculated using the treasury stock method (or, in the case of the convertible preferred shares, the "if-converted" method). Atlas’ dilutive potential ordinary voting common shares consist of outstanding restricted stock units,

8

stock options to purchase ordinary voting common shares, and preferred shares potentially convertible to ordinary voting common shares at the option of the holders at any date after December 31, 2015 ( 2,940,500 preferred shares at the rate of 0.1270 ordinary voting common shares for each preferred share) and after March 11, 2018 ( 4,000,000 preferred shares at the rate of 0.05 ordinary voting common shares for each preferred share). The effects of these convertible instruments are excluded from the computation of earnings per diluted common share 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 basic earnings per share. In the three month periods ended March 31, 2015 and 2014 , stock options and all of the convertible preferred shares were deemed to be dilutive.
5. INVESTMENTS
The amortized cost, gross unrealized gains and losses and fair value for Atlas’ investments in fixed maturities, equity investments and other investments are as follows. Atlas' other investments are comprised of various limited partnerships that invest in income-producing real estate, equities, or catastrophe bonds. Atlas' interests in these investments are not deemed minor, and as a result, the Company uses the equity method of accounting. As of March 31, 2015 , the carrying values of these other investments were approximately $15.1 million versus approximately $14.4 million as of December 31, 2014 . 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 dividends on a routine basis that approximate the income earned on the limited partnership that invests in income-producing real estate.
The amortized cost, gross unrealized gains and losses and fair value for Atlas’ investments in fixed maturities, equities and other investments are as follows (all amounts in '000s):
As of March 31, 2015
Amortized Cost
Gross Unrealized Gains
Gross Unrealized Losses
Fair Value
Fixed Income:
 
 
 
 
U.S.
Government
$
35,378

$
187

$
(68
)
$
35,497

 
Corporate
 
 
 
 
 
Banking/financial services
25,153

415

(10
)
25,558

 
Consumer goods
8,881

129

(3
)
9,007

 
Capital goods
17,001

473

(14
)
17,460

 
Energy
5,535

67

(60
)
5,542

 
Telecommunications/utilities
10,419

172

(8
)
10,583

 
Health care
2,736

22

—

2,758

 
Total Corporate
69,725

1,278

(95
)
70,908

 
Mortgage backed - agency
30,770

424

(37
)
31,157

 
Mortgage backed - commercial
17,670

240

(134
)
17,776

 
Total Mortgage backed
48,440

664

(171
)
48,933

 
Other asset backed
14,330

51

(6
)
14,375

Total Fixed Income
167,873

2,180

(340
)
169,713

Equities
2,970

111

(233
)
2,848

Other investments
15,080

—

—

15,080

 Totals
$
185,923

$
2,291

$
(573
)
$
187,641


9

As of December 31, 2014
Amortized Cost
Gross Unrealized Gains
Gross Unrealized Losses
Fair Value
Fixed Income:
 
 
 
 
U.S.
Government
$
20,506

$
32

$
(159
)
$
20,379

 
Corporate
 
 
 
 
 
Banking/financial services
15,551

215

(31
)
15,735

 
Consumer goods
3,478

50

(13
)
3,515

 
Capital goods
14,285

354

(52
)
14,587

 
Energy
2,829

—

(84
)
2,745

 
Telecommunications/utilities
5,297

67

(8
)
5,356

 
Health care
1,948

—

(16
)
1,932

 
Total Corporate
43,388

686

(204
)
43,870

 
Mortgage backed - agency
30,772

250

(160
)
30,862

 
Mortgage backed - commercial
16,774

79

(269
)
16,584

 
Total Mortgage backed
47,546

329

(429
)
47,446

 
Other asset backed
15,261

20

(27
)
15,254

Total Fixed Income
126,701

1,067

(819
)
126,949

Equities
2,220

12

(139
)
2,093

Other investments
14,366

—

—

14,366

 Totals
$
143,287

$
1,079

$
(958
)
$
143,408

The following tables summarize carrying amounts of fixed income securities by contractual maturity. As certain securities and debentures have the right to call or prepay obligations, the actual settlement dates may differ from contractual maturity.
 
One year or
One to five
Five to ten
More than
 
As of March 31, 2015
less
years
years
ten years
Total
Fixed income securities
$
6,274

$
68,524

$
35,715

$
59,200

$
169,713

Percentage of total
3.7
%
40.4
%
21.0
%
34.9
%
100.0
%

One year or
One to five
Five to ten
More than
 
As of December 31, 2014
less
years
years
ten years
Total
Fixed income securities
$
1,875

$
54,349

$
23,166

$
47,559

$
126,949

Percentage of total
1.5
%
42.8
%
18.2
%
37.5
%
100.0
%
Management performs a quarterly analysis of Atlas’ investment holdings to determine if declines in fair value are other than temporary (equities may require more timely review in some cases). The analysis includes some or all of the following procedures as deemed appropriate by management:
◦
identifying all security holdings in unrealized loss positions;
◦
obtaining a valuation analysis from third party investment managers regarding these holdings based on their knowledge, experience and other market-based valuation techniques;
◦
reviewing the trading range of certain securities over the preceding calendar period;
◦
assessing whether declines in market value are other than temporary for debt security holdings based on credit ratings from third party security rating agencies; and
◦
determining the necessary provision for declines in market value that are considered other than temporary based on the analyses performed.
The risks and uncertainties inherent in the assessment methodology utilized to determine declines in market value that are other than temporary include, but may not be limited to, the following:
◦
the opinion of professional investment managers could prove to be incorrect;
◦
the past trading patterns of individual securities may not reflect future valuation trends;
◦
the credit ratings assigned by independent credit rating agencies may prove to be incorrect due to unforeseen or unknown facts related to a company’s financial situation; and
◦
the debt service pattern of non-investment grade securities may not reflect future debt service capabilities and may not reflect a company’s unknown underlying financial problems.

10

There were no other than temporary impairments recorded in the three month periods ended March 31, 2015 and 2014 as a result of the above analysis performed by management. Overall, Atlas' portfolio was in a net unrealized gain position as of March 31, 2015 . This gain was primarily driven by the changes in market values during the first three months of 2015. The total fair value of the securities currently in an unrealized loss position was $37.2 million as of March 31, 2015 with a total temporary impairment relating to unrealized losses of $573,000 . Atlas has the ability and intent to hold these securities 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.
The aging of unrealized losses on the Company's investments in fixed income and equity securities is presented as follows (all amounts in '000s):
 
 
Less Than 12 Months
 
More Than 12 Months
 
Total
As of March 31, 2015
Fair Value
Unrealized Losses
 
Fair Value
Unrealized Losses
 
Fair Value
Unrealized Losses
Fixed Income:
 
 
 
 
 
 
 
 
U.S.
Government
$
4,878

$
(30
)
 
$
5,490

$
(38
)
 
$
10,368

$
(68
)
 
Corporate
 
 
 
 
 
 
 
 
 
Banking/financial services
2,581

(10
)
 
—

—

 
2,581

(10
)
 
Consumer goods
828

(3
)
 
282

—

 
1,110

(3
)
 
Capital goods
1,009

(6
)
 
547

(8
)
 
1,556

(14
)
 
Energy
1,484

(59
)
 
87

(1
)
 
1,571

(60
)
 
Telecommunications/utilities
1,233

(8
)
 
—

—

 
1,233

(8
)
 
Health care
—

—

 
—

—

 
—

—

 
Total Corporate
7,135

(86
)
 
916

(9
)
 
8,051

(95
)
 
Mortgage backed - agency
2,672

(7
)
 
2,266

(30
)
 
4,938

(37
)
 
Mortgage backed - commercial
2,229

(12
)
 
5,085

(122
)
 
7,314

(134
)
 
Total Mortgage backed
4,901

(19
)
 
7,351

(152
)
 
12,252

(171
)
 
Other asset backed
4,346

(5
)
 
1,000

(1
)
 
5,346

(6
)
Total Fixed Income
$
21,260

$
(140
)
 
$
14,757

$
(200
)
 
$
36,017

$
(340
)
Equities
1,166

(233
)
 
—

—

 
1,166

(233
)
Totals
$
22,426

$
(373
)
 
$
14,757

$
(200
)
 
$
37,183

$
(573
)

11

 
 
Less Than 12 Months
 
More Than 12 Months
 
Total
As of December 31, 2014
Fair Value
Unrealized Losses
 
Fair Value
Unrealized Losses
 
Fair Value
Unrealized Losses
Fixed Income:
 
 
 
 
 
 
 
 
U.S.
Government
$
2,228

$
(3
)
 
$
9,395

$
(156
)
 
$
11,623

$
(159
)
 
Corporate
 
 
 
 
 
 
 
 
 
Banking/financial services
3,298

(14
)
 
1,523

(17
)
 
4,821

(31
)
 
Consumer goods
269

—

 
714

(13
)
 
983

(13
)
 
Capital goods
2,599

(19
)
 
1,543

(33
)
 
4,142

(52
)
 
Energy
2,583

(82
)
 
86

(2
)
 
2,669

(84
)
 
Telecommunications/utilities
1,371

(7
)
 
168

(1
)
 
1,539

(8
)
 
Health care
1,443

(10
)
 
488

(6
)
 
1,931

(16
)
 
Total Corporate
11,563

(132
)
 
4,522

(72
)
 
16,085

(204
)
 
Mortgage backed - agency
4,196

(28
)
 
9,202

(132
)
 
13,398

(160
)
 
Mortgage backed - commercial
1,409

(5
)
 
9,781

(264
)
 
11,190

(269
)
 
Total Mortgage backed
5,605

(33
)
 
18,983

(396
)
 
24,588

(429
)
 
Other asset backed
10,021

(27
)
 
—

—

 
10,021

(27
)
Total Fixed Income
$
29,417

$
(195
)
 
$
32,900

$
(624
)
 
$
62,317

$
(819
)
Equities
1,230

(139
)
 
—

—

 
1,230

(139
)
Totals
$
30,647

$
(334
)
 
$
32,900

$
(624
)
 
$
63,547

$
(958
)
The following table summarizes the components of net investment income for the three month periods ended March 31, 2015 and 2014 (all amounts in '000s):
 
Three Month Periods Ended
 
March 31, 2015
March 31, 2014
Total investment income
 
 
   Interest income
$
592

$
701

   Dividends
29

—

   Income from other investments
53

187

Investment expenses
(154
)
(109
)
Net investment income
$
520

$
779

The following table summarizes the components of net investment gains (losses) for the three month periods ended March 31, 2015 and 2014 (all amounts in '000's):
 
 
Three Month Periods Ended
 
March 31, 2015
March 31, 2014
Fixed income securities
$
137

$
(17
)
Equities
—

6

Net realized investment gains (losses)
$
137

$
(11
)
Collateral pledged:
As of March 31, 2015 and as of December 31, 2014 , bonds and term deposits with a fair value of $15.8 million and $14.5 million , respectively, were on deposit with state and provincial regulatory authorities. Also, from time to time, the Company pledges securities to third parties to collateralize liabilities incurred under its policies of insurance. As of March 31, 2015 and as of December 31, 2014 , the amount of such pledged securities was $6.9 million and $6.8 million , respectively. Collateral pledging transactions are conducted under terms that are common and customary to standard collateral pledging and are subject to the Company’s standard risk management controls. These assets and investment income related thereto remain the property of the Company while pledged. Neither the state, provincial regulatory authorities nor any other third party has the right to re-pledge or sell said securities held on deposit.


12

6. FINANCIAL AND CREDIT RISK MANAGEMENT
At March 31, 2015 , Atlas' allowance for bad debt was $705 ,000. Atlas increased its allowance for doubtful accounts by $145 ,000 in the three month period ended March 31, 2015 compared to the balance at December 31, 2014 . This increase consists of : 1) an increase of $ 22,000 related to the run-off worker's compensation program write-offs, 2) an increase of $32,000 related to the Anchor acquisition and 3) an increase of $ 91,000 related to the formulaic modeling correlating to the changes in accounts receivable balances in our core lines during the three month period ended March 31, 2015 .
Fair value - Fair value amounts represent estimates of the consideration that would currently be agreed upon between knowledgeable, willing parties who are under no compulsion to act.
Atlas records the available for sale securities held in its securities portfolio at their fair value. Atlas primarily uses the services of external securities pricing vendors to obtain these values. The securities are valued using quoted market prices or prices established using observable market inputs. In volatile market conditions, these quoted market prices or observable market inputs can change rapidly causing a significant impact on fair value and financial results recorded.
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 following table summarizes Atlas' investments at fair value as of March 31, 2015 and as of December 31, 2014 (all amounts in '000s):
As of March 31, 2015
Level 1
Level 2
Level 3
Total
Fixed income securities
$
21,575

$
148,138

$
—

$
169,713

Equities
2,848

—

—

2,848

Other investments
—

3,436

11,644

15,080

Totals
$
24,423

$
151,574

$
11,644

$
187,641

As of December 31, 2014
Level 1
Level 2
Level 3
Total
Fixed income securities
$
12,608

$
114,341

$
—

$
126,949

Equities
2,093

—

—

2,093

Other investments
—

3,346

11,020

14,366

Totals
$
14,701

$
117,687

$
11,020

$
143,408

The Company's investments in fixed income securities that are classified as Level 1 in the two preceding tables consist only of U.S. Treasury Securities. The Company's investments in equity securities that are classified as Level 1 in the two preceding tables consist of investments in publicly-traded common stocks.
The Company's investments in fixed income securities that are classified as Level 2 in the two preceding tables consist of investments in corporate bonds, states and political subdivisions bonds and mortgage-backed securities of U.S. government agencies and other asset-backed bonds. The Company's other investments that are classified as Level 2 consist of a limited partnership that invests in equities.
For securities classified as Level 3, the Company uses valuations provided by third party fund managers. These valuations are typically the audited net book value for each limited partnership. These limited partnerships invest in income-producing real estate or catastrophe bonds.
Though Atlas believes its valuation methods are appropriate, the use of different methodologies or assumptions to determine its fair value could result in a different fair value as of March 31, 2015 . Management does not believe that reasonable changes to the inputs to its valuation methodology would result in a significantly higher or lower fair value measurement.
There were no transfers in or out of Level 2 or Level 3 during the three month period ended March 31, 2015 .
Information by security type pertaining to the changes in fair value of the Company's investments classified as Level 3 for the three month periods ended March 31, 2015 and 2014 are presented below (all amounts in '000s):
March 31, 2015
Fixed Income Securities
 
Other Investments
 
Total
Balance at beginning of period
$
—

 
$
11,020

 
$
11,020

Total gains included in:
 
 
 
 
 
Consolidated statement of income
—

 
(62
)
 
(62
)
Purchases
—

 
686

 
686

Balance at end of period
$
—

 
$
11,644

 
$
11,644


13


March 31, 2014
Fixed Income Securities
 
Other Investments
 
Total
Balance at beginning of period
$
617

 
$
1,234

 
$
1,851

Total gains included in:
 
 
 
 
 
Consolidated statement of income
96

 
133

 
229

Balance at end of period
$
713

 
$
1,367

 
$
2,080

Capital management - The Company manages capital using both regulatory capital measures and internal metrics. The Company’s capital is primarily derived from common shareholders’ equity, retained deficit and accumulated other comprehensive income (loss).
As a holding company, Atlas could derive cash from its Insurance Subsidiaries generally in the form of dividends to meet its obligations, which will primarily consist of operating expense payments and debt payments. Atlas’ Insurance Subsidiaries fund their obligations primarily through premium and investment income and maturities in the securities portfolio. The Insurance Subsidiaries require regulatory approval for the return of capital and, in certain circumstances, prior to the payment of dividends. In the event that dividends available to the holding company are inadequate to cover its operating expenses and debt payments, the holding company would need to raise capital, sell assets or incur future debt.
The Insurance Subsidiaries must each maintain a minimum statutory capital and surplus of $1.5 million , $2.4 million and $3.5 million under the provisions of the Illinois Insurance Code, the Missouri Insurance Code and New York Insurance Code, respectively. Dividends may only be paid from statutory unassigned surplus, and payments may not be made if such surplus is less than a stipulated amount. The dividend restriction is the greater of statutory net income or 10% of total statutory capital and surplus.
At March 31, 2015 our Insurance Subsidiaries had a combined statutory surplus of $80.8 million and had combined net written premiums and combined statutory net income for the three months ended March 31, 2015 of $48.7 million and $1.6 million , respectively.
At December 31, 2014 , American Country, American Service and Gateway had a combined statutory surplus of $63.0 million and had combined net written premiums and combined statutory net income for the twelve months ended December 31, 2014 of $111.4 million and $7.6 million , respectively.
Atlas did not declare or pay any dividends to its common shareholders during the three month period ended March 31, 2015 or in the year ended December 31, 2014 .
7. INCOME TAXES
Atlas' effective tax rate was 43.1% for the three month period ended March 31, 2015 and, due to the partial reversal of the deferred tax valuation allowance during the first quarter of 2014, 0.0% for the three month period ended March 31, 2014 . The below table reconciles the U.S. statutory income tax rate of 34% to the effective tax rate (all amounts in '000s):
 
Three Month Periods Ended
 
March 31, 2015
March 31, 2014
 
Amount
%
Amount
%
Provision for taxes at U.S. statutory marginal income tax rate of 34%
$
1,278

34.0
 %
$
746

34.0
 %
Provision for deferred tax assets deemed unrealizable (valuation allowance)
—

—
 %
(748
)
(34.1
)%
Nondeductible expenses
19

0.5
 %
2

0.1
 %
State tax (net of federal benefit)
15

0.4
 %
—

—
 %
Nondeductible purchase accounting adjustment
320

8.5
 %
—

—
 %
Other
(9
)
(0.3
)%
—

—
 %
Provision for income taxes for continuing operations
$
1,623

43.1
 %
$
—

—
 %

14

Income tax expense consists of the following for the three month periods ended March 31, 2015 and 2014 :
 
Three Month Periods Ended
 
March 31, 2015
March 31, 2014
Current tax expense
$
1,634

$
415

Deferred tax benefit
(11
)
(415
)
Total
$
1,623

$
—

Upon the transaction forming Atlas on December 31, 2010, a yearly limitation as required by U.S. Internal Revenue Code of 1986 (as amended, "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, which could not be utilized by Atlas as a result of this limitation. As a result, Atlas’ ability to recognize future tax benefits associated with a portion of its deferred tax assets generated during prior years has been permanently limited to the amount determined under IRC Section 382. The result is a maximum expected net deferred tax asset that Atlas has available after the merger which is believed more likely than not to be utilized in the future, after consideration of the valuation allowance.
On July 22, 2013, as a result of shareholder activity, a "triggering event" as determined under IRC Section 382 occurred. As a result, under IRC Section 382, the use of the Company's net operating loss and other carryforwards 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 of approximately $14.0 million as of March 31, 2015 .
The components of net deferred income tax assets and liabilities as of March 31, 2015 and December 31, 2014 are as follows (all amounts in '000s):
As of:
March 31, 2015
December 31, 2014
Gross deferred tax assets:
 
 
Unpaid claims and unearned premiums
$
7,722

$
5,560

Loss carryforwards
13,987

14,212

Bad debts
229

191

Other
895

1,266

Total gross deferred tax assets
22,833

21,229

 
 
 
Gross deferred tax liabilities:
 
 
Deferred policy acquisition costs
3,808

2,776

Securities
1,227

740

Other
405

396

Total gross deferred tax liabilities
5,440

3,912

Net deferred tax assets
$
17,393

$
17,317

Amounts and expiration dates of the operating loss carryforwards as of March 31, 2015 are as follows (all amounts in '000s):
Year of Occurrence
Year of Expiration
Amount
2001
2021
$
7,072

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
8,371

2012
2032
2,576

Total
 
$
41,139

Atlas has not established a valuation allowance for its gross future deferred tax assets as of March 31, 2015 or as of December 31, 2014 . Based on Atlas’ expectations of future taxable income, its ability to change its investment strategy, as well as reversing

15

gross future tax liabilities, management believes it is more likely than not that Atlas will fully realize the net future tax assets. The Company, therefore, released its remaining valuation allowance at December 31, 2014 .
Atlas accounts for uncertain tax positions in accordance with the income taxes accounting guidance. Atlas has analyzed filing positions in the federal and state jurisdiction where it is required to file tax returns, as well as the open tax years in these jurisdictions. Atlas believes that its federal and state income tax filing positions and deductions will be sustained on audit and does not anticipate any adjustments that will result in a material change to its financial position. Therefore, no reserves for uncertain federal and state income tax positions have been recorded. Atlas would recognize interest and penalties related to unrecognized tax benefits as a component of the provision for federal income taxes. Atlas did not incur any federal income tax related interest income, interest expense or penalties for the three month periods ended March 31, 2015 and 2014 . Tax years 2009 through 2015 are subject to examination by the Internal Revenue Service ("IRS"). The Company's 2012 tax year is currently under examination by the IRS.
8. COMMITMENTS AND CONTINGENCIES
On May 22, 2012, Atlas closed the sale of its headquarters building to 150 Northwest Point, LLC, a Delaware limited liability company. Atlas recognized a gain on the sale of this property of $213,000 , which will be deferred and recognized over the 5 year lease term. Atlas recognized $11,000 as an offset to rent expense for each of the three month periods ended March 31, 2015 and 2014 . Total rental expense recognized on the headquarters building was $183,000 for each of the three month periods ended March 31, 2015 and 2014 .
As of March 31, 2015 , Atlas has the following future minimum rentals, related principally to office space, required under operating leases (all amounts in '000s):
Year
2015
2016
2017
2018
2019 & Beyond
Total
Amount
$
1,583

$
1,554

$
1,011

$
753

$
2,533

$
7,434

In the ordinary course of its business, Atlas is involved in legal proceedings, including lawsuits, regulatory examinations and inquiries. Based on currently available information, the Company does not believe that it is reasonably possible that any of its pending legal proceedings will have a material effect on the Company's Consolidated Financial Statements.
Atlas is exposed to credit risk on balances receivable from policyholders, agents and reinsurers. Credit exposure to any one individual policyholder is not material. The Company's policies, however, are distributed by agents who may manage cash collection on its behalf pursuant to the terms of their agency agreement. Atlas has policies to evaluate the financial condition of its reinsurers and monitors concentrations of credit risk arising from similar geographic regions, activities, or economic characteristics of the reinsurers to minimize its exposure to significant losses from reinsurers’ insolvency.
Virtually all states require insurers licensed to do business therein to bear a portion of contingent and incurred claim handling expenses and the unfunded amount of “covered” claim and unearned premium obligations of impaired or insolvent insurance companies, either up to the policy's limit, the applicable guaranty fund covered claim 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 written premium”), on all member insurers in the state on the basis of the proportionate share of the premiums written by member insurers in certain covered lines of business in which the impaired, insolvent or failed insurer was engaged.
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 loss 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.
9. SOFTWARE AND OFFICE EQUIPMENT
Atlas held the following internal use software and capital assets as of March 31, 2015 and as of December 31, 2014 , excluding assets held for sale (all amounts in '000s):

16

As of:
March 31, 2015
December 31, 2014
Leasehold improvements
$
501

$
501

Internal use software
7,404

7,372

Computer equipment
1,879

1,844

Furniture and other office equipment
481

397

Total
10,265

10,114

Accumulated depreciation
(7,582
)
(7,295
)
Balance, end of period
$
2,683

$
2,819


Depreciation expense and amortization was $200 ,000 for the three month period ended March 31, 2015 . For the year ended December 31, 2014 , depreciation expense and amortization was $856 ,000.
10. UNDERWRITING POLICY AND REINSURANCE CEDED
Underwriting Risk - Underwriting risk is the risk that the total cost of claims and acquisition expenses will exceed premiums received and can arise from numerous factors, including pricing risk, reserving risk, catastrophic loss risk, reinsurance coverage risk and that loss and loss adjustment expense reserves are not sufficient.
Reinsurance Ceded - As is customary in the insurance industry, Atlas reinsures portions of certain insurance policies it writes, thereby providing a greater diversification of risk and minimizing exposure on larger risks. Atlas remains contingently at risk with respect to any reinsurance ceded and would incur an additional loss if an assuming company were unable to meet its obligation under the reinsurance treaty.
Atlas monitors the financial condition of its reinsurers to minimize its exposure to significant losses from reinsurer insolvencies. Letters of credit are maintained for any unauthorized reinsurer to cover ceded unearned premium, ceded loss reserve balances and ceded paid losses. These policies mitigate the risk of credit quality or dispute from becoming a danger to financial strength. To date, the Company has not experienced any material difficulties in collecting reinsurance recoverables.
Gross premiums written and ceded premiums, losses and commissions for the three month periods ended March 31, 2015 and 2014 are as follows (all amounts in '000s):
 
Three Month Periods Ended
 
March 31, 2015
March 31, 2014
Direct premiums written
$
44,868

$
31,094

Assumed premiums written
105

130

Ceded premiums written
(4,394
)
(2,011
)
Net premiums written
$
40,579

$
29,213

 
 
 
Direct premiums earned
$
34,053

$
24,017

Assumed premiums earned
129

138

Ceded premiums earned
(4,015
)
(2,201
)
Net premiums earned
$
30,167

$
21,954

 
 
 
Ceded losses and loss adjustment expenses
898

620

Ceding commissions
1,170

512

11. UNPAID CLAIMS
Claims liabilities - The changes in the provision for unpaid claims, net of amounts recoverable from reinsurers, for the three month periods ended March 31, 2015 and 2014 were as follows (all amounts in '000s):

17

 
Three Month Periods Ended
 
March 31, 2015
March 31, 2014
Unpaid claims, beginning of period
$
102,430

$
101,385

Less: reinsurance recoverable
18,421

18,144

Net beginning unpaid claims reserves
84,009

83,241

 
 
 
Net reserves acquired
19,396

—

 
 
 
Loss portfolio transfer
(14
)
155

 
 
 
Incurred related to:
 
 
Current year
18,561

14,129

Prior years
(1,629
)
(210
)
 
16,932

13,919

 
 
 
Paid related to:
 
 
Current year
3,144

2,189

Prior years
15,895

12,653

 
19,039

14,842

 
 
 
Net unpaid claims, end of period
101,284

82,473

Add: reinsurance recoverable
29,156

17,706

Unpaid claims, end of period
$
130,440

$
100,179

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 establishment of reserves is an inherently uncertain process involving estimates; and 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.
The favorable development in the three month period ended March 31, 2015 was primarily related to Gateway's commercial auto program. The favorable development in the three month period ended March 31, 2014 was related to a program that remains in run-off.
12. SHARE BASED COMPENSATION
On January 6, 2011, Atlas adopted a stock option plan (the “Stock Option Plan”) in order to advance the interests of Atlas by providing incentives to eligible persons defined in the plan. In the second quarter of 2013, a new equity incentive plan (the “Equity Incentive Plan”) was approved by the Company's common shareholders at the Annual General Meeting, and Atlas ceased to grant new stock options under the preceding Stock Option Plan. The Equity Incentive Plan is a securities based compensation plan, pursuant to which Atlas may issue restricted stock grants for ordinary voting common shares, restricted units, stock grants for ordinary voting common shares, stock options and other forms of equity incentives to eligible persons as part of their compensation. The Equity Incentive Plan is considered an amendment and restatement of the Stock Option Plan, although outstanding stock options issued pursuant to the Stock Option Plan will continue to be governed by the terms of the Stock Option Plan.
Stock options - Stock option activity for the three month periods ended March 31, 2015 and March 31, 2014 follows (prices in Canadian dollars designated with "C$" and United States dollars designated with "US$" ):

18

 
Three Month Periods Ended
 
March 31, 2015
March 31, 2014
C$ Denominated:
Number of Shares
Average Exercise Price
Number of Shares
Average Exercise Price
Outstanding, beginning of period
224,623

C$6.05
224,623

C$6.05
Granted
—

—

—

—

Exercised
—

—

—

—

Outstanding, end of period
224,623

C$6.05
224,623

C$6.05
 
 
 
 
 
 
Three Month Periods Ended
 
March 31, 2015
March 31, 2014
US$ Denominated:
Number of Shares
Average Exercise Price
Number of Shares
Average Exercise Price
Outstanding, beginning of period
175,000

US$13.26
—

—

Granted
200,000

US$20.29
175,000

US$13.26
Exercised
—

—

—

—

Outstanding, end of period
375,000

US$17.01
175,000

US$13.26
There are 252,400 stock options that are exercisable as of March 31, 2015 . The stock option grants outstanding have a weighted average remaining life of 8.39 years , and have an intrinsic value of $3.6 million as of March 31, 2015 .
Restricted shares - The activity for the restricted shares and restricted share units for the three month periods ended March 31, 2015 and 2014 are as follows:
 
Three Month Periods Ended
 
March 31, 2015
March 31, 2014
 
Number of Shares
Weighted Average Fair Value at Grant Date
Number of Shares
Weighted Average Fair Value at Grant Date
Non-vested, beginning of period
185,190

$
12.20

—

$
—

Granted
200,000

17.99

185,190

12.20

Vested
(37,035
)
12.20

—

—

Non-vested, end of period
348,155

$
15.53

185,190

$
12.20

 
 
 
 
 
In accordance with ASC 718 (Stock-Based Compensation), Atlas has recognized stock compensation expense on a straight-line basis over the requisite service period of the last separately vesting portion of the award. Stock compensation expense is a component of other underwriting expenses on the income statement. Atlas recognized $433,000 in stock compensation expense for the three month period ended March 31, 2015 . For the three month period ended March 31, 2014 , we incurred $642,000 of share based compensation expense, $500,000 of which was an amount in excess of the first quarter of 2014 discretionary bonus accrual. Total deferred stock compensation expense of $2.5 million related to all stock option grants and $5.3 million related to restricted shares and restricted share units as of March 31, 2015 . This deferred stock compensation expense will be amortized over the next 59 months.
13. OTHER EMPLOYEE BENEFIT PLANS
Defined Contribution Plan - On March 1, 2011, Atlas formed a defined contribution 401(k) plan covering all qualified employees of Atlas and its subsidiaries. Employees can choose to contribute up to 60% of their annual earnings, but not more than $18,000 for 2015 , to the plan. Qualifying employees age 50 and older can contribute an additional $6,000 during 2015 . Effective April 2014, Atlas matches 100% of the employee contribution up to 2.5% of annual earnings plus 50% of additional contributions up to 2.5% of annual earnings for a total maximum expense of 3.75% of annual earnings per participant. Atlas contributions are discretionary. Employees are 100% vested in their own contributions and vest in Atlas contributions based on years of service equally over 5 years with 100% vested after 5 years . Company contributions were $71,000 and $32,000 for the three month periods ended March 31, 2015 and 2014 , respectively.

