Notes to Condensed Consolidated Financial Statements
(unaudited)
1. Nature of Operations and Basis of Presentation
Atlas Financial Holdings, Inc. (“Atlas” or “We” or the “Company”) commenced operations on December 31, 2010. The primary business of Atlas focuses on a managing general agency strategy, primarily through our wholly owned subsidiary, Anchor Group Management, Inc. (“AGMI”). AGMI focuses on a niche market orientation for the “light” commercial automobile sector. This sector includes taxi cabs, non-emergency para-transit, limousine, livery, including certain transportation network companies (“TNC”) drivers/operators, and business autos. Automobile insurance products provide insurance coverage in three major areas: liability, accident benefits and physical damage.
Atlas’ business is carried out through its non-insurance company subsidiaries: AGMI, Plainview Premium Finance Company, Inc. (“Plainview Delaware”), UBI Holdings Inc. (“UBI Holdings”) and UBI Holdings’ wholly-owned subsidiaries, optOn Digital IP Inc. (“OOIP”) and optOn Insurance Agency Inc. (“optOn” and together with OOIP and UBI Holdings, “UBI”).
Prior to a strategic transition, our core business was the underwriting of commercial automobile insurance policies, focusing on the “light” commercial automobile sector, through American Country Insurance Company (“American Country”), American Service Insurance Company, Inc. (“American Service”) and Gateway Insurance Company (“Gateway” and together with American Country and American Service, the “ASI Pool Companies”) and Global Liberty Insurance Company of New York (“Global Liberty” and together with the ASI Pool Companies, our “Insurance Subsidiaries”), along with our wholly owned managing general agency, AGMI. The ASI Pool Companies were placed into rehabilitation under the statutory control of the Illinois Department of Insurance during the second half of 2019 and have been deconsolidated from our consolidated financial statements as of October 1, 2019 as a result of these actions. Other regulatory actions were taken in certain states, including restriction, suspension, or revocation of certain state licenses and certificates of authority held by the ASI Pool Companies preceding and following the initiation of rehabilitation.
During the fourth quarter of 2019, the Company began actively pursuing the potential sale of Global Liberty, and as a result, Global Liberty has been classified as a discontinued operation.
The Insurance Subsidiaries distribute their insurance products through AGMI, which has contracted a network of retail independent agents. Together, the Insurance Subsidiaries are licensed to write property and casualty (“P&C”) insurance in 49 states and the District of Columbia in the U.S. Atlas’ core products are actively distributed in 42 of those states plus the District of Columbia. The Insurance Subsidiaries and the Company’s other non-insurance subsidiaries share common management and operating infrastructure. During the third quarter of 2019, new business writings were restricted or stopped in connection with certain of the Insurance Subsidiaries. See “Note 19, Subsequent Events” and “Part I, Item 2, 2020 Developments” for certain developments with respect to the Company and the Insurance Subsidiaries subsequent to September 30, 2020.
Atlas’ ordinary common shares trade on the OTC Markets system under the symbol “AFHIF” (see Note 19, Subsequent Events).
Basis of Presentation
These statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The consolidated financial statements include the accounts of Atlas and the entities it controls. Equity investments in entities that we do not consolidate, including corporate entities in which we have significant influence and partnership and partnership-like entities in which we have more than minor influence over operating and financial policies, are accounted for under the equity method unless we have elected the fair value option. All significant intercompany accounts and transactions have been eliminated.
The results for the three and nine months ended September 30, 2020 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 U.S. GAAP for complete financial statements and should be read in conjunction with Atlas’ Annual Report on Form 10-K for the year ended December 31, 2019, which provides a more complete understanding of the Company’s accounting policies, financial position, operating results, business properties, and other matters. Atlas has consistently applied the same accounting policies throughout all periods presented.
Estimates and Assumptions
The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates and changes in estimates are recorded in the accounting period in which they are determined Significant estimates in the accompanying financial statements include deferred tax asset valuation, and allowances on premiums and notes receivable.
Revenue Recognition
Revenues from contracts with customers include both commission and fee income. The recognition and measurement of revenue is based on the assessments of individual contract terms. As an MGA, the Company has contracts with various insurance carriers which determines the Company’s commission income revenue. Each contract specifies what our performance obligations are as an MGA and what determines our commission income revenue, generally gross written premiums, net of cancellations and refunds. Under these contracts there are a number of performance obligations; however, it is the bundle of these services and not a single obligation that results in the performance of the MGA under the contracts. The Company considers these performance obligations as a non-bifurcated bundle of services where the performance obligations are satisfied simultaneous to the point in time where the Company issues a policy, or cancels a policy to an insured. The commission rate stated in the individual contract is the standalone selling price of these non-bifurcated services which is allocated to the service bundle and not to any individual obligation under the various contracts.
The revenue included as commission income for the three months ended September 30, 2020 and 2019 was $1.7 million and $860,000, respectively and $4.7 million for each of the nine months ended September 30, 2020 and 2019.
The balance of receivables related to contracts with customers, which is recorded as part of premiums receivable on the Condensed Consolidated Statements of Financial Position as of September 30, 2020 and December 31, 2019 totaled $3.1 million and $1.4 million, respectively.
Premium income is recognized on a pro-rata basis over the terms of the respective insurance contracts.
Seasonality
The P&C insurance business is seasonal in nature. Our ability to generate commission income is also impacted by the timing of policy effective periods in the states in which we operate and products provided by our business partners. For example, January 1st and March 1st are common taxi cab renewal dates in Illinois and New York, respectively.
Operating Segments
The Company operates in one business segment, the Managing General Agency segment.
2. New Accounting Standards
There have been no recent pronouncements or changes in pronouncements during the nine months ended September 30, 2020, as compared to those described in our Annual Report on Form 10-K for the twelve months ended December 31, 2019, that are of significance or potential significance to Atlas. Pertinent Accounting Standard Updates (“ASUs”) are issued from time to time by the Financial Accounting Standards Board (“FASB”) and are adopted by the Company as they become effective. All recently issued accounting pronouncements with effective dates prior to October 1, 2020 have been adopted by the Company.