19

Employee Stock Purchase Plan - On June 1, 2011, Atlas initiated the Atlas Employee Stock Purchase Plan (the “ESPP”) to encourage continued employee interest in the operation, growth and development of Atlas and to provide an additional investment opportunity to employees. Beginning in June 2011, full time and permanent part time employees working more than 30 hours per week were allowed to invest up to 5% of adjusted salary in Atlas ordinary voting common shares. Effective April 2014, Atlas matches 100% of the employee contribution up to 2.5% of annual earnings plus 50% of additional contributions up to 5% of annual earnings for a total maximum expense of 5% of annual earnings per participant. Atlas also pays all administrative costs related to this plan. Atlas' costs incurred related to the matching portion of the ESPP were $33,000 and $15,000 for the three month periods ended March 31, 2015 and 2014 , respectively. Shares purchased pursuant to this plan are made in the open market.
14. SHARE CAPITAL
The share capital for the common shares is as follows:
 
 
March 31, 2015
December 31, 2014
 
Shares Authorized
Shares Issued and Outstanding
Amount (in '000s)
Shares Issued and Outstanding
Amount (in '000s)
Ordinary Voting Common
266,666,667

11,846,130

$
36

11,638,723

$
34

Restricted Voting Common
33,333,334

132,863

—

132,863

—

Total common shares
300,000,001

11,978,993

$
36

11,771,586

$
34

All of the issued and outstanding restricted voting common shares are beneficially owned or controlled by Kingsway Financial Services, Inc. (including its subsidiaries and affiliated companies, "Kingsway"). The restricted voting common shares are entitled to vote at all meetings of shareholders, except at meetings of holders of a specific class that are entitled to vote separately as a class. The restricted voting common shares as a class shall not carry more than 30% of the aggregate votes eligible to be voted at a general meeting of common shareholders. The restricted voting common shares will convert to ordinary voting common shares in the event that these Kingsway-owned shares are sold to non-affiliates of Kingsway.
There were 29,631 and 37,038 non-vested restricted stock units (RSUs) as of March 31, 2015 and December 31, 2014 , respectively. These RSUs are participative and are included in the computations of earnings per share and book value per share for these periods.
During the three month period ended March 31, 2015, the Company issued 7,407 ordinary voting common shares as a result of the vesting of RSUs and 200,000 non-vested restricted shares to a director and the officers, respectively. These shares were granted and issued under the Company's Equity Incentive Plan.
During the three month period ended March 31, 2015, the Company issued 4,000,000 preferred shares as a portion of the consideration related to the Anchor acquisition and an additional 940,500 preferred shares pursuant to the Gateway stock purchase agreement. At March 31, 2015 there were 6,940,500 preferred shares outstanding. These preferred shares are beneficially owned or controlled by the former parents of Gateway ( 2,940,500 preferred shares) and Anchor ( 4,000,000 preferred shares). The Gateway preferred shares have been recorded as additional acquisition expense and not as an adjustment to goodwill because the fair value of the contingent considered was determined to be zero at the date of the Gateway acquisition. In accordance with U.S. GAAP, such adjustments are reflected in the income statement in the period that the contingency is re-estimated. The estimate of this contingency could change in the future until all remaining claims are settled.
Preferred shareholders are entitled to dividends on a cumulative basis, whether or not declared by the Board of Directors, at the rate of $0.045 per share per year ( 4.5% ) and may be paid in cash or in additional preferred shares at the option of Atlas. In liquidation, dissolution or winding-up of Atlas, preferred shareholders receive the greater of $1.00 per share plus all declared and unpaid dividends or the amount they would receive in liquidation if the preferred shares had been converted to restricted voting common shares or ordinary voting common shares immediately prior to liquidation. Preferred shares are convertible into ordinary voting common shares at the option of the former parents of Gateway and Anchor at any date after the fifth year of issuance at the rate of 0.1270 and .05 , respectively, of ordinary voting common shares for each preferred share. The conversion rate is subject to change if the number of ordinary voting common shares or restricted voting common shares changes by way of an anti-dilution event. The preferred shares are redeemable at the option of Atlas at a price of $1.00 per share plus accrued and unpaid dividends, subject to certain conditions. Preferred shares are not entitled to vote.
During the three month period ended March 31, 2015 , Atlas did not declare or pay dividends earned through the preferred shares. The former parents of Gateway and Anchor earned $25,000 and $10,000 , respectively, in dividends during the three month period ended March 31, 2015 . Through March 31, 2015 , Atlas has accrued $209,000 and $10,000 , respectively in dividends for the former parents of Gateway and Anchor, which remain unpaid.
15. DEFERRED POLICY ACQUISITION COSTS

20

Deferred policy acquisition costs for the three month periods ended March 31, 2015 and March 31, 2014 (in '000s):
 
Three Month Periods Ended
 
March 31, 2015
March 31, 2014
Balance, beginning of period
$
8,166

$
6,674

Acquired in business combination
1,828

—

Acquisition costs deferred
5,125

3,956

Amortization charged to income
3,918

3,090

Balance, end of period
$
11,201

$
7,540

16. RELATED PARTY TRANSACTIONS
The business of Atlas is carried on through its Insurance Subsidiaries, Anchor Management and Plainview (collectively, "Operating Subsidiaries"). Related party transactions, including services provided or received by Atlas’ Operating Subsidiaries are carried out in the normal course of operations and are measured at the amount of consideration paid or received as established and agreed upon by the parties. Such transactions typically include claims handling services, marketing services and commission payments. Management believes that consideration paid for such services approximates fair value.
During the periods presented, a small percentage of the Company’s investment portfolio was allocated to investment vehicles, primarily focused on income generating real estate, that are considered related-party transactions.  In these cases, one or more of the Company’s directors may be deemed to control unrelated entities that may invest in these vehicles and may also manage these vehicles.  In total, such related-party investments were approximately 1% of the Company’s total assets.
17. NOTE PAYABLE
On March 9, 2015, American Insurance Acquisition, Inc. ("American Acquisition") entered into a loan and security agreement (“Loan Agreement”) for a $35.0 million loan facility with Fifth Third Bank. The Loan Agreement includes a $30.0 million line of credit ("Draw amount"), which can be drawn in increments at any time during the first twelve months of the agreement effective date of March 9, 2015. The $30.0 million line of credit has a five year term and bears interest at one-month LIBOR plus 4.5% . The Loan Agreement also includes a $5.0 million revolving line of credit ("Revolver") that bears interest at one month LIBOR plus 2.75% . This $5.0 million revolving line of credit replaces the $10.0 million revolving line of credit American Acquisition previously had in place with Fifth Third Bank.
The Loan Agreement also provides for the issuance of letters of credit in an amount up to $2.0 million outstanding at any time. In addition, there is a non-utilization fee for each of the $30.0 million line of credit and $5.0 million revolving line of credit equal to 0.50% per annum of an amount equal to $30.0 million and $5.0 million , respectively, less the daily average of the aggregate principal amount outstanding under such credit lines (plus, in the case of the $30.0 million line of credit, the aggregate amount of the letter of credit obligations outstanding).
The Loan Agreement requires American Acquisition to comply with customary affirmative and negative covenants, including those governing indebtedness, liens, investments, sales of assets, issuance of securities, and distributions. The Loan Agreement also requires American Acquisition to make mandatory prepayments under certain conditions, and to comply with certain financial covenants, including the ASI Pool Subsidiaries (defined below) maintaining a combined statutory net worth in an amount not less than $60.0 million (subject to adjustment) and maintaining a minimum funded debt to Earnings Before Interest, Taxes, Depreciation and Amortization ratio. The Loan Agreement is secured by substantially all of the property of American Acquisition, including all of the outstanding shares of American Country, American Service and Gateway, which are wholly-owned direct subsidiaries of American Acquisition (the “ASI Pool Subsidiaries”).
As of March 31, 2015 , $2.0 million in funds were accessed from the Revolver and used for the Anchor acquisition. No amounts were accessed against the Draw amount, and no letters of credit were issued under the terms of this Loan Agreement as of March 31, 2015 . For the three month period ended March 31, 2015 , American Acquisition incurred interest expense of $3,000 and bank fees of $15,000 in connection with the Loan Agreement.
18. SUBSEQUENT EVENTS
Effective April 1, 2015, the Company amended its quota share reinsurance contract with Swiss Reinsurance America Corporation ("Swiss Re") by increasing the cession rate from 5% to 15%.
On April 27, 2015, American Acquisition accessed $500,000 from the Revolver with Fifth Third Bank. The funds will be used to support Plainview's operations.

21

On May 1, 2015, American Acquisition accessed $15.5 million from the Draw amount of the line of credit with Fifth Third Bank. The draw will be contributed to the ASI Pool Subsidiaries in exchange for surplus notes that carry a variable interest rate of prime plus 2% with a maturity date of April 30, 2020 .



22


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Section
Description
Page
I.
II.
III.
IV.
V.




23
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 acquisitions; 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, 2014 . 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.
Over the past four 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.

24
Table of Contents

The “light” commercial automobile sector is a subset of the historically profitable commercial automobile insurance industry segment. Commercial automobile insurance has generally outperformed the overall P&C industry over the past ten years based on data compiled by SNL Financial. This data indicates that for 2014 the total U.S. market for commercial automobile liability insurance to be approximately $26 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.
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. No new business will be written in connection with this program in 2015, however, there will be a small amount of renewals recorded in 2015.
Other
The other line of business is comprised of Gateway's truck and workers' compensation programs, Atlas' non-standard personal lines business, Global Liberty's homeowners program and assigned risk business.
The Gateway truck and workers' compensation programs were put into run-off during 2012. The workers' compensation program is 100% reinsured retrospectively and prospectively to an unrelated third party. The Global Liberty homeowners program was non-renewed prior to Atlas' acquisition.
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.
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. Because a portion of our personnel expenses are relatively fixed in nature, increased writings will improve our operating scale and will lead to reduced operating expense ratios.



25
Table of Contents

II. CONSOLIDATED PERFORMANCE
First Quarter 2015 Financial Performance Summary (comparisons to First Quarter 2014 unless otherwise noted):
•
Gross premium written increased by 44.0 %, which included an increase of 48.1 % in our core commercial auto business
•
Including the Global Liberty premium for the full quarter of $14.6 million, proforma gross written premiums were 81.5% higher
•
Operating income was $5.3 million for the three month period ended March 31, 2015 , or $0.42 per diluted share, compared to $2.2 million for the three month period ended March 31, 2014 , or $0.22 per diluted share
•
Atlas issued 940,500 additional preferred shares pursuant to the Gateway stock purchase agreement as a result of favorable loss development of $1.9 million
•
The combined ratio improved by 9.3 percentage points to 84.2%
•
Underwriting results improved by $3.3 million , representing a 235% increase
•
Costs related to acquisitions were $1.7 million for the three month period ended March 31, 2015 , or $0.13 per diluted share; there were no costs related to acquisitions for the three month period ended March 31, 2014
•
For the three month period ended March 31, 2015 , net income was $2.1 million compared to $2.2 million for the three month period ended March 31, 2014
•
Net earnings per diluted common share were $0.17 , after the impact of acquisition related expenses and dilution, representing a $0.05 decrease from first quarter 2014
•
Book value per diluted common share on March 31, 2015 was $9.23 , compared to $9.08 at December 31, 2014 and $6.79 at March 31, 2014
•
Annualized first quarter 2015 return on average common equity ("ROCE") 1 was 7.7% ; excluding acquisition related expenses of $1.7 million and proforma annualized ROCE was 13.9 %

The following financial data is derived from Atlas’ unaudited consolidated financial statements for the three month periods ended March 31, 2015 and 2014 .
Selected financial information (in '000s, except per share values)
 
Three Month Periods Ended
 
March 31, 2015
March 31, 2014
Gross premium written
$
44,973

$
31,224

Net premium earned
30,167

21,954

Losses on claims
16,932

13,919

Acquisition costs
3,918

3,090

Other underwriting expenses
4,554

3,523

Net underwriting income
4,763

1,422

Net investment income
520

779

Income from operating activities, before tax
5,283

2,201

Less: Costs incurred related to acquisitions
1,692

—

Realized gains (losses) and other income
169

(9
)
Net income before tax
3,760

2,192

Income tax expense
1,623

—

Net income
$
2,137

$
2,192

 
 
 
Key Financial Ratios:
 
 
Loss ratio
56.1
%
63.4
%
Acquisition cost ratio
13.0
%
14.1
%
Other underwriting expense ratio
15.1
%
16.0
%
Combined ratio
84.2
%
93.5
%
Return on equity (annualized)
7.5
%
13.4
%
Return on common equity (annualized) 1
7.7
%
13.7
%
Operating income per diluted common share
$
0.42

$
0.22

Earnings per diluted common share
$
0.17

$
0.22

Book value per common shares outstanding
$
9.23

$
6.79

1 - Return on common equity (ROCE) = (net income - preferred dividends) / common equity; this formula is non-U.S. GAAP

26
Table of Contents



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.
First Quarter 2015 compared to First Quarter 2014 :
Atlas’ combined ratio for the three month period ended March 31, 2015 was 84.2 %, compared to 93.5 % for the three month period ended March 31, 2014 .
There was a 48.1 % and a 38.8 % increase in gross and net premium written, respectively, related to core commercial lines for the three month period ended March 31, 2015 compared to the three month period ended March 31, 2014 . The loss ratio improvement in 2015 as compared to 2014 resulted primarily from favorable development on Gateway's commercial auto program. The overall loss ratio for the three month period ended March 31, 2015 improved to 56.1 % from 63.4 % in the three month period ended March 31, 2014 . Excluding the impact of favorable development related to Gateway, the loss ratio in the first quarter of 2015 was 62.3% . The incremental opportunities during 2014 to increase price are expected to continue in 2015 .
Net premium earned increased by 37.4 % in the three month period ended March 31, 2015 to $30.2 million compared to $22.0 million for the three month period ended March 31, 2014 . Global Liberty accounted for $1.8 million of this increase based on premiums earned by that subsidiary from March 11, 2015 through the end of the quarter. The remaining increase in net earned premiums resulted from organic growth primarily in the states of California, Louisiana, Michigan, New York and Washington.
Based on a recent analysis of the niche markets on which we focus, we believe that the total vehicle count has increased approximately 19% in the past two years. At our current rate levels, we believe the size of the addressable market in terms of premium has increased approximately 30% over that same period. We believe that our insurance companies can continue to grow within these specialty segments to a market share of 20% without having a disproportionate share of the market. Atlas’ focus has been, and continues to be, utilizing our expertise, experience and strong value proposition to maximize underwriting profit.  It is important to note that we continue to see favorable market trends within our niche and believe that increased opportunity to expand underwriting margin will exist.  These projections are subject to change should the competitive environment reverse from current trends. ROCE remains our priority, and our objective will always be to deliver better than industry level results based on our specialized focus. At current net written premium to surplus levels, we believe that managing volume, operating margin and financial leverage should result in the maximizing of ROCE and value creation for shareholders. Tools, including our quota share reinsurance program and recently announced credit facility provide important flexibility in this regard.
Atlas generated net investment income of $520 ,000 for the three month period ended March 31, 2015 , as well as $169 ,000 of realized gains and other income. This resulted in a 1.2% annualized yield for the three month period ended March 31, 2015 . The decrease in yield for the three month period ended March 31, 2015 is attributable to the decline in interest rates. Atlas generated net investment income of $779 ,000 for the three month period ended March 31, 2014 , as well as $11 ,000 of realized losses. This resulted in a 2.2% annualized yield for the three month period ended March 31, 2014 .
Overall, Atlas generated net income of $2.1 million for the three month period ended March 31, 2015 . After the dilutive impact of the convertible preferred shares and stock options, earnings per diluted common share in the three month period ended March 31, 2015 was $0.17 . This compares to net income of $2.2 million and earnings per diluted common share of $0.22 in the three month period ended March 31, 2014 .
The decrease in Atlas' net income and the impact on earnings per diluted common share for the three month periods ended March 31, 2015 and 2014 are summarized in the table below:
Net Income (in '000's, except per share values)
 
Three Month Periods Ended
 
March 31, 2015
March 31, 2014
Operating income
$
5,283

$
0.42

$
2,201

$
0.22

Add: Other income
32

—

2

—

Add: Net investment gains (losses)
137

0.01

(11
)
—

Less: expenses incurred related to Anchor acquisition
750

0.06

—

—

Less: expense incurred pursuant to Gateway stock purchase agreement
942

0.07

0

—

Less: income tax expense
1,623

0.13

0

—

Net income
$
2,137

$
0.17

$
2,192

$
0.22


27
Table of Contents

For the three month period ended March 31, 2015 , operating income increased $0.20 per diluted common share primarily due to premium growth and the favorable loss development for Gateway's commercial auto program. The increases in operating income and net investment gains were offset by legal and professional services expenses incurred related to the Anchor acquisition, expenses incurred pursuant to the Gateway stock purchase agreement, and income tax expense.

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 ("DTA").
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, 2014 .
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 creditworthiness 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. As of March 31, 2015 , 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, that the data inputs and the valuation techniques utilized are appropriate and 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 that 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.
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

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security before the anticipated recovery, a loss in the entire amount of the impairment is reflected in net realized gains (losses) on investments in the consolidated statements of income and 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 income and comprehensive 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 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 carryforward 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.
As of March 31, 2015 , there was no valuation allowance recorded against the Company's DTA.

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IV. OPERATING RESULTS
Three month period ended March 31, 2015 compared to three month period ended March 31, 2014 :
Gross Premium Written
Atlas' core business is providing insurance for specialty operators in the public automobile insurance space, specifically users of light vehicles moving passengers for a fare. This business traditionally included taxi, limousine and paratransit operators. Today, it includes other commercially licensed livery operators as well. Each of the specialty business lines on which Atlas’ strategy is focused is a subset of the approximately $26 billion U.S. Commercial Auto industry segment.
There are a number of other programs that were written by our subsidiaries prior to Atlas' acquisition of these companies. These programs are non-core and have been placed into run-off as follows:
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. No new premiums will be written during 2015, however, a small amount of renewal business was recorded for the three month period ended March 31, 2015 . These policies will be non-renewed upon their next anniversary.
The other lines of business in this category are comprised of Gateway's truck and workers' compensation programs, Atlas' non-standard personal lines business, Global Liberty's homeowners program and assigned risk business. The Gateway truck and workers' compensation programs were put into run-off during 2012. The workers' compensation program is 100% reinsured retrospectively and prospectively to an unrelated third party. The Global Liberty homeowners program was non-renewed prior to Atlas' acquisition.
The following table summarizes gross premium written by line of business.
Gross premium written by line of business (in '000s)
 
Three Month Periods Ended
 
March 31, 2015
March 31, 2014
% Change
Commercial automobile
$
44,652

$
30,146

48.1
 %
Surety
200

951

(79.0
)%
Other
121

127

(4.7
)%
 
$
44,973

$
31,224

44.0
 %
For the three month period ended March 31, 2015 , gross premium written was $45.0 million compared to $31.2 million in the three month period ended March 31, 2014 , representing a 44.0 % increase. In the three month period ended March 31, 2015 , gross premium written from commercial automobile was $44.7 million , representing an increase of 48.1% relative to the three month period ended March 31, 2014 . We target primarily owner operators and small fleets within the "light" public commercial auto space. Our gross written premium from these target accounts increased 48.2 % in the first quarter of 2015 as compared to the first quarter of 2014 . For the first quarter of 2015 , the Global Liberty acquisition accounted for 9.4% of the increase in gross premium from commercial automobile business relative to the first quarter of 2014 . The remaining increase in gross written premium for the three month period ended March 31, 2015 resulted from organic growth primarily in the states of California, Louisiana, Michigan, New York and Washington.
 
Geographic Concentration
The following table summarizes gross premium written by state.

30

Gross premium written by state ($ in '000s)
 
Three Month Periods Ended
 
March 31, 2015
March 31, 2014
Illinois
$
9,379

20.9
%
$
9,696

31.1
%
New York
7,912

17.6
%
5,044

16.2
%
Michigan
3,532

7.9
%
2,934

9.4
%
Louisiana
3,322

7.4
%
739

2.4
%
California
2,775

6.2
%
947

3.0
%
Texas
2,348

5.2
%
1,175

3.8
%
Minnesota
1,689

3.8
%
1,503

4.8
%
Nevada
1,550

3.4
%
44

0.1
%
Ohio
1,274

2.8
%
1,134

3.6
%
Oregon
1,055

2.3
%
204

0.6
%
Other
10,137

22.5
%
7,804

25.0
%
Total
$
44,973

100.0
%
$
31,224

100.0
%
This illustrates the geographically balanced growth of our gross premium written this year. Compared to the three month period ended March 31, 2014 , we experienced growth in gross premium written in 28 states in the three month period ended March 31, 2015 . In 11 of those 28 states, we experienced quarter over quarter growth of greater than 100% due to a continuing positive response from both new and existing agents to Atlas' value proposition and the current market environment.
Atlas saw similar geographic diversification in the three month period ended March 31, 2015 compared to the three month period ended March 31, 2014 , where 17 states experienced growth of 50% or more as compared to the prior year period.
Ceded Premium Written
Ceded premium written is equal to premium ceded under the terms of Atlas’ in force reinsurance treaties. Ceded premium written increased by 118.5 % to $4.4 million for the three month period ended March 31, 2015 compared to $2.0 million for the three month period ended March 31, 2014 . The increase in ceded premium written from the prior year first quarter is primarily due to Atlas' participation in a 5% quota share reinsurance agreement for its commercial auto and general liability lines of business, which was implemented as of July 1, 2014. This quota share agreement provides the Company with financial flexibility to manage expected growth and the timing of potential future capital raising activities.
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 38.9% to $40.6 million for the three month period ended March 31, 2015 compared with $29.2 million for the three month period ended March 31, 2014 . 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 $30.2 million in the three month period ended March 31, 2015 , a 37.4% increase compared to $22.0 million in the three month period ended March 31, 2014 . These increases are attributed to the combined effects of the issues cited in the ‘Gross Premium Written’ and ‘Ceded Premium Written’ sections above.
Claims Incurred
The loss ratio relating to the claims incurred for the three month period ended March 31, 2015 was 56.1% compared to 63.4% for the three month period ended March 31, 2014 . The loss ratio improvement relative to prior periods was primarily due to the favorable development on Gateway's commercial auto program creating a 6.3% decrease in loss ratio for the three month period ended March 31, 2015 and better pricing in our core commercial auto lines. 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. The Company is committed to maintaining and building on this underwriting and claim handling expertise as a core competency as the volume of business continues to increase. Excluding the favorable development related to Gateway, the loss ratio in the first quarter of 2015 was 62.3%.
Acquisition Costs
Acquisition costs represent commissions and taxes incurred on net premium earned. Acquisition costs were $3.9 million in the three month period ended March 31, 2015 , or 13.0% of net premium earned, as compared to 14.1% in the three month period ended March 31, 2014 . The decrease in the ratio is the result of Atlas' participation in a quota share reinsurance agreement for its commercial auto and general liability lines of business, which was implemented as of July 1, 2014.
Other Underwriting Expenses

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The other underwriting expense ratio was 15.1% in the three month period ended March 31, 2015 compared to 16.0% in the three month period ended March 31, 2014 . The decrease in the other underwriting expense ratio is primarily related to the premium growth.
Also, while the Company's quota share agreement provides a ceding commission to offset underwriting expense, this commission reduces acquisition costs rather than other underwriting expense on the income statement. With this in mind, acquisition costs and other underwriting expenses should be examined collectively to understand operating efficiency.
The underwriting expense ratio includes share based compensation expenses. The table below indicates the amount at which other underwriting expenses and combined ratio are impacted by share based compensation expenses.
(in '000s, percentages to net earned premiums)
Three Month Periods Ended
 
March 31, 2015
March 31, 2014
Other underwriting expenses before share based compensation expenses
$
4,181

13.9
%
$
2,881

13.1
%
Share based compensation expenses
373

1.2
%
642

2.9
%
Other underwriting expenses
$
4,554

15.1
%
$
3,523

16.0
%
For the three month period ended March 31, 2014, we incurred $642,000 of share based compensation expense, $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 .
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.
Atlas’ combined ratios for the three month periods ended March 31, 2015 and 2014 are summarized in the table below. 2015 combined ratio improvement is attributable to the factors described in the ‘Net Premium Earned’, ‘Claims Incurred’, ‘Acquisition Costs’, and ‘Other Underwriting Expenses’ sections above.
Combined Ratios (in '000s)
 
Three Month Periods Ended
 
March 31, 2015
March 31, 2014
Net premium earned
$
30,167

$
21,954

Underwriting expenses 1
25,404

20,532

Combined ratio
84.2
%
93.5
%
1 - Underwriting expenses are the combination of claims incurred, acquisition costs, and other underwriting expenses
Net Investment Income
The following table summarizes investment results for the three month periods ended March 31, 2015 and 2014 (in '000s except percentages):
 
Three Month Periods Ended
 
March 31, 2015
March 31, 2014
Average securities at cost
$
210,614

$
142,858

Interest income after expenses
$
438

$
592

Percent earned on average investments (annualized)
1.0
%
2.2
%
Net realized gains (losses)
$
137

$
(11
)
Dividend income
29

—

Equity in investees
53

187

Net investment income
$
657

$
768

Total realized yield (annualized)
1.2
%
2.2
%
Investment income (excluding net realized gains (losses)) decreased by 33.3% to $520 ,000 in the three month period ended March 31, 2015 , compared to $779 ,000 in the three month period ended March 31, 2014 . These amounts are primarily comprised of interest income. The annualized realized yield on invested assets was 1.2% for the three month period ended March 31, 2015 and 2.2% for the three month period ended March 31, 2014 . The decreases in net investment income and total realized yield from the prior year period are the result of the maturity of an accretive security occurring in 2014 and a decrease in performance on other

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investments offset by an increase in realized gains from the prior year period. The increase in average securities at cost is the result of the invested assets obtained with the Anchor acquisition.
Net Realized Investment Gains (Losses)
Net realized investment gains in the three month period ended March 31, 2015 were $137 ,000 compared to net realized investment losses of $11 ,000 in the three month period ended March 31, 2014 . The difference is the result of management's decision to sell certain securities in the first quarter of 2015 to take advantage of favorable market conditions.
Other Income
Atlas recorded other income of $32,000 in the three month period ended March 31, 2015 and $2,000 for the three month period ended March 31, 2014 . This increase is primarily the result of Plainview's fee income.
Costs Related to Acquisitions
Atlas recorded total expenses of $1.7 million related to the acquisition of Anchor and pursuant to the contingent adjustments relative to the Gateway stock purchase agreement. The Anchor costs of $750,000 were incurred to effect the business combination including legal fees, advisory services, accounting fees, and internal general and administrative costs. The Gateway expense of $941,900 related to the terms of the Gateway stock purchase agreement and the issuance of preferred shares pursuant to the terms of such agreement and is subject to adjustment in future periods.
Income before Income Taxes
Atlas generated pre-tax income of $3.8 million in the three month period ended March 31, 2015 , compared to pre-tax income of $2.2 million in the three month period ended March 31, 2014 , or a 71.5% increase over the prior year-to-date period. The causes of these changes are attributed to the combined effects of the issues cited in the ‘Net Premium Earned’, ‘Claims Incurred’, 'Acquisition Costs', 'Other Underwriting Expenses', 'Net Investment Income', 'Net Realized Investment Gains', and 'Other Income' sections above.
Income Tax Expense
Atlas recognized tax expense of $1.6 million in the three month period ended March 31, 2015 compared to $0 in the three month period ended March 31, 2014 . The Company was able to utilize deferred tax benefits to fully offset current income tax expense in the first quarter of 2014 . The following table reconciles the statutory U.S. Federal tax rate of 34.0% to the actual effective tax rate for the three month periods ended March 31, 2015 and 2014 :
Tax Rate Reconciliation (in '000s)
 
Three Month Periods Ended
 
March 31, 2015
March 31, 2014
 
Amount
%
Amount
%
Provision for taxes at U.S. statutory marginal income tax rate of 34%
$
1,278

34.0
 %
$
746

34.0
 %
Provision for deferred tax assets deemed unrealizable (valuation allowance)
—

—
 %
(748
)
(34.1
)%
Nondeductible expenses
19

0.5
 %
2

0.1
 %
State tax (net of federal benefit)
15

0.4
 %
—

—
 %
Nondeductible purchase accounting adjustment
320

8.5
 %
—

—
 %
Other
(9
)
(0.3
)%
—

—
 %
Provision for income taxes for continuing operations
$
1,623

43.1
 %
$
—

—
 %
Net Income and Earnings per Common Share
Atlas had net income of $2.1 million during the three month period ended March 31, 2015 compared to $2.2 million during the three month period ended March 31, 2014 . After taking the impact of the liquidation preference of the preferred shares into consideration, earnings per diluted common share in the three month period ended March 31, 2015 was $0.17 compared to $0.22 in the three month period ended March 31, 2014 . For the three month period ended March 31, 2015 , operating income increased $0.20 per diluted common share primarily due to premium growth and the favorable loss development for Gateway's commercial auto program. The increases in operating income and net investment gains were offset by legal and professional services expenses incurred related to the Anchor acquisition, expenses incurred pursuant to the Gateway stock purchase agreement, and income tax expense.
For the three month period ended March 31, 2015 , there were 11,850,848 weighted average common shares outstanding used to compute basic earnings per share and 12,624,789 used for earnings per diluted common share. For the three month period ended

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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 earnings per diluted common share.
The following chart illustrates Atlas’ potential dilutive common shares for the three month periods ended March 31, 2015 and 2014 :
 
Three Month Periods Ended
 
March 31, 2015
March 31, 2014
Weighted average common shares outstanding
11,850,848

9,498,995

Dilutive potential ordinary shares:
 
 
Dilutive stock options
200,497

130,560

Dilutive shares upon preferred share conversion
573,444

254,000

Dilutive average common shares outstanding
12,624,789

9,883,555

Operating Income
Operating income is an internal performance measure used in the management of the Company's operations. It represents before-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.
The components of Atlas' operating income and the impact on earnings per diluted common share for the three month periods ended March 31, 2015 and 2014 are summarized in the table below:
Operating Income (in '000's, except per share values)
 
Three Month Periods Ended
 
March 31, 2015
March 31, 2014
U.S. GAAP net income
$
2,137

$
0.17

$
2,192

$
0.22

Add: income tax expense
1,623

0.13

—

—

Add: expenses incurred related to Anchor acquisition
750

0.06

—

—

Add: expenses incurred related to Gateway stock purchase agreement
942

0.07

—

—

Less: net investment gains (losses)
137

0.01

(11
)
—

Less: other income
32

—

2

—

Operating income
$
5,283

$
0.42

$
2,201

$
0.22

The increase in operating income is attributable to the factors described in the ‘Net Premium Earned’, ‘Claims Incurred’, ‘Acquisition Costs’, ‘Other Underwriting Expenses', and 'Net Investment Income' sections above.

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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 a portion of the portfolio in 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 $187.6 million as of March 31, 2015 , 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, equity, and other investments by type and sector are as follows (all amounts in '000s):
Fair value of securities portfolio (in '000s)
As of March 31, 2015
Amortized Cost
Gross Unrealized Gains
Gross Unrealized Losses
Fair Value
Fixed Income:
 
 
 
 
U.S.
Government
$
35,378

$
187

$
(68
)
$
35,497

 
Corporate
 
 
 
 
 
Banking/financial services
25,153

415

(10
)
25,558

 
Consumer goods
8,881

129

(3
)
9,007

 
Capital goods
17,001

473

(14
)
17,460

 
Energy
5,535

67

(60
)
5,542

 
Telecommunications/utilities
10,419

172

(8
)
10,583

 
Health care
2,736

22

—

2,758

 
Total Corporate
69,725

1,278

(95
)
70,908

 
Mortgage backed - agency
30,770

424

(37
)
31,157

 
Mortgage backed - commercial
17,670

240

(134
)
17,776

 
Total Mortgage backed
48,440

664

(171
)
48,933

 
Other asset backed
14,330

51

(6
)
14,375

Total Fixed Income
167,873

2,180

(340
)
169,713

Equities
2,970

111

(233
)
2,848

Other investments
15,080

—

—

15,080

 Totals
$
185,923

$
2,291

$
(573
)
$
187,641

                       

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Table of Contents

As of December 31, 2014
Amortized Cost
Gross Unrealized Gains
Gross Unrealized Losses
Fair Value
Fixed Income:
 
 
 
 
U.S.
Government
$
20,506

$
32

$
(159
)
$
20,379

 
Corporate
 
 
 
 
 
Banking/financial services
15,551

215

(31
)
15,735

 
Consumer goods
3,478

50

(13
)
3,515

 
Capital goods
14,285

354

(52
)
14,587

 
Energy
2,829

—

(84
)
2,745

 
Telecommunications/utilities
5,297

67

(8
)
5,356

 
Health care
1,948

—

(16
)
1,932

 
Total Corporate
43,388

686

(204
)
43,870

 
Mortgage backed - agency
30,772

250

(160
)
30,862

 
Mortgage backed - commercial
16,774

79

(269
)
16,584

 
Total Mortgage backed
47,546

329

(429
)
47,446

 
Other asset backed
15,261

20

(27
)
15,254

Total Fixed Income
126,701

1,067

(819
)
126,949

Equities
2,220

12

(139
)
2,093

Other investments
14,366

—

—

14,366

 Totals
$
143,287

$
1,079

$
(958
)
$
143,408

For the three month period ended March 31, 2015 , investment holdings grew by $40.3 million due to the Anchor acquisition. The remaining change in investment holdings is due to purchases of investments and positive fair value fluctuations offset by sales of investments.
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, 2015
December 31, 2014
 
Amount
%
Amount
%
Due in less than one year
$
6,274

3.7
%
$
1,875

1.5
%
Due in one through five years
68,524

40.4
%
54,349

42.8
%
Due after five through ten years
35,715

21.0
%
23,166

18.2
%
Due after ten years
59,200

34.9
%
47,559

37.5%

Total
$
169,713

100.0
%
$
126,949

100.0
%
As of March 31, 2015 , 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 4.7 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, agents and reinsurers.

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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 following table summarizes the composition of the fair value of the fixed income securities portfolio and 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 81.5% rated ‘A’ or better as of March 31, 2015 compared to 87.4% as of December 31, 2014 . The composition of the fair value of the fixed income securities portfolio changed with the Anchor acquisition.
Credit ratings of fixed income securities portfolio (in '000s)
As of:
March 31, 2015
December 31, 2014
 
Amount
% of Total
Amount
% of Total
AAA/Aaa
$
90,142

53.1
%
$
77,856

61.3
%
AA/Aa
16,449

9.7
%
10,897

8.6
%
A/A
31,654

18.7
%
22,206

17.5
%
BBB/Baa
30,790

18.1
%
15,990

12.6
%
BB
540

0.3
%
—

—
%
CCC
138

0.1
%
—

—
%
Total Securities
$
169,713

100.0
%
$
126,949

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, 2015 or the three month period ended March 31, 2014 .
The length of time securities may be held in an unrealized loss position may vary based on the opinion of the external portfolio manager and its 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 external portfolio 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 in an unrealized loss position as of March 31, 2015 was $37.2 million compared to $63.5 million as of December 31, 2014 . This decrease was primarily driven by the positive changes in market values during the first quarter of 2015 . Atlas has the ability and intent to hold these securities 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.
Estimated impact of changes in interest rates and securities prices
For Atlas’ available-for-sale fixed income securities, 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 $242,000 and $100,000 as of March 31, 2015 and December 31, 2014 , respectively. 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 $313,000 and $102,000 as of March 31, 2015 and December 31, 2014 , respectively.
A 100 basis point increase would have also decreased other comprehensive income by approximately $6.7 million and $4.6 million as of March 31, 2015 and December 31, 2014 , respectively, 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

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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. As a result, the Company has entered into a quota share reinsurance contract with Swiss Reinsurance America Corporation ("Swiss Re"), a highly accredited global reinsurer. Our initial cession is 5% of subject written premiums, which can be increased at our election should we want to utilize it as a means of deleveraging. This new facility 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 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 $32.4 million recoverable from third party reinsurers (exclusive of amounts prepaid) and other insurers as of March 31, 2015 as compared to $20.7 million as of December 31, 2014 . The increase is attributable primarily to the Global Liberty acquisition.
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., General Reinsurance Corporation ("Gen Re"), a subsidiary of Berkshire Hathaway, Inc., Swiss Re and White Rock Insurance (SAC) Ltd. ("White Rock"). Great American has a financial strength rating of A+ from Standard & Poor’s, Gen Re has a financial strength rating of Aa1 from Moody’s, Swiss Re has a financial strength rating of Aa3 from Moody's, and White Rock is unrated. The White Rock balances are specifically related to the Gateway workers' compensation program that was exited during 2013 and are fully secured by a letter-of-credit.
Deferred Tax Asset
Components of Net Deferred Tax (in '000s)
As of:
March 31, 2015
December 31, 2014
Gross deferred tax assets:
 
 
Unpaid claims and unearned premiums
$
7,722

$
5,560

Loss carryforwards
13,987

14,212

Bad debts
229

191

Other
895

1,266

Total gross deferred tax assets
$
22,833

$
21,229

 
 
 
Gross deferred tax liabilities:
 
 
Deferred policy acquisition costs
$
3,808

$
2,776

Securities
1,227

740

Other
405

396

Total gross deferred tax liabilities
5,440

3,912

Net deferred tax assets
$
17,393

$
17,317

Atlas has not established a valuation allowance for its gross future deferred tax assets as of March 31, 2015 and as of December 31, 2014 , respectively. Based on Atlas’ expectations of future taxable income, its ability to change its investment strategy, as well as reversing gross future tax liabilities, management believes it is more likely than not that Atlas will fully realize the net future tax assets. The Company, therefore, released its remaining valuation allowance as of December 31, 2014 .
Atlas has the following total net operating loss carryforwards as of March 31, 2015 :

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Net operating loss carryforward by expiry (in '000s)
 
Year of Occurrence
Year of Expiration
Amount
2001
2021
$
7,072

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
8,371

2012
2032
2,576

Total
 
$
41,139

Claims Liabilities
The table below shows the amounts of total case reserves and incurred but not reported (“IBNR”) claims provision as of March 31, 2015 and as of the year ended December 31, 2014 . The provision for unpaid claims increased by 27.3% to $130.4 million as of March 31, 2015 compared to $ 102.4 million as of December 31, 2014 . The Global Liberty acquisition accounted for 30.3% of this change. We experienced a $1.9 million favorable reserve development compared to December 31, 2014 on Gateway's commercial auto program during the first quarter of 2015 . During the three month period ended March 31, 2015 , case reserves increased by 35.2% compared to December 31, 2014 , and IBNR reserves increased by 15.5% . The Global Liberty acquisition increased case reserves by 20.9% and IBNR by 44.3% . Excluding the Global Liberty acquisition, gross case reserves on Atlas' core lines increased by 14.9% during the first quarter of 2015 due to updates in the estimated ultimate costs on a few claims.
Provision for unpaid claims by type - gross ($ in '000s)
As of:
March 31, 2015
December 31, 2014
YTD% Change
Case reserves
$
83,265

$
61,588

35.2
%
IBNR
47,175

40,842

15.5
%
Total
$
130,440

$
102,430

27.3
%

Provision for unpaid claims by line of business – gross ($ in '000s)
As of:
March 31, 2015
December 31, 2014
YTD% Change
Commercial auto
114,208

87,123

31.1
%
Other
16,232

15,307

6.0
%
Total
$
130,440

$
102,430

27.3
%
Provision for unpaid claims by line of business - net of reinsurance recoverables ($ in '000s)
As of:
March 31, 2015
December 31, 2014
YTD% Change
Commercial Auto
$
99,133

$
82,164

20.7
%
Other
2,151

1,845

16.5
%
Total
$
101,284

$
84,009

20.6
%
Claims liabilities - The changes in the provision for unpaid claims, net of amounts recoverable from reinsurers, for the three month periods ended March 31, 2015 and March 31, 2014 were as follows:

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Three Month Periods Ended
 
March 31, 2015
March 31, 2014
Unpaid claims, beginning of period
$
102,430

$
101,385

Less: reinsurance recoverable
18,421

18,144

Net beginning unpaid claims reserves
84,009

83,241

 
 
 
Net reserves acquired
19,396

—

 
 
 
Loss portfolio transfer
(14
)
155

 
 
 
Incurred related to:
 
 
Current year
18,561

14,129

Prior years
(1,629
)
(210
)
 
16,932

13,919

 
 
 
Paid related to:
 
 
Current year
3,144

2,189

Prior years
15,895

12,653

 
19,039

14,842

 
 
 
Net unpaid claims, end of period
101,284

82,473

Add: reinsurance recoverable
29,156

17,706

Unpaid claims, end of period
$
130,440

$
100,179

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 change to the provision for unpaid claims is consistent with the change in written premium. 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.
The favorable development of $1.6 million in the three month period ended March 31, 2015 was primarily related to Gateway's commercial auto program and programs that remain in run-off. The favorable development of $210,000 in the three month period ended March 31, 2014 was related to a program that remains in run-off.
Off-balance sheet arrangements
As of March 31, 2015 , Atlas has the following cash obligations related to its operating leases:
Operating Lease Commitments (in '000s)
Year
2015
2016
2017
2018
2019 & Beyond
Total
Amount
$
1,583

$
1,554

$
1,011

$
753

$
2,533

$
7,434


Shareholders’ Equity
The table below identifies changes in shareholders’ equity for the three month periods ended March 31, 2015 and 2014 :

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Table of Contents

Changes in Shareholders' Equity (in '000s)
 
Preferred Shares
 
Ordinary Voting Common Shares
 
Restricted Voting Common Shares
 
Additional Paid-in Capital
 
Retained Deficit
 
Accumulated Other Comprehensive Income/(Loss)
 
Total
Balance December 31, 2013
$
2,000

 
$
28

 
$
—

 
$
169,595

 
$
(106,496
)
 
$
(1,429
)
 
$
63,698

Net income
 
 
 
 
 
 
 
 
2,192

 
 
 
2,192

Other comprehensive income
 
 
 
 
 
 
 
 
 
 
862

 
862

Share-based compensation
 
 
1

 
 
 
642

 
 
 
 
 
643

Balance March 31, 2014 (unaudited)
$
2,000

 
$
29

 
$
—

 
$
170,237

 
$
(104,304
)
 
$
(567
)
 
$
67,395

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance December 31, 2014
$
2,000

 
$
34

 
$
—

 
$
196,079

 
$
(88,794
)
 
$
80

 
$
109,399

Net income
 
 
 
 
 
 
 
 
2,137

 
 
 
2,137

Issuance of preferred shares
4,941

 
 
 
 
 
 
 
 
 
 
 
4,941

Other comprehensive income
 
 
 
 
 
 
 
 
 
 
1,053

 
1,053

Share-based compensation
 
 
2

 
 
 
431

 
 
 
 
 
433

Balance March 31, 2015 (unaudited)
$
6,941

 
$
36

 
$
—

 
$
196,510

 
$
(86,657
)
 
$
1,133

 
$
117,963

As of May 7, 2015 , there were 11,846,130 ordinary voting common shares outstanding, 132,863 restricted voting common shares outstanding, 29,631 restricted stock units, and 6,940,500 preferred shares issued and outstanding.
The holders of restricted voting common shares are entitled to vote at all meetings of shareholders, except at meetings of holders of a specific class that are entitled to vote separately as a class. The restricted voting common shares as a class shall not carry more than 30% of the aggregate votes eligible to be voted at a general meeting of common shareholders.
All of the issued and outstanding restricted voting common shares are beneficially owned or controlled by Kingsway, or its affiliated entities. The restricted voting common shares will convert to ordinary voting common shares in the event that these Kingsway owned shares are sold to non-affiliates of Kingsway.
The preferred shares are beneficially owned or controlled by the former parents of Gateway and Anchor. Preferred shareholders are entitled to dividends on a cumulative basis, whether or not declared by the Board of Directors, at the rate of $0.045 per share per year ( 4.5% ) and may be paid in cash or in additional preferred shares at the option of Atlas. In liquidation, dissolution or winding-up of Atlas, preferred shareholders receive the greater of $1.00 per share plus all declared and unpaid dividends or the amount they would receive in liquidation if the preferred shares had been converted to restricted voting common shares or ordinary voting common shares immediately prior to liquidation. Preferred shares are convertible into ordinary voting common shares at the option of the former parents of Gateway and Anchor at any date after the fifth year of issuance at the rate of 0.1270 and .05 , respectively, ordinary voting common shares for each preferred share. The conversion rate is subject to change if the number of ordinary voting common shares or restricted voting common shares changes by way of an anti-dilution event.
During the three month period ended March 31, 2015 , Atlas did not declare or pay dividends earned through the preferred shares. The former parents of Gateway and Anchor earned $25,000 and $10,000 , respectively, in dividends during the three month period ended March 31, 2015 . Through March 31, 2015 , Atlas has accrued $209,000 and $10,000 , respectively, in dividends for the former parents of Gateway and Anchor, which remain unpaid.
Book Value per Common Share
Book value per common share was as follows:

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Table of Contents

As of: (in '000s, except for shares and per share data)
March 31, 2015
December 31, 2014
Shareholders' equity
$
117,963

$
109,399

Less: Preferred stock in equity
6,941

2,000

Less: Accumulated dividends on preferred stock
219

184

Common equity
$
110,803

$
107,215

Participative shares:
 
 
Common shares outstanding
11,978,993

11,771,586

Restricted stock units (RSUs)
29,631

37,038

Total participative shares
12,008,624

11,808,624

Book value per participative share outstanding
$
9.23

$
9.08

Year-to-date in 2015 , book value per common share increased by $0.15 relative to December 31, 2014 as follows: an increase of $0.30 related to net income after tax (excluding expenses incurred with the acquisition of subsidiaries), an increase of $0.09 related to the change in unrealized gains/losses after tax, a decrease of $0.12 related to share based compensation and a decrease of $0.12 related to expenses incurred with the acquisition of subsidiaries.
Liquidity and Capital Resources
The purpose of liquidity management is to ensure there is sufficient cash to meet all financial commitments and obligations as they become due. The liquidity requirements of Atlas’ business have been met primarily by funds generated from operations, asset maturities and income and other returns received on securities. Cash provided from these sources is used primarily for payment of claims and operating expenses. The timing and amount of catastrophe claims are inherently unpredictable and may create increased liquidity requirements.
As a holding company, Atlas may derive cash from its subsidiaries generally in the form of dividends and in the future may charge management fees to the extent allowed by statute or other regulatory approval requirements to meet its obligations. The Insurance Subsidiaries fund their obligations primarily through premium and investment income and maturities in their securities portfolio. Refer also to the discussion “Investments Overview and Strategy." The Insurance Subsidiaries require regulatory approval for the return of capital and, in certain circumstances, payment of dividends. In the event that dividends and management fees available to the holding company are inadequate to service its obligations, the holding company would need to raise capital, sell assets or incur debt obligations.
On March 9, 2015, American Acquisition entered into a loan and security agreement (“Loan Agreement”) for a $35.0 million loan facility with Fifth Third Bank. The Loan Agreement includes a $30.0 million line of credit, which can be drawn in increments at any time during the first twelve months of the agreement effective date of March 9, 2015. The $30.0 million line of credit has a five year term and bears interest at one-month LIBOR plus 4.5% . The Loan Agreement also includes a $5.0 million revolving line of credit that bears interest at one month LIBOR plus 2.75% . This $5.0 million revolving line of credit replaces the $10.0 million revolving line of credit American Acquisition previously had in place with Fifth Third Bank.
The Loan Agreement also provides for the issuance of letters of credit in an amount up to $2.0 million outstanding at any time. In addition, there is a non-utilization fee for each of the $30.0 million line of credit and $5.0 million revolving line of credit equal to 0.50% per annum of an amount equal to $30.0 million and $5.0 million , respectively, less the daily average of the aggregate principal amount outstanding under such credit lines (plus, in the case of the $30.0 million line of credit, the aggregate amount of the letter of credit obligations outstanding).
The Loan Agreement requires American Acquisition to comply with customary affirmative and negative covenants, including those governing indebtedness, liens, investments, sales of assets, issuance of securities, and distributions. The Loan Agreement also requires American Acquisition to make mandatory prepayments under certain conditions and to comply with certain financial covenants, including the ASI Pool Subsidiaries (defined below) maintaining a combined statutory net worth in an amount not less than $60.0 million (subject to adjustment) and maintaining a minimum funded debt to Earnings Before Interest, Taxes, Depreciation and Amortization ratio. The Loan Agreement is secured by substantially all of the property of American Acquisition, including all of the outstanding shares of American Country Insurance Company, American Service Insurance Company, Inc., and Gateway Insurance Company, which are wholly-owned direct subsidiaries of American Acquisition (the “ASI Pool Subsidiaries”).
As of March 31, 2015 , $2.0 million in funds were accessed from the revolving line of credit and used for the Anchor acquisition. No letters of credit were issued under the terms of this Loan Agreement as of March 31, 2015 .
The following table summarizes consolidated cash flow activities:

42
Table of Contents

Summary of Cash Flows (in ‘000s)
 
Three Month Period Ended
Twelve Month Period Ended
 
March 31, 2015
December 31, 2014
Net cash flows (used in) provided by operating activities
$
(943
)
$
13,716

Net cash flows provided by financing activities
2,000

25,022

Net cash flows used in investing activities
(13,494
)
(11,963
)
Net (decrease) increase in cash
$
(12,437
)
$
26,775

Cash used in operations during the three month period ended March 31, 2015 was primarily due to an increase in net income offset by increases in operating assets and liabilities. Cash provided by financing activities during the three month period ended March 31, 2015 was the result of the proceeds related to the Loan Agreement. Cash used in investing activities during the three month period ended March 31, 2015 was primarily a result of the acquisition of Anchor and other investments.

43
Table of Contents

Item 3.    Quantitative and Qualitative Disclosures About Market Risk.

Not applicable.

Item 4.
Controls and Procedures.
Disclosure Controls and Procedures  
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”), as of the end of the period covered by this quarterly report. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective such that the information required to be disclosed in our SEC reports is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Internal Control over Financial Reporting  
There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Part II. OTHER INFORMATION

Item 1.
Legal Proceedings.
In connection with its operations, the Company and its Insurance Subsidiaries are, from time to time, named as defendants in actions for damages and costs allegedly sustained by the plaintiffs. While it is not possible to estimate the outcome of the various proceedings at this time, such actions have generally been resolved with minimal damages or expense in excess of amounts provided, and the Company does not believe that it will incur any significant additional loss or expense in connection with such actions. All such actions are ordinary routine litigation incidental to the Company's business.
Item 1A.
Risk Factors.
There have been no material changes to the risk factors that were discussed in Part I, Item 1A of the Company's Annual Report on Form 10K for the year ended December 31, 2014 .
Item 2.
Unregistered Sales of Equity Securities And Use of Proceeds.
Pursuant to the previously disclosed terms of the Gateway stock purchase agreement, on March 30, 2015, Atlas issued 940,500 preferred shares to the former parent of Gateway as a post-closing purchase price adjustment. In light of the terms of the Gateway stock purchase agreement and manner of issuance, Atlas relied on an exemption from registration under Section 4(2) of the Securities Act of 1933, as amended, in connection with this share issuance. Additional post-closing purchase price adjustments, which may result in the issuance of additional preferred shares, may be made pursuant to the terms of the Gateway stock purchase agreement.
Item 3.     Defaults Upon Senior Securities.
None.
Item 4.
Mine Safety Disclosures.
Not applicable.
Item 5.     Other Information.
None.

44
Table of Contents

Item 6.    Exhibits.
10.1
Loan and Security Agreement, dated as of March 9, 2015, by and between American Insurance Acquisition, Inc. and Fifth Third Bank.
31.1
Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) or Rule 15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) or Rule 15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema Document
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB
XBRL Taxonomy Extension Label Linkbase Document.
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document.



45
Table of Contents

SIGNATURE
Pursu ant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
 
 
Date:
May 11, 2015
Atlas Financial Holdings, Inc.
 
 
(Registrant)
 
 
 
 
 
By:
 
/s/ Paul A. Romano
 
 
 
 
Paul A. Romano
 
 
 
 
Vice President and Chief Financial Officer


46



Exhibit 10.1

LOAN AND SECURITY AGREEMENT

This LOAN AND SECURITY AGREEMENT dated as of March 9, 2015 (the “ Agreement ”), is executed by and between AMERICAN INSURANCE ACQUISITION INC., a Delaware corporation (the “ Borrower ”), which has its chief executive office located at 150 Northwest Point Blvd., 3rd Floor, Elk Grove Village, Illinois 60007 and FIFTH THIRD BANK, an Ohio banking corporation (the “ Bank ”), whose address is 1701 Golf Road, Suite 900, Rolling Meadows, Illinois 60008.

R E C I T A L S :

A. The Borrower desires to borrow funds and obtain other financial accommodations from the Bank.

B. Pursuant to the Borrower’s request, the Bank is willing to extend such financial accommodations to the Borrower under the terms and conditions set forth herein.

NOW THEREFORE, in consideration of the premises, and the mutual covenants and agreements set forth herein, the Borrower agrees to borrow from the Bank, and the Bank agrees to lend to the Borrower, subject to and upon the following terms and conditions:

A G R E E M E N T S :

Section 1.
DEFINITIONS .

1. Defined Terms . For the purposes of this Agreement, the following capitalized words and phrases shall have the meanings set forth below.

“ Account Debtor ” and “ Account Debtors ” shall mean the Person(s) who is obligated under an Account.

“ Accounts ” shall mean “accounts” as defined in the UCC, including, without limitation, all present and future accounts receivable and other rights of the Borrower to payment for goods sold or leased or for services rendered, which are not evidenced by instruments or chattel paper, and whether or not they have been earned by performance.

“ Acquisition Transaction ” shall mean a transaction between Borrower and any Person occurring on or after the Closing Date, whereby Borrower (i) satisfies the Acquisition Transaction Conditions and (ii) purchases and acquires any After-Acquired Collateral using the proceeds of the Revolving Loan.

“ Acquisition Transaction Conditions ” shall mean the following conditions precedent to the consummation of any Acquisition Transaction: (i) no Event of Default or Unmatured Event of Default exists; (ii) Borrower has delivered to Bank timely notice of its desire to consummate an Acquisition Transaction; (iii) Borrower has delivered to Bank certain due diligence with respect to the Acquisition Transaction including, without limitation, financial statements, asset descriptions, appraisals and other such due diligence as it relates to the prospective After-Acquired Collateral; and (v) Borrower has delivered to Bank any other information or due diligence as reasonably requested by Bank.





“ Affiliate ” shall mean, with respect to any Person (a) any other Person which, directly or indirectly, controls or is controlled by or is under common control with such Person, (b) any officer or director of such Person, and (c) with respect to the Bank, any entity administered or managed by the Bank, or an Affiliate or investment advisor thereof and which is engaged in making, purchasing, holding or otherwise investing in commercial loans. A Person shall be deemed to be “controlled by” any other Person if such Person possesses, directly or indirectly, power to direct or cause the direction of the management and policies of such Person whether by contract, ownership of voting securities, membership interests or otherwise.

“ After-Acquired Collateral ” shall mean, with respect to any Person, the assets, Capital Securities, collateral or any other property of any kind or description, tangible or intangible, wheresoever located of any Person.

“ Alternate Rate ” has the meaning ascribed to it in Section 2.4(a) hereof.
        
“ American Country ” shall mean American Country Insurance Company, an Illinois property and casualty domestic stock company.

“ American Service ” shall mean American Service Insurance Company, Inc., an Illinois property and casualty domestic stock company.

“ Atlas ” shall mean Atlas Financial Holdings, Inc., a financial services holding company incorporated in the Cayman Islands.

“ Authorized Representative ” shall mean those persons shown on the list of officers provided by Borrower pursuant to Section 3.1(a)(ix) or on any update of any such list provided from time to time by Borrower to Bank, or any further or different officers of Borrower so named by any Authorized Representative of Borrower in a written notice to Bank.

“ Bank Product Agreements ” shall mean those certain agreements entered into from time to time by the Borrower or any Subsidiary with the Bank or any Affiliate of the Bank concerning Bank Products.

“ Bank Product Obligations ” shall mean all obligations, liabilities, contingent reimbursement obligations, fees, and expenses owing by the Borrower or any Subsidiary to the Bank or any Affiliate of the Bank pursuant to or evidenced by the Bank Product Agreements and irrespective of whether for the payment of money, whether direct or indirect, absolute or contingent, due or to become due, now existing or hereafter arising.

“ Bank Products ” shall mean any service or facility extended to the Borrower or any Subsidiary by the Bank or any Affiliate of the Bank, including: (a) credit cards, (b) credit card processing services, (c) debit cards, (d) purchase cards, (e) ACH transactions, (f) cash management, including controlled disbursement, accounts or services, or (g) Hedging Agreements.

“ Bankruptcy Code ” shall mean the United States Bankruptcy Code, as now existing or hereafter amended.

“ Borrowing Base Amount ” shall mean, for the Revolving Loan, an amount equal to Eighty percent (80%) of the Statutory Unassigned Surplus Eligible for Dividend.

“ Borrowing Base Certificate ” shall mean a certificate to be signed by the Borrower certifying the accuracy of the Borrowing Base Amount in the form attached hereto as Exhibit A , as further described in Section 3.2(a) hereof.





“ Business Day ” shall mean any day other than a Saturday, Sunday or a legal holiday on which banks are authorized or required to be closed for the conduct of commercial banking business in Chicago, Illinois.

“ Capital Lease ” shall mean, as to any Person, a lease of any interest in any kind of property or asset, whether real, personal or mixed, or tangible or intangible, by such Person, as lessee, that is, or should be, in accordance with Financial Accounting Standards Board Statement No. 13, as amended from time to time, or, if such statement is not then in effect, such statement of GAAP as may be applicable, recorded as a “capital lease” on the financial statements of such Person prepared in accordance with GAAP.

“ Capital Note ” shall mean an unsecured subordinated debt obligation of an Operating Subsidiary, incorporated in Illinois, to the Borrower for which such Operating Subsidiary has obtained all required approvals from the Insurance Director in accordance with 215 ILCS 5/147.3.

“ Capital Securities ” shall mean, with respect to any Person, all shares, interests, participations or other equivalents (however designated, whether voting or non-voting) of such Person’s capital, whether now outstanding or issued or acquired after the date hereof, including common shares, preferred shares, membership interests in a limited liability company, limited or general partnership interests in a partnership or any other equivalent of such ownership interest.

“ Capitalized Lease Obligations ” shall mean, as to any Person, all rental obligations of such Person, as lessee under a Capital Lease which are or will be required to be capitalized on the books of such Person.

“ Cash Equivalent Investment ” shall mean, at any time, (a) any evidence of Debt, maturing not more than one year after such time, issued or guaranteed by the United States government or any agency thereof, (b) commercial paper, maturing not more than one year from the date of issue, or corporate demand notes, in each case (unless issued by the Bank or its holding company) rated at least A-l by Standard & Poor’s Ratings Services, a division of The McGraw-Hill Companies, Inc. or P-l by Moody’s Investors Service, Inc., (c) any certificate of deposit, time deposit or banker’s acceptance, maturing not more than one year after such time, or any overnight Federal Funds transaction that is issued or sold by the Bank or its holding company (or by a commercial banking institution that is a member of the Federal Reserve System and has a combined capital and surplus and undivided profits of not less than $500,000,000), (d) any repurchase agreement entered into with the Bank, or other commercial banking institution of the nature referred to in clause (c) , which (i) is secured by a fully perfected security interest in any obligation of the type described in any of clauses (a) through (c) above, and (ii) has a market value at the time such repurchase agreement is entered into of not less than 100% of the repurchase obligation of the Bank, or other commercial banking institution, thereunder, (e) money market accounts or mutual funds which invest exclusively in assets satisfying the foregoing requirements, and (f) other short term liquid investments approved in writing by the Bank.

“ Change in Control ” shall mean the occurrence of any of the following events: (a) Atlas shall cease to own and control, directly or indirectly, at least 100% of the outstanding Capital Securities of the Borrower; (b) the Borrower shall cease to, directly or indirectly, own and control 100% of each class of the outstanding Capital Securities of each of the Operating Subsidiaries; or (c) no Person shall acquire an amount equal to or greater than thirty percent (30%) of the Capital Securities of Atlas. For the purpose hereof, the terms “control” or “controlling” shall mean the possession of the power to direct, or cause the direction of, the management and policies of the Borrower by contract or voting of securities or ownership interests. Notwithstanding the foregoing, a change of control as defined by the NAIC or any statutory insurance regulator shall not be considered a Change in Control for the purpose of this Agreement so long as the




Borrower continues to own one hundred percent (100%) of the Capital Securities of the Operating Subsidiaries, provided, such change of control shall not be in breach of subsection (c) hereof.

“ Collateral ” shall have the meaning set forth in Section 6.1 hereof.

“ Collateral Access Agreement ” shall mean an agreement in form and substance reasonably satisfactory to the Bank pursuant to which a mortgagee or lessor of real property on which Collateral is stored or otherwise located, or a warehouseman, processor or other bailee of property owned by the Borrower or any Subsidiary, acknowledges the Liens of the Bank and waives any Liens held by such Person on such property, and, in the case of any such agreement with a mortgagee or lessor, permits the Bank reasonable access to and use of such real property following the occurrence and during the continuance of an Event of Default to assemble, complete and sell any collateral stored or otherwise located thereon.

“ Collateral Assignment ” shall mean that certain Collateral Assignment by Borrower collaterally assigning the Subsidiary Notes to Bank.

“ Commodity Exchange Act ” shall mean the Commodity Exchange Act (7 U.S.C. § 1 et seq.), as amended from time to time, and any successor statute.

“ Compliance Certificate ” shall have the meaning set forth in Section 8.14 hereof.

“ Contingent Liability ” and “ Contingent Liabilities ” shall mean, respectively, each obligation and liability of the Borrower and all such obligations and liabilities of the Borrower incurred pursuant to any agreement, undertaking or arrangement by which the Borrower: (a) guarantees, endorses or otherwise becomes or is contingently liable upon (by direct or indirect agreement, contingent or otherwise, to provide funds for payment, to supply funds to, or otherwise to invest in, a debtor, or otherwise to assure a creditor against loss) the indebtedness, dividend, obligation or other liability of any other Person in any manner (other than by endorsement of instruments in the course of collection), including any indebtedness, dividend or other obligation which may be issued or incurred at some future time; (b) guarantees the payment of dividends or other distributions upon the shares or ownership interest of any other Person; (c) undertakes or agrees (whether contingently or otherwise): (i) to purchase, repurchase, or otherwise acquire any indebtedness, obligation or liability of any other Person or any property or assets constituting security therefor, (ii) to advance or provide funds for the payment or discharge of any indebtedness, obligation or liability of any other Person (whether in the form of loans, advances, stock purchases, capital contributions or otherwise), or to maintain solvency, assets, level of income, working capital or other financial condition of any other Person, or (iii) to make payment to any other Person other than for value received; (d) agrees to lease property or to purchase securities, property or services from such other Person with the purpose or intent of assuring the owner of such indebtedness or obligation of the ability of such other Person to make payment of the indebtedness or obligation; (e) to induce the issuance of, or in connection with the issuance of, any letter of credit for the benefit of such other Person; or (f) undertakes or agrees otherwise to assure a creditor against loss. The amount of any Contingent Liability shall (subject to any limitation set forth herein) be deemed to be the outstanding principal amount (or maximum permitted principal amount, if larger) of the indebtedness, obligation or other liability guaranteed or supported thereby.

“ Debt ” shall mean, as to any Person, without duplication, (a) all indebtedness of such Person; (b) all borrowed money of such Person (including principal, interest, fees and charges), whether or not evidenced by bonds, debentures, notes or similar instruments; (c) all obligations to pay the deferred purchase price of property or services; (d) all obligations, contingent or otherwise, with respect to the maximum face amount of all letters of credit (whether or not drawn), bankers’ acceptances and similar obligations issued for the account of such Person (including the Letters of Credit), and all unpaid drawings in respect of such




letters of credit, bankers’ acceptances and similar obligations; (e) all indebtedness secured by any Lien on any property owned by such Person, whether or not such indebtedness has been assumed by such Person (provided, however, if such Person has not assumed or otherwise become liable in respect of such indebtedness, such indebtedness shall be deemed to be in an amount equal to the fair market value of the property subject to such Lien at the time of determination); (f) the aggregate amount of all Capitalized Lease Obligations of such Person; (g) all Contingent Liabilities of such Person, whether or not reflected on its balance sheet; (h) all Hedging Obligations of such Person; (i) all Debt of any partnership of which such Person is a general partner; and (j) all monetary obligations of such Person under (i) a so-called synthetic, off-balance sheet or tax retention lease, or (ii) an agreement for the use or possession of property creating obligations that do not appear on the balance sheet of such Person but which, upon the insolvency or bankruptcy of such Person, would be characterized as the indebtedness of such Person (without regard to accounting treatment). Notwithstanding the foregoing, Debt shall not include the insurance or reinsurance of any Obligor, trade payables and accrued expenses incurred by such Person in accordance with customary practices and in the ordinary course of business of such Person.

“ Default Rate ” shall mean a per annum rate of interest equal to the applicable Interest Rate, plus Five percent (5.00%).

“ Depreciation ” shall mean the total amounts added to depreciation, amortization, obsolescence, valuation and other proper reserves, as reflected on the Borrower’s financial statements and determined in accordance with GAAP.

“ Draw ” and “ Draws ” shall mean respectively, each Open Draw or Surplus Draw and the aggregate of all such Open Draws and Surplus Draws made by the Bank to the Borrower under and pursuant to Section 2.2 of this Agreement.

“ Draw Loan Commitment ” means the obligation of Bank to make Draws issued for the account of Borrower hereunder in an aggregate principal amount not to exceed Thirty Million and 00/100 Dollars ($30,000,000.00).

“ Draw Interest Rate ” shall mean a floating per annum rate of interest equal to the LIBOR Rate, plus Four and One-Half percent (4.50%).

“ Draw Loan ” means and refers to each Draw from and including the date such Draw is funded by Bank.

“ Draw Loan Maturity Date ” means, March 9, 2020.

“ Draw Note ” means, a promissory note in substantially the form of Exhibit C hereto or in another form prepared by and acceptable to that Bank together with any and all renewals, extensions, modifications or replacements thereof and given in substitution therefor.

“ Draw Period ” means the period from the Closing Date up to but not including the Draw Period Termination Date during which Borrower may make a Draw on the Draw Loan Commitment.

“ Draw Period Termination Date ” means March 9, 2016, or such earlier date on which the Draw Credit Commitment is terminated in whole pursuant to Section 11.

“ EBITDA ” means for any period, determined on a consolidated basis for the Operating Subsidiaries, in accordance with SAP and without duplication, Statutory Net Income for such period plus ,




to the extent deducted in determining Statutory Net Income, the sum of (a) Interest Expense, (b) Taxes, and (c) depreciation and amortization.

“ Employee Plan ” includes any pension, stock bonus, employee stock ownership plan, retirement, profit sharing, deferred compensation, stock option, bonus or other incentive plan, whether qualified or nonqualified, or any disability, medical, dental or other health plan, life insurance or other death benefit plan, vacation benefit plan, severance plan or other employee benefit plan or arrangement, including those pension, profit-sharing and retirement plans of the Borrower described from time to time in the financial statements of the Borrower and any pension plan, welfare plan, Defined Benefit Pension Plans (as defined in ERISA) or any multi-employer plan, maintained or administered by the Borrower or to which the Borrower is a party or may have any liability or by which the Borrower is bound.

“ Environmental Laws ” shall mean all present or future federal, state or local laws, statutes, common law duties, rules, regulations, ordinances and codes, together with all administrative or judicial orders, consent agreements, directed duties, requests, licenses, authorizations and permits of, and agreements with, any governmental authority, in each case relating to any matter arising out of or relating to public health and safety, or pollution or protection of the environment or workplace, including any of the foregoing relating to the presence, use, production, generation, handling, transport, treatment, storage, disposal, distribution, discharge, emission, release, threatened release, control or cleanup of any Hazardous Substance.

“ ERISA ” shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time.

“ Event of Default ” shall mean any of the events or conditions which are set forth in Section 11 hereof.