3. Intangible Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible Assets by Major Asset Class
|
|
($ in ‘000s)
|
Economic Useful Life
|
Gross Carrying Amount
|
Accumulated Amortization
|
Net
|
|
As of September 30, 2020
|
|
|
|
|
|
Trade name and trademark
|
15 years
|
$
|
1,800
|
|
$
|
673
|
|
$
|
1,127
|
|
|
Customer relationship
|
10 years
|
2,700
|
|
1,495
|
|
1,205
|
|
|
|
|
$
|
4,500
|
|
$
|
2,168
|
|
$
|
2,332
|
|
|
|
|
|
|
|
|
As of December 31, 2019
|
|
|
|
|
|
Trade name and trademark
|
15 years
|
$
|
1,800
|
|
$
|
581
|
|
$
|
1,219
|
|
|
Customer relationship
|
10 years
|
2,700
|
|
1,294
|
|
1,406
|
|
|
|
|
$
|
4,500
|
|
$
|
1,875
|
|
$
|
2,625
|
|
|
|
|
|
|
|
4. Loss From Continuing Operations per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Computations of Basic and Diluted Loss per Common Share from Continuing Operations
|
|
($ in ‘000s, except share and per share amounts)
|
Three months ended September 30,
|
Nine months ended September 30,
|
|
|
2020
|
2019
|
2020
|
2019
|
|
Basic
|
|
|
|
|
|
Loss from continuing operations before income taxes
|
$
|
(3,712)
|
|
$
|
(2,963)
|
|
$
|
(11,700)
|
|
$
|
(6,145)
|
|
|
Income tax (benefit) expense
|
(148)
|
|
26
|
|
(271)
|
|
26
|
|
|
Net loss attributable to common shareholders from continuing operations
|
$
|
(3,564)
|
|
$
|
(2,989)
|
|
$
|
(11,429)
|
|
$
|
(6,171)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average common shares outstanding
|
11,971,490
|
|
11,954,494
|
|
11,946,051
|
|
11,954,494
|
|
|
Loss per common share basic from continuing operations
|
$
|
(0.30)
|
|
$
|
(0.25)
|
|
$
|
(0.96)
|
|
$
|
(0.52)
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
Basic weighted average common shares outstanding
|
11,971,490
|
|
11,954,494
|
|
11,946,051
|
|
11,954,494
|
|
|
Dilutive potential ordinary shares:
|
|
|
|
|
|
Dilutive stock options outstanding
|
—
|
|
—
|
|
—
|
|
—
|
|
|
|
|
|
|
|
|
Diluted weighted average common shares outstanding
|
11,971,490
|
|
11,954,494
|
|
11,946,051
|
|
11,954,494
|
|
|
Loss per common share diluted from continuing operations
|
$
|
(0.30)
|
|
$
|
(0.25)
|
|
$
|
(0.96)
|
|
$
|
(0.52)
|
|
Common shares are defined as ordinary voting common shares, restricted voting common shares and participative restricted stock units (“RSUs”). Earnings per common share diluted is computed by dividing net income by the weighted average number of common shares outstanding for 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. Atlas’ potential dilutive ordinary voting common shares consists of outstanding stock options to purchase ordinary voting common shares and warrants to purchase 2,387,368 ordinary voting common shares of Atlas for $0.69 per share.
Atlas’ dilutive potential ordinary voting common shares consist of outstanding stock options to purchase ordinary voting common shares. The effects of these convertible instruments are excluded from the computation of earnings per common share diluted from continuing operations in periods in which the effect would be anti-dilutive. For the three and nine months ended September 30, 2020 and 2019, all exercisable stock options were deemed to be anti-dilutive.
5. Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of Net Investment Income
|
|
($ in ‘000s)
|
Three months ended September 30,
|
Nine months ended September 30,
|
|
|
2020
|
2019
|
2020
|
2019
|
|
Total investment income:
|
|
|
|
|
|
Interest income
|
$
|
—
|
|
$
|
525
|
|
$
|
—
|
|
$
|
1,859
|
|
|
|
|
|
|
|
|
Income from other investments
|
—
|
|
45
|
|
—
|
|
794
|
|
|
Investment expenses
|
—
|
|
(241)
|
|
—
|
|
(769)
|
|
|
Net investment income
|
$
|
—
|
|
$
|
329
|
|
$
|
—
|
|
$
|
1,884
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate Proceeds and Gross Realized Investment Gains and Losses
|
|
($ in ‘000s)
|
Three months ended September 30,
|
Nine months ended September 30,
|
|
|
2020
|
2019
|
2020
|
2019
|
|
Fixed income securities:
|
|
|
|
|
|
Proceeds from sales and calls
|
$
|
—
|
|
$
|
10,177
|
|
$
|
—
|
|
$
|
42,102
|
|
|
Gross realized investment gains
|
—
|
|
120
|
|
—
|
|
438
|
|
|
Gross realized investment losses
|
—
|
|
(32)
|
|
—
|
|
(201)
|
|
|
Equities:
|
|
|
|
|
|
Proceeds from sales
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
5,997
|
|
|
Gross realized investment gains
|
—
|
|
—
|
|
—
|
|
443
|
|
|
Gross realized investment losses
|
—
|
|
—
|
|
—
|
|
(96)
|
|
|
Other investments:
|
|
|
|
|
|
Proceeds from sales
|
$
|
—
|
|
$
|
1,700
|
|
$
|
—
|
|
$
|
3,997
|
|
|
Gross realized investment gains
|
—
|
|
297
|
|
—
|
|
576
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total:
|
|
|
|
|
|
Proceeds from sales and calls
|
$
|
—
|
|
$
|
11,877
|
|
$
|
—
|
|
$
|
52,096
|
|
|
Gross realized investment gains
|
—
|
|
417
|
|
—
|
|
1,457
|
|
|
Gross realized investment losses
|
—
|
|
(32)
|
|
—
|
|
(297)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of Net Realized Gains
|
|
($ in ‘000s)
|
Three months ended September 30,
|
Nine months ended September 30,
|
|
|
2020
|
2019
|
2020
|
2019
|
|
Fixed income securities
|
$
|
—
|
|
$
|
88
|
|
$
|
—
|
|
$
|
237
|
|
|
Equities
|
—
|
|
—
|
|
—
|
|
347
|
|
|
Other investments
|
—
|
|
296
|
|
—
|
|
554
|
|
|
|
|
|
|
|
|
Net realized gains
|
$
|
—
|
|
$
|
384
|
|
$
|
—
|
|
$
|
1,138
|
|
|
|
|
|
|
|
6. Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of U.S. Statutory Marginal Income Tax Rate to the Effective Tax Rate - Continuing Operations
|
|
($ in ‘000s)
|
Three months ended September 30,
|
Nine months ended September 30,