“ Excluded Assets ” shall mean (a) any contract, property right or agreement to which the Borrower is a party or under which the Borrower has any right or interest if and only for so long as the grant of a security interest hereunder shall constitute or result in a breach, termination or default under any such contract, property right or agreement, (b) any voting stock in excess of sixty-six percent (66%) of the outstanding voting stock of any Subsidiary that is not a domestic Subsidiary, (c) any intent to use trademark application for which the creation by the Borrower of a security interest therein is prohibited by applicable law, (d) assets subject to a Permitted Lien, in each case for so long as such Permitted Lien remains in effect and to the extent that the documentation pertaining to such Permitted Lien prohibits a Lien in favor of the Bank on the assets subject to such Permitted Lien, (e) the underlying assets of the Operating Subsidiaries; provided however, that at no time shall the Capital Securities of the Operating Subsidiaries pledged by Borrower to Bank in the Stock Pledge Agreement constitute “Excluded Assets”, and (f) any rights or property to the extent that any law or regulation applicable thereto prohibits the creation of a security interest therein or would otherwise result in any loss, termination, invalidity, cancellation or abandonment of such rights or property from the grant, attachment, creation or enforcement of such security interest therein; provided , however , that: (i) in no event shall clauses (a) and (f) of the foregoing proviso be construed (A) to apply if any described negative pledge, restriction or prohibition is unenforceable or rendered ineffective under Sections 9-406, 9-407, 9-408 or 9-409 of the UCC (or any successor provision or provisions) or any other applicable law (including the Bankruptcy Code) or principles of equity, (B) to limit, impair or otherwise affect the Bank’s continuing security interests in and Liens upon any rights or interests of the Borrower in or to monies due or to become due under any described contract, property right or agreement (including any Accounts), (C) to limit, impair, or otherwise affect the Bank’s continuing security interests in and liens upon any rights or interest of the Borrower in and to any proceeds from the sale, license, lease, or other disposition of any such contract, property right or agreement, or (D) to apply at any time that such terms are no longer effective and enforceable or at any time that the consent of the other party to the agreement is obtained to




the grant of a security interest in and to such asset in favor of the Bank, and (ii) such security interest shall attach immediately and automatically to any portion of such contract, property right or agreement that does not result in any of the consequences specified above. In any event, the Borrower covenants and agrees to use commercially reasonable efforts to avoid owning or acquiring any Excluded Assets .

“ Excluded Swap Obligation ” shall mean, with respect to any guarantor of a Swap Obligation, including the grant of a security interest to secure the guaranty of such Swap Obligation, any Swap Obligation if, and to the extent that, such Swap Obligation is or becomes illegal under the Commodity Exchange Act or any rule, regulation or order of the Commodity Futures Trading Commission (or the application or official interpretation of any thereof) by virtue of such guarantor’s failure for any reason to constitute an "eligible contract participant" as defined in the Commodity Exchange Act and the regulations thereunder at the time the guaranty or grant of such security interest becomes effective with respect to such Swap Obligation.  If a Swap Obligation arises under a Master Agreement governing more than one swap, such exclusion shall apply only to the portion of such Swap Obligation that is attributable to swaps for which such Swap Obligation or security interest is or becomes illegal.

“ Funded Debt to EBITDA ” shall mean the ratio of (a) the Borrower’s indebtedness (i) in respect of money borrowed or (ii) evidenced by a note debenture to other like written obligation to pay money, or (iii) in respect of rent or hire of property under leases or lease arrangements which under GAAP are required to be capitalized, or (iv) in respect of obligations under conditional sales or other title retention agreements to (b) EBITDA for the period of four consecutive fiscal quarters ending on or immediately prior to such date, all as determined for the Operating Subsidiaries on a consolidated basis in accordance with SAP.

“ GAAP ” shall mean generally accepted accounting principles set forth from time to time in the opinions and pronouncements of the Accounting Principles Board and the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board (or agencies with similar functions of comparable stature and authority within the U.S. accounting profession), which are applicable to the circumstances as of the date of determination, provided, however, that interim financial statements or reports shall be deemed in compliance with GAAP despite the absence of footnotes and fiscal year-end adjustments as required by GAAP.

“ Gateway ” shall mean Gateway Insurance Company, a Missouri corporation.

“ Hazardous Substances ” shall mean (a) any petroleum or petroleum products, radioactive materials, asbestos in any form that is or could become friable, urea formaldehyde foam insulation, dielectric fluid containing levels of polychlorinated biphenyls, radon gas and mold; (b) any chemicals, materials, pollutant or substances defined as or included in the definition of “hazardous substances”, “hazardous waste”, “hazardous materials”, “extremely hazardous substances”, “restricted hazardous waste”, “toxic substances”, “toxic pollutants”, “contaminants”, “pollutants” or words of similar import, under any applicable Environmental Law; and (c) any other chemical, material or substance, the exposure to, or release of which is prohibited, limited or regulated by any governmental authority or for which any duty or standard of care is imposed pursuant to, any Environmental Law.

“ Hedging Agreement ” shall mean any Swap Contract or any other agreement with respect to any swap, collar, cap, future, forward or derivative transaction, whether exchange-traded, over-the-counter or otherwise, including any involving, or settled by reference to, one or more interest rates, currencies, commodities, equity or debt instruments, any economic, financial or pricing index or basis, or any similar transaction, including any option with respect to any of these transactions and any combination of these transactions.





“ Hedging Obligation ” shall mean, with respect to any Person, any liability of such Person under any Hedging Agreement, including any and all cancellations, buy backs, reversals, terminations or assignments under any Hedging Agreement.
“ Indemnified Party ” and “ Indemnified Parties ” shall mean, respectively, each of the Bank and any parent corporation, Affiliate or Subsidiary of the Bank, and each of their respective officers, directors, employees, attorneys and agents, and all of such parties and entities.

“ Insurance Claims ” shall mean threatened and/or asserted insurance claims incurred by the Borrower and/or its Subsidiaries in the normal course of business.

“ Insurance Director ” shall mean each applicable governmental authority whose approval is required for the issuance of a Subsidiary Note by an Operating Subsidiary.

“ Intellectual Property ” shall mean the collective reference to all rights, priorities and privileges relating to intellectual property, whether arising under United States, multinational or foreign laws or otherwise, including copyrights, patents, service marks and trademarks, and all registrations and applications for registration therefor and all licensees thereof, trade names, domain names, technology, know-how and processes, and all rights to sue at law or in equity for any infringement or other impairment thereof, including the right to receive all proceeds and damages therefrom.

“ Interest Charges ” shall mean, for any period, the sum of: (a) all interest, charges and related expenses payable with respect to that fiscal period to a lender in connection with borrowed money or the deferred purchase price of assets that are treated as interest in accordance with GAAP, plus (b) the portion of Capitalized Lease Obligations with respect to that fiscal period that should be treated as interest in accordance with GAAP, plus (c) all charges paid or payable (without duplication) during that period with respect to any Hedging Agreements.

“ Interest Period ” shall mean successive one month periods, beginning and ending as provided in this Agreement.

“ Interest Rate ” shall mean the Draw Interest Rate or the Revolving Interest Rate, as applicable.

“ Investment ” shall mean, with respect to any Person, any investment in another Person, whether by acquisition of any debt or equity security, by making any loan or advance, by becoming obligated with respect to a Contingent Liability in respect of obligations of such other Person (other than travel and similar advances to employees in the ordinary course of business).

“ Letter of Credit ” and “ Letters of Credit ” shall mean, respectively, a letter of credit and all such letters of credit issued by the Bank, in its sole discretion, upon the execution and delivery by the Borrower and the acceptance by the Bank of a Master Letter of Credit Agreement and a Letter of Credit Application, as set forth in Section 2.7 of this Agreement.

“ Letter of Credit Application ” shall mean, with respect to any request for the issuance of a Letter of Credit, a letter of credit application in the form being used by the Bank at the time of such request for the type of Letter of Credit requested.

“ Letter of Credit Commitment ” shall mean, at any time, an amount up to Two Million and 00/100 Dollars ($2,000,000.00).

“ Letter of Credit Maturity Date ” shall mean the Revolving Loan Maturity Date.





“ Letter of Credit Obligations ” shall mean, at any time, an amount equal to the aggregate of the original face amounts of all Letters of Credit minus the sum of (i) the amount of any reductions in the original face amount of any Letter of Credit which did not result from a draw thereunder, (ii) the amount of any payments made by the Bank with respect to any draws made under a Letter of Credit for which the Borrower has reimbursed the Bank, (iii) the amount of any payments made by the Bank with respect to any draws made under a Letter of Credit which have been converted to a Revolving Loan as set forth in Section 2.7 , and (iv) the portion of any issued but expired Letter of Credit which has not been drawn by the beneficiary thereunder. For purposes of determining the outstanding Letter of Credit Obligations at any time, the Bank’s acceptance of a draft drawn on the Bank pursuant to a Letter of Credit shall constitute a draw on the applicable Letter of Credit at the time of such acceptance.

“ Liabilities ” shall mean at all times all liabilities of the Borrower that would be shown as such on a balance sheet of the Borrower prepared in accordance with GAAP.

“ LIBOR ” shall mean a rate of interest equal to (a) the per annum rate of interest at which United States dollar deposits for a period equal to the relevant Interest Period are offered in the London Interbank Eurodollar market at 11:00 a.m. (London time) two (2) Business Days prior to the commencement of such Interest Period (or three (3) Business Days prior to the commencement of such Interest Period if banks in London, England were not open and dealing in offshore United States dollars on such second preceding Business Day), as displayed in the Bloomberg Financial Markets system (or other authoritative source selected by the Bank in its sole discretion), divided by (b) a number determined by subtracting from 1.00 the then stated maximum reserve percentage for determining reserves to be maintained by member banks of the Federal Reserve System for Eurocurrency funding or liabilities as defined in Regulation D (or any successor category of liabilities under Regulation D), or as LIBOR is otherwise determined by the Bank in its sole and absolute discretion. The Bank’s determination of LIBOR shall be conclusive, absent manifest error.

“ LIBOR Rate ” shall mean a per annum rate of interest equal to LIBOR for the relevant Interest Period, which LIBOR Rate shall remain fixed during such Interest Period.

“ Lien ” shall mean, with respect to any Person, any interest granted by such Person in any real or personal property, asset or other right owned or being purchased or acquired by such Person (including an interest in respect of a Capital Lease) which secures payment or performance of any obligation and shall include any mortgage, lien, encumbrance, title retention lien, charge or other security interest of any kind, whether arising by contract, as a matter of law, by judicial process or otherwise.

“ Loans ” shall mean, collectively, all Revolving Loans made by the Bank to the Borrower, all Draw Loans made by the Bank to the Borrower and all Letter of Credit Obligations, under and pursuant to this Agreement.

“ Loan Documents ” shall mean each of the agreements, documents, instruments and certificates set forth in Section 3.1 hereof, and any and all such other instruments, documents, certificates and agreements from time to time executed and delivered by the Borrower, any of the Operating Subsidiaries or any of its other Subsidiaries for the benefit of the Bank pursuant to any of the foregoing, and all amendments, restatements, supplements and other modifications thereto.

“ Mandatory Prepayments ” shall mean One Hundred Percent (100%) of the net proceeds (for the avoidance of doubt, net of Taxes) of: (i) any sales or issuance of debt securities by the Borrower (with exceptions to be determined and subject to an intercreditor agreement at Bank’s discretion), (ii) any sale or




disposition of (other than sales in the ordinary course of business of (a) inventory or (b) investments securities) any assets with net proceeds in excess of $50,000, unless such net proceeds have been reinvested in the business by the Borrower or the applicable Operating Subsidiary within 60 days after the date of receipt of such net proceeds, and (iii) insurance proceeds not otherwise reinvested.

“ Master Letter of Credit Agreement ” shall mean, at any time, with respect to the issuance of Letters of Credit, a Master Letter of Credit Agreement in the form being used by the Bank at such time.

“ Material Adverse Effect ” shall mean (a) a material adverse change in, or a material adverse effect upon, the assets, business, properties, condition (financial or otherwise) or results of operations of the Borrower and its Operating Subsidiaries taken as a whole, (b) a material impairment of the ability of the Borrower and its Operating Subsidiaries to perform any of the Obligations under any of the Loan Documents, or (c) a material adverse effect on (i) any substantial portion of the Collateral, (ii) the legality, validity, binding effect or enforceability against the Borrower and its Operating Subsidiaries of any of the Loan Documents, (iii) the perfection or priority of any Lien granted to the Bank under any Loan Document, or (iv) the rights or remedies of the Bank under any Loan Document.

“ Minimum Net Worth ” means, (i) as of the end of the fiscal quarter ended March 31, 2015, $60,000.000.00, and (ii) as of the end of each fiscal year of the Borrower thereafter, an amount equal to the sum of (a) Minimum Net Worth for the immediately preceding fiscal year, and solely for the fiscal year ending December 31, 2015, $60,000,000.00 plus (b) the greater of (i) zero (0) or (ii) fifty percent (50%) of Statutory Net Income of the Operating Subsidiaries for the fiscal year then ending.

“ NAIC ” shall mean the National Association of Insurance Commissioners.

“ Non-Excluded Taxes ” shall have the meaning set forth in Section 2.7(a) hereof.

“ Notes ” shall mean the Revolving Note and the Draw Note.

“ Notice of Draw Borrowing ” shall mean a notice, in accordance with Section 3.2 hereof, from Borrower to Bank, in form and substance of Exhibit D attached hereto.

“ Obligations ” shall mean the Loans, as evidenced by any Note, all interest accrued thereon (including interest which would be payable as post-petition in connection with any bankruptcy or similar proceeding, whether or not permitted as a claim thereunder), any fees due the Bank hereunder, any expenses incurred by the Bank hereunder, including without limitation, all liabilities and obligations under this Agreement, under any other Loan Document, any reimbursement obligations of the Borrower in respect of Letters of Credit and surety bonds, all Hedging Obligations of the Borrower which are owed to the Bank or any Affiliate of the Bank, and all Bank Product Obligations of the Borrower, and any and all other liabilities and obligations owed by the Borrower to the Bank from time to time, howsoever created, arising or evidenced, whether direct or indirect, joint or several, absolute or contingent, now or hereafter existing, or due or to become due, together with any and all renewals, extensions, restatements or replacements of any of the foregoing; provided, however, that the “Obligations” shall not include any Excluded Swap Obligations and that in the event any Borrower is not a Qualified ECP Borrower, the Obligations of such Borrower shall not include any Hedging Obligations.
“ Obligor ” shall mean the Borrower, any of the Operating Subsidiaries, any, accommodation endorser, third party pledgor, or any other party liable with respect to the Obligations.





“ Open Draw ” shall mean each advance and the aggregate of all advances under the Draw Loan Commitment (i) which in the aggregate total amount do not exceed $15,000,000.00 and (ii) for which a Subsidiary Note is not required.
        
“ Operating Subsidiaries ” shall mean, collectively, American Country, American Service and Gateway, each are Wholly-Owned Subsidiaries.

“ Organizational Identification Number ” shall mean, with respect to Borrower, the organizational identification number assigned to Borrower by the applicable governmental unit or agency of the jurisdiction of organization of the Borrower.

“ Other Taxes ” shall mean any present or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies which arise from the execution, delivery, enforcement or registration of, or otherwise with respect to, this Agreement or any of the other Loan Documents.

“ Permitted Liens ” shall mean (a)   Liens for Taxes, assessments or other governmental charges (including without limitation charges due and payable to state insurance regulatory entities) not at the time delinquent or thereafter payable without penalty or being contested in good faith by appropriate proceedings and, in each case, for which it maintains adequate reserves in accordance with GAAP and in respect of which no Lien has been filed; (b) Liens arising in the ordinary course of business (such as (i) Liens of carriers, warehousemen, mechanics and materialmen and other similar Liens imposed by law, and (ii) Liens in the form of deposits or pledges incurred in connection with worker’s compensation, unemployment compensation and other types of social security (excluding Liens arising under ERISA) or in connection with surety bonds, bids, performance bonds and similar obligations) for sums not overdue or being contested in good faith by appropriate proceedings and not involving any advances or borrowed money or the deferred purchase price of property or services, which do not in the aggregate materially detract from the value of the property or assets of the Borrower or materially impair the use thereof in the operation of the Borrower’s business and, in each case, for which it maintains adequate reserves in accordance with GAAP and in respect of which no Lien has been filed; (c) Liens described on Schedule 9.2 as of the Closing Date; (d)   Liens with respect to Insurance Claims; (e) easements, rights of way, restrictions, minor defects or irregularities in title and other similar Liens not interfering in any material respect with the ordinary conduct of the business of the Borrower, its Operating Subsidiaries or any of its other Subsidiaries; (f) Liens in the form of pledges to a state’s insurance regulatory entity as required by applicable insurance regulatory laws; and (f) Liens granted to the Bank hereunder and under the Loan Documents.

“ Person ” shall mean any natural person, partnership, limited liability company, corporation, trust, joint venture, joint stock company, association, unincorporated organization, government or agency or political subdivision thereof, or other entity, whether acting in an individual, fiduciary or other capacity.

“ Qualified ECP Borrower ” shall mean any Borrower that maintains total assets exceeding Ten Million and 00/100 Dollars ($10,000,000.00) at the time such Borrower enters into a Secured Hedge Agreement or any Borrower that otherwise constitutes an “eligible contract participant” under the Commodity Exchange Act or any regulations promulgated thereunder, including, without limitation, as an “eligible contract participant” merely by virtue of entering into a keepwell agreement with another “eligible contract participant” in accordance with Section 1a(18)(A)(v)(II) of the Commodity Exchange Act.

“ Regulated Insurance Company ” shall mean an insurance or surety company that has the ability to dividend capital subject to applicable insurance regulations.





“ Regulatory Change ” shall mean the introduction of, or any change in any applicable law, treaty, rule, regulation or guideline or in the interpretation or administration thereof by any governmental authority or any central bank or other fiscal, monetary or other authority having jurisdiction over the Bank or its lending office.

“ Revolving Interest Rate ” shall mean a floating per annum rate of interest equal to the LIBOR Rate, plus Two and Seventy-Five Hundredths percent (2.75%).

“ Revolving Loan ” and “ Revolving Loans ” shall mean, respectively, each direct advance and the aggregate of all such direct advances made by the Bank to the Borrower under and pursuant to this Agreement, as set forth in Section 2.1 of this Agreement.

“ Revolving Loan Availability ” shall mean, at any time, an amount equal to the lesser of (a) the Revolving Loan Commitment minus the Letter of Credit Obligations, and (b) the Borrowing Base Amount minus the Letter of Credit Obligations.

“ Revolving Loan Commitment ” shall mean an amount up to Five Million and 00/100 Dollars ($5,000,000.00).

“ Revolving Loan Maturity Date ” shall mean May 7, 2016, unless extended by the Bank pursuant to any modification, extension or renewal note executed by the Borrower and accepted by the Bank in its sole and absolute discretion in substitution for the Revolving Note.

“ Revolving Note ” shall mean a revolving promissory note dated as of the date hereof, in the amount of the Revolving Loan Commitment and maturing on the Revolving Loan Maturity Date, duly executed by the Borrower and payable to the order of the Bank, together with any and all renewal, extension, modification or replacement notes executed by the Borrower and delivered to the Bank and given in substitution therefor.

“ SAP ” shall mean statutory accounting principles which consist of rules promulgated by the NAIC and adopted and implemented by state insurance regulatory authorities for the preparation of the financial statements of insurance companies and to monitor and regulate the solvency of insurance companies.

“ Secured Hedge Agreement ” shall mean any Swap Contract not expressly prohibited under this Agreement or any of the other Loan Documents.

“ Statutory Financial Statements ” shall mean financial statements required to be filed by the Operating Subsidiaries with insurance regulatory authorities under applicable insurance regulatory laws, including the Annual Financial Statement and the Quarterly Financial Statements for each such Operating Subsidiary.

“ Statutory Net Income ” shall mean net income as determined in accordance with SAP made applicable to the Operating Subsidiaries under applicable insurance regulatory laws.

“ Statutory Net Worth ” shall mean statutory policyholder's surplus as determined in accordance with SAP made applicable to the Operating Subsidiaries under applicable insurance regulatory laws.

“ Statutory Unassigned Surplus Eligible for Dividend ” shall mean, the aggregate sum of the Statutory Unassigned Surplus Eligible for Dividend Calculation for all the Operating Subsidiaries.

“ Statutory Unassigned Surplus Eligible for Dividend Calculation ” shall mean the sum of:





(a).      the lesser of (i) ten percent (10%) of the Statutory Surplus of American Country, and (ii) the year-to-date Statutory Net Income of American Country, plus

(b).      the lesser of (i) ten percent (10%) of the Statutory Surplus of American Service, and (ii) the year-to-date Statutory Net Income of American Service, plus

(c).      the lesser of (i) ten percent (10%) of the Statutory Surplus of Gateway, and (ii) the year-to-date Statutory Net Income of Gateway.

“ Subsidiary ” and “ Subsidiaries ” shall mean, respectively, with respect to any Person, each and all such corporations, partnerships, limited partnerships, limited liability companies, limited liability partnerships, joint ventures or other entities of which or in which such Person owns, directly or indirectly, such number of outstanding Capital Securities as have more than fifty percent (50.00%) of the ordinary voting power for the election of directors or other managers of such corporation, partnership, limited liability company or other entity. Unless the context otherwise requires, each reference to Subsidiaries herein shall be a reference to Subsidiaries of the Borrower.

“ Subsidiary Note ” shall mean each and any Capital Note and Surplus Note.

“ Surplus Draw ” each advance and the aggregate of all advances under the Draw Loan Commitment (i) which in the aggregate total amount do not exceed $15,000,000.00, (ii) for which an Operating Subsidiary has obtained all required approvals from the applicable Insurance Director to make a Subsidiary Note payable to the order of Borrower in the amount of such advance, and (iii) for which the Borrower must collaterally assign such Subsidiary Note to Bank.

“ Surplus Note ” shall mean an unsecured subordinated debt obligation of an Operating Subsidiary, incorporated in Missouri, to the Borrower for which such Operating Subsidiary has obtained all required approvals from the Insurance Director in accordance with the Mo. Code Regs. tit. 20, Section 200-1.070.

“ Swap Contract ” shall mean (a) any and all rate swap transactions, basis swaps, credit derivative transactions, forward rate transactions, commodity swaps, commodity options, forward commodity contracts, equity or equity index swaps or options, bond or bond price or bond index swaps or options or forward bond or forward bond price or forward bond index transactions, interest rate options, forward foreign exchange transactions, cap transactions, floor transactions, collar transactions, currency swap transactions, cross-currency rate swap transactions, currency options, spot contracts, or any other similar transactions or any combination of any of the foregoing (including any options to enter into any of the foregoing), whether or not any such transaction is governed by or subject to any master agreement, and (b) any and all transactions of any kind, and the related confirmations, which are subject to the terms and conditions of, or governed by, any form of master agreement published by the International Swaps and Derivatives Association, Inc., any International Foreign Exchange Master Agreement, or any other master agreement (any such master agreement, together with any related schedules, a “ Master Agreement ”), including any such obligations or liabilities under any Master Agreement.

“ Swap Obligation ” shall mean any obligation with respect to a Swap Contract that constitutes a “swap” within the meaning of Section 1a(47) of the Commodity Exchange Act, as amended from time to time.





“ Taxes ” shall mean any and all present and future taxes, duties, levies, imposts, deductions, assessments, charges or withholdings, and any and all liabilities (including interest and penalties and other additions to taxes) with respect to the foregoing.

“ UCC ” shall mean the Uniform Commercial Code in effect in the state of Illinois from time to time.

“ Unassigned Statutory Surplus ” shall mean the unassigned portion of policyholder's surplus as determined in accordance with SAP made applicable to the Operating Subsidiaries under applicable insurance regulatory laws.

“ Unmatured Event of Default ” shall mean any event which, with the giving of notice, the passage of time or both, would constitute an Event of Default.

“ Voidable Transfer ” shall have the meaning set forth in Section 13.21 hereof.

“ Wholly-Owned Subsidiary ” shall mean Subsidiary of which or in which the Borrower owns, directly or indirectly, one hundred percent (100%) of the Capital Securities of such Subsidiary.

2. Accounting Terms . Any accounting terms used in this Agreement which are not specifically defined herein shall have the meanings customarily given them in accordance with GAAP. Calculations and determinations of financial and accounting terms used and not otherwise specifically defined hereunder and the preparation of financial statements to be furnished to the Bank pursuant hereto shall be made and prepared, both as to classification of items and as to amount, in accordance with sound accounting practices and GAAP as used in the preparation of the financial statements of the Borrower on the date of this Agreement. If any changes in accounting principles or practices from those used in the preparation of the financial statements are hereafter occasioned by the promulgation of rules, regulations, pronouncements and opinions by or required by the Financial Accounting Standards Board or the American Institute of Certified Public Accountants (or any successor thereto or agencies with similar functions), which results in a material change in the method of accounting in the financial statements required to be furnished to the Bank hereunder or in the calculation of financial covenants, standards or terms contained in this Agreement, the parties hereto agree to enter into good faith negotiations to amend such provisions so as equitably to reflect such changes to the end that the criteria for evaluating the financial condition and performance of the Borrower will be the same after such changes as they were before such changes; and if the parties fail to agree on the amendment of such provisions, the Borrower will furnish financial statements in accordance with such changes, but shall provide calculations for all financial covenants, perform all financial covenants and otherwise observe all financial standards and terms in accordance with applicable accounting principles and practices in effect immediately prior to such changes. Calculations with respect to financial covenants required to be stated in accordance with applicable accounting principles and practices in effect immediately prior to such changes shall be reviewed and certified by the Borrower’s accountants.

3. Other Terms Defined in UCC . All other capitalized words and phrases used herein and not otherwise specifically defined herein shall have the respective meanings assigned to such terms in the UCC, to the extent the same are used or defined therein.

4. Other Interpretive Provisions .





(a) The meanings of defined terms are equally applicable to the singular and plural forms of the defined terms. Whenever the context so requires, the neuter gender includes the masculine and feminine, the single number includes the plural, and vice versa, and in particular the word “Borrower” shall be so construed.

(b) Section and Schedule references are to this Agreement unless otherwise specified. The words “hereof”, “herein” and “hereunder” and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement.

(c) The term “including” is not limiting, and means “including, without limitation”.

(d) In the computation of periods of time from a specified date to a later specified date, the word “from” means “from and including”; the words “to” and “until” each mean “to but excluding”, and the word “through” means “to and including”.

(e) Unless otherwise expressly provided herein, (i) references to agreements (including this Agreement and the other Loan Documents) and other contractual instruments shall be deemed to include all subsequent amendments, restatements, supplements and other modifications thereto, but only to the extent such amendments, restatements, supplements and other modifications are not prohibited by the terms of any Loan Document, and (ii) references to any statute or regulation shall be construed as including all statutory and regulatory provisions amending, replacing, supplementing or interpreting such statute or regulation.

(f) To the extent any of the provisions of the other Loan Documents are inconsistent with the terms of this Agreement, the provisions of this Agreement shall govern.

(g) This Agreement and the other Loan Documents may use several different limitations, tests or measurements to regulate the same or similar matters. All such limitations, tests and measurements are cumulative and each shall be performed in accordance with its terms.

Section 2.
COMMITMENT OF THE BANK .

1. Revolving Loans .

(a) Revolving Loan Commitment . Subject to the terms and conditions of this Agreement and the other Loan Documents, and in reliance upon the representations and warranties of the Borrower set forth herein and in the other Loan Documents, the Bank agrees to make such Revolving Loans at such times as the Borrower may from time to time request until, but not including, the Revolving Loan Maturity Date, and in such amounts as the Borrower may from time to time request, provided, however, that the aggregate principal balance of all Revolving Loans outstanding at any time shall not exceed the Revolving Loan Availability. Revolving Loans made by the Bank may be repaid and, subject to the terms and conditions hereof, borrowed again up to, but not including the Revolving Loan Maturity Date unless the Revolving Loans are otherwise accelerated, terminated or extended as provided in this Agreement. The Revolving Loans shall be used by the Borrower (i) to allow Borrower to make strategic acquisitions of non-insurance regulated assets or companies that are not Regulated Insurance Companies, (ii) for general capital purposes and (iii) to fund certain fees and expenses associated with the closing of the Loans.

(b) Revolving Loan Interest and Payments . Except as otherwise provided in this Section 2.1(b) , the principal amount of the Revolving Loans outstanding from time to time shall bear interest




at the applicable Revolving Interest Rate. Accrued and unpaid interest on the unpaid principal balance of all Revolving Loans outstanding from time to time, shall be due and payable monthly, in arrears, commencing on the first day of the first month following a draw on the Revolving Loans and continuing on the last day of each Interest Period, throughout and including the Interest Period in which the Revolving Loan Maturity Date occurs. From and after the Revolving Loan Maturity Date, or after the occurrence and during the continuation of an Event of Default (whichever is first), interest on the outstanding principal balance of the Revolving Loans, at the option of the Bank, may accrue at the Default Rate and shall be payable upon demand from the Bank.

(c) Revolving Loan Principal Payments .

(i) Revolving Loan Mandatory Payments . All Revolving Loans hereunder shall be repaid by the Borrower on the Revolving Loan Maturity Date, unless payable sooner pursuant to the provisions of this Agreement. In the event (A) the aggregate outstanding principal balance of all Revolving Loans and Letter of Credit Obligations hereunder exceeds the Revolving Loan Availability and Borrower has not taken actions satisfactory to the Bank as are necessary to eliminate such excess, or (B) any Mandatory Prepayment is due and payable, then Borrower shall, without notice or demand of any kind, make such repayments of the Revolving Loans within three (3) Business Days. Notwithstanding anything to the contrary herein, Borrower shall not be required to make a prepayment hereunder for any issuances of any equity securities of Atlas, either directly or indirectly, through a public or private exchange or for the sale of equity securities of Atlas to employees of Atlas.

(ii) Optional Prepayments . The Borrower may from time to time prepay the Revolving Loans, in whole or in part, without any prepayment penalty whatsoever, provided that any prepayment of the entire principal balance of the Revolving Loans shall include accrued interest on such Revolving Loans to the date of such prepayment, as well as all other sums due to Bank under the Draw Loans.

2. Draw Loans.

(a) Loan Amount .
Subject to the terms and conditions of this Agreement and the other Loan Documents, and in reliance upon the representations and warranties of the Borrower set forth herein, and in the other Loan Documents, the Bank agrees to make Draw Loans available at such times as the Borrower may from time to time request, by notice to the Bank pursuant to Section 5.1 hereof, during but not including the last day of the Draw Period, and in such amounts as the Borrower may from time to time request, provided, however that the aggregate principal balance of all Draw Loans extended to Borrower during the Draw Period shall not exceed the Draw Loan Commitment. The Draw Loans shall be used by the Borrower to (i) allow Borrower to make capital injections in the Operating Subsidiaries, (ii) for general corporate purposes and (iii) fund certain fees and expense associated with the closing of the Loans.

(b) Draw Notes .
Each Draw Loan shall be evidenced by a Draw Note in the form of Exhibit C attached hereto and duly executed by the Borrower and payable to the order of the Bank.

(c) Draw Loan Interest and Payments .
Except as otherwise provided in this Section 2.2(c) , the principal amount of the Draw Loans outstanding from time to time shall bear interest at the applicable Draw Interest Rate. Accrued and unpaid interest on the unpaid principal balance of all Draw Loans outstanding from time to time, shall be due and payable




monthly, in arrears, commencing on the first day of the first month following a draw on the Draw Loans and continuing on the last day of each Interest Period, throughout and including the Interest Period in which the Draw Loan Maturity Date occurs. From and after the Draw Loan Maturity Date or after the occurrence and during the continuation of an Event of Default (whichever is first), interest on the outstanding principal balance of the Draw Loans, at the option of the Bank, may accrue at the Default Rate and shall be payable upon demand from the Bank.

(d) Draw Loan Principal Payments .

(i) Draw Loan Mandatory Payments . All Draw Loans hereunder shall be repaid by the Borrower on the Draw Loan Maturity Date, unless payable sooner pursuant to the provisions of this Agreement. At any time that the Borrower receives a principal payment on a Subsidiary Note, Borrower must notify Bank of such payment and make a principal payment on the Draw Loan in immediately available funds to Bank in the same amount as the principal payment on the Subsidiary Note within one Business Day of the principal payment on such Subsidiary Note. In the event any Mandatory Prepayment is due and payable, then Borrower shall, without notice or demand of any kind, make such repayments of the Draw Loans, to the extent such repayment has not been made under Section 2.1(c)(i ) above, to the Bank within three (3) Business Days. Notwithstanding anything to the contrary herein, Borrower shall not be required to make a prepayment hereunder for any issuances of any equity securities of Atlas, either directly or indirectly, through a public or private exchange or for the sale of equity securities of Atlas to employees of Atlas.

(ii) Optional Prepayments . The Borrower may from time to time prepay the Draw Loans, in whole or in part, without any prepayment penalty whatsoever, provided that any prepayment of the entire principal balance of the Draw Loans shall include accrued interest on such Draw Loan to the date of such prepayment, as well as all other sums due to Bank under the Draw Loans.

3. Intentionally Omitted .

4. Additional Loan Provisions .

(a) LIBOR Unavailability . If the Bank determines in good faith (which determination shall be conclusive, absent manifest error) prior to the commencement of any Interest Period that (i) the making or maintenance of any Loan would violate any applicable law, rule, regulation or directive, whether or not having the force of law, (ii) United States dollar deposits in the principal amount, and for periods equal to the Interest Period for funding any Loan are not available in the London Interbank Eurodollar market in the ordinary course of business, (iii) by reason of circumstances affecting the London Interbank Eurodollar market, adequate and fair means do not exist for ascertaining the LIBOR Rate to be applicable to the relevant Loan, or (iv) the LIBOR Rate does not accurately reflect the cost to the Bank of a Loan, the Bank shall promptly notify the Borrower thereof and, so long as the foregoing conditions continue, Bank may select an alternative, but similar index upon which to base the LIBOR Rate (the rate based on said alternate index is referred to herein as the “ Alternate Rate ”), and such determination by Bank shall be binding upon Borrower and all other Obligors.