|
|
|
2020
|
2019
|
2020
|
2019
|
|
|
Amount
|
%
|
Amount
|
%
|
Amount
|
%
|
Amount
|
%
|
|
Provision for taxes at U.S. statutory marginal income tax rate
|
$
|
(779)
|
|
20.5
|
%
|
$
|
(623)
|
|
21.0
|
|
$
|
(2,456)
|
|
21.0
|
%
|
$
|
(1,291)
|
|
21.0
|
|
|
Provision for deferred tax assets deemed unrealizable (valuation allowance)
|
(12)
|
|
0.3
|
|
626
|
|
(21.1)
|
|
1,571
|
|
(13.4)
|
|
1,242
|
|
(20.2)
|
|
|
Nondeductible expenses
|
1
|
|
—
|
|
3
|
|
(0.1)
|
|
2
|
|
—
|
|
26
|
|
(0.4)
|
|
|
Tax-exempt income
|
—
|
|
—
|
|
(1)
|
|
—
|
|
—
|
|
—
|
|
(3)
|
|
—
|
|
|
State tax (net of federal benefit)
|
—
|
|
—
|
|
21
|
|
(0.7)
|
|
—
|
|
—
|
|
21
|
|
(0.3)
|
|
|
Stock compensation
|
642
|
|
(16.9)
|
|
—
|
|
—
|
|
654
|
|
(5.6)
|
|
31
|
|
(0.5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax rate differential
|
—
|
|
—
|
|
—
|
|
—
|
|
(42)
|
|
0.3
|
|
—
|
|
—
|
|
|
Provision for income taxes for continuing operations
|
$
|
(148)
|
|
3.9
|
%
|
$
|
26
|
|
(0.9)
|
%
|
$
|
(271)
|
|
2.3
|
%
|
$
|
26
|
|
(0.4)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of U.S. Statutory Marginal Income Tax Rate to the Effective Tax Rate - Discontinued Operations
|
|
($ in ‘000s)
|
Three months ended September 30,
|
Nine months ended September 30,
|
|
|
2020
|
2019
|
2020
|
2019
|
|
|
Amount
|
%
|
Amount
|
%
|
Amount
|
%
|
Amount
|
%
|
|
Provision for taxes at U.S. statutory marginal income tax rate
|
$
|
8
|
|
21.0
|
%
|
$
|
157
|
|
21.0
|
%
|
$
|
(134)
|
|
21.0
|
%
|
$
|
(5)
|
|
21.0
|
%
|
|
Provision for deferred tax assets deemed unrealizable (valuation allowance)
|
(9)
|
|
(21.8)
|
|
(156)
|
|
(21.0)
|
|
(189)
|
|
29.3
|
|
4
|
|
(16.1)
|
|
|
Nondeductible expenses
|
1
|
|
0.8
|
|
—
|
|
—
|
|
1
|
|
(0.2)
|
|
2
|
|
(9.4)
|
|
|
Tax-exempt income
|
—
|
|
—
|
|
(1)
|
|
—
|
|
—
|
|
—
|
|
(1)
|
|
4.5
|
|
|
Tax rate differential
|
—
|
|
—
|
|
—
|
|
—
|
|
(200)
|
|
31.0
|
|
—
|
|
—
|
|
|
Provision for income taxes for discontinued operations
|
$
|
—
|
|
—
|
%
|
$
|
—
|
|
—
|
%
|
$
|
(522)
|
|
81.1
|
%
|
$
|
—
|
|
—
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of Income Tax (Benefit) Expense - Continuing Operations
|
|
($ in ‘000s)
|
Three months ended September 30,
|
Nine months ended September 30,
|
|
|
2020
|
2019
|
2020
|
2019
|
|
Current tax (benefit) expense
|
$
|
(148)
|
|
$
|
26
|
|
$
|
(271)
|
|
$
|
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of Income Tax Benefit - Discontinued Operations
|
|
($ in ‘000s)
|
Three months ended September 30,
|
Nine months ended September 30,
|
|
|
2020
|
2019
|
2020
|
2019
|
|
Current tax benefit
|
$
|
—
|
|
$
|
—
|
|
$
|
(522)
|
|
$
|
—
|
|
|
|
|
|
|
|
During 2013 and 2019, due to shareholder activity, “triggering events” 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 generated prior to the “triggering events” will be subject to a yearly limitation 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 the mechanics of the Section 382 calculation when there are multiple triggering events the Company’s losses will generally be limited based on the thresholds of the 2019 triggering event. The Company has established a valuation allowance against the NOLs that will expire unused as a result of the yearly limitation.
|
|
|
|
|
|
|
|
|
|
|
Components of Deferred Income Tax Assets and Liabilities
|
|
($ in ‘000s)
|
September 30, 2020
|
December 31, 2019
|
|
Gross deferred tax assets:
|
|
|
|
Losses carried forward
|
$
|
13,042
|
|
$
|
10,264
|
|
|
Claims liabilities and unearned premium reserves
|
354
|
|
554
|
|
|
Investment in affiliates
|
23,707
|
|
24,450
|
|
|
Bad debts
|
167
|
|
168
|
|
|
Stock compensation
|
276
|
|
873
|
|
|
Other
|
160
|
|
81
|
|
|
Valuation allowance
|
(33,119)
|
|
(32,522)
|
|
|
Total gross deferred tax assets
|
4,587
|
|
3,868
|
|
|
|
|
|
|
Gross deferred tax liabilities:
|
|
|
|
Deferred policy acquisition costs
|
143
|
|
112
|
|
|
Investments
|
162
|
|
116
|
|
|
Fixed assets
|
1,477
|
|
2,099
|
|
|
Intangible assets
|
490
|
|
551
|
|
|
Other
|
2,315
|
|
990
|
|
|
Total gross deferred tax liabilities
|
4,587
|
|
3,868
|
|
|
Net deferred tax assets
|
$
|
—
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Operating Loss Carryforward as of September 30, 2020 by Expiry
|
|
($ in ‘000s)
|
|
|
|
Year of Occurrence
|
Year of Expiration
|
Amount
|
|
2011
|
2031
|
$
|
1
|
|
|
2012
|
2032
|
70
|
|
|
2015
|
2035
|
1
|
|
|
2017
|
2037
|
13,649
|
|
|
2018
|
2038
|
8,903
|
|
|
2018
|
Indefinite
|
8,245
|
|
|
2019
|
2039
|
10,863
|
|
|
2019
|
Indefinite
|
6,306
|
|
|
2020
|
2040
|
8,460
|
|
|
2020
|
Indefinite
|
5,605
|
|
|
Total
|
|
$
|
62,103
|
|
|
|
|
|
Deferred tax assets are recognized to the extent that it is probable that future taxable income will be available against which they can be utilized. When considering the extent of the valuation allowance on Atlas’ deferred tax assets, weight is given by management to both positive and negative evidence. U.S. GAAP states that a cumulative loss in recent years is a significant piece of negative evidence that is difficult to overcome in determining that a valuation allowance is not needed against deferred tax assets. Based on Atlas’ cumulative loss in recent years and certain deferred tax assets subject to a yearly limitation under Section 382 which will likely result in expiration before utilization, Atlas has recorded a valuation allowance of $33.1 million and $32.5 million for its gross future deferred tax assets as of September 30, 2020 and December 31, 2019, respectively.