(b) Regulatory Change . In addition, if, after the date hereof, a Regulatory Change shall, in the reasonable determination of the Bank, make it unlawful for the Bank to make or maintain the LIBOR Rate, then all outstanding Loans and all other Loans shall thereafter accrue interest at the Alternate Rate.





(c) LIBOR Indemnity . If any Regulatory Change, or compliance by the Bank or any Person controlling the Bank with any request or directive of any governmental authority, central bank or comparable agency (whether or not having the force of law) shall (a) impose, modify or deem applicable any assessment, reserve, special deposit or similar requirement against assets held by, or deposits in or for the account of or loans by, or any other acquisition of funds or disbursements by, the Bank; (b) subject the Bank or any Loan to any tax, duty, charge, stamp tax or fee or change the basis of taxation of payments to the Bank of principal or interest due from the Borrower to the Bank hereunder (other than a change in the taxation of the overall net income of the Bank); or (c) impose on the Bank any other condition regarding such Loan or the Bank’s funding thereof, and the Bank shall determine (which determination shall be conclusive, absent manifest error) that the result of the foregoing is to increase the cost to, or to impose a cost on, the Bank or such controlling Person of making or maintaining such Loan or to reduce the amount of principal or interest received by the Bank hereunder, then the Borrower shall pay to the Bank or such controlling Person, on demand, such additional amounts as the Bank shall, from time to time, determine are sufficient to compensate and indemnify the Bank for such increased cost or reduced amount.

1. Interest and Fee Computation; Collection of Funds . Except as otherwise set forth herein, all interest and fees shall be calculated on the basis of a year consisting of 360 days and shall be paid for the actual number of days elapsed. Principal payments submitted in funds not immediately available shall continue to bear interest until collected. If any payment to be made by the Borrower hereunder or under any Note shall become due on a day other than a Business Day, such payment shall be made on the next succeeding Business Day and such extension of time shall be included in computing any interest in respect of such payment. Notwithstanding anything to the contrary contained herein, the final payment due under any of the Loans must be made by wire transfer or other immediately available funds. All payments made by the Borrower hereunder or under any of the Loan Documents shall be made without setoff, counterclaim, or other defense. To the extent permitted by applicable law, all payments hereunder or under any of the Loan Documents (including any payment of principal, interest, or fees) to, or for the benefit, of any Person shall be made by the Borrower free and clear of, and without deduction or withholding for, or account of, any taxes now or hereinafter imposed by any taxing authority.

2. Late Charge . If any payment of interest or principal due hereunder is not made within ten (10) days after such payment is due in accordance with the terms hereof, then, in addition to the payment of the amount so due, the Borrower shall pay to the Bank a “late charge” of five cents for each whole dollar so overdue to defray part of the cost of collection and handling such late payment. The Borrower agrees that the damages to be sustained by the Bank for the detriment caused by any late payment are extremely difficult and impractical to ascertain, and that the amount of five cents for each one dollar due is a reasonable estimate of such damages, does not constitute interest, and is not a penalty.

3. Letters of Credit . Subject to the terms and conditions of this Agreement and upon (i) the execution by the Borrower and the Bank of a Master Letter of Credit Agreement in form and substance acceptable to the Bank (together with all amendments, modifications and restatements thereof, the “Master Letter of Credit Agreement”), and (ii) the execution and delivery by the Borrower, and the acceptance by the Bank, in its sole and absolute discretion, of a Letter of Credit Application, the Bank agrees to issue for the account of the Borrower from time to time up to, but not including, the Revolving Loan Maturity Date, such Letters of Credit in the standard form of the Bank and otherwise in form and substance acceptable to the Bank, provided that the Letter of Credit Obligations




may not at any time exceed the Letter of Credit Commitment and provided further, that no Letter of Credit shall have an expiration date later than the Letter of Credit Maturity Date. The amount of any payments made by the Bank with respect to draws made by a beneficiary under a Letter of Credit for which the Borrower has failed to reimburse the Bank upon the earlier of (i) the Bank’s demand for repayment, or (ii) five (5) days from the date of such payment to such beneficiary by the Bank, shall be deemed to have been converted to a Revolving Loan as of the date such payment was made by the Bank to such beneficiary. Upon the occurrence of an Event of a Default and at the option of the Bank, all Letter of Credit Obligations shall be converted to Revolving Loans, all without demand, presentment, protest or notice of any kind, all of which are hereby waived by the Borrower. To the extent the provisions of the Master Letter of Credit Agreement differ from, or are inconsistent with, the terms of this Agreement, the provisions of this Agreement shall govern.

4. Taxes .

(a) All payments made by the Borrower under this Agreement shall be made free and clear of, and without deduction or withholding for or on account of, any present or future income, stamp or other taxes, levies, imposts, duties, charges, fees, deductions or withholdings, now or hereafter imposed, levied, collected, withheld or assessed by any governmental authority, excluding net income taxes and franchise taxes (imposed in lieu of net income taxes) imposed on the Bank as a result of a present or former connection between the Bank and the jurisdiction of the governmental authority imposing such tax or any political subdivision or taxing authority thereof or therein (other than any such connection arising solely from the Bank having executed, delivered or performed its obligations or received a payment under, or enforced, this Agreement or any other Loan Document). If any such non-excluded taxes, levies, imposts, duties, charges, fees, deductions or withholdings (collectively, “ Non-Excluded Taxes ”) or Other Taxes are required to be withheld from any amounts payable to the Bank hereunder, the amounts so payable to the Bank shall be increased to the extent necessary to yield to the Bank (after payment of all Non-Excluded Taxes and Other Taxes) interest or any such other amounts payable hereunder at the rates or in the amounts specified in this Agreement, provided, however, that the Borrower shall not be required to increase any such amounts payable to the Bank with respect to any Non-Excluded Taxes that are attributable to the Bank’s failure to comply with the requirements of subsection 2.8(c).

(b) The Borrower shall pay any Other Taxes to the relevant governmental authority in accordance with applicable law.

(c) At the request of the Borrower and at the Borrower’s sole cost, the Bank shall take reasonable steps to (i) contest its liability for any Non-Excluded Taxes or Other Taxes that have not been paid, or (ii) seek a refund of any Non-Excluded Taxes or Other Taxes that have been paid.

(d) Whenever any Non-Excluded Taxes or Other Taxes are payable by the Borrower, as promptly as possible thereafter, the Borrower shall send to the Bank a certified copy of an original official receipt received by the Borrower showing payment thereof. If the Borrower fails to pay any Non-Excluded Taxes or Other Taxes when due to the appropriate taxing authority or fails to remit to the Bank the required receipts or other required documentary evidence or if any governmental authority seeks to collect a Non-Excluded Tax or Other Tax directly from the Bank for any other reason, the Borrower shall indemnify the Bank on an after-tax basis for any incremental taxes, interest or penalties that may become payable by the Bank.

(e) The agreements in this Section shall survive the satisfaction and payment of the Obligations and the termination of this Agreement.





5. All Loans to Constitute Single Obligation . The Loans shall constitute one general obligation of the Borrower, and shall be secured by Bank’s first priority security interest in and Lien upon all of the Collateral and by all other security interests, Liens, claims and encumbrances heretofore, now or at any time or times hereafter granted by the Borrower, its Operating Subsidiaries and/or any other Subsidiary to Bank.

Section 1.
CONDITIONS OF BORROWING .

Notwithstanding any other provision of this Agreement, as a condition precedent to any obligations of the Bank under this Agreement to make the Loans, all of the following shall have occurred, to the Lender's satisfaction:
    
1. Solely with respect to the closing of the Loans:

(a) Loan Documents; Ancillary Documents . The Borrower shall have executed and delivered to the Bank each of the following Loan Documents and ancillary documents thereto, all of which must be satisfactory to the Bank and the Bank’s counsel in form, substance and execution:

(i) Loan Agreement . Two copies of this Agreement duly executed by the Borrower.

(ii) Revolving Note . The Revolving Note duly executed by the Borrower.

(iii) Draw Note . The Draw Note duly executed by the Borrower.

(iv) Collateral Assignment . A Collateral Assignment executed by Borrower whereby Borrower to the extent permitted by applicable law, collaterally assigns the Subsidiary Notes to Bank.

(v) Stock Pledge Agreement . A Stock Pledge Agreement executed by Borrower, whereby Borrower shall pledge to Bank One-Hundred percent (100%) of the Capital Securities in each of the Operating Subsidiaries (the “ Stock Pledge Agreement ”).

(vi) Stock Certificates . Certain stock certificates representing Borrower’s Capital Securities in the Operating Subsidiaries, duly delivered to Bank.

(vii) Stock Powers Executed in Blank . Stock Powers, executed by Borrower in blank, and delivered to Bank with the corresponding Stock Certificates.

(viii) Master Letter of Credit Agreement . A Master Letter of Credit Agreement prepared by and acceptable to the Bank, duly executed by the Borrower in favor of the Bank.

(ix) Authorized Representatives . A list of the Borrower’s Authorized Representatives.

(x) Legal Opinion . The favorable written opinion of counsel to Borrower in form and substance satisfactory to Bank.

(xi) Other Documents . Such other agreements, instruments, documents, certificates, and opinions as Bank may reasonably request.





(b) Search Results; Lien Terminations . The Bank shall have received copies of UCC search reports dated such a date as is reasonably acceptable to the Bank, listing all effective financing statements which name the Borrower and the Operating Subsidiaries, under their present names and any previous names, as debtors, together with (i) copies of such financing statements, (ii) payoff letters evidencing repayment in full of all existing Debt to be repaid with the Loans, the termination of all agreements relating thereto and the release of all Liens granted in connection therewith, with UCC or other appropriate termination statements and documents effective to evidence the foregoing (other than Permitted Liens), and (iii) such other UCC termination statements as the Bank may reasonably request.

(c) Organizational and Authorization Document . The Bank shall have received copies of (i) the Articles of Incorporation and Bylaws of the Borrower and each of the Operating Subsidiaries; (ii) resolutions of the board of directors and/or governing body of the Borrower and each of the Operating Subsidiaries approving and authorizing such Person’s execution, delivery and performance of the Loan Documents to which it is party and the transactions contemplated thereby; (iii) signature and incumbency certificates of the officers of the Borrower and each of its Operating Subsidiaries, executing any of the Loan Documents, each of which the Borrower hereby certifies to be true and complete, and in full force and effect without modification, it being understood that the Bank may conclusively rely on each such document and certificate until formally advised by the Borrower of any changes therein; and (iv) good standing certificates in the state of incorporation of the Borrower and each of its Operating Subsidiaries and in each other state requested by the Bank.

(d) Insurance . Upon request by the Bank, evidence satisfactory to the Bank of the existence of insurance required to be maintained pursuant to Section 8.6 .

(e) Payment of Closing Fees and Legal Fees . Borrower shall have paid to Bank at or prior to the Closing Date (i) Bank closing fees in the amount of $300,000 and (ii) all documented reasonable out-of-pocket legal fees and expenses of Bank (including estimated post-closing fees and expenses) associated with the closing of this Agreement.

2. With respect to the disbursement of any of the Loans:

(a) Borrowing Base Certificate . For any Revolving Loan, a Borrowing Base Certificate in the form prepared by the Bank, certified as accurate by the Borrower and acceptable to the Bank in its sole discretion, in form and substance as set forth on Exhibit A attached hereto.

(b) Notice of Draw Borrowing . For any Draw Loan, Borrower shall provide Bank a Notice of Draw Borrowing, in form and substance as set forth on Exhibit D attached hereto.

(c) Collateral Assignment . For any Surplus Draw, Borrower shall deliver to Bank (i) an updated Schedule 1 to the Collateral Assignment and (ii) all Subsidiary Notes associated with such Surplus Draw, which Subsidiary Notes shall be in form and substance acceptable to the applicable Insurance Director.

(d) Compliance Certificate . For each Loan advance, Borrower must provide Bank a Compliance Certificate signed by an Authorized Representative, in form and substance as set forth on Exhibit B attached hereto.





(e) Event of Default . No Event of Default, or Unmatured Event of Default shall have occurred and be continuing.

(f) Material Adverse Effect . No event having a Material Adverse Effect upon the Borrower shall have occurred since September 30, 2014, in the case of the first disbursement hereunder, and as of the date of any subsequent disbursement.

(g) Litigation . Except with respect to Insurance Claims, no litigation or governmental proceeding shall have been instituted against the Borrower or any of its officers or shareholders having a Material Adverse Effect upon the Borrower.

(h) Representations and Warranties . No representation or warranty of the Borrower contained herein or in any Loan Document shall be untrue or incorrect as of the date of any Loan as though made on such date, except to the extent such representation or warranty expressly relates to an earlier date.

(i) Additional Documents . The Bank's receipt of all such other certificates, financial statements, schedules, resolutions, opinions of counsel, notes and other documents which are provided for hereunder or which the Bank shall require including (without limitation) the request for, and determination as to, approval by the domiciliary insurance regulatory authority of any Operating Subsidiary to pay any dividend under applicable insurance regulatory laws.

Section 1.
NOTES EVIDENCING LOANS .

1. Revolving Note . The Revolving Loans and the Letter of Credit Obligations shall be evidenced by the Revolving Note. At the time of the initial disbursement of a Revolving Loan and at each time any additional Revolving Loan shall be requested hereunder or a repayment made in whole or in part thereon, a notation thereof shall be made on the books and records of the Bank. All amounts recorded shall be, absent manifest error, conclusive and binding evidence of (i) the principal amount of the Revolving Loans advanced hereunder and the amount of all Letter of Credit Obligations, (ii) any accrued and unpaid interest owing on the Revolving Loans, and (iii) all amounts repaid on the Revolving Loans or the Letter of Credit Obligations. The failure to record any such amount or any error in recording such amounts shall not, however, limit or otherwise affect the obligations of the Borrower under the Revolving Note to repay the principal amount of the Revolving Loans, together with all interest accruing thereon.

2. Draw Note . The Draw Loan shall be evidenced by the Draw Note. At the time of the initial disbursement of a Draw Loan and at each time any additional Draw Loan shall be requested hereunder or a repayment made in whole or in part thereon, a notation thereof shall be made on the books and records of the Bank. All amounts recorded shall be, absent manifest error, conclusive and binding evidence of (i) the principal amount of the Draw Loans advanced hereunder, (ii) any accrued and unpaid interest owing on the Draw Loans, and (iii) all amounts repaid on the Draw Loans. The failure to record any such amount or any error in recording such amounts shall not, however, limit or otherwise affect the obligations of the Borrower under the Draw Note to repay the principal amount of the Draw Loans, together with all interest accruing thereon.

Section 2.
MANNER OF BORROWING .

1. Borrowing Procedures . Each Loan shall be made available to the Borrower upon any written, verbal, electronic, telephonic or telecopy loan request which the Bank in good faith believes




to emanate from an Authorized Representative of the Borrower, whether or not that is in fact the case. Each such request shall be effective and irrevocable upon receipt by the Bank of the loan request, which shall specify the date, amount and type of borrowing. Borrower agrees that Bank may rely on any such telephonic, telecopy or other telecommunication notice given by any person Bank in good faith believes is an Authorized Representative without the necessity of independent investigation, and in the event any such notice by telephone conflicts with any written confirmation such telephonic notice shall govern if Bank has acted in reliance thereon. The Borrower does hereby irrevocably confirm, ratify and approve all such advances by the Bank and does hereby indemnify the Bank against losses and expenses (including court costs, attorneys’ and paralegals’ fees and expenses) and shall hold the Bank harmless with respect thereto. Upon notice to Borrower by Bank (or, in the case of an Event of Default under Section 10 hereof with respect to Borrower, without notice), except at the Bank’s sole discretion, no Draw shall be advanced if any Event of Default then exists and is continuing.

(a) Revolving Loan . Each request for a Revolving Loan must be received by the Bank no later than 11:00 a.m. Chicago, Illinois time at least one (1) day prior to the date on the notice that Borrower requests Bank to advance such Revolving Loan. Upon confirmation by Bank that all requirements of Section 3.2 hereof have been met, the proceeds of such Revolving Loan shall be made available at the office of the Bank by credit to the account of the Borrower or by other means requested by the Borrower and acceptable to the Bank.

(b) Draw Loan . Each request for a Draw Loan must be received by the Bank no later than 11:00 a.m. Chicago, Illinois time at least two (2) days’ prior to the date on the notice that Borrower requests Bank to advance such Draw Loan. All such notices concerning the advance of a Draw Loan shall specify the date of the requested Draw Loan (which shall be a Business Day), the amount of the requested Draw to be advanced, and, if such Draw is a Surplus Draw, Borrower shall deliver to Bank, prior to such Surplus Draw, (i) an updated Schedule 1 to Collateral Assignment, and (ii) the applicable Subsidiary Notes. Upon confirmation by Bank that all requirements of Section 3.2 hereof have been met, the proceeds of such Draw Loan shall be made available at the office of the Bank by credit to the account of the Borrower or by other means requested by the Borrower and acceptable to the Bank.

2. Letters of Credit . All Letters of Credit shall bear such application, issuance, renewal, negotiation and other fees and charges, and bear such interest as charged by the Bank or otherwise payable pursuant to the Master Letter of Credit Agreement. In addition to the foregoing, each standby Letter of Credit issued under and pursuant to this Agreement shall bear an annual issuance fee equal to two percent (2.00%) of the face amount of such standby Letter of Credit, payable by the Borrower prior to the issuance by the Bank of such Letter of Credit and annually thereafter, until (i) such Letter of Credit has expired or has been returned to the Bank, or (ii) the Bank has paid the beneficiary thereunder the full face amount of such Letter of Credit.

1. Automatic Debit . In order to effectuate the timely payment of any of the Obligations when due, the Borrower hereby authorizes and directs the Bank, at the Bank’s option, to (a) debit the amount of the Obligations to any ordinary deposit account of the Borrower, or (b) make a Revolving Loan hereunder to pay the amount of the Obligations.

2. Discretionary Disbursements . The Bank, in its sole and absolute discretion, may immediately upon prior written notice to the Borrower, disburse any or all proceeds of the Loans made or available to the Borrower pursuant to this Agreement to pay any fees, costs, expenses or




other amounts required to be paid by the Borrower hereunder and not so paid. All monies so disbursed shall be a part of the Obligations, payable by the Borrower on demand from the Bank.

Section 1.
SECURITY FOR THE OBLIGATIONS .

1. Security Interest for Obligations . As security for the payment and performance of the Obligations, the Borrower does hereby pledge, assign, transfer, deliver and grant to the Bank, for its own benefit and as agent for its Affiliates, a continuing and unconditional first priority security interest in and to any and all property of the Borrower, of any kind or description, tangible or intangible, wheresoever located and whether now existing or hereafter arising or acquired, including the following (all of which property, along with the products and proceeds therefrom, are individually and collectively referred to as the “ Collateral ”):

(a) all property of, or for the account of, the Borrower now or hereafter coming into the possession, control or custody of, or in transit to, the Bank or any agent or bailee for the Bank or any parent, Affiliate or Subsidiary of the Bank or any participant with the Bank in the Loans (whether for safekeeping, deposit, collection, custody, pledge, transmission or otherwise), including all earnings, dividends, interest, or other rights in connection therewith and the products and proceeds therefrom, including the proceeds of insurance thereon; and

(b) the additional property of the Borrower, whether now existing or hereafter arising or acquired, and wherever now or hereafter located, together with all additions and accessions thereto, substitutions, betterments and replacements therefor, products and Proceeds therefrom, and all of the Borrower’s books and records and recorded data relating thereto (regardless of the medium of recording or storage), together with all of the Borrower’s right, title and interest in and to all computer software required to utilize, create, maintain and process any such records or data on electronic media, identified and set forth as follows:

(i)
All Accounts and all Goods whose sale, lease or other disposition by the Borrower has given rise to Accounts and have been returned to, or repossessed or stopped in transit by, the Borrower, or rejected or refused by an Account Debtor;

(ii)
All Inventory, including raw materials, work-in-process and finished goods;

(iii)
All Goods (other than Inventory), including embedded software, Equipment, vehicles, furniture and Fixtures;

(iv)
All Software and computer programs;

(v)
All Securities, Investment Property, Financial Assets and Deposit Accounts;

(vi)
All Chattel Paper, Electronic Chattel Paper, Instruments, Documents, Letter of Credit Rights, all proceeds of letters of credit, Health-Care-Insurance Receivables, Supporting Obligations, notes secured by real estate, Commercial Tort Claims (described on Schedule 6.1(b)(vi) attached hereto) and General Intangibles, including Payment Intangibles; and

(vii)
All Proceeds (whether Cash Proceeds or Noncash Proceeds) of the foregoing property, including all insurance policies and proceeds of insurance payable by reason of loss or damage to the foregoing property, including unearned premiums, and of eminent domain or condemnation awards.





To the extent any of the capitalized terms used in this Section 6.1 are undefined, such terms shall have meaning ascribed to them in the UCC.

(c) Collateral shall not include Excluded Assets, notwithstanding anything to the contrary contained herein.

2. Other Collateral . In addition, the Obligations are also secured by the Stock Pledge Agreement, the Collateral Assignment, this Agreement and all other collateral evidenced by the Loan Documents.

1. Possession and Transfer of Collateral . Unless an Event of Default exists hereunder, the Borrower shall be entitled to possession or use of the Collateral, Tangible Chattel Paper, Investment Property consisting of certificated securities and other Collateral required to be delivered to the Bank pursuant to this Section 6 ). The cancellation or surrender of any Note, upon payment or otherwise, shall not affect the right of the Bank to retain the Collateral for any other of the Obligations. The Borrower shall not sell, assign (by operation of law or otherwise), license, lease or otherwise dispose of, or grant any option with respect to any of the Collateral, except that the Borrower may sell Inventory in the ordinary course of business.

2. Financing Statements . The Borrower shall, at the Bank’s request, at any time and from time to time, execute and deliver to the Bank such financing statements, amendments and other documents and do such acts as the Bank deems necessary in order to establish and maintain valid, attached and perfected first priority security interests in the Collateral in favor of the Bank, free and clear of all Liens and claims and rights of third parties whatsoever, except Permitted Liens. The Borrower hereby irrevocably authorizes the Bank at any time, and from time to time, to file in any jurisdiction any initial financing statements and amendments thereto without the signature of the Borrower that (a) indicate the Collateral (i) is comprised of all assets of the Borrower or words of similar effect, regardless of whether any particular asset comprising a part of the Collateral falls within the scope of Article 9 of the Uniform Commercial Code of the jurisdiction wherein such financing statement or amendment is filed, or (ii) as being of an equal or lesser scope or within greater detail as the grant of the security interest set forth herein, and (b) contain any other information required by Section 5 of Article 9 of the Uniform Commercial Code of the jurisdiction wherein such financing statement or amendment is filed regarding the sufficiency or filing office acceptance of any financing statement or amendment, including (i) whether the Borrower is an organization, the type of organization and any Organizational Identification Number issued to the Borrower, and (ii) in the case of a financing statement filed as a fixture filing or indicating Collateral as as-extracted collateral or timber to be cut, a sufficient description of the real property to which the Collateral relates. The Borrower hereby agrees that a photocopy or other reproduction of this Agreement is sufficient for filing as a financing statement and the Borrower authorizes the Bank to file this Agreement as a financing statement in any jurisdiction. The Borrower agrees to furnish any such information to the Bank promptly upon request. The Borrower further ratifies and affirms its authorization for any financing statements and/or amendments thereto, executed and filed by the Bank in any jurisdiction prior to the date of this Agreement. In addition, the Borrower shall make appropriate entries on its books and records disclosing the Bank’s security interests in the Collateral.

3. Intentionally Omitted .

4. Preservation of the Collateral . The Bank may, but is not required, to take such actions from time to time as the Bank deems appropriate to maintain or protect the Collateral. The Bank




shall have exercised reasonable care in the custody and preservation of the Collateral if the Bank takes such action as the Borrower shall reasonably request in writing which is not inconsistent with the Bank’s status as a secured party, but the failure of the Bank to comply with any such request shall not be deemed a failure to exercise reasonable care; provided, however, the Bank’s responsibility for the safekeeping of the Collateral shall (i) be deemed reasonable if such Collateral is accorded treatment substantially equal to that which the Bank accords its own property, and (ii) not extend to matters beyond the control of the Bank, including acts of God, war, insurrection, riot or governmental actions. In addition, any failure of the Bank to preserve or protect any rights with respect to the Collateral against prior or third parties, or to do any act with respect to preservation of the Collateral, not so requested by the Borrower, shall not be deemed a failure to exercise reasonable care in the custody or preservation of the Collateral. The Borrower shall have the sole responsibility for taking such action as may be necessary, from time to time, to preserve all rights of the Borrower and the Bank in the Collateral against prior or third parties. Without limiting the generality of the foregoing, where Collateral consists in whole or in part of securities, the Borrower represents to, and covenants with, the Bank that the Borrower has made arrangements for keeping informed of changes or potential changes affecting the securities (including rights to convert or subscribe, payment of dividends, reorganization or other exchanges, tender offers and voting rights), and the Borrower agrees that the Bank shall have no responsibility or liability for informing the Borrower of any such or other changes or potential changes or for taking any action or omitting to take any action with respect thereto. The Borrower further agrees to indemnify and hold the Bank harmless against claims of any Persons not a party to this Agreement arising out of disputes with respect to the Collateral.

5. Other Actions as to any and all Collateral . The Borrower further agrees to take any other action reasonably requested by the Bank to ensure the attachment, perfection and first priority of, and the ability of the Bank to enforce, the Bank’s security interest in any and all of the Collateral, including (a) causing the Bank’s name to be noted as secured party on any certificate of title for a titled good at the Bank's request if such notation is a condition to attachment, perfection or priority of, or ability of the bank to enforce, the Bank’s security interest in such Collateral, (b) complying with any provision of any statute, regulation or treaty of the United States as to any Collateral if compliance with such provision is a condition to attachment, perfection or priority of, or ability of the Bank to enforce, the Bank’s security interest in such Collateral, (c) obtaining governmental and other third party consents and approvals, including any consent of any licensor, lessor or other Person obligated on Collateral, (d) using commercially reasonable efforts to obtain waivers from mortgagees and landlords in form and substance reasonably satisfactory to the Bank, and (e) taking all actions required by the UCC in effect from time to time or by other law, as applicable in any relevant Uniform Commercial Code jurisdiction, or by other law as applicable in any foreign jurisdiction. The Borrower further agrees to indemnify and hold the Bank harmless against claims of any Persons not a party to this Agreement concerning disputes arising over the Collateral.

6. Collateral in the Possession of a Warehouseman or Bailee . If any of the Collateral at any time is in the possession of a warehouseman or bailee, the Borrower shall promptly notify the Bank thereof, and shall use commercially reasonable efforts to obtain a Collateral Access Agreement. The Bank agrees with the Borrower that the Bank shall not give any instructions to such warehouseman or bailee pursuant to such Collateral Access Agreement unless an Event of Default has occurred and is continuing, or would occur after taking into account any action by the Borrower with respect to the warehouseman or bailee.

7. Intentionally Omitted .





8. Letter-of-Credit Rights . If the Borrower at any time is a beneficiary under a letter of credit now or hereafter issued in favor of the Borrower, the Borrower shall promptly notify the Bank thereof and, at the request and option of the Bank, the Borrower shall, pursuant to an agreement in form and substance satisfactory to the Bank, either (i) arrange for the issuer and any confirmer of such letter of credit to consent to an assignment to the Bank of the proceeds of any drawing under the letter of credit, or (ii) arrange for the Bank to become the transferee beneficiary of the letter of credit, with the Bank agreeing, in each case, that the proceeds of any drawing under the letter to credit are to be applied as provided in this Agreement.

9. Commercial Tort Claims . If the Borrower shall at any time hold or acquire a Commercial Tort Claim, the Borrower shall immediately notify the Bank in writing signed by the Borrower of the details thereof and grant to the Bank in such writing a security interest therein and in the proceeds thereof, all upon the terms of this Agreement, in each case in form and substance satisfactory to the Bank, and shall execute any amendments hereto deemed reasonably necessary by the Bank to perfect its security interest in such Commercial Tort Claim.

10. Electronic Chattel Paper and Transferable Records . If the Borrower at any time holds or acquires an interest in any electronic chattel paper or any “transferable record”, as that term is defined in Section 201 of the federal Electronic Signatures in Global and National Commerce Act, or in Section 16 of the Uniform Electronic Transactions Act as in effect in any relevant jurisdiction, the Borrower shall promptly notify the Bank thereof and, at the request of the Bank, shall take such action as the Bank may reasonably request to vest in the Bank control under Section 9-105 of the UCC of such electronic chattel paper or control under Section 201 of the federal Electronic Signatures in Global and National Commerce Act or, as the case may be, Section 16 of the Uniform Electronic Transactions Act, as so in effect in such jurisdiction, of such transferable record. The Bank agrees with the Borrower that the Bank will arrange, pursuant to procedures satisfactory to the Bank and so long as such procedures will not result in the Bank’s loss of control, for the Borrower to make alterations to the electronic chattel paper or transferable record permitted under Section 9-105 of the UCC or, as the case may be, Section 201 of the federal Electronic Signatures in Global and National Commerce Act or Section 16 of the Uniform Electronic Transactions Act for a party in control to make without loss of control.

11. After-Acquired Collateral . Upon the consummation of any Acquisition Transaction, Borrower shall within three (3) Business Days execute and deliver to Bank the documents necessary to grant Bank a first lien priority interest in any After-Acquired Collateral (other than Excluded Assets).

Section 1.
REPRESENTATIONS AND WARRANTIES .

To induce the Bank to make the Loans, the Borrower makes the following representations and warranties to the Bank as of the date hereof and as of the date of any Loan, each of which shall survive the execution and delivery of this Agreement:

1. Borrower Organization and Name . The Borrower is a corporation duly organized, existing and in good standing under the laws of the State of Delaware, with full and adequate power to carry on and conduct its business as presently conducted and each of the Operating Subsidiaries are validly existing and in good standing under the laws of the jurisdiction of its respective organization. The Borrower and each of the Operating Subsidiaries are duly licensed or qualified in all foreign jurisdictions wherein the nature of its activities require such qualification or licensing, except for such jurisdictions where the failure to so qualify could not reasonably be expected to result




in a Material Adverse Effect. The Borrower’s Organizational Identification Number is 4843376. The exact legal name of the Borrower is as set forth in the first paragraph of this Agreement, and the Borrower currently does not conduct, nor has it during the last five (5) years conducted, business under any other name or trade name.

2. Authorization . The Borrower has full right, power and authority to enter into this Agreement, to make the borrowings and execute and deliver the Loan Documents as provided herein and to perform all of its duties and obligations under this Agreement and the other Loan Documents. The execution and delivery of this Agreement and the other Loan Documents will not, nor will the observance or performance of any of the matters and things herein or therein set forth, violate or contravene any provision of law or of the Certificate of Incorporation or bylaws of the Borrower. All necessary and appropriate action has been taken on the part of the Borrower to authorize the execution and delivery of this Agreement and the Loan Documents.

3. Validity and Binding Effect . This Agreement and the other Loan Documents are the legal, valid and binding obligations of the Borrower, enforceable against the Borrower in accordance with their respective terms, subject to bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforceability of creditors’ rights generally and to general principles of equity.

4. Consent; Absence of Breach . The execution, delivery and performance of this Agreement, the other Loan Documents and any other documents or instruments to be executed and delivered by the Borrower in connection with the Loans, and the borrowings by the Borrower hereunder, do not and will not (a) require any consent, approval, authorization of, or filings with, notice to or other act by or in respect of, any governmental authority or any other Person (other than any consent or approval which has been obtained and is in full force and effect); (b) conflict with (i) any provision of law or any applicable regulation, order, writ, injunction or decree of any court or governmental authority, (ii) the Certificate of Incorporation or bylaws of the Borrower or the organizational documents any of the Operating Subsidiaries or other Subsidiaries, or (iii) any material agreement, indenture, instrument or other document, or any judgment, order or decree, which is binding upon the Borrower, any of its Operating Subsidiaries or any of its other Subsidiaries or any of their respective properties or assets; or (c) require, or result in, the creation or imposition of any Lien on any asset of Borrower, any of its Operating Subsidiaries or any of its other Subsidiaries, other than Liens in favor of the Bank created pursuant to this Agreement.

5. Ownership of Properties; Liens . The Borrower is the sole owner of all of its properties and assets, real and personal, tangible and intangible, of any nature whatsoever (including patents, trademarks, trade names, service marks and copyrights), free and clear of all Liens, charges and claims (including infringement claims with respect to patents, trademarks, service marks, copyrights and the like), other than Permitted Liens.

6. Equity Ownership . All issued and outstanding Capital Securities of the Borrower, each of its Operating Subsidiaries and each of their other Subsidiaries are duly authorized and validly issued, fully paid, non-assessable, and free and clear of all Liens other than those that shall be in favor of the Bank, and such securities were issued in compliance with all applicable state and federal laws concerning the issuance of securities. As of the date hereof, there are no pre-emptive or other outstanding rights, options, warrants, conversion rights or other similar agreements or understandings for the purchase or acquisition of any Capital Securities of the Borrower, any of its Operating Subsidiaries or any of its other Subsidiaries.





7. Intellectual Property . The Borrower owns and possesses or has a license or other right to use all Intellectual Property, as are necessary for the conduct of the businesses of the Borrower, without any infringement upon rights of others which could reasonably be expected to have a Material Adverse Effect upon the Borrower, and no material claim has been asserted and is pending by any Person challenging or questioning the use of any Intellectual Property or the validity or effectiveness of any Intellectual Property nor does the Borrower know of any valid basis for any such claim.

8. Financial Statements . All financial statements submitted to the Bank have been prepared in accordance with sound accounting practices and GAAP on a basis, except as otherwise noted therein and the financial statements submitted to the Bank by the Operating Subsidiaries shall have been prepared pursuant to consistently applied principles of SAP, consistent with the previous calendar year and present fairly the financial condition of the Borrower and the results of the operations for the Borrower as of such date and for the periods indicated. Since the date of the most recent financial statement submitted by the Borrower to the Bank, there has been no change in the financial condition or in the assets or liabilities of the Borrower which could reasonably be expected to have a Material Adverse Effect on the Borrower.

9. Litigation and Contingent Liabilities . There is no litigation, arbitration proceeding, demand, charge, claim, petition or governmental investigation or proceeding pending, threatened, against the Borrower, its Operating Subsidiaries or any of its other Subsidiaries, which, if adversely determined, which could reasonably be expected to have a Material Adverse Effect upon the Borrower, except (i) with respect to Insurance Claims and (ii) as set forth in Schedule 7.9 attached hereto. Other than any liability incident to such litigation or proceedings, the Borrower has no material guarantee obligations, contingent liabilities, liabilities for taxes, or any long-term leases or unusual forward or long-term commitments, including any interest rate or foreign currency swap or exchange transaction or other obligation in respect of derivatives, that are not fully-reflected or fully reserved for in the most recent audited financial statements delivered pursuant to subsection 8.8(a) or fully-reflected or fully reserved for in the most recent quarterly financial statements delivered pursuant to subsection 8.8(b) and not permitted by Section 9.1 .

10. Event of Default . No Event of Default or Unmatured Event of Default exists or would result from the incurrence by the Borrower of any of the Obligations hereunder or under any other Loan Document, and, on the date hereof, the Borrower is not in material default (without regard to grace or cure periods) under any other material contract or agreement to which it is a party.

11. Adverse Circumstances . No condition, circumstance, event, agreement, document, instrument, restriction, litigation or proceeding (or threatened litigation or proceeding or basis therefor) exists which (a) would have a Material Adverse Effect upon the Borrower, or (b) would constitute an Event of Default or an Unmatured Event of Default.

12. Environmental Laws and Hazardous Substances . The Borrower has not generated, used, stored, treated, transported, manufactured, handled, produced or disposed of any Hazardous Substances, on or off any of the premises of the Borrower (whether or not owned by it) in any manner which at any time violates any Environmental Law or any license, permit, certificate, approval or similar authorization thereunder. The Borrower will comply in all material respects with all Environmental Laws and will obtain all licenses, permits certificates, approvals and similar authorizations thereunder. There has been no investigation, proceeding, complaint, order, directive, claim, citation or notice by any governmental authority or any other Person, nor is any pending or, to the best of the Borrower’s knowledge, threatened, and the Borrower shall immediately notify the Bank upon becoming aware of any such investigation, proceeding, complaint, order, directive, claim,




citation or notice, and shall take prompt and appropriate actions to respond thereto, with respect to any non-compliance with, or violation of, the requirements of any Environmental Law by the Borrower or the release, spill or discharge, threatened or actual, of any Hazardous Material or the generation, use, storage, treatment, transportation, manufacture, handling, production or disposal of any Hazardous Material or any other environmental, health or safety matter, which affects the Borrower or its business, operations or assets or any properties at which the Borrower has transported, stored or disposed of any Hazardous Substances. The Borrower has no material liability, contingent or otherwise, in connection with a release, spill or discharge, threatened or actual, of any Hazardous Substances or the generation, use, storage, treatment, transportation, manufacture, handling, production or disposal of any Hazardous Material. The Borrower further agrees to allow the Bank or its agent access to the properties of the Borrower and its Subsidiaries to confirm compliance with all Environmental Laws, and the Borrower shall, following determination by the Bank that there is non-compliance, or any condition which requires any action by or on behalf of the Borrower in order to avoid any non-compliance, with any Environmental Law, at the Borrower’s sole expense, cause an independent environmental engineer acceptable to the Bank to conduct such tests of the relevant site as are appropriate, and prepare and deliver a report setting forth the result of such tests, a proposed plan for remediation and an estimate of the costs thereof.

13. Solvency, etc . As of the date hereof, and immediately prior to and after giving effect to the issuance of each Letter of Credit and each Loan hereunder and the use of the proceeds thereof, (a) the fair value of the Borrower’s assets is greater than the amount of its liabilities (including disputed, contingent and unliquidated liabilities) as such value is established and liabilities evaluated as required under the Section 548 of the Bankruptcy Code, (b) the present fair saleable value of the Borrower’s assets is not less than the amount that will be required to pay the probable liability on its debts as they become absolute and matured, (c) the Borrower is able to realize upon its assets and pay its debts and other liabilities (including disputed, contingent and unliquidated liabilities) as they mature in the normal course of business, (d) the Borrower does not intend to, and does not believe that it will, incur debts or liabilities beyond its ability to pay as such debts and liabilities mature, and (e) the Borrower is not engaged in business or a transaction, and is not about to engage in business or a transaction, for which its property would constitute unreasonably small capital.

14. ERISA Obligations . All Employee Plans of the Borrower meet the minimum funding standards of Section 302 of ERISA and 412 of the Internal Revenue Code where applicable, and each such Employee Plan that is intended to be qualified within the meaning of Section 401 of the Internal Revenue Code of 1986 is qualified. No withdrawal liability has been incurred under any such Employee Plans and no “Reportable Event” or “Prohibited Transaction” (as such terms are defined in ERISA), has occurred with respect to any such Employee Plans, unless approved by the appropriate governmental agencies. The Borrower has promptly paid and discharged all obligations and liabilities arising under the Employee Retirement Income Security Act of 1974 (“ERISA”) of a character which if unpaid or unperformed might result in the imposition of a Lien against any of its properties or assets.

15. Labor Relations . Except as could not reasonably be expected to have a Material Adverse Effect, (i) there are no strikes, lockouts or other labor disputes against the Borrower or threatened, (ii) hours worked by and payment made to employees of the Borrower have not been in violation of the Fair Labor Standards Act or any other applicable law, and (ii) no unfair labor practice complaint is pending against the Borrower or threatened before any governmental authority.

16. Security Interest . This Agreement creates a valid security interest in favor of the Bank in the Collateral and, when properly perfected by filing the appropriate financing statements in the




appropriate jurisdictions, or by possession or Control of such Collateral by the Bank or delivery of such Collateral to the Bank, shall constitute a valid, perfected, first-priority security interest in such Collateral.

17. Lending Relationship . The relationship hereby created between the Borrower and the Bank is and has been conducted on an open and arm’s length basis in which no fiduciary relationship exists, and the Borrower has not relied and is not relying on any such fiduciary relationship in executing this Agreement and in consummating the Loans. The Bank represents that it will receive any Note payable to its order as evidence of a bank loan.

18. Business Loans . The Loans, including interest rate, fees and charges as contemplated hereby, (i) are business loans within the purview of 815 ILCS 205/4(1)(c), as amended from time to time, (ii) are an exempted transaction under the Truth In Lending Act, 12 U.S.C. 1601 et seq ., as amended from time to time, and (iii) do not, and when disbursed shall not, violate the provisions of the Illinois usury laws, any consumer credit laws or the usury laws of any state which may have jurisdiction over this transaction, the Borrower or any property securing the Loans.

19. Taxes . The Borrower has timely filed all tax returns and reports required by law to have been filed by it and has paid all taxes, governmental charges and assessments due and payable with respect to such returns, except any such taxes or charges which are being diligently contested in good faith by appropriate proceedings and for which adequate reserves in accordance with GAAP shall have been set aside on its books, are insured against or bonded over to the satisfaction of the Bank and the contesting of such payment does not create a Lien on the Collateral which is not a Permitted Lien. Except as set forth on Schedule 7.19 , on the date hereof, there is no controversy or objection pending or threatened in respect of any tax returns of the Borrower. The Borrower has made adequate reserves on its books and records in accordance with GAAP for all taxes that have accrued but which are not yet due and payable.

20. Compliance with Regulation U . No portion of the proceeds of the Loans shall be used by the Borrower, or any Affiliate of the Borrower, either directly or indirectly, for the purpose of purchasing or carrying any margin stock, within the meaning of Regulation U as adopted by the Board of Governors of the Federal Reserve System or any successor thereto.

21. Governmental Regulation . The Borrower and its Subsidiaries are not, or after giving effect to any loan, will not be, subject to regulation under the Public Utility Holding Company Act of 2005, the Federal Power Act, the ICC Termination Act of 1995 or the Investment Company Act of 1940 or to any federal or state statute or regulation limiting its ability to incur indebtedness for borrowed money. Each Operating Subsidiary is licensed in good standing in each jurisdiction in which it does business and is not the subject of any insurer delinquency proceeding, including (without limitation) liquidation, rehabilitation, conservation, or supervision. No Operating Subsidiary is subject to any requirement to comply with any company action plan or regulatory action plan under the risk based capital provisions of applicable insurance regulatory laws.

22. Bank Accounts . Borrower's primary Deposit Accounts and operating bank accounts of the Borrower and its Subsidiaries are located at the Bank, except those listed on Schedule 7.22 attached hereto.

23. Place of Business . The principal place of business and books and records of the Borrower is set forth in the preamble to this Agreement, and the location of all Collateral, if other than at such principal place of business, is as set forth on Schedule 7.23 attached hereto and made a




part hereof, and the Borrower shall promptly notify the Bank of any change in such locations. The Borrower will not remove or permit the Collateral to be removed from such locations without the prior written consent of the Bank.

24. Complete Information . This Agreement and all financial statements, schedules, certificates, confirmations, agreements, contracts, and other materials and information heretofore or contemporaneously herewith furnished in writing by the Borrower to the Bank for purposes of, or in connection with, this Agreement and the transactions contemplated hereby is, and all written information hereafter furnished by or on behalf of the Borrower to the Bank pursuant hereto or in connection herewith will be, true and accurate in every material respect on the date as of which such information is dated or certified, and none of such information is or will be incomplete by omitting to state any material fact necessary to make such information not misleading in light of the circumstances under which made (it being recognized by the Bank that any projections and forecasts provided by the Borrower are based on good faith estimates and assumptions believed by the Borrower to be reasonable as of the date of the applicable projections or assumptions and that actual results during the period or periods covered by any such projections and forecasts may differ from projected or forecasted results).

Section 1.
AFFIRMATIVE COVENANTS .

1. Compliance with Bank Regulatory Requirements; Increased Costs . If the Bank shall reasonably determine that any Regulatory Change, or compliance by the Bank or any Person controlling the Bank with any request or directive (whether or not having the force of law) of any governmental authority, central bank or comparable agency has or would have the effect of reducing the rate of return on the Bank’s or such controlling Person’s capital as a consequence of the Bank’s obligations hereunder or under any Letter of Credit to a level below that which the Bank or such controlling Person could have achieved but for such Regulatory Change or compliance (taking into consideration the Bank’s or such controlling Person’s policies with respect to capital adequacy) by an amount deemed by the Bank or such controlling Person to be material or would otherwise reduce the amount of any sum received or receivable by the Bank under this Agreement or under any Note with respect thereto, then from time to time, upon demand by the Bank (which demand shall be accompanied by a statement setting forth the basis for such demand and a calculation of the amount thereof in reasonable detail), the Borrower shall pay directly to the Bank or such controlling Person such additional amount as will compensate the Bank for such increased cost or such reduction, so long as such amounts have accrued on or after the day which is one hundred eighty days (180) days prior to the date on which the Bank first made demand therefor.

2. Existence . The Borrower and each Subsidiary shall at all times (a) preserve and maintain its existence and good standing in the jurisdiction of its organization, (b) preserve and maintain its qualification to do business and good standing in each jurisdiction where the nature of its business makes such qualification necessary (other than such jurisdictions in which the failure to be qualified or in good standing could not reasonably be expected to have a Material Adverse Effect), and (c) continue as a going concern in the business which the Borrower is presently conducting.

3. Compliance With Laws . The Borrower shall use the proceeds of the Loans for working capital and other general corporate or business purposes not in contravention of any requirements of law and not in violation of this Agreement, and shall comply, and cause each Subsidiary to comply, in all respects, including the conduct of its business and operations and the use of its properties and assets, with all applicable laws, rules, regulations, decrees, orders, judgments, licenses and permits, except where failure to comply could not reasonably be expected to have a Material Adverse Effect.




In addition, and without limiting the foregoing sentence, the Borrower shall (a) ensure, and cause each Subsidiary to ensure, that no person who owns a controlling interest in or otherwise controls the Borrower or any Subsidiary is or shall be listed on the Specially Designated Nationals and Blocked Person List or other similar lists maintained by the Office of Foreign Assets Control (“OFAC”), the Department of the Treasury or included in any Executive Orders, (b) not use or permit the use of the proceeds of the Loans to violate any of the foreign asset control regulations of OFAC or any enabling statute or Executive Order relating thereto, and (c) comply, and cause each Subsidiary to comply, with all applicable Bank Secrecy Act (“BSA”) laws and regulations, as amended.

4. Payment of Taxes and Liabilities . The Borrower shall pay, and cause each Subsidiary to pay, and discharge, prior to delinquency and before penalties accrue thereon, all property and other taxes, and all governmental charges or levies against it or any of the Collateral, as well as claims of any kind which, if unpaid, could become a Lien on any of its property; provided that the foregoing shall not require the Borrower or any Subsidiary to pay any such tax or charge so long as it shall contest the validity thereof in good faith by appropriate proceedings and shall set aside on its books adequate reserves with respect thereto in accordance with GAAP and, in the case of a claim which could become a Lien on any of the Collateral, such contest proceedings stay the foreclosure of such Lien or the sale of any portion of the Collateral to satisfy such claim.

5. Maintain Property . The Borrower shall at all times maintain, preserve and keep its plant, properties and equipment, including any Collateral, in good repair, working order and condition, normal wear and tear excepted, and shall from time to time make all needful and proper repairs, renewals, replacements, and additions thereto so that at all times the efficiency thereof shall be fully preserved and maintained. The Borrower shall permit the Bank to examine and inspect such plant, properties and equipment, including any Collateral, at all reasonable times.

6. Maintain Insurance . The Borrower shall at all times maintain, and cause each Subsidiary to maintain, with insurance companies reasonably acceptable to the Bank, such insurance coverage as may be required by any law or governmental regulation or court decree or order applicable to it and such other insurance, to such extent and against such hazards and liabilities, including (without limitation) employers’, public and professional liability risks, as is customarily maintained by companies similarly situated, and shall have insured amounts no less than, and deductibles no higher than, are reasonably acceptable to the Bank. Solely with respect to any Acquisition Transaction that produces insurable After-Acquired Collateral, the Borrower shall (a) cause each issuer of an insurance policy thereof to provide the Bank with an endorsement (i) showing the Bank as lender’s loss payee with respect to each policy of property or casualty insurance and (ii) providing that ten (10) days' notice will be given to the Bank prior to any cancellation of, material reduction or change in coverage provided by or other material modification to such policy, and (b) execute and deliver to the Bank a collateral assignment, in form and substance satisfactory to the Bank, of each business interruption insurance policy maintained by the Borrower.

In the event the Borrower either fails to provide the Bank with evidence of the insurance coverage required by this Section 8.6 or at any time hereafter shall fail to obtain or maintain any of the policies of insurance required above, or to pay any premium in whole or in part relating thereto, then the Bank, without waiving or releasing any obligation or default by the Borrower hereunder, may at any time (but shall be under no obligation to so act), obtain and maintain such policies of insurance and pay such premiums and take any other action with respect thereto, which the Bank deems advisable. This insurance coverage (a) may, but need not, protect the Borrower’s interests in such property, including the Collateral, and (b) may not pay any claim made by, or against, the Borrower in connection with such property, including the Collateral. The Borrower may later cancel any such insurance purchased by the Bank, but only after providing the Bank




with evidence that the Borrower has obtained the insurance coverage required by this Section. If the Bank purchases insurance for the Collateral, the Borrower will be responsible for the costs of that insurance, including interest and any other charges that may be imposed with the placement of the insurance, until the effective date of the cancellation or expiration of the insurance. The costs of the insurance may be added to the principal amount of the Loans owing hereunder. The costs of the insurance may be more than the cost of the insurance the Borrower may be able to obtain on its own.

7. ERISA Liabilities; Employee Plans . The Borrower shall (i) keep in full force and effect any and all Employee Plans which are presently in existence or may, from time to time, come into existence under ERISA, and not withdraw from any such Employee Plans, unless such withdrawal can be effected or such Employee Plans can be terminated without liability to the Borrower; (ii) make contributions to all of such Employee Plans in a timely manner and in a sufficient amount to comply with the standards of ERISA; including the minimum funding standards of ERISA; (iii) comply with all material requirements of ERISA which relate to such Employee Plans; (iv) notify the Bank immediately upon receipt by the Borrower of any notice concerning the imposition of any withdrawal liability or of the institution of any proceeding or other action which may result in the termination of any such Employee Plans or the appointment of a trustee to administer such Employee Plans; (v) promptly advise the Bank of the occurrence of any “Reportable Event” or “Prohibited Transaction” (as such terms are defined in ERISA), with respect to any such Employee Plans; and (vi) amend any Employee Plan that is intended to be qualified within the meaning of Section 401 of the Internal Revenue Code of 1986 to the extent necessary to keep the Employee Plan qualified, and to cause the Employee Plan to be administered and operated in a manner that does not cause the Employee Plan to lose its qualified status.

8. Financial Statements . The Borrower shall, and shall cause its Operating Subsidiaries to, at all times maintain a standard and modern system of accounting, on the accrual basis of accounting and in all respects in accordance with GAAP or, as applicable to American Country, American Service and Gateway, SAP, and shall furnish to the Bank or its authorized representatives such information regarding the business affairs, operations and financial condition of the Borrower and its Operating Subsidiaries, including:

(a) promptly when available, and in any event, within one hundred twenty (120) days after the close of each calendar year (beginning with the calendar year ending on December 31, 2014), a copy of the annual internally prepared and reviewed Statutory Financial Statements of the Borrower and its Operating Subsidiaries, including balance sheet, statement of income and retained earnings, statement of cash flows for the calendar year then ended and such other information (including nonfinancial information) as the Bank may request, in reasonable detail, prepared and certified;

(b) promptly when available, and in any event, within forty five (45) days following the end of each calendar quarter (beginning with the calendar quarter ending on March 31, 2015), a copy of the internally prepared and reviewed Statutory Financial Statements of the Borrower and its Operating Subsidiaries regarding such calendar quarter, including balance sheet, statement of income and retained earnings, statement of cash flows for the calendar quarter then ended and such other information (including nonfinancial information) as the Bank may request, in reasonable detail, prepared and certified as true and correct by the Borrower’s treasurer or chief financial officer;

(c) so long as the Capital Securities of Atlas continue to be publicly traded on a stock exchange regulated by the SEC (defined below), promptly when available, and in any event, within one hundred twenty (120) days after the close of each calendar year (beginning with the calendar year ending on December 31, 2014), a copy of the annual audited financial statements of Atlas




including, without limitation, the Form 10-K (filed with the U.S. Securities and Exchange Commission (the “ SEC ”)), the balance sheet, statement of income and retained earnings, statement of cash flows for the calendar year then ended and such other information (including nonfinancial information) as the Bank may request, in reasonable detail, prepared and certified by Atlas’s treasurer or chief financial officer; and

(d) so long as the Capital Securities of Atlas continue to be publicly traded on a stock exchange regulated by the SEC. promptly when available, and in any event, within forty five (45) days following the end of each calendar quarter (beginning with the calendar quarter ending on March 31, 2015), a copy of the internally prepared and reviewed financial statements of Atlas regarding such calendar quarter, including, without limitation, the Form 10-Q (filed with the SEC), the balance sheet, statement of income and retained earnings, statement of cash flows for the calendar quarter then ended and such other information (including nonfinancial information) as the Bank may request, in reasonable detail, prepared and certified as true and correct by Atlas’s treasurer or chief financial officer.

No change with respect to such accounting principles shall be made by the Borrower or any of the Operating Subsidiaries without giving prior notification to the Bank. The Borrower represents and warrants to the Bank that the financial statements delivered to the Bank at or prior to the execution and delivery of this Agreement and to be delivered at all times thereafter accurately reflect and will accurately reflect the financial condition of the Borrower and its Subsidiaries. The Bank shall have the right at all times during business hours to inspect the books and records of the Borrower and make extracts therefrom.

9. Extraordinary Dividend . Borrower shall provide to Lender, and cause any Operating Subsidiary to provide to Lender, (i) any request by such Operating Subsidiary and (ii) any approval or disapproval of any such request by such Operating Subsidiary, for the payment of any extraordinary dividend that must be approved by such Operating Subsidiary’s Insurance Director.

10. Supplemental Financial Statements . The Borrower shall within three (3) Business Days upon receipt thereof, provide to the Bank (i) copies of interim and supplemental reports if any, submitted to the Borrower by independent accountants in connection with any interim audit or review of the books of the Borrower, its Operating Subsidiaries or any other Subsidiaries, including (without limitation) any report by an independent auditor on the financial condition and the internal financial controls of any Operating Subsidiary required to be filed with any insurance regulatory authority under applicable insurance regulatory laws, (ii) any opinion by a qualified actuary of the loss and loss expense reserves of each Operating Subsidiary required to be filed with any insurance regulatory authority under applicable insurance regulatory laws, subject to the Bank's execution of any release as may be required by auditor, (iii) any calculation of risk based capital of any Operating Subsidiary required to be filed with any insurance regulatory authority under applicable insurance regulatory laws, and (iv) any risk solvency assessment required to be filed by an Operating Subsidiary and any enterprise risk report required to be filed by Borrower under applicable insurance regulatory laws.

11. Borrowing Base Certificate . The Borrower shall, (a) within forty five (45) days following the end of each calendar quarter, and (b) at any time the Borrower shall request a Revolving Loan hereunder, deliver to the Bank a Borrowing Base Certificate dated as of the last Business Day of such month, certified as true and correct by an Authorized Representative of the Borrower and acceptable to the Bank in its sole and absolute discretion, provided, however, at any time an Event of Default exists, the Bank may require the Borrower to deliver Borrowing Base Certificates more frequently.





12. Intentionally Omitted .

13. Intentionally Omitted .

14. Covenant Compliance Certificate . The Borrower shall, contemporaneously with the furnishing of the financial statements pursuant to Sections 8.8(a) and 8.8(b) , deliver to the Bank a duly completed compliance certificate (a “ Compliance Certificate ”), dated the date of such financial statements and certified as true and correct by an Authorized Representative of the Borrower, containing a computation of each of the financial covenants set forth in Section 10 and stating that the Borrower has not become aware of any Event of Default or Unmatured Event of Default that has occurred and is continuing or, if there is any such Event of Default or Unmatured Event of Default describing it and the steps, if any, being taken to cure it. The Compliance Certificate shall be in form and substance as set forth on Exhibit B attached hereto.

15. Field Audits . The Borrower shall permit the Bank to inspect the tangible assets and/or other business operations of the Borrower and each Operating Subsidiary, to perform appraisals of all or any part of the Collateral of the Borrower and each Subsidiary, and to inspect, audit, check and make copies of, and extracts from, the books, records, computer data, computer programs, journals, orders, receipts, correspondence and other data relating any Collateral no more than twice in any calendar year except no such limitation shall apply after an Event of Default has occurred and is continuing, the results of which must be satisfactory to the Bank in the Bank’s sole and absolute discretion. All such inspections or audits by the Bank shall be at the Borrower’s sole expense and in compliance with all applicable laws.

16. Other Reports . The Borrower shall, within such period of time as the Bank may specify, deliver to the Bank such other schedules and reports as the Bank may require.

17. Collateral Records . The Borrower shall keep full and accurate books and records relating to the Collateral and shall mark such books and records to indicate the Bank’s Lien in the Collateral.

18. Intellectual Property . The Borrower shall maintain, preserve and renew all Intellectual Property necessary for the conduct of its business as and where the same is currently located as heretofore or as hereafter conducted by it.

19. Notice of Proceedings . The Borrower, promptly upon becoming aware, shall give written notice to the Bank of any litigation, arbitration or governmental investigation or proceeding not previously disclosed by the Borrower to the Bank which has been instituted or, to the knowledge of the Borrower, is threatened against the Borrower or any of its Subsidiaries or to which any of their respective properties is subject which might reasonably be expected to have a Material Adverse Effect.

20. Notice of Event of Default or Material Adverse Effect . The Borrower shall, immediately after the Borrower's knowledge thereof, give notice to the Bank in writing of the occurrence of any Event of Default or any Unmatured Event of Default, or the occurrence of any condition or event having a Material Adverse Effect.

21. Environmental Matters . If any release or threatened release or other disposal of Hazardous Substances shall occur or shall have occurred on any real property or any other assets of the Borrower or any of its Subsidiaries, the Borrower shall, or shall cause the applicable Subsidiary to, cause the prompt containment and removal of such Hazardous Substances and the remediation of




such real property or other assets as necessary to comply with all Environmental Laws and to preserve the value of such real property or other assets. Without limiting the generality of the foregoing, the Borrower shall, and shall cause each Subsidiary to, comply with any Federal or state judicial or administrative order requiring the performance at any real property of the Borrower or any Subsidiary of activities in response to the release or threatened release of a Hazardous Substance. To the extent that the transportation of Hazardous Substances is permitted by this Agreement, the Borrower shall, and shall cause its Subsidiaries to, dispose of such Hazardous Substances, or of any other wastes, only at licensed disposal facilities operating in compliance with Environmental Laws.

22. Further Assurances . The Borrower shall take, and cause the Operating Subsidiaries and each other Subsidiary to take, such actions as are necessary or as the Bank may reasonably request from time to time to ensure that the Obligations under the Loan Documents are secured by substantially all of the assets of the Borrower, including the Pledged Stock of the Operating Subsidiaries, in each case as the Bank may determine, including (a) the execution and delivery of security agreements, pledge agreements, mortgages, deeds of trust, financing statements and other documents, and the filing or recording of any of the foregoing, and (b) the delivery of certificated securities and other collateral with respect to which perfection is obtained by possession.

23. Banking Relationship . The Borrower covenants and agrees, at all times during the term of this Agreement, to utilize the Bank as its primary bank of account and depository for all financial services, including without limitation, all receipts, disbursements, cash management, treasury management, custody services, multi-card and related ancillary services.

24. Non-Utilization Fee . The Borrower agrees to pay to the Bank the following non-utilization fees:

(a) Revolving Loan . A non-utilization fee equal to One-Half of One percent (0.50%) per annum of the total of (a) the Revolving Loan Commitment, minus (b) the sum of (i) the daily average of the aggregate principal amount of the Revolving Loans outstanding, plus (ii) the daily average of the aggregate amount of the Letters of Credit Obligations, which non-utilization fee shall be (A) calculated on the basis of a year consisting of 360 days, (B) paid for the actual number of days elapsed and (C) payable monthly in arrears on the last day of each Interest Period, commencing on April 1, 2015 and continuing throughout the Revolving Loan Maturity Date or earlier acceleration or termination of the Obligations.

(b) Draw Loan . A non-utilization fee equal to One-Half of One percent (0.50%) per annum of the total of (a) the Draw Loan Commitment, minus (b) the sum of the daily average of the aggregate principal amount of the Draw Loans outstanding, which non-utilization fee shall be (A) calculated on the basis of a year consisting of 360 days, (B) paid for the actual number of days elapsed and (C) payable monthly in arrears on the last day of each Interest Period, commencing on April 1, 2015 and continuing throughout the Draw Period or earlier acceleration or termination of the Obligations.

Section 2.
NEGATIVE COVENANTS .

1. Debt . The Borrower shall not, and shall not cause any Operating Subsidiaries or any other Subsidiary to (as applicable), either directly or indirectly, create, assume, incur or have outstanding any Debt (including purchase money indebtedness), or become liable, whether as endorser, guarantor, surety or otherwise, for any debt or obligation of any other Person, except:

(a) the Obligations under this Agreement and the other Loan Documents;





(b) obligations of the Borrower for accounts payable, other than for money borrowed, incurred in the ordinary course of business;

(c) Debt of the Borrower to any Operating Subsidiary, or Debt of any Operating Subsidiary to the Borrower; provided that such Debt shall be evidenced by a note in form and substance reasonably satisfactory to the Bank, and the obligations under such note shall be subordinated to the Obligations in all respects;

(d) Hedging Obligations incurred in favor of the Bank or an Affiliate thereof for bona fide hedging purposes and not for speculation;

(e) claims and liabilities of the Borrower or any of its Subsidiaries under pooling arrangements approved by insurance regulations; or

(f) Debt described on Schedule 9.1 and any extension, renewal or refinancing thereof so long as the principal amount thereof is not increased.

2. Encumbrances .
  
(a) The Borrower shall not, either directly or indirectly, create, assume, incur or suffer or permit to exist any Lien or charge of any kind or character upon any asset of the Borrower, whether owned at the date hereof or hereafter acquired, except for Permitted Liens; and

(b) None of the Operating Subsidiaries shall, either directly or indirectly, create, assume, incur or suffer or permit to exist any Lien, pledge or charge of any kind or character upon any asset of any such Operating Subsidiary, whether owned at the date hereof or hereafter acquired, except for Permitted Liens.

3. Investments . The Borrower shall not, either directly or indirectly, make or have outstanding any Investment, except:

(a) contributions by the Borrower to the capital of any Operating Subsidiary or any other Subsidiary, so long as such Capital Securities of such Subsidiary owned by the Borrower shall be pledged to the Bank, or by any Subsidiary to the capital of any other domestic Wholly-Owned Subsidiary;

(b) Investments constituting Debt permitted by Section 9.1 ;

(c) Contingent Liabilities constituting Debt permitted by Section 9.1 or Liens permitted by Section 9.2 ;

(d) Cash Equivalent Investments;

(e) bank deposits in the ordinary course of business, provided that the aggregate amount of all such deposits, which are maintained with any bank other than the Bank shall not at any time exceed $250,000;

(f) Investments consisting of loans or other credit facilities extended to policyholders in the ordinary course of business to finance insurance premiums;





(g) Investments by the Borrower or any of the Operating Subsidiaries in the normal course of business as allowed by the NAIC and other insurance regulations;

(h) Investments in securities of Account Debtors received pursuant to any plan of reorganization or similar arrangement upon the bankruptcy or insolvency of such account debtors; or

(i) Investments listed on Schedule 9.3 as of the Closing Date.

provided, however, that (i) any Investment which when made complies with the requirements of the definition of the term “Cash Equivalent Investment” may continue to be held notwithstanding that such Investment if made thereafter would not comply with such requirements; and (ii) no Investment otherwise permitted by subsections (b) or (c) shall be permitted to be made if, immediately before or after giving effect thereto, any Event of Default or Unmatured Event of Default exists.

4. Transfer; Merger; Sales . The Borrower shall not, and not permit any of the Operating Subsidiaries or any other Subsidiary to, whether in one transaction or a series of related transactions, (a) be a party to any merger or consolidation, or purchase or otherwise acquire all or substantially all of the assets or any Capital Securities of any class of, or any partnership or joint venture interest in, any other Person, except for (i) any such merger, consolidation, sale, transfer, conveyance, lease or assignment of or by any Operating Subsidiary into the Borrower or into any other Operating Subsidiary, and (ii) any such purchase or other acquisition or transfer by the Borrower or any Operating Subsidiary of the assets or equity interests of any Operating Subsidiary pursuant to a pooling agreement or otherwise; (b) sell, transfer, convey or lease all or any substantial part of its assets or Capital Securities (including the sale of Capital Securities of any Subsidiary); or (c) sell or assign, with or without recourse, any receivables. Notwithstanding anything to the contrary herein, and to the extent the Borrower or any Operating Subsidiary forms a Wholly-Owned Subsidiary, such Wholly-Owned Subsidiary shall not be permitted to acquire, purchase or otherwise receive the assets of the Borrower or any Operating Subsidiary pursuant to any existing pooling agreements or similar arrangements under which the Borrower or any Operating Subsidiary is a party thereto, except that, (i) provided Bank is given no less than three (3) days' notice after any filing of any application for approval of any such transaction and (ii) subject to the regulatory approval of applicable state insurance regulatory authorities, future premiums, expenses and losses of such new Wholly-Owned Subsidiary shall be shared among the existing pooling agreements or similar arrangements.

5. Issuance of Capital Securities . The Borrower shall not, and shall not permit any of the Operating Subsidiaries or other Subsidiaries to, issue any Capital Securities other than (a) any issuance of shares of the Borrower’s common Capital Securities pursuant to any employee or director option program, benefit plan or compensation program, or (b) any issuance of Capital Securities by a Subsidiary to the Borrower or another Subsidiary in accordance with Section 9.6 . For the avoidance of doubt, the Borrower may issue Capital Securities to Atlas in exchange for cash contributions to Borrower, so long as such exchange will not result in a Change of Control.