Atlas accounts for uncertain tax positions in accordance with the income taxes accounting guidance. Atlas has analyzed filing positions in the federal and state jurisdictions where it is required to file tax returns, as well as the open tax years in these jurisdictions. Atlas believes that its federal and state income tax filing positions and deductions will be sustained on audit and does not anticipate any adjustments that will result in a material change to its financial position. Therefore, no reserves for uncertain federal and state income tax positions have been recorded. Atlas would recognize interest and penalties related to unrecognized tax benefits as a component of the provision for federal income taxes. Atlas did not incur any federal income tax related interest income, interest expense or penalties for the three and nine months ended September 30, 2020 and 2019. Tax year 2015 and years thereafter are subject to examination by the Internal Revenue Service (“IRS”).
7. Commitments and Contingencies
In the ordinary course of its business, Atlas is involved in legal proceedings, including lawsuits, regulatory examinations and inquiries.
Atlas is exposed to credit risk on balances receivable from insureds and agents. Credit exposure to any one individual insured is not material due to the “in-equity” payment terms offered. The policies placed with risk taking partners are distributed by agents who may manage cash collection on its behalf pursuant to the terms of their agency agreement. Atlas has procedures to monitor and minimize its exposure to delinquent agent balances, including, but not limited to, reviewing account current statements, processing policy cancellations for non-payment and other collection efforts deemed appropriate.
8. Property and Equipment
|
|
|
|
|
|
|
|
|
|
|
Property and Equipment Held1
|
|
($ in ‘000s)
|
September 30, 2020
|
December 31, 2019
|
|
Buildings
|
$
|
7,425
|
|
$
|
7,425
|
|
|
Land
|
1,840
|
|
1,840
|
|
|
Building improvements
|
9,031
|
|
9,023
|
|
|
Leasehold improvements
|
193
|
|
193
|
|
|
Internal use software
|
12,795
|
|
12,610
|
|
|
Computer equipment
|
1,921
|
|
1,925
|
|
|
Furniture and other office equipment
|
1,121
|
|
1,150
|
|
|
Total
|
$
|
34,326
|
|
$
|
34,166
|
|
|
Accumulated depreciation and amortization
|
(14,796)
|
|
(12,373)
|
|
|
Total property and equipment, net
|
$
|
19,530
|
|
$
|
21,793
|
|
|
|
|
|
1Excluding assets held for sale.
Depreciation expense and amortization from continuing operations was $741,000 and $1.1 million for the three months ended September 30, 2020 and 2019, respectively, and $2.5 million and $3.0 million for the nine months ended September 30, 2020 and 2019, respectively. As part of a cost sharing agreement with affiliates under common ownership, depreciation expense of $0 and $49,000 was allocated to Global Liberty during the three months ended September 30, 2020 and 2019, respectively, and $0 and $250,000 for the nine months ended September 30, 2020 and 2019, respectively. For the year ended December 31, 2019, depreciation expense and amortization from continuing operations was $3.9 million, and $250,000 was allocated to Global Liberty as part of the cost sharing agreement with affiliates under common ownership.
For the nine months ended September 30, 2020 and 2019, the Company capitalized $185,000 and $2.2 million, respectively, of costs incurred, consisting primarily of external consultants and internal labor costs incurred during the application development stage for internal-use software. Substantially all of the costs incurred during the period were part of the application development stage. Amortization expense recorded for projects in the post-implementation/operation stage was $308,000 and $578,000 for the three months ended September 30, 2020 and 2019, respectively, and $1.1 million and $1.5 million for the nine months ended September 30, 2020 and 2019, respectively.
During 2016, Atlas purchased a building and land to serve as its new corporate headquarters to replace its former leased office space. Atlas’ Chicago area staff moved into this space in late October 2017 and occupies approximately 70,000 square feet in the building. An unrelated tenant occupies the remaining office space in the building. Rental income related to this lease agreement was $116,000 and $111,000 for the three months ended September 30, 2020 and 2019, respectively, and $346,000 and $334,000 for the nine months ended September 30, 2020 and 2019, respectively. Depreciation expense related to the building and its improvements was $284,000 and $283,000 for the three months ended September 30, 2020 and 2019, respectively, and $833,000 and $850,000 for the nine months ended September 30, 2020 and 2019, respectively.
Loss on disposals of fixed assets totaled $0 and $21,000 for three and nine months ended September 30, 2019, respectively. There were no losses on disposals of fixed assets for the three and nine months ended September 30, 2020.
9. Reinsurance Ceded
As is customary in the insurance industry, Atlas reinsures portions of certain insurance policies it writes, thereby providing a greater diversification of risk and minimizing exposure on larger risks. Atlas remains contingently at risk with respect to any reinsurance ceded and would incur an additional loss if an assuming company were unable to meet its obligation under the reinsurance treaty.
Atlas monitors the financial condition of its reinsurers to minimize its exposure to significant losses from reinsurer insolvencies. Letters of credit are maintained for any unauthorized reinsurer to cover ceded unearned premium reserves, ceded claims and claims adjustment expense reserve balances and ceded paid claims. These policies mitigate the risk of credit quality or dispute from becoming a danger to financial strength. To date, the Company has not experienced any material difficulties in collecting reinsurance recoverables.
The below table represents activity of the ASI Pool Companies for the three and nine months ended September 30, 2020 and 2019. The activity for Global Liberty has not been included as a result of being classified as a discontinued operation. The ASI Pool Companies were deconsolidated as of October 1, 2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums Written, Premiums Earned and Amounts Related to Reinsurance
|
|
($ in ‘000s)
|
Three months ended September 30,
|
Nine months ended September 30,
|
|
|
2020
|
2019
|
2020
|
2019
|
|
Direct premiums written
|
$
|
—
|
|
$
|
26,488
|
|
$
|
—
|
|
$
|
133,827
|
|
|
Assumed premiums written
|
—
|
|
4,301
|
|
—
|
|
26,857
|
|
|
Ceded premiums written
|
—
|
|
(10,672)
|
|
—
|
|
(72,911)
|
|
|
Net premiums written
|
$
|
—
|
|
$
|
20,117
|
|
$
|
—
|
|
$
|
87,773
|
|
|
|
|
|
|
|
|
Direct premiums earned
|
$
|
—
|
|
$
|
46,831
|
|
$
|
—
|
|
$
|
149,609
|
|
|
Assumed premiums earned
|
—
|
|
9,595
|
|
—
|
|
26,954
|
|
|
Ceded premiums earned
|
—
|
|
(21,898)
|
|
—
|
|
(66,322)
|
|
|
Net premiums earned
|
$
|
—
|
|
$
|
34,528
|
|
$
|
—
|
|
$
|
110,241
|
|
|
|
|
|
|
|
|
Ceded claims and claims adjustment expenses
|
$
|
—
|
|
$
|
14,013
|
|
$
|
—
|
|
$
|
31,551
|
|
|
Ceding commissions
|
$
|
—
|
|
$
|
3,919
|
|
$
|
—
|
|
$
|
16,381
|
|
During 2019, the Company received notice from General Reinsurance Corporation (“Gen Re”) that effective July 31, 2019, the XOL reinsurance coverage for the ASI Pool Companies would terminate on a cut-off basis. Additionally, effective September 30, 2019, the ASI Pool Companies’ Quota Share contract with Swiss Reinsurance America Corporation (“Swiss Re”) was terminated on a run-off basis. During 2020, the Company received notice from Gen Re that effective January 1, 2020, the XOL reinsurance coverage for Global Liberty terminated on a run-off basis. See “Note 19, Subsequent Events” and “Part I, Item 2, 2020 Developments” for certain developments with respect to the ASI Pool Companies and Global Liberty.
10. Claims Liabilities
The below table represents activity of the ASI Pool Companies for the three and nine months ended September 30, 2020 and 2019. The activity for Global Liberty has not been included as a result of being classified as a discontinued operation. The ASI Pool Companies were deconsolidated as of October 1, 2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in the Provision for Unpaid Claims and Claims Adjustment Expenses, Net of Reinsurance Recoverables
|
|
($ in ‘000s)
|
Three months ended September 30,
|
Nine months ended September 30,
|
|
|
2020
|
2019
|
2020
|
2019
|
|
Unpaid claims and claims adjustment expenses, beginning of period
|
$
|
—
|
|
$
|
206,996
|
|
$
|
—
|
|
$
|
226,487
|
|
|
Less: reinsurance recoverable
|
—
|
|
55,533
|
|
—
|
|
55,265
|
|
|
Net unpaid claims and claims adjustment expenses, beginning of period
|
—
|
|
151,463
|
|
—
|
|
171,222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incurred related to:
|
|
|
|
|
|
Current year
|
—
|
|
23,509
|
|
—
|
|
78,613
|
|
|
Prior years
|
—
|
|
1,590
|
|
—
|
|
2,154
|
|
|
|
—
|
|
25,099
|
|
—
|
|
80,767
|
|
|
|
|
|
|
|
|
Paid related to:
|
|
|
|
|
|
Current year
|
—
|
|
9,756
|
|
—
|
|
22,182
|
|
|
Prior years
|
—
|
|
26,969
|
|
—
|
|
89,970
|
|
|
|
—
|
|
36,725
|
|
—
|
|
112,152
|
|
|
|
|
|
|
|
|
Net unpaid claims and claims adjustment expenses, end of period
|
—
|
|
139,837
|
|
—
|
|
139,837
|
|
|
Add: reinsurance recoverable
|
—
|
|
65,166
|
|
—
|
|
65,166
|
|
|
Unpaid claims and claims adjustment expenses, end of period
|
$
|
—
|
|
$
|
205,003
|
|
$
|
—
|
|
$
|
205,003
|
|
|
|
|
|
|
|
The process of establishing the estimated provision for unpaid claims and claims adjustment expenses 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 may deviate, perhaps substantially, from the best estimates made.
The incurred related to prior years for the three and nine months ended September 30, 2020 and 2019 primarily resulted from changes in estimates on involuntary assigned risk pools and run-off commercial auto. Assigned risk pools are established by state governments to cover high-risk insureds who cannot purchase insurance through conventional means. See “Note 19, Subsequent Events” and “Part I, Item 2, 2020 Developments” for certain developments with respect to the Company and the Insurance Subsidiaries.
11. Share-Based Compensation
On January 6, 2011, Atlas adopted a stock option plan (“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 (“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 stock, 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
|
|
|
|
|
|
(prices in Canadian dollars designated with “C$” and U.S. dollars designated with “US$”
|
Nine months ended September 30,
|
|
2020
|
2019
|
|
|
Number of Options
|
Weighted Average Exercise Price
|
Number of Options
|
Weighted Average Exercise Price
|
|
C$ Denominated:
|
|
|
|
|
|
Outstanding, beginning of period
|
27,195
|
|
C$6.00
|
27,195
|
|
C$6.00
|
|
Granted
|
—
|
|
—
|
|
—
|
|
—
|
|
|
Exercised
|
—
|
|
—
|
|
—
|
|
—
|
|
|
Canceled
|
(27,195)
|
|
C$6.00
|
—
|
|
—
|
|
|
Outstanding, end of period
|
—
|
|
—
|
|
27,195
|
|
C$6.00
|
|
|
|
|
|
|
|
US$ Denominated:
|
|
|
|
|
|
Outstanding, beginning of period
|
375,000
|
|
US$17.01
|
375,000
|
|
US$17.01
|
|
Granted
|
—
|
|
—
|
|
—
|
|
—
|
|
|
Exercised
|
—
|
|
—
|
|
—
|
|
—
|
|
|
Canceled
|
(193,500)
|
|
US$18.73
|
—
|
|
—
|
|
|
Outstanding, end of period
|
181,500
|
|
US$13.51
|
375,000
|
|
US$17.01
|
|
|
|
|
|
|
There are no stock options that are exercisable as of September 30, 2020. The stock option grants outstanding have a weighted average remaining life of 3.47 years and have an intrinsic value of $0 as of September 30, 2020. In association with his retirement from the Company’s board of directors, 27,195 options held by Gordon Pratt were canceled effective August 1, 2020.