6. Distributions . At any time where there are Loans, the Borrower shall not, and shall not permit any Subsidiary to, (a) make any distribution or dividend (other than stock dividends), whether in cash or otherwise, to Atlas or any other equity-holder, (b) purchase or redeem any of its equity interests or any warrants, options or other rights in respect thereof, (c) pay any management fees or similar fees to Atlas or any of other equity-holder or any Affiliate thereof, (d) pay or prepay interest on, principal of, premium, if any, redemption, conversion, exchange, purchase, retirement, defeasance or sinking fund, or (e) set aside funds for any of the foregoing. Notwithstanding the




foregoing, any Subsidiary may pay dividends or make other distributions to the Borrower or to a domestic Wholly-Owned Subsidiary.

7. Transactions with Affiliates . Except as disclosed on Schedule 9.7 hereto, the Borrower shall not, directly or indirectly, enter into or permit to exist any transaction with any of its Affiliates or with any director, officer or employee of the Borrower other than transactions in the ordinary course of, and pursuant to the reasonable requirements of, the business of the Borrower and upon fair and reasonable terms which are fully disclosed to the Bank and are no less favorable to the Borrower than would be obtained in a comparable arm’s length transaction with a Person that is not an Affiliate of the Borrower.

8. Unconditional Purchase Obligations . The Borrower shall not, and shall not permit any Subsidiary to, enter into or be a party to any contract for the purchase of materials, supplies or other property or services if such contract requires that payment be made by it regardless of whether delivery is ever made of such materials, supplies or other property or services.

9. Cancellation of Debt . The Borrower shall not, and not permit any of the Operating Subsidiaries or any other Subsidiary to, cancel any claim or debt owing to it, except for reasonable consideration or in the ordinary course of business.

10. Inconsistent Agreements . The Borrower shall not, and shall not permit any of the Operating Subsidiaries or any other Subsidiary to, enter into any agreement containing any provision which would (a) be violated or breached by any borrowing by the Borrower hereunder or by the performance by the Borrower or any Subsidiary of any of its Obligations hereunder or under any other Loan Document, (b) prohibit the Borrower from granting to the Bank a Lien on any of its assets, or (c) create or permit to exist or become effective any encumbrance or restriction on the ability of any Subsidiary to (i) pay dividends or make other distributions to the Borrower or any other Subsidiary, or pay any Debt owed to the Borrower or any other Subsidiary, (ii) make loans or advances to the Borrower or any other Subsidiary, or (iii) transfer any of its assets or properties to the Borrower or any other Subsidiary, other than (A) customary restrictions and conditions contained in agreements relating to the sale of all or a substantial part of the assets of any Subsidiary pending such sale, provided that such restrictions and conditions apply only to the Subsidiary to be sold and such sale is permitted hereunder, (B) restrictions or conditions imposed by any agreement relating to purchase money Debt, Capital Leases and other secured Debt permitted by this Agreement if such restrictions or conditions apply only to the property or assets securing such Debt, and (C) customary provisions in leases and other contracts restricting the assignment thereof.

11. Use of Proceeds . Neither the Borrower nor any of its Subsidiaries or Affiliates shall use any portion of the proceeds of the Loans, either directly or indirectly, for the purpose of purchasing any securities underwritten by Bank or any Affiliate of the Bank.

12. Bank Accounts . The Borrower shall not establish any new Deposit Accounts or other bank accounts, other than Deposit Accounts or other bank accounts established at or with the Bank without the prior written consent of the Bank.

13. Business Activities; Change of Legal Status and Organizational Documents . The Borrower shall not, and shall not permit any of the Operating Subsidiaries or any other Subsidiary to, (a) engage in any line of business other than the businesses engaged in on the date hereof and businesses reasonably related thereto, (b) change its name, its Organizational Identification Number, if it has one, its type of organization, its jurisdiction of organization or other legal structure, or (b)




permit its charter, bylaws or other organizational documents to be amended or modified in any way which could reasonably be expected to materially adversely affect the interests of the Bank.

Section 3.
FINANCIAL COVENANTS .

1. Statutory Net Worth . Borrower shall not permit its Statutory Net Worth as of the end of the fiscal quarter ending March 31, 2015 and as of the end of any fiscal quarter thereafter, to be less than the Minimum Net Worth.

2. Funded Debt to EBITDA Ratio . As of the end of each fiscal quarter of Borrower, Borrower shall maintain a Funded Debt to EBITDA Ratio as follows:

Fiscal Quarter Ending              Funded Debt to EBITDA Ratio
March 31, 2015                  Not greater than 2.50 to 1.0
March 31, 2016                  Not greater than 2.25 to 1.0
March 31, 2017                  Not greater than 2.00 to 1.0
March 31, 2018                  Not greater than 1.75 to 1.0
March 31, 2019                  Not greater than 1.50 to 1.0

Section 4.
EVENTS OF DEFAULT .

The Borrower, without notice or demand of any kind, shall be in default under this Agreement upon the occurrence of any of the following events (each an “Event of Default”).

1. Nonpayment of Obligations . Any amount due and owing on any Note or any of the Obligations, whether by its terms or as otherwise provided herein, is not paid when due.

2. Misrepresentation . Any oral or written warranty, representation, certificate or statement of any Obligor in this Agreement, the other Loan Documents or any other agreement with the Bank shall be false when made or at any time thereafter, or if any financial data or any other information now or hereafter furnished to the Bank by or on behalf of any Obligor shall prove to be false, inaccurate or misleading in any material respect.

3. Nonperformance . Any failure to perform or default in the performance of any covenant, condition or agreement contained in this Agreement, or in the other Loan Documents or any other agreement with the Bank and such failure to perform or default shall remain uncured for a period of thirty (30) days; provided, however, that the thirty (30) day cure period granted by this Section 11.3 shall not be applicable to Section 11.1 hereof.

4. Default under Loan Documents . A default beyond any applicable cure or grace period under any of the other Loan Documents, all of which covenants, conditions and agreements contained therein are hereby incorporated in this Agreement by express reference, shall be and constitute an Event of Default under this Agreement and any other of the Obligations.

5. Default under Other Debt . Any default by any Obligor in the payment of any Debt with a principal amount in excess of $250,000 for any other obligation beyond any period of grace provided with respect thereto or in the performance of any other term, condition or covenant contained in any agreement (including any capital or operating lease or any agreement in connection with the deferred purchase price of property) under which any such obligation is created, the effect of which default is to cause or permit the holder of such obligation (or the other party to such other agreement) to cause such obligation to become due prior to its stated maturity or terminate such other agreement.





6. Bankruptcy, Insolvency, etc. Any Obligor becomes insolvent or generally fails to pay, or admits in writing its inability or refusal to pay, debts as they become due; or any Obligor applies for, consents to, or acquiesces in the appointment of a trustee, receiver or other custodian for such Obligor or any property thereof, or makes a general assignment for the benefit of creditors; or, in the absence of such application, consent or acquiescence, a trustee, receiver or other custodian is appointed for any Obligor or for a substantial part of the property of any thereof; or any bankruptcy, reorganization, debt arrangement, or other case or proceeding under any bankruptcy or insolvency law, or any dissolution or liquidation proceeding, is commenced in respect of any Obligor; or any Obligor takes any action to authorize, or in furtherance of, any of the foregoing and shall not be dismissed or vacated within sixty (60) days.

7. Judgments . The entry of any final judgment, decree, levy, attachment, garnishment or other process, or the filing of any Lien against any Obligor which is not fully covered by insurance or reinsurance, in each case, for a monetary obligation in excess of $250,000.

8. Change in Control . The occurrence of any Change in Control.

9. Collateral Impairment . The entry of any judgment, decree, levy, attachment, garnishment or other process, or the filing of any Lien against, any of the Collateral or any collateral under a separate security agreement securing any of the Obligations, or the loss, theft, destruction, seizure or forfeiture, or the occurrence of any deterioration or impairment of any of the Collateral or any of the collateral under any security agreement securing any of the Obligations, or any decline or depreciation in the value or market price thereof (whether actual or reasonably anticipated), which causes the Collateral, in the sole opinion of the Bank acting in good faith, to become unsatisfactory as to value or character, or which causes the Bank to reasonably believe that it is insecure and that the likelihood for repayment of the Obligations is or will soon be impaired, time being of the essence. The cause of such deterioration, impairment, decline or depreciation shall include, but is not limited to, the failure by the Borrower to do any act deemed necessary by the Bank to preserve and maintain the value and collectability of the Collateral.

10. Material Adverse Effect . The occurrence of any development, condition or event which has a Material Adverse Effect on the Borrower.

11. Intentionally Omitted .

Section 5.
REMEDIES .

Upon the occurrence of an Event of Default, the Bank shall have all rights, powers and remedies set forth in the Loan Documents, in any written agreement or instrument (other than this Agreement or the Loan Documents) relating to any of the Obligations or any security therefor, as a secured party under the UCC or as otherwise provided at law or in equity. Without limiting the generality of the foregoing, the Bank may, at its option upon the occurrence of an Event of Default, declare its commitments to the Borrower to be terminated and all Obligations to be immediately due and payable, provided, however, that upon the occurrence of an Event of Default under Section 11.6 , all commitments of the Bank to the Borrower shall immediately terminate and all Obligations shall be automatically due and payable, all without demand, notice or further action of any kind required on the part of the Bank. The Borrower hereby waives any and all presentment, demand, notice of dishonor, protest, and all other notices and demands in connection with the enforcement of Bank’s rights under the Loan Documents, and hereby consents to, and waives notice of release, with or without consideration, of any Collateral, notwithstanding anything contained herein or in




the Loan Documents to the contrary. In addition to the foregoing, upon the occurrence and during the continuance of an Event of Default:

1. Possession and Assembly of Collateral . The Bank may, without notice, demand or legal process of any kind, take possession of any or all of the Collateral (in addition to Collateral of which the Bank already has possession), wherever it may be found, and for that purpose may pursue the same wherever it may be found, and may at any time enter into any of the Borrower’s premises where any of the Collateral may be or is supposed to be, and search for, take possession of, remove, keep and store any of the Collateral until the same shall be sold or otherwise disposed of and the Bank shall have the right to store and conduct a sale of the same in any of the Borrower’s premises without cost to the Bank. At the Bank’s request, the Borrower will, at the Borrower’s sole expense, assemble the Collateral and make it available to the Bank at a place or places to be designated by the Bank which is reasonably convenient to the Bank and the Borrower.

2. Sale of Collateral . The Bank may sell any or all of the Collateral at public or private sale, upon such terms and conditions as the Bank may deem proper, and the Bank may purchase any or all of the Collateral at any such sale. The Borrower acknowledges that the Bank may be unable to effect a public sale of all or any portion of the Collateral because of certain legal and/or practical restrictions and provisions which may be applicable to the Collateral and, therefore, may be compelled to resort to one or more private sales to a restricted group of offerees and purchasers. The Borrower consents to any such private sale so made even though at places and upon terms less favorable than if the Collateral were sold at public sale. The Bank shall have no obligation to clean-up or otherwise prepare the Collateral for sale. The Bank may apply the net proceeds, after deducting all costs, expenses, attorneys’ and paralegals’ fees incurred or paid at any time in the collection, protection and sale of the Collateral and the Obligations, to the payment of any Note and/or any of the other Obligations, returning the excess proceeds, if any, to the Borrower. The Borrower shall remain liable for any amount remaining unpaid after such application, with interest at the Default Rate. Any notification of intended disposition of the Collateral required by law shall be conclusively deemed reasonably and properly given if given by the Bank at least ten (10) calendar days before the date of such disposition. The Borrower hereby confirms, approves and ratifies all acts and deeds of the Bank relating to the foregoing, and each part thereof, and expressly waives any and all claims of any nature, kind or description which it has or may hereafter have against the Bank or its representatives, by reason of taking, selling or collecting any portion of the Collateral. The Borrower consents to releases of the Collateral at any time (including prior to default) and to sales of the Collateral in groups, parcels or portions, or as an entirety, as the Bank shall deem appropriate. The Borrower expressly absolves the Bank from any loss or decline in market value of any Collateral by reason of delay in the enforcement or assertion or nonenforcement of any rights or remedies under this Agreement.

3. Standards for Exercising Remedies . To the extent that applicable law imposes duties on the Bank to exercise remedies in a commercially reasonable manner, the Borrower acknowledges and agrees that it is not commercially unreasonable for the Bank (a) to fail to incur expenses reasonably deemed significant by the Bank to prepare Collateral for disposition or otherwise to complete raw material or work-in-process into finished goods or other finished products for disposition, (b) to fail to obtain third party consents for access to Collateral to be disposed of, or to obtain or, if not required by other law, to fail to obtain governmental or third party consents for the collection or disposition of Collateral to be collected or disposed of, (c) to fail to exercise collection remedies against Account Debtors or other Persons obligated on Collateral or to remove liens or encumbrances on or any adverse claims against Collateral, (d) to exercise collection remedies against Account Debtors and other Persons obligated on Collateral directly or through the use of collection agencies and other collection




specialists, (e) to advertise dispositions of Collateral through publications or media of general circulation, whether or not the Collateral is of a specialized nature, (f) to contact other Persons, whether or not in the same business as the Borrower, for expressions of interest in acquiring all or any portion of the Collateral, (g) to hire one or more professional auctioneers to assist in the disposition of Collateral, whether or not the collateral is of a specialized nature, (h) to dispose of Collateral by utilizing internet sites that provide for the auction of assets of the types included in the Collateral or that have the reasonable capability of doing so, or that match buyers and sellers of assets, (i) to dispose of assets in wholesale rather than retail markets, (j) to disclaim disposition warranties, including any warranties of title, (k) to purchase insurance or credit enhancements to insure the Bank against risks of loss, collection or disposition of Collateral or to provide to the Bank a guaranteed return from the collection or disposition of Collateral, or (l) to the extent deemed appropriate by the Bank, to obtain the services of other brokers, investment bankers, consultants and other professionals to assist the Bank in the collection or disposition of any of the Collateral. The Borrower acknowledges that the purpose of this section is to provide non-exhaustive indications of what actions or omissions by the Bank would not be commercially unreasonable in the Bank’s exercise of remedies against the Collateral and that other actions or omissions by the Bank shall not be deemed commercially unreasonable solely on account of not being indicated in this section. Without limitation upon the foregoing, nothing contained in this section shall be construed to grant any rights to the Borrower or to impose any duties on the Bank that would not have been granted or imposed by this Agreement or by applicable law in the absence of this section.

4. UCC and Offset Rights . The Bank may exercise, from time to time, any and all rights and remedies available to it under the UCC or under any other applicable law in addition to, and not in lieu of, any rights and remedies expressly granted in this Agreement or in any other agreements between any Obligor and the Bank, and may, without demand or notice of any kind, appropriate and apply toward the payment of such of the Obligations, whether matured or unmatured, including costs of collection and attorneys’ and paralegals’ fees, and in such order of application as the Bank may, from time to time, elect, any indebtedness of the Bank to any Obligor, however created or arising, including balances, credits, deposits, accounts or moneys of such Obligor in the possession, control or custody of, or in transit to the Bank. The Borrower, on behalf of itself and each Obligor, hereby waives the benefit of any law that would otherwise restrict or limit the Bank in the exercise of its right, which is hereby acknowledged, to appropriate at any time hereafter any such indebtedness owing from the Bank to any Obligor.

5. Additional Remedies . The Bank shall have the right and power to:

(a) instruct the Borrower, at its own expense, to notify any parties obligated on any of the Collateral, including any Account Debtors, to make payment directly to the Bank of any amounts due or to become due thereunder, or the Bank may directly notify such obligors of the security interest of the Bank, and/or of the assignment to the Bank of the Collateral and direct such obligors to make payment to the Bank of any amounts due or to become due with respect thereto, and thereafter, collect any such amounts due on the Collateral directly from such Persons obligated thereon;

(b) enforce collection of any of the Collateral, including any Accounts, by suit or otherwise, or make any compromise or settlement with respect to any of the Collateral, or surrender, release or exchange all or any part thereof, or compromise, extend or renew for any period (whether or not longer than the original period) any indebtedness thereunder;

(c) take possession or control of any proceeds and products of any of the Collateral, including the proceeds of insurance thereon;





(d) extend, renew or modify for one or more periods (whether or not longer than the original period) any Note, any other of the Obligations, any obligation of any nature of any other obligor with respect to any Note or any of the Obligations;

(e) grant releases, compromises or indulgences with respect to any Note, any of the Obligations, any extension or renewal of any of the Obligations, any security therefor, or to any other obligor with respect to any Note or any of the Obligations;

(f) transfer the whole or any part of securities which may constitute Collateral into the name of the Bank or the Bank’s nominee without disclosing, if the Bank so desires, that such securities so transferred are subject to the security interest of the Bank, and any corporation, association, or any of the managers or trustees of any trust issuing any of such securities, or any transfer agent, shall not be bound to inquire, in the event that the Bank or such nominee makes any further transfer of such securities, or any portion thereof, as to whether the Bank or such nominee has the right to make such further transfer, and shall not be liable for transferring the same;

(g) vote the Collateral;

(h) make an election with respect to the Collateral under Section 1111 of the Bankruptcy Code or take action under Section 364 or any other section of the Bankruptcy Code; provided, however, that any such action of the Bank as set forth herein shall not, in any manner whatsoever, impair or affect the liability of the Borrower hereunder, nor prejudice, waive, nor be construed to impair, affect, prejudice or waive the Bank’s rights and remedies at law, in equity or by statute, nor release, discharge, nor be construed to release or discharge, the Borrower, any guarantor or other Person liable to the Bank for the Obligations; and

(i) at any time, and from time to time, accept additions to, releases, reductions, exchanges or substitution of the Collateral, without in any way altering, impairing, diminishing or affecting the provisions of this Agreement, the Loan Documents, or any of the other Obligations, or the Bank’s rights hereunder, under any Note or under any of the other Obligations.

The Borrower hereby ratifies and confirms whatever the Bank may do with respect to the Collateral and agrees that the Bank shall not be liable for any error of judgment or mistakes of fact or law with respect to actions taken in connection with the Collateral.

6. Attorney-in-Fact . The Borrower hereby irrevocably makes, constitutes and appoints the Bank (and any officer of the Bank or any Person designated by the Bank for that purpose) as the Borrower’s true and lawful proxy and attorney-in-fact (and agent-in-fact) in the Borrower’s name, place and stead, with full power of substitution, to (i) take such actions as are permitted in this Agreement, (ii) execute such financing statements and other documents and to do such other acts as the Bank may require to perfect and preserve the Bank’s security interest in, and to enforce such interests in the Collateral, (iii) direct any Operating Subsidiary to request the applicable Insurance Director to approve the repayment of any of that Operating Subsidiary’s Subsidiary Notes and if necessary, make the request on behalf of and in the name of such Operating Subsidiary, provided that (a) an Event of Default has occurred and has continued for thirty (30) days, (b) the Bank has accelerated the Obligations, and (c) the applicable Operating Subsidiary has not acted in good faith with the Bank to remedy such Event of Default and to obtain approval of repayment from the applicable Insurance Director, and (iv) carry out any remedy provided for in this Agreement, including endorsing the Borrower’s name to checks, drafts, instruments and other items of payment, and proceeds of the




Collateral, executing change of address forms with the postmaster of the United States Post Office serving the address of the Borrower, changing the address of the Borrower to that of the Bank, opening all envelopes addressed to the Borrower and applying any payments contained therein to the Obligations. The Borrower hereby acknowledges that the constitution and appointment of such proxy and attorney-in-fact are coupled with an interest and are irrevocable. The Borrower hereby ratifies and confirms all that such attorney-in-fact may do or cause to be done by virtue of any provision of this Agreement.

7. No Marshaling . The Bank shall not be required to marshal any present or future collateral security (including this Agreement and the Collateral) for, or other assurances of payment of, the Obligations or any of them or to resort to such collateral security or other assurances of payment in any particular order. To the extent that it lawfully may, the Borrower hereby agrees that it will not invoke any law relating to the marshaling of collateral which might cause delay in or impede the enforcement of the Bank’s rights under this Agreement or under any other instrument creating or evidencing any of the Obligations or under which any of the Obligations is outstanding or by which any of the Obligations is secured or payment thereof is otherwise assured, and, to the extent that it lawfully may, the Borrower hereby irrevocably waives the benefits of all such laws.

8. Application of Proceeds . The Bank will within three (3) Business Days after receipt of cash or solvent credits from collection of items of payment, proceeds of Collateral or any other source, apply the whole or any part thereof against the Obligations secured hereby. The Bank shall further have the exclusive right to determine how, when and what application of such payments and such credits shall be made on the Obligations, and such determination shall be conclusive upon the Borrower. Any proceeds of any disposition by the Bank of all or any part of the Collateral may be first applied by the Bank to the payment of expenses incurred by the Bank in connection with the Collateral, including reasonable attorneys’ fees and legal expenses as provided for in Section 13 hereof.

9. No Waiver . No Event of Default shall be waived by the Bank except in writing. No failure or delay on the part of the Bank in exercising any right, power or remedy hereunder shall operate as a waiver of the exercise of the same or any other right at any other time; nor shall any single or partial exercise of any such right, power or remedy preclude any other or further exercise thereof or the exercise of any other right, power or remedy hereunder. There shall be no obligation on the part of the Bank to exercise any remedy available to the Bank in any order. The remedies provided for herein are cumulative and not exclusive of any remedies provided at law or in equity. The Borrower agrees that in the event that the Borrower fails to perform, observe or discharge any of its Obligations or liabilities under this Agreement or any other agreements with the Bank, no remedy of law will provide adequate relief to the Bank, and further agrees that the Bank shall be entitled to temporary and permanent injunctive relief in any such case without the necessity of proving actual damages.

10. Letters of Credit . With respect to all Letters of Credit for which presentment for honor shall not have occurred at the time of an acceleration pursuant to this Section 12 , the Borrower shall at such time deposit in a cash collateral account opened by the Bank an amount equal to the Letter of Credit Obligations then outstanding. Amounts held in such cash collateral account shall be applied by the Bank to the payment of drafts drawn under such Letters of Credit, and the unused portion thereof after all such Letters of Credit shall have expired or been fully drawn upon, if any, shall be applied to repay the Obligations, in such order of application as the Bank may, in its sole discretion, from time to time elect. After all such Letters of Credit shall have expired or been fully drawn upon, all commitments to make Loans hereunder have terminated and all other Obligations have been




indefeasibly satisfied and paid in full in cash, the balance, if any, in such cash collateral account shall be returned to the Borrower or such other Person as may be lawfully entitled thereto.

Section 6.
MISCELLANEOUS .

1. Obligations Absolute . None of the following shall affect the Obligations of the Borrower to the Bank under this Agreement or the Bank’s rights with respect to the Collateral:

(a) acceptance or retention by the Bank of other property or any interest in property as security for the Obligations;

(b) release by the Bank of all or any part of the Collateral or of any party liable with respect to the Obligations;

(c) release, extension, renewal, modification or substitution by the Bank of any Note, or any note evidencing any of the Obligations, or the compromise of the liability of the Obligations; or

(d) failure of the Bank to resort to any other security or to pursue the Borrower or any other obligor liable for any of the Obligations before resorting to remedies against the Collateral.

2. Entire Agreement . This Agreement and the other Loan Documents (i) are valid, binding and enforceable against the Borrower and the Bank in accordance with their respective provisions and no conditions exist as to their legal effectiveness; (ii) constitute the entire agreement between the parties with respect to the subject matter hereof and thereof; and (iii) are the final expression of the intentions of the Borrower and the Bank. No promises, either expressed or implied, exist between the Borrower and the Bank, unless contained herein or therein. This Agreement, together with the other Loan Documents, supersedes all negotiations, representations, warranties, commitments, term sheets, discussions, negotiations, offers or contracts (of any kind or nature, whether oral or written) prior to or contemporaneous with the execution hereof with respect to any matter, directly or indirectly related to the terms of this Agreement and the other Loan Documents. This Agreement and the other Loan Documents are the result of negotiations among the Bank, the Borrower and the other parties hereto and thereto, and have been reviewed (or have had the opportunity to be reviewed) by counsel to all such parties, and are the products of all parties. Accordingly, this Agreement and the other Loan Documents shall not be construed more strictly against the Bank merely because of the Bank’s involvement in their preparation.

3. Amendments; Waivers . No delay on the part of the Bank in the exercise of any right, power or remedy shall operate as a waiver thereof, nor shall any single or partial exercise by the Bank of any right, power or remedy preclude other or further exercise thereof, or the exercise of any other right, power or remedy. No amendment, modification or waiver of, or consent with respect to, any provision of this Agreement or the other Loan Documents shall in any event be effective unless the same shall be in writing and acknowledged by the Bank and the Borrower, and then any such amendment, modification, waiver or consent shall be effective only in the specific instance and for the specific purpose for which given.

4. WAIVER OF DEFENSES . THE BORROWER, ON BEHALF OF ITSELF AND ANY GUARANTOR OF ANY OF THE OBLIGATIONS, WAIVES EVERY PRESENT DEFENSE, CAUSE OF ACTION, COUNTERCLAIM OR SETOFF WHICH THE BORROWER MAY NOW HAVE OR HEREAFTER MAY HAVE TO ANY ACTION BY THE BANK IN ENFORCING THIS AGREEMENT, OTHER THAN PAYMENT IN FULL OF THE OBLIGATIONS. PROVIDED THE




BANK ACTS IN GOOD FAITH, THE BORROWER RATIFIES AND CONFIRMS WHATEVER THE BANK MAY DO PURSUANT TO THE TERMS OF THIS AGREEMENT. THIS PROVISION IS A MATERIAL INDUCEMENT FOR THE BANK GRANTING ANY FINANCIAL ACCOMMODATION TO THE BORROWER.

5. FORUM SELECTION AND CONSENT TO JURISDICTION . ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT, SHALL BE BROUGHT AND MAINTAINED EXCLUSIVELY IN THE CIRCUIT COURTS OF COOK COUNTY WITHIN THE STATE OF ILLINOIS OR IN THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF ILLINOIS; PROVIDED THAT NOTHING IN THIS AGREEMENT SHALL BE DEEMED OR OPERATE TO PRECLUDE THE BANK FROM BRINGING SUIT OR TAKING OTHER LEGAL ACTION IN ANY OTHER JURISDICTION. THE BORROWER HEREBY EXPRESSLY AND IRREVOCABLY SUBMITS TO THE JURISDICTION OF THE CIRCUIT COURTS OF COOK COUNTY WITHIN THE STATE OF ILLINOIS AND OF THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF ILLINOIS FOR THE PURPOSE OF ANY SUCH LITIGATION AS SET FORTH ABOVE. THE BORROWER FURTHER IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS BY REGISTERED MAIL, POSTAGE PREPAID, OR BY PERSONAL SERVICE WITHIN OR WITHOUT THE STATE OF ILLINOIS. THE BORROWER HEREBY EXPRESSLY AND IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY SUCH LITIGATION BROUGHT IN ANY SUCH COURT REFERRED TO ABOVE AND ANY CLAIM THAT ANY SUCH LITIGATION HAS BEEN BROUGHT IN AN INCONVENIENT FORUM.

6. WAIVER OF JURY TRIAL . THE BANK AND THE BORROWER, AFTER CONSULTING OR HAVING HAD THE OPPORTUNITY TO CONSULT WITH COUNSEL, EACH KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE IRREVOCABLY, ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY RIGHTS UNDER THIS AGREEMENT, ANY NOTE, ANY OTHER LOAN DOCUMENT, ANY OF THE OTHER OBLIGATIONS, THE COLLATERAL, OR ANY AMENDMENT, INSTRUMENT, DOCUMENT OR AGREEMENT DELIVERED OR WHICH MAY IN THE FUTURE BE DELIVERED IN CONNECTION HEREWITH OR THEREWITH OR ARISING FROM ANY LENDING RELATIONSHIP EXISTING IN CONNECTION WITH ANY OF THE FOREGOING, OR ANY COURSE OF CONDUCT OR COURSE OF DEALING IN WHICH THE BANK AND THE BORROWER ARE ADVERSE PARTIES, AND EACH AGREES THAT ANY SUCH ACTION OR PROCEEDING SHALL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY. THIS PROVISION IS A MATERIAL INDUCEMENT FOR THE BANK GRANTING ANY FINANCIAL ACCOMMODATION TO THE BORROWER.

7. Assignability . The Bank may at any time assign the Bank’s rights in this Agreement, the other Loan Documents, the Obligations, or any part thereof and transfer the Bank’s rights in any or all of the Collateral, and the Bank thereafter shall be relieved from all liability with respect to such Collateral. In addition, the Bank may at any time sell one or more participations in the Loans. The Borrower may not sell or assign this Agreement, or any other agreement with the Bank or any portion thereof, either voluntarily or by operation of law, without the prior written consent of the Bank. This Agreement shall be binding upon the Bank and the Borrower and their respective legal representatives and successors. All references herein to the Borrower shall be deemed to include any successors, whether immediate or remote. In the case of a joint venture or partnership, the term “Borrower” shall




be deemed to include all joint venturers or partners thereof, who shall be jointly and severally liable hereunder.

8. Confirmations . The Borrower and the Bank agree from time to time, upon written request received by it from the other, to confirm to the other in writing the aggregate unpaid principal amount of the Loans then outstanding under such Note.

9. Confidentiality . The Bank agrees to use commercially reasonable efforts (equivalent to the efforts the Bank applies to maintain the confidentiality of its own confidential information) to maintain as confidential all information provided to it by the Borrower, including all information designated as confidential, except that the Bank may disclose such information (a) to Persons employed or engaged by the Bank in evaluating, approving, structuring or administering the Loans; (b) to any assignee or participant or potential assignee or participant that has agreed to comply with the covenant contained in this Section 13.9 (and any such assignee or participant or potential assignee or participant may disclose such information to Persons employed or engaged by them as described in clause (a) above); (c) as required or requested by any federal or state regulatory authority or examiner, or any insurance industry association, or as reasonably believed by the Bank to be compelled by any court decree, subpoena or legal or administrative order or process; (d) as, on the advice of the Bank’s counsel, is required by law; (e) in connection with the exercise of any right or remedy under the Loan Documents or in connection with any litigation to which the Bank is a party; (f) to any nationally recognized rating agency that requires access to information about the Bank’s investment portfolio in connection with ratings issued with respect to the Bank; (g) to any Affiliate of the Bank who may provide Bank Products to the Borrower or any Subsidiary, or (h) that ceases to be confidential through no fault of the Bank.

10. Binding Effect . This Agreement shall become effective upon execution by the Borrower and the Bank. If this Agreement is not dated or contains any blanks when executed by the Borrower, the Bank is hereby authorized, without notice to the Borrower, to date this Agreement as of the date when it was executed by the Borrower, and to complete any such blanks according to the terms upon which this Agreement is executed.

11. Governing Law . This Agreement, the Loan Documents and any Note shall be delivered and accepted in and shall be deemed to be contracts made under and governed by the internal laws of the State of Illinois (but giving effect to federal laws applicable to national banks) applicable to contracts made and to be performed entirely within such state, without regard to conflict of laws principles.

12. Enforceability . Wherever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be prohibited by, unenforceable or invalid under any jurisdiction, such provision shall as to such jurisdiction, be severable and be ineffective to the extent of such prohibition or invalidity, without invalidating the remaining provisions of this Agreement or affecting the validity or enforceability of such provision in any other jurisdiction.

13. Survival of Borrower Representations . All covenants, agreements, representations and warranties made by the Borrower herein shall, notwithstanding any investigation by the Bank, be deemed material and relied upon by the Bank and shall survive the making and execution of this Agreement and the Loan Documents and the issuance of any Note, and shall be deemed to be continuing representations and warranties until such time as the Borrower has fulfilled all of its Obligations to the Bank, and the Bank has been indefeasibly paid in full in cash. The Bank, in




extending financial accommodations to the Borrower, is expressly acting and relying on the aforesaid representations and warranties.

14. Extensions of Bank’s Commitment . This Agreement shall secure and govern the terms of (i) any extensions or renewals of the Bank’s commitment hereunder, and (ii) any replacement note executed by the Borrower and accepted by the Bank in its sole and absolute discretion in substitution for any Note.

15. Time of Essence . Time is of the essence in making payments of all amounts due the Bank under this Agreement and in the performance and observance by the Borrower of each covenant, agreement, provision and term of this Agreement.

16. Counterparts; Facsimile Signatures . This Agreement may be executed in any number of counterparts and by the different parties hereto on separate counterparts and each such counterpart shall be deemed to be an original, but all such counterparts shall together constitute but one and the same Agreement. Receipt of an executed signature page to this Agreement by facsimile or other electronic transmission shall constitute effective delivery thereof. Electronic records of executed Loan Documents maintained by the Bank shall deemed to be originals thereof.

17. Notices . Except as otherwise provided herein or in any other Loan Document, the Borrower waives all notices and demands in connection with the enforcement of the Bank’s rights hereunder. All notices, requests, demands and other communications provided for hereunder shall be in writing and addressed as follows:

To the Borrower:
American Insurance Acquisition Inc.
c/o Atlas Financial Holdings, Inc
150 Northwest Point Blvd.
3rd Floor
Elk Grove Village, IL 60007
Attn: Paul Romano Jr.
 