On March 12, 2015, the Board of Directors of Atlas granted equity awards of (i) 200,000 restricted stock grants for ordinary voting common shares of the Company and (ii) 200,000 options to acquire ordinary voting common shares to the executive officers of the Company as part of the Company’s annual compensation process. The awards were made under the Company’s Equity Incentive Plan. The awards vest in five equal annual installments of 20%, provided that an installment shall not vest unless an annual performance target based on specific book value growth rates linked to return on equity goals is met. In the event the performance target is not met in any year, the 20% installment for such year shall not vest, but such non-vested installment shall carry forward and can become vested in future years (up to the fifth year from the date of grant), subject to achievement in a future year of the applicable performance target for such year. For the three and nine months ended September 30, 2020 and 2019, no shares of either of the restricted stock grants for ordinary voting common shares or the options to acquire ordinary voting common shares vested due to not meeting annual performance targets. During the first quarter of 2020, 140,000 of the option awards were canceled as a result of not meeting the annual performance targets. Also during the first quarter of 2020, an additional 53,500 options were canceled due to the departure of a former officer. The Monte-Carlo simulation model was used, for both the options and restricted stock grants for ordinary voting common shares, to estimate the fair value of compensation expense as a result of the performance based component of these grants. Utilizing the Monte-Carlo simulation model, the fair values were $1.5 million and $1.9 million for the options and restricted stock grants for ordinary voting common shares, respectively. This expense will be amortized over the anticipated vesting period.
On December 31, 2018, the Company awarded restricted stock unit grants for ordinary voting common shares of the Company to its external directors pursuant to a director equity award agreement dated December 31, 2018. The awards, which were approved by the Company’s Board of Directors in March 2018, were valued at $40,000 per external director (“Aggregate Award”) and were made under the Company’s Equity Incentive Plan. The number of restricted stock units awarded was determined by dividing (A) the Aggregate Award by (B) the closing price of a Company ordinary voting common share at the close of market on April 4, 2018, which was $10.50 per share. For new directors, the Aggregate Award is proportionate to the director’s start date and priced as of that same day. During 2018, the Company awarded 17,524 RSU grants having an aggregate grant date fair value of $179,000. The RSUs will vest 33.3% on January 1 of each year with the last vesting period of January 1, 2021.
Restricted Shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock Grants for Ordinary Voting Common Shares and Restricted Share Unit Activity
|
|
|
Nine months ended September 30,
|
|
|
2020
|
2019
|
|
|
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
|
$
|
171,682
|
|
$
|
17.46
|
|
$
|
207,156
|
|
$
|
16.50
|
|
|
Granted
|
—
|
|
—
|
|
—
|
|
—
|
|
|
Vested
|
(8,381)
|
|
10.22
|
|
(28,066)
|
|
11.79
|
|
|
Canceled
|
(160,000)
|
|
9.62
|
|
(7,408)
|
|
12.20
|
|
|
Non-vested, end of period
|
$
|
3,301
|
|
$
|
10.22
|
|
$
|
171,682
|
|
$
|
17.46
|
|
|
|
|
|
|
|
During the first quarter of 2019, 7,408 restricted share units related to a February 2014 grant to an independent director were canceled at such director’s request. During the first quarter of 2020, 140,000 ordinary voting restricted common shares were canceled as a result of not meeting annual performance targets. Also during the first quarter of 2020, an additional 20,000 restricted common shares were canceled due to the departure of a former officer. During the third quarter of 2020, 2,540 restricted share units vested related to the retirement of two former directors.
In accordance with ASC 718 (Stock-Based Compensation), Atlas has recognized share-based compensation expense on a straight-line basis over the requisite service period of the last separately vesting portion of the award. Share-based compensation expense is a component of other underwriting expenses on the condensed consolidated statements of operations. Atlas recognized $82,000 and $188,000 in share-based compensation expense, including income tax expense, for the three months ended September 30, 2020 and 2019, respectively, and $277,000 and $685,000 for the nine months ended September 30, 2020 and 2019, respectively. As of September 30, 2020, there was $15,000 of unrecognized total compensation expense related to restricted stock and restricted stock units for ordinary voting common shares. The expense will be amortized over a weighted average period of 3 months.
12. Other Employee Benefit Plans
Defined Contribution Plan
Atlas has a defined contribution 401(k) plan covering all qualified employees of Atlas and its subsidiaries. Contributions to this plan are limited based on IRS guidelines. 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’ matching 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 $19,000 and $119,000 for the three months ended September 30, 2020 and 2019, respectively, and $77,000 and $381,000 for the nine months ended September 30, 2020 and 2019, respectively. The matching portion of this plan was suspended during the third quarter of 2020.
Employee Stock Purchase Plan
The Atlas Employee Stock Purchase Plan (“ESPP”) encourages employee interest in the operation, growth and development of Atlas and provides an additional investment opportunity to employees. Full time and permanent part time employees working more than 30 hours per week are allowed to invest up to 7.5% of adjusted salary in Atlas ordinary voting common shares. 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’ matching contributions are discretionary. Atlas’ costs incurred related to the matching portion of the ESPP were $5,000 and $21,000 for the three months ended September 30, 2020 and 2019, respectively, and $21,000 and $107,000 for the nine months ended September 30, 2020 and 2019, respectively. The matching portion of this plan was suspended during the third quarter of 2020.
13. Share Capital and Mezzanine Equity
Share Capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share Capital Activity
|
|
|
|
September 30, 2020
|
December 31, 2019
|
|
|
Shares Authorized
|
Shares Issued
|
Shares Outstanding
|
Amount
($ in ‘000s)
|
Shares Issued
|
Shares Outstanding
|
Amount
($ in ‘000s)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary voting common shares
|
266,666,667
|
|
12,240,198
|
|
11,984,693
|
|
$
|
36
|
|
12,198,319
|
|
11,942,812
|
|
$
|
36
|
|
|
Restricted voting common shares
|
33,333,334
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
Total common shares
|
300,000,001
|
|
12,240,198
|
|
11,984,693
|
|
$
|
36
|
|
12,198,319
|
|
11,942,812
|
|
$
|
36
|
|
|
|
|
|
|
|
|
|
|
There were 3,301 and 11,682 non-vested RSUs as of September 30, 2020 and December 31, 2019, respectively. These RSUs are participative and are included in the computations of earnings per common share and book value per common share for these periods.
During the nine months ended September 30, 2020, the Company issued 201,881 ordinary voting common shares of which 193,500 ordinary voting common shares were issued under the near term incentive program while 8,381 ordinary voting common shares were issued as a result of the vesting of RSUs. Also, during the first quarter of 2020 140,000 ordinary voting restricted common shares were cancelled due to not meeting performance targets, and 20,000 ordinary voting restricted common shares were canceled due to the departure of a former officer. During the year ended December 31, 2019, the Company issued 5,842 ordinary voting common shares as a result of the vesting of RSUs.
Warrants
The Schedule 13G/A filed by American Financial Group, Inc. a parent holding company, on January 31, 2020 states that as of December 31, 2019, and as updated on February 2, 2021 for December 31, 2020, it has sole power to vote and sole power to dispose of 2,387,368 ordinary voting common shares. These shares are represented by warrants to purchase 2,387,368 ordinary voting common shares until June 10, 2024, under a Warrant Agreement dated June 10, 2019 (the “Warrant Agreement”), at an initial exercise price of $0.69 per share, with both the number of ordinary voting common shares subject to the Warrant Agreement and the exercise price subject to adjustment as set forth in the Warrant Agreement.
Mezzanine Equity
There were no preferred shares outstanding as of September 30, 2020 and December 31, 2019.
14. Deferred Policy Acquisition Costs
The below table represents activity of the ASI Pool Companies for the nine months ended September 30, 2020 and 2019. The activity for Global Liberty has not been included as a result of being classified as a discontinued operation. The ASI Pool Companies were deconsolidated as of October 1, 2019.
|
|
|
|
|
|
|
|
|
|
|
Components of Deferred Policy Acquisition Costs
|
|
($ in ‘000s)
|
Nine months ended September 30,
|
|
|
2020
|
2019
|
|
Balance, beginning of period
|
$
|
—
|
|
$
|
5,918
|
|
|
Acquisition costs deferred
|
—
|
|
9,497
|
|
|
Amortization charged to income
|
—
|
|
(11,405)
|
|
|
Balance, end of period
|
$
|
—
|
|
$
|
4,010
|
|
|
|
|
|
15. Leases
The Company adopted ASC 842 (Leases) as of January 1, 2019, using the transition method wherein entities were allowed to initially apply the new lease standard at adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Adoption of ASC 842 resulted in an increase of operating lease right-of-use asset totaling approximately $2.5 million, an operating lease liability of approximately $3.1 million and a decrease of net deferred rent liabilities of approximately $600,000 on the condensed consolidated statements of financial position as of January 1, 2019.
We currently lease real estate space, automobiles, and certain equipment under non-cancelable operating lease agreements. Leases with an initial term of 12 months or less, which are immaterial to the Company, are not recorded in the condensed consolidated statement of financial position. The Company has elected the practical expedient to account for each separate lease component of a contract and its associated non-lease components as a single lease component, thus causing all fixed payments to be capitalized. The Company also elected the package of practical expedients permitted within the new standard, which among other things, allows the Company to carry forward historical lease classification. Variable lease payment amounts that cannot be determined at the commencement of the lease, such as increases to lease payments based on changes in index rates or usage, are not recorded in the condensed consolidated statement of financial position.
Certain agreements include an option to extend or renew the lease term at our option. The operating lease liability includes lease payments related to options to extend or renew the lease term if the Company is reasonably certain of exercising those options. Lease payments are discounted using the implicit discount rate in the lease. If the implicit discount rate for the lease cannot be readily determined, the Company uses an estimate of its incremental borrowing rate. The Company did not have any contracts accounted for as finance leases as of September 30, 2020 or 2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease Expense
|
|
($ in ‘000s)
|
Three months ended September 30,
|
Nine months ended September 30,
|
|
|
2020
|
2019
|
2020
|
2019
|
|
Operating leases
|
$
|
190
|
|
$
|
242
|
|
$
|
570
|
|
$
|
718
|
|
|
Variable lease cost
|
88
|
|
90
|
|
268
|
|
256
|
|
|
Total
|
$
|
278
|
|
$
|
332
|
|
$
|
838
|
|
$
|
974
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Operating Lease Information
|
|
($ in ‘000s)
|
Three months ended September 30,
|
Nine months ended September 30,
|
|
|
2020
|
2019
|
2020
|
2019
|
|
Cash paid for amounts included in the measurement of lease liabilities reported in operating cash flows
|
$
|
278
|
|
$
|
333
|
|
$
|
838
|
|
$
|
976
|
|
|
Right-of-use assets obtained in exchange for new lease liabilities
|
—
|
|
—
|
|
—
|
|
—
|
|
|
Total
|
$
|
278
|
|
$
|
333
|
|
$
|
838
|
|
$
|
976
|
|
|
|
|
|
|
|
|
Weighted-average remaining lease term
|
|
|
|
1.4 years
|
|
Weighted-average discount rate
|
|
|
|
3.5
|
%
|
The following table presents the undiscounted contractual maturities of the Company’s operating lease liability:
|
|
|
|
|
|
|
|
|
Contractual Operating Lease Liabilities
|
|
($ in ‘000s)
|
|
As of September 30, 2020
|
|
Remainder of 2020
|
|
$
|
235
|
|
|
2021
|
|
898
|
|
|
2022
|
|
179
|
|
|
2023
|
|
23
|
|
|
|
|
|
|
Total lease payments
|
|
$
|
1,335
|
|
|
Impact of discounting
|
|
(14)
|
|
|
Operating lease liability
|
|
$
|
1,321
|
|
|
|
|
|
16. Related Party Transactions
During the periods presented, a portion of Global Liberty’s investment portfolio, which is included in “Assets held for sale” on the Condensed Consolidated Statements of Financial Position, included investment vehicles that are considered related-party transactions. As of September 30, 2020 and December 31, 2019, these related-party transactions make up less than 14.5% and 1.0%, respectively, of the Company’s investment portfolio. In these transactions, one or more of the Company’s former directors or entities affiliated with such directors invest in and/or manage these vehicles. These related-party transactions are consistent with the Company’s investment guidelines and have been reviewed and approved by the Investment Committee of the Company’s Board of Directors. The Company believes that these transactions leverage investment resources that would otherwise not be available to the Company.
17. Notes Payable
On April 26, 2017, Atlas issued $25 million of five-year 6.625% senior unsecured notes and received net proceeds of approximately $23.9 million after deducting underwriting discounts and commissions and other estimated offering expenses. Interest on the senior unsecured notes is payable quarterly on each January 26, April 26, July 26 and October 26. Atlas may, at its option, beginning with the interest payment date of April 26, 2020, and on any scheduled interest payment date thereafter, redeem the senior unsecured notes, in whole or in part, at a redemption price equal to 100% of the principal amount plus accrued and unpaid interest to, but excluding, the date of redemption. The senior unsecured notes will rank senior in right of payment to any of Atlas’ existing and future indebtedness that is by its terms expressly subordinated or junior in right of payment to the senior unsecured notes. The senior unsecured notes will rank equally in right of payment to all of Atlas’ existing and future senior indebtedness, but will be effectively subordinated to any secured indebtedness to the extent of the value of the collateral securing such secured indebtedness. In addition, the senior unsecured notes will be structurally subordinated to the indebtedness and other obligations of Atlas’ subsidiaries.