 
With a copy to:
DLA Piper LLP
203 N. LaSalle Street
Suite 1900
Chicago, Illinois 60601
Attn: Brian K. Doyle
 
 
To the Bank:
Fifth Third Bank
1701 Golf Road, Suite 900
Rolling Meadows, IL 60008
Attention: Jeff Bobis
 
 
With copy to:
Holland & Knight, LLP
131 S. Dearborn, 30 th  Floor
Chicago, IL 60603
Attention: Francis L. Keldermans





or, as to each party, at such other address as shall be designated by such party in a written notice to each other party complying as to delivery with the terms of this subsection. All notices addressed as above shall be deemed to have been properly given (i) if served in person, upon acceptance or refusal of delivery; (ii) if mailed by certified or registered mail, return receipt requested, postage prepaid, on the third (3rd) day following the day such notice is deposited in any post office station or letter box; or (iii) if sent by recognized overnight courier, on the first (1st) day following the day such notice is delivered to such carrier. No notice to or demand on the Borrower in any case shall entitle the Borrower to any other or further notice or demand in similar or other circumstances.

18. Release of Claims Against Bank . In consideration of the Bank making the Loans, the Borrower and all other Obligors do each hereby release and discharge the Bank of and from any and all claims, harm, injury, and damage of any and every kind, known or unknown, legal or equitable, which any Obligor may have against the Bank from the date of their respective first contact with the Bank until the date of this Loan Agreement, including any claim arising from any reports (environmental reports, surveys, appraisals, etc.) prepared by any parties hired or recommended by the Bank. The Borrower and all other Obligors confirm to Bank that they have reviewed the effect of this release with competent legal counsel of their choice, or have been afforded the opportunity to do so, prior to execution of this Agreement and the Loan Documents and do each acknowledge and agree that the Bank is relying upon this release in extending the Loans to the Borrower.

19. Costs, Fees and Expenses . The Borrower shall pay or reimburse the Bank for all reasonable costs, fees and expenses incurred by the Bank or for which the Bank becomes obligated in connection with the negotiation, preparation, consummation, collection of the Obligations or enforcement of this Agreement, the other Loan Documents and all other documents provided for herein or delivered or to be delivered hereunder or in connection herewith (including any amendment, supplement or waiver to any Loan Document), or during any workout, restructuring or negotiations in respect thereof, including reasonable consultants’ fees and attorneys’ fees and time charges of counsel to the Bank, which shall also include attorneys’ fees and time charges of attorneys who may be employees of the Bank or any Affiliate of the Bank, plus costs and expenses of such attorneys or of the Bank; search fees, costs and expenses; and all taxes payable in connection with this Agreement or the other Loan Documents, whether or not the transaction contemplated hereby shall be consummated. In furtherance of the foregoing, the Borrower shall pay any and all stamp and other taxes, UCC search fees, filing fees and other costs and expenses in connection with the execution and delivery of this Agreement, any Note and the other Loan Documents to be delivered hereunder, and agrees to save and hold the Bank harmless from and against any and all liabilities with respect to or resulting from any delay in paying or omission to pay such costs and expenses. That portion of the Obligations consisting of costs, expenses or advances to be reimbursed by the Borrower to the Bank pursuant to this Agreement or the other Loan Documents which are not paid on or prior to the date hereof shall be payable by the Borrower to the Bank on demand. If at any time or times hereafter the Bank: (a) employs counsel for advice or other representation (i) with respect to this Agreement or the other Loan Documents, (ii) to represent the Bank in any litigation, contest, dispute, suit or proceeding or to commence, defend, or intervene or to take any other action in or with respect to any litigation, contest, dispute, suit, or proceeding (whether instituted by the Bank, the Borrower, or any other Person) in any way or respect relating to this Agreement, the other Loan Documents or the Borrower’s business or affairs, or (iii) to enforce




any rights of the Bank against the Borrower or any other Person that may be obligated to the Bank by virtue of this Agreement or the other Loan Documents; (b) takes any action to protect, collect, sell, liquidate, or otherwise dispose of any of the Collateral; and/or (c) attempts to or enforces any of the Bank’s rights or remedies under the Agreement or the other Loan Documents, the reasonable costs and expenses incurred by the Bank in any manner or way with respect to the foregoing, shall be part of the Obligations, payable by the Borrower to the Bank on demand.

20. Indemnification . The Borrower agrees to defend (with counsel satisfactory to the Bank), protect, indemnify, exonerate and hold harmless each Indemnified Party from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, claims, costs, expenses and disbursements of any kind or nature (including the disbursements and the reasonable fees of counsel for each Indemnified Party thereto, which shall also include, without limitation, reasonable attorneys’ fees and time charges of attorneys who may be employees of any Indemnified Party), which may be imposed on, incurred by, or asserted against, any Indemnified Party (whether direct, indirect or consequential and whether based on any federal, state or local laws or regulations, including securities laws, Environmental Laws, commercial laws and regulations, under common law or in equity, or based on contract or otherwise) in any manner relating to or arising out of this Agreement or any of the Loan Documents, or any act, event or transaction related or attendant thereto, the preparation, execution and delivery of this Agreement and the Loan Documents, including the making or issuance and management of the Loans, the use or intended use of the proceeds of the Loans, the enforcement of the Bank’s rights and remedies under this Agreement, the Loan Documents, any Note, any other instruments and documents delivered hereunder, or under any other related agreement between the Borrower and the Bank; provided, however, that the Borrower shall not have any obligations hereunder to any Indemnified Party with respect to matters determined by a court of competent jurisdiction by final and nonappealable judgment to have been caused by or resulting from the willful misconduct or gross negligence of such Indemnified Party. To the extent that the undertaking to indemnify set forth in the preceding sentence may be unenforceable because it violates any law or public policy, the Borrower shall satisfy such undertaking to the maximum extent permitted by applicable law. Any liability, obligation, loss, damage, penalty, cost or expense covered by this indemnity shall be paid to each Indemnified Party on demand, and failing prompt payment, together with interest thereon at the Default Rate from the date incurred by each Indemnified Party until paid by the Borrower, shall be added to the Obligations of the Borrower and be secured by the Collateral. The provisions of this Section shall survive the satisfaction and payment of the other Obligations and the termination of this Agreement.

21. Revival and Reinstatement of Obligations . If the incurrence or payment of the Obligations by any Obligor or the transfer to the Bank of any property should for any reason subsequently be declared to be void or voidable under any state or federal law relating to creditors’ rights, including provisions of the Bankruptcy Code relating to fraudulent conveyances, preferences, or other voidable or recoverable payments of money or transfers of property (collectively, a “Voidable Transfer”), and if the Bank is required to repay or restore, in whole or in part, any such Voidable Transfer, or elects to do so upon the reasonable advice of its counsel, then, as to any such Voidable Transfer, or the amount thereof that the Bank is required or elects to repay or restore, and as to all reasonable costs, expenses, and attorneys' fees of the Bank, the Obligations shall automatically shall be revived, reinstated, and restored and shall exist as though such Voidable Transfer had never been made.





22. Customer Identification - USA Patriot Act Notice . The Bank hereby notifies the Borrower that pursuant to the requirements of the USA Patriot Act (Title III of Pub. L. 107-56, signed into law October 26, 2001) (the “Act”), and the Bank’s policies and practices, the Bank is required to obtain, verify and record certain information and documentation that identifies the Borrower, which information includes the name and address of the Borrower and such other information that will allow the Bank to identify the Borrower in accordance with the Act.

[Signature Page Follows]
- 10 -
IN WITNESS WHEREOF, the Borrower and the Bank have executed this Loan and Security Agreement as of the date first above written.

BORROWER :

AMERICAN INSURANCE ACQUISITION INC., a Delaware corporation

By:      ________________________________
Name:      Scott D. Wollney
Title:      Chief Executive Office and President


BANK :

FIFTH THIRD BANK,
an Ohio banking corporation

By:      ________________________________
Name:      Jeffrey Bobis
Title:      Vice President




STOCK PLEDGE AGREEMENT

This Stock Pledge Agreement (“ Pledge Agreement ”) is entered into as of this 9th day of March 2015 by and between American Insurance Acquisition Inc ., a Delaware corporation (“ Pledgor ”), and FIFTH THIRD BANK , an Ohio banking corporation (“ Bank ”).

RECITALS :

A. Bank has heretofore agreed to extend certain loan facilities in the maximum principal amount of up to Thirty-Five Million and No/100 Dollars ($35,000,000.00) (the “ Loans ”) to Pledgor (sometimes referred to herein as “ Borrower ”) and pursuant to the terms and conditions of that certain Loan and Security Agreement dated as of even date herewith by and between Borrower and Bank (as may be amended, restated, supplemented and/or modified from time to time, the “ Loan Agreement ”). All capitalized terms used but not defined herein shall have the meanings ascribed to such terms in the Loan Agreement.





B. The Loans are evidenced by (i) that certain Revolving Promissory Note dated as of even date herewith, in the maximum principal amount of $5,000,000 (as amended restated, supplemented and/or modified from time to time, the “ Revolving Note ”) made payable by Borrower to the order of Bank and (ii) that certain Draw Note dated as of even date herewith, in the maximum principal amount of $30,000,000 (as amended, restated, supplemented and/or modified from time to time, the “ Draw Note ”; and together with the Revolving Note, the “ Notes ”) made payable by Borrower to the order of Bank.

C. As a condition to making the Loans to Borrower, Bank requires, and Borrower agrees to execute this certain Pledge Agreement, pursuant to which, among other things, the Borrower pledges to Bank all of its equity interests in its Wholly-Owned Subsidiaries.

D. Pledgor desires to give this pledge to Bank as an inducement for Bank to make the Loans and as security for the Loans and the Notes.

AGREEMENTS :

NOW, THEREFORE, to secure the Loans and the Notes, and all liabilities, obligations, and agreements of Borrower under the Loan Agreement, and in consideration of the premises and the covenants hereinafter contained, it is agreed as follows:

ARTICLE I: DEFINITIONS

1.1      Ancillary Collateral . “Ancillary Collateral” shall have the meaning ascribed in Section 2.2(c) hereof.

1.2      Cash Distributions . “Cash Distributions” shall have the meaning ascribed in Section 2.4 hereof.


1.3      Liabilities . References in this Pledge Agreement to “ Liabilities ” shall mean the payment and performance of the following:

(a)      All Obligations and Liabilities of Borrower, whether now existing or hereafter arising and whether or not contemplated on the date of this Pledge Agreement, evidenced by the Loan Agreement, the Notes and all applicable Loan Documents (including all renewals, replacements, and extensions thereof and interest thereon) executed and delivered by Borrower to Bank, and under any other agreements between Borrower and Bank evidencing the Loans;

(b)      All obligations and liabilities of Pledgor hereunder; and

(c)      All obligations and liabilities of the Operating Subsidiaries under the Loan Documents.

1.4      Event of Default . The occurrence of an Event of Default as defined in the Loan Agreement, which definition includes, without limitation, any failure by Pledgor to promptly perform any of its obligations or observe any other condition, covenant, term, agreement or provision required to be performed or observed by Pledgor under this Pledge Agreement beyond any applicable grace or cure periods.

1.5      Pledge Agreement . References to this “ Pledge Agreement ” shall mean this Pledge Agreement, including all amendments, modifications and supplements, and any exhibits or schedules to any




of the foregoing, and shall refer to this Pledge Agreement as the same may be in effect at the time such reference becomes operative.

1.6      Pledged Stock . References in this Pledge Agreement to “ Pledged Stock ” shall collectively mean 100% of the outstanding Capital Securities of each of the Operating Subsidiaries, and all dividends and interest on, distributions, economic interests, rights, proceeds and products of, additions to and substitutions for any of the foregoing (including, without limitation, insurance proceeds and payments under the Securities Investor Protection Act of 1970), together with all certificates, options, rights or other distributions issued as an addition to, in substitution or in exchange for, or on account of, any such shares and/or accounts, and all proceeds of all of the foregoing, now or hereafter owned or acquired by the Pledgor.

1.7      Operating Subsidiaries . References in this Pledge Agreement to “Operating Subsidiaries” shall collectively mean and refer to “Operating Subsidiaries” as defined in the Loan Agreement. The Operating Subsidiaries are, directly or indirectly, wholly owned subsidiaries of Pledgor, as shown on Exhibit A attached hereto and made a part hereof.


ARTICLE II: THE PLEDGE

2.1      Pledge of Stock . As security for the prompt satisfaction of the Liabilities, Pledgor hereby pledges to Bank all of its right, title and interest in and to the Pledged Stock and grants Bank a lien on the Pledged Stock and a security interest therein and authorizes Bank to file such financing statements as may be required to perfect Bank’s security interest in the Pledged Stock.

2.2      Incidents of Ownership . If Pledgor shall have, or shall become entitled to receive or shall receive, in connection with any of the Pledged Stock, any:

(a)      Stock certificates including, but without limitation, any certificate representing a distribution or in connection with any increase or reduction of capital, reclassification, merger, consolidation, sale of assets, combination of interests, split, spin-off or split-off;
(b)      Option, warrant, or right, whether as an addition to or in substitution or in exchange for any of the Pledged Stock, or otherwise; or

(c)      Distributions or dividends payable in property, shares or stock, whether such distribution shall constitute the return of Pledgor’s capital contribution to Pledgor, distribution of profits, or payment for any other reason (“ Ancillary Collateral ”);

then Pledgor shall hold or accept such Ancillary Collateral as Bank’s agent, in trust for Bank, and shall deliver them forthwith to Bank in the exact form received with, as applicable, Pledgor’s endorsement when necessary, or appropriate assignments duly executed in blank, to be held by Bank, subject to the terms hereof, as part of the Pledged Stock.

2.3      Registration . Pledgor hereby covenants that prior to or upon execution hereof, Pledgor will or has previously (i) cause or caused, as applicable, each issuer of Pledged Stock to execute and deliver to Bank stock powers in blank with respect to the Pledged Stock, which stock powers shall be in form and substance as set forth on Exhibit B attached hereto and (ii) cause or caused, as applicable, each issuer of Pledged Stock to note the security interest granted to Bank on the books of such issuer. Immediately and without further notice, upon an Event of Default, Bank or its nominee shall have, with respect to the Pledged Stock, the right to exercise all voting rights under the Bylaws of each issuer, and all other company rights and all conversion, exchange, subscription or other rights, privileges or options pertaining thereto as if it were the absolute owner thereof, including, without limitation, the right to exchange any or all of the Pledged




Stock upon the merger, consolidation, reorganization, recapitalization or other readjustment of an issuer thereof, or upon the exercise by such issuer of any right, privilege, or option pertaining to any of the Pledged Stock, and, in connection therewith, to deliver any of the Pledged Stock to any committee, depository, transfer agent, registrar or other designated agency upon such terms and conditions as it may determine, all without liability except to account for property actually received by it; but Bank shall have no duty to exercise any of the aforesaid rights, privileges or options and shall not be responsible for any failure to do so or delay in so doing.

2.4      Cash Distributions . Unless an Event of Default shall have occurred and be continuing, and unless prohibited by Section 9.6 of the Loan Agreement or any of the Loan Documents, Pledgor shall be entitled to receive for its own use any distributions or dividends payable in cash, whether such distribution shall constitute the return of Pledgor’s capital contribution to Pledgor, distribution of profits, or payment for any other reason (“ Cash Distribution ”). Upon an Event of Default, Bank may require any such Cash Distributions to be delivered to Bank as satisfaction of the Liabilities.

2.5      Remedy Upon Default .

(a)      Upon an Event of Default, Bank may, without demand of performance or other demand, advertisement, or notice of any kind (except the notice specified below of time and place of public or private sale) to or upon Pledgor or any other Person (all of which are, to the extent permitted by law, hereby expressly waived), forthwith realize upon the Pledged Stock or any part thereof, may direct each issuer of Pledged Stock to make any Cash Distributions payable to Pledgor directly to Bank, may direct each issuer of Pledged Stock to permit Bank to withdraw any amount which may be withdrawn at such time with respect to the Pledged Stock of Pledgor, and may forthwith, or agree to, sell or otherwise dispose of and deliver the Pledged Stock or any part thereof or interest therein, in one or more parcels at public or private sale or sales, at any exchange, broker’s board or at any of Bank’s offices or elsewhere, at such prices and on such terms (including, but without limitation, a requirement that any purchaser of all or any part of the Pledged Stock purchase the Pledged Stock for investment and without any intention to make a distribution thereof) as it may deem best, for cash or on credit, or for future delivery without assumption of any credit risk, with the right to Bank or any purchaser to purchase upon any such sale the whole or any part of the Pledged Stock free of any right or equity of redemption in Pledgor, which right or equity is hereby expressly waived and released.

(b)      Pledgor acknowledges and agrees that upon the occurrence and continuance of an Event of Default, Bank will suffer irreparable harm for which it will have no adequate remedy at law and for which any accurate determination of legal damages will be impossible. Consequently, Bank shall be entitled, in addition to all other remedies available under applicable laws and agreements, to obtain, without bond or other surety, injunctive and other equitable relief to require specific performance by Pledgor of its obligations to Bank.

(c)      Bank shall be entitled to reimbursement upon demand from Pledgor for all of its reasonable costs (including without limitation reasonable attorneys’ fees, expenses and costs) incurred in enforcing its remedies hereunder.

2.6      Proceeds of Sale . The proceeds of any such disposition or other action by Bank shall be applied in accordance with Section 12.8 of the Loan Agreement.

2.7      Notice of Sale . Bank need not give more than ten (10) days’ written notice of the time and place of any public or private sale which Pledgor acknowledges and agrees is commercially reasonable, adequate notice.





ARTICLE III: REPRESENTATIONS AND WARRANTIES

3.1      Inducement . Pledgor represents and warrants to Bank that:

(a)      Pledgor will notify Bank in writing of any change in address and will, upon demand, execute and deliver to Bank such assignments, financing statements and other documents as Bank may reasonably request to maintain a perfected security interest in the Pledged Stock.

(b)      All acts, conditions and things required to be done and performed and to have happened precedent to the creation and issuance of this Pledge Agreement and to constitute it as the valid and legally binding obligation of Pledgor in accordance with the terms hereof, including, without limitation, the delivery of assignments and/or endorsements, have been done and performed.

3.2      Warranties Concerning Pledged Stock . With respect to the Pledged Stock, Pledgor represents and warrants to Bank that:

(a)      It is the legal and beneficial owner of the Pledged Stock, as applicable;

(b)      All of the Pledged Stock has been duly and validly issued, and is owned, directly or indirectly, by Pledgor free of any pledge, mortgage, hypothecation, lien, charge, encumbrance or security interest in the Pledged Stock or the proceeds thereof, except as granted hereunder;

(c)      Upon execution hereof, this Pledge Agreement along with delivery of the Stock Certificates and stock powers, each executed in blank, shall create a valid lien upon and perfected security interest in the Pledged Stock and the proceeds thereof, subject to no prior security interest, lien, charge or encumbrance, or agreement purporting to grant to any third party a prior security interest in the property or assets of Pledgor which would include the Pledged Stock;

(d)      Pledgor will not consent to any amendment, modification or termination of the Bylaws or dissolution of any issuer of the Pledged Stock without prior written consent of Bank, which consent shall not be unreasonably withheld; and

(e)      The execution, delivery and performance of this Pledge Agreement and the pledge made hereunder are not in contravention of any terms of the Certificate of Incorporation or Bylaws of Pledgor, any material contract, agreement, undertaking or commitment of Pledgor.

ARTICLE IV: COVENANTS

4.1      Covenants . Pledgor hereby covenants that, until all of the Liabilities have been satisfied in full (other than any contingent liabilities which may survive the termination of the Loan Documents), it shall comply with the following covenants, unless Bank consents otherwise in writing:

(a)      Disposition of Pledged Stock . Pledgor shall not, except as permitted herein or in the Loan Agreement, sell, convey or otherwise dispose of any of the Pledged Stock or any interest therein, or create, incur or permit to exist any pledge, mortgage, lien, charge, encumbrance or any security interest whatsoever in or with respect to any of the Pledged Stock or the proceeds thereof, other than that created hereby or permitted hereunder;





(b)      Defense of Title . Pledgor shall, at its own expense, defend Bank’s right, title, special property and security interest in and to the Pledged Stock against the claims of any person, firm, corporation or other entity;

(c)      Delivery of Notices . Pledgor shall promptly deliver to Bank all written notices, and shall promptly give Bank written notice of any other notices, received by it with respect to the Pledged Stock, and Bank shall promptly give like notice to the Pledgor of any such notices received by it or its nominee;

(d)      Further Assurances . Pledgor shall at any time, and from time to time, upon the written request of Bank, execute and deliver such financing statements or further documents and do such further acts and things as Bank may reasonably request to effect the purposes of this Pledge Agreement, including, without limitation, delivering to Bank upon the occurrence of an Event of Default irrevocable proxies with respect to the Pledged Stock in form satisfactory to Bank;

(e)      Issuance of Additional Stock . Pledgor shall not and shall not permit the shareholders and officers of any issuer of the Pledged Stock to, at any time during the term hereof, cause such issuer to issue any additional stock in such issuer whatsoever, unless such additional stock is pledged to secure the Liabilities; and

(f)      Entries on Books . Pledgor shall make appropriate entries upon its books and records to acknowledge and disclose Bank’s interests in the Pledged Stock.

ARTICLE V: OBLIGATIONS OF BANK

5.1      Reasonable Care . Beyond the exercise of reasonable care to assure the safe custody of any certificates of the Pledged Stock while held hereunder, Bank shall have no duty or liability to preserve rights pertaining thereto and shall be relieved of all responsibility for any certificates of the Pledged Stock upon surrendering it or tendering surrender of it to Pledgor.

5.2      Return of Pledged Stock . Upon the satisfaction in full of all Liabilities (other than any contingent liabilities which may survive the termination of the Loan Documents) and the satisfaction of all additional reasonable costs and expenses of Bank as provided herein, this Pledge Agreement shall terminate and Bank shall deliver to Pledgor, at Pledgor’s expense, any such applicable certificates, stock powers or other evidence of the Pledged Stock as shall not have been sold or otherwise applied pursuant to this Pledge Agreement, and shall authorize the filing of terminations of all financing statements filed hereunder.

ARTICLE VI: MISCELLANEOUS

6.1      No Waiver .      No course of dealing between Pledgor and Bank, nor any failure to exercise, nor any delay in exer-cising, any right, power or privilege of Bank hereunder or under the Loan Documents shall operate as a waiver thereof; nor shall any single or partial exercise of any right, power or privilege hereunder or thereunder preclude any other or further exercise thereof or the exercise of any other right, power or privilege.

6.2      Remedies Cumulative . The rights and remedies provided herein and in the Loan Agreement, the Loan Documents and in all other agreements, instruments, and documents delivered pursuant to or in connection with the Loan, are cumulative and are in addition to and not exclusive of any rights or remedies provided by law, including, but without limitation, the rights and remedies of a secured party under the UCC. If there is any conflict between the terms and conditions of this Pledge Agreement and the Loan Agreement, the Loan Agreement shall control.





6.3      Severability . The provisions of this Pledge Agreement are severable, and if any clause or provision shall be held invalid or unenforceable in whole or in part in any jurisdiction, then such invalidity or unenforceability shall affect only such clause or provision or part thereof in such jurisdiction and shall not in any manner affect such clause or provision in this Pledge Agreement in any other jurisdiction.

6.4      Notices . All notices, communications and waivers under this Pledge Agreement shall be in writing and shall be (i) delivered in person or (ii) mailed, postage prepaid, either by registered or certified mail, return receipt requested, or (iii) by overnight express carrier, addressed in each case as follows:

To Pledgor:
American Insurance Acquisition Inc.
c/o Atlas Financial Holdings, Inc.
150 Northwest Point Blvd.
3rd Floor
Elk Grove Village, IL 60007
Attn: Paul Romano Jr.
 
 
With a copy to:
DLA Piper LLP
203 N. LaSalle Street
Suite 1900
Chicago, Illinois 60601
Attn: Brian K. Doyle
 
 
To Bank:
Fifth Third Bank
1701 Golf Road, Suite 900
Rolling Meadows, IL 60008
Attention: Jeff Bobis
 
 
With copy to:
Holland & Knight, LLP
131 S. Dearborn, 30 th  Floor
Chicago, IL 60603
Attention: Francis L. Keldermans

or to another address or number as each party designates to the other in the manner prescribed in this Pledge Agreement.

6.5      Successors and Assigns . This Pledge Agreement shall inure to the benefit of and shall be binding upon the successors and assigns of the parties hereto.

6.6      Singular and Plural; Gender . Unless the context requires otherwise, wherever used herein the singular shall include the plural and vice versa, and the use of one gender shall also denote the others where appropriate.

6.7      Assignment . This Pledge Agreement may not be assigned in whole or in part by either party without the prior written consent of the other party, except that Bank may upon written notice to Pledgor assign this Pledge Agreement to an affiliate of Bank in conjunction with any




assignment of the Loans permitted by the applicable Loan Agreement. Subject to the preceding sentence, this Pledge Agreement shall be binding upon and inure to the benefit of and be enforceable by the parties and their respective permitted successors and assigns.

6.8      Governing Law . This Pledge Agreement shall be deemed to have been given by Pledgor and delivered to and accepted by Bank in Chicago, Illinois. Any dispute arising out of, or in connection with, related to, or incidental to this Agreement shall be governed by the internal laws of the State of Illinois (but giving effect to federal laws applicable to national banks) applicable to contracts made and to be performed entirely within such state, without regard to conflict of laws principles.

6.9      Jurisdiction .

(A)      FORUM SELECTION AND CONSENT TO JURISDICTION . ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT, SHALL BE BROUGHT AND MAINTAINED EXCLUSIVELY IN THE CIRCUIT COURTS OF COOK COUNTY WITHIN THE STATE OF ILLINOIS OR IN THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF ILLINOIS; PROVIDED THAT NOTHING IN THIS AGREEMENT SHALL BE DEEMED OR OPERATE TO PRECLUDE BANK FROM BRINGING SUIT OR TAKING OTHER LEGAL ACTION IN ANY OTHER JURISDICTION. PLEDGOR HEREBY EXPRESSLY AND IRREVOCABLY SUBMITS TO THE JURISDICTION OF THE CIRCUIT COURTS OF COOK COUNTY WITHIN THE STATE OF ILLINOIS AND OF THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF ILLINOIS FOR THE PURPOSE OF ANY SUCH LITIGATION AS SET FORTH ABOVE. PLEDGOR FURTHER IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS BY REGISTERED MAIL, POSTAGE PREPAID, OR BY PERSONAL SERVICE WITHIN OR WITHOUT THE STATE OF ILLINOIS. PLEDGOR HEREBY EXPRESSLY AND IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY SUCH LITIGATION BROUGHT IN ANY SUCH COURT REFERRED TO ABOVE AND ANY CLAIM THAT ANY SUCH LITIGATION HAS BEEN BROUGHT IN AN INCONVENIENT FORUM

(B)      WAIVER OF BOND . PLEDGOR WAIVES THE POSTING OF ANY BOND OTHERWISE REQUIRED OF BANK IN CONNECTION WITH ANY JUDICIAL PROCESS OR PROCEEDING TO OBTAIN POSSESSION OF, REPLEVY, ATTACH, OR LEVY UPON COLLATERAL OR ANY OTHER SECURITY FOR THE LIABILITIES, TO ENFORCE ANY JUDGMENT OR OTHER COURT ORDER ENTERED IN FAVOR OF BANK, OR TO ENFORCE BY SPECIFIC PERFORMANCE, TEMPORARY RESTRAINING ORDER, OR PRELIMINARY OR PERMANENT INJUNCTION THIS Pledge AGREEMENT OR ANY OTHER Pledge AGREEMENT OR DOCUMENT BETWEEN BANK AND PLEDGOR.

(C)      WAIVER OF JURY TRIAL . PLEDGOR AND BANK EACH WAIVE ANY RIGHT TO HAVE A JURY PARTICIPATE IN RESOLVING ANY DISPUTE, WHETHER SOUNDING IN CONTRACT, TORT, OR OTHERWISE, BETWEEN BANK AND PLEDGOR ARISING OUT OF, CONNECTED WITH, RELATED TO, OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED BETWEEN THEM IN CONNECTION WITH THIS Pledge AGREEMENT OR ANY OTHER INSTRUMENT, DOCUMENT OR Pledge AGREEMENT EXECUTED OR DELIVERED IN CONNECTION THEREWITH OR THE TRANSACTIONS RELATED THERETO. PLEDGOR AND BANK HEREBY AGREE AND CONSENT THAT ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT A JURY AND THAT EITHER MAY




FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS Pledge AGREEMENT WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE PARTIES TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY.

6.10      Recitals . The Recitals to this Pledge Agreement are incorporated herein as an integral part of this Pledge Agreement.

6.11      Counterparts . This Pledge Agreement may be executed by one or more of the parties to this Pledge Agreement on any numbers of separate counterparts (including by facsimile or other electronic transmission), and all of said counterparts taken together shall be deemed to constitute one and the same instrument. Signatures to this Pledge Agreement delivered via facsimile or electronic transmission shall be deemed original binding signatures hereto for all purposes.

6.12      Regulatory Restrictions . Notwithstanding any provision to the contrary in any Loan Document, neither the Bank nor any of its assignees shall take any action pursuant to this Pledge Agreement or any of the Loan Documents which would constitute or result in a direct or indirect acquisition or exercise of control of any Operating Subsidiary (including, without limitation, any direct or indirect voting of the Pledged Stock) without first obtaining applicable approval (or an exemption from the requirement to obtain such approval) from the applicable insurance regulator of such Operating Subsidiary.

[SIGNATURE PAGE FOLLOWS]
 
[Signature Page of Stock Pledge Agreement]
IN WITNESS WHEREOF , the parties hereto have duly executed this Pledge Agreement as of the date and year first above written.


PLEDGOR:

AMERICAN INSURANCE ACQUISITION INC ., a Delaware corporation



By:                         
Name: Scott D. Wollney
Its: Chief Executive Officer and President


BANK:

FIFTH THIRD BANK ,
an Ohio banking corporation



By:                         
Name: Jeffrey Bobis




Its: Vice President


Exhibit A- 1
EXHIBIT A

“Pledged Stock”



American Country Insurance Corporation

Holder
Date Issued
Issuer
Certificate Number
Number of Shares
American Insurance Acquisition Inc.
11/1/2010
American Country
Insurance Corporation
4
5,000,000


American Service Insurance Company, Inc.

Holder
Date Issued
Issuer
Certificate Number
Number of Shares
American Insurance Acquisition Inc.
11/1/2010
American Service
Insurance Company, Inc.
55
821,919


Gateway Insurance Company

Holder
Date Issued
Issuer
Certificate Number
Number of Shares
American Insurance Acquisition Inc.
11/1/2014
Gateway Insurance Company
013
38,150

Signature Page to Loan and Security Agreement
EXHIBIT B
“Form of Stock Power”

IRREVOCABLE STOCK POWER Identify transferee, number of shares and certificate number. Appointment of agent to remain blank.

FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers to:

___________________________________________________

the following shares of stock of _____________________, a ____________ ____________:



Number of Shares: ___      Certificate Number: ___







and irrevocably appoints __________________________________ its agent and attorney-in-fact to transfer all or any part of such equity interests and to take all necessary and appropriate action to effect any such transfer. The agent and attorney-in-fact may substitute and appoint one or more persons to act for him. The effectiveness of a transfer pursuant to this stock power shall be subject to any and all transfer restrictions referenced on the face of the certificates evidencing such interest or in the certificate of incorporation or bylaws of the subject corporation, to the extent they may from time to time exist.


[PLEDGOR]


By:     
Name:     
Title:     













EXHIBIT 31.1
Certification of Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Scott D. Wollney, certify that:
 
1
I have reviewed this quarterly report on Form 10-Q of Atlas Financial Holdings, Inc.;
 
2
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4
The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
 
(a)
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
 
(b)
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
 
(c)
evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
 
(d)
disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
 
5
The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
 
 
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
 
 
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: May 11, 2015
 
 
 
/s/ Scott D. Wollney
 
 
Scott D. Wollney
 
 
President and Chief Executive Officer




EXHIBIT 31.2
Certification of Chief Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Paul A. Romano, certify that:
 
1
I have reviewed this quarterly report on Form 10-Q of Atlas Financial Holdings, Inc.;
 
2
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
 
a)
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
 
b)
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
 
c)
evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
 
d)
disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
 
5
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
 
 
a)
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
 
 
b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: May 11, 2015
/ S /    Paul A. Romano
Paul A. Romano
Chief Financial Officer





EXHIBIT 32.1
Certification of Chief Executive Officer
In connection with the Quarterly Report of Atlas Financial Holdings, Inc. (the “Company”) on Form 10-Q for the quarterly period ended March 31, 2015 , as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, as President and Chief Executive Officer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to his knowledge:
 
(i)
the Report of the Company fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and
 
 
(ii)
the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: May 11, 2015
 
/ S /    Scott D. Wollney
Scott D. Wollney
Chief Executive Officer
A signed original of this written statement required by Section 906 has been provided to Atlas Financial Holdings, Inc. and will be retained by Atlas Financial Holdings, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.





EXHIBIT 32.2
Certification of Chief Financial Officer
In connection with the Quarterly Report of Atlas Financial Holdings, Inc. (the “Company”) on Form 10-Q for the quarterly period ended March 31, 2015 , as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, as Executive Vice President and Chief Financial Officer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to his knowledge:
(1)
the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and

(2)
the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company
Date: May 11, 2015
 
/ S /    Paul A. Romano
Paul A. Romano
Chief Financial Officer
A signed original of this written statement required by Section 906 has been provided to Atlas Financial Holdings, Inc. and will be retained by Atlas Financial Holdings, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.