The senior unsecured notes were issued under an indenture and supplemental indenture that contain covenants that, among other things, limit: (i) the ability of Atlas to merge or consolidate, or lease, sell, assign or transfer all or substantially all of its assets; (ii) the ability of Atlas to sell or otherwise dispose of the equity securities of certain of its subsidiaries; (iii) the ability of certain of Atlas’ subsidiaries to issue equity securities; (iv) the ability of Atlas to permit certain of its subsidiaries to merge or consolidate, or lease, sell, assign or transfer all or substantially all of their respective assets; and (v) the ability of Atlas and its subsidiaries to incur debt secured by equity securities of certain of its subsidiaries.
On November 10, 2016, American Insurance Acquisition, Inc. (“AIAI”) entered into a ten-year 5.0% fixed rate mortgage agreement with the Insurance Subsidiaries totaling $10.7 million with principal and interest payments due monthly. The mortgage rate is secured by the Company’s headquarters and was previously eliminated in consolidation. The amount payable as of September 30, 2020 is due to the ASI Pool Companies.
On May 1, 2020, AIAI entered into a Paycheck Protection Program Promissory Note (the "PPP Note") with respect to a loan of $4,600,500 (the "PPP Loan") from Fifth Third Bank, National Association. The PPP Loan was obtained pursuant to the Paycheck Protection Program (the "PPP") of the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") administered by the U.S. Small Business Administration ("SBA"). The PPP Loan matures on May 1, 2022 and bears interest at a rate of 1.0% per annum. The PPP Loan is payable in 18 equal monthly payments of $257,611.48 which was to commence December 1, 2020. The PPP Loan may be prepaid at any time prior to maturity with no prepayment penalties. AIAI has applied for loan forgiveness pursuant to the terms of the PPP as certain of the criteria have been met and is awaiting the results of the forgiveness decision, and as a result, monthly payments will be deferred until final resolution of the forgiveness application process.
Interest expense on notes payable was $571,000 and $470,000 for the three months ended September 30, 2020 and 2019, respectively, and $1.7 million and $1.4 million for the nine months ended September 30, 2020 and 2019, respectively.
|
|
|
|
|
|
|
|
|
|
|
Notes Payable Outstanding
|
|
($ in ‘000s)
|
September 30, 2020
|
December 31, 2019
|
|
6.625% Senior Unsecured Notes due April 26, 2022
|
$
|
25,000
|
|
$
|
25,000
|
|
|
1.0% PPP Loan due May 1, 2022
|
4,601
|
|
—
|
|
|
5.0% Mortgage due November 10, 2026
|
7,056
|
|
7,621
|
|
|
Total outstanding borrowings
|
36,657
|
|
32,621
|
|
|
Unamortized issuance costs
|
(352)
|
|
(521)
|
|
|
Total notes payable
|
$
|
36,305
|
|
$
|
32,100
|
|
|
|
|
|
18. Deconsolidation and Discontinued Operations
Deconsolidation
Effective October 1, 2019, Atlas no longer had statutory responsibility or authority over the financial activities of the ASI Pool Companies while still maintaining their indirect ownership of the ASI Pool Companies. This resulted in the ASI Pool Companies being classified as variable interest entities for which the Company is no longer the primary beneficiary, and they were deconsolidated during the fourth quarter of 2019. The financial results of the ASI Pool Companies are included in the condensed consolidated statements of operations through the October 1, 2019 disposal date. There was not re-measurement of any retained interest since no future value was assigned to the deconsolidated entities as a result of the rehabilitation. Management will continue supporting the administrative activities of the ASI Pool Companies as required by the Office of the Special Deputy Receiver of the Illinois Department of Insurance (“OSD”); however, the Company will have no control over the financial activities of these entities.
As part of the deconsolidation, notes receivable from the ASI Pool Companies with an outstanding principal balance of $15.5 million are now presented on the condensed consolidated statements of financial position. On May 1, 2015, AIAI entered into subordinated surplus debentures (“Surplus Notes”) with the ASI Pool Companies that had a maturity date of April 30, 2020 carrying a variable interest equal to the corporate base rate as reported by the largest bank (measured in assets) with its head office located in Chicago, Illinois, in effect on the first business day of each month for the term of the Surplus Notes plus two percent per annum on the unpaid principal balance with a maximum variable interest rate for any month not to exceed the initial rate for the Surplus Notes by more than ten percent per annum. These Surplus Notes are subject to various terms and conditions as set forth by the Illinois Department of Insurance and the Missouri Department of Insurance and require prior written approvals for the payment of interest and/or a reduction in principal (See Note 19, Subsequent Events and Part I, Item 2, 2020 Developments). These Surplus Notes could be used at some point to offset future amounts payable to the ASI Pool Companies.
Discontinued Operations
During the fourth quarter of 2019, the Company began actively pursuing the potential sale of Global Liberty, and as a result, Global Liberty has been classified as a discontinued operation and the results of Global Liberty’s operations are reported separately for all periods presented.
Summary financial information for Global Liberty included in income (loss) from discontinued operations, net of tax in the condensed consolidated statements of operations for the three and nine months ended September 30, 2020 and 2019 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) from Discontinued Operations
|
|
($ in ‘000s)
|
Three months ended September 30,
|
Nine months ended September 30,
|
|
|
2020
|
2019
|
2020
|
2019
|
|
Net premiums earned
|
$
|
3,208
|
|
$
|
6,054
|
|
$
|
11,048
|
|
$
|
21,633
|
|
|
Net investment (loss) income
|
(27)
|
|
99
|
|
(44)
|
|
396
|
|
|
Net realized losses
|
—
|
|
28
|
|
(1,565)
|
|
(46)
|
|
|
Total revenue
|
3,181
|
|
6,181
|
|
9,439
|
|
21,983
|
|
|
Net claims incurred
|
1,071
|
|
3,742
|
|
3,424
|
|
15,700
|
|
|
Acquisition costs
|
389
|
|
350
|
|
2,818
|
|
3,222
|
|
|
Other underwriting expenses
|
1,682
|
|
1,342
|
|
3,840
|
|
3,152
|
|
|
Interest (income)
|
—
|
|
—
|
|
—
|
|
(68)
|
|
|
Total expenses
|
3,142
|
|
5,434
|
|
10,082
|
|
22,006
|
|
|
Income (loss) from operations before income taxes
|
39
|
|
747
|
|
(643)
|
|
(23)
|
|
|
Income tax benefit
|
—
|
|
—
|
|
(522)
|
|
—
|
|
|
Net income (loss)
|
$
|
39
|
|
$
|
747
|
|
$
|
(121)
|
|
$
|
(23)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statements of Comprehensive Income
|
|
($ in ‘000s)
|
Three months ended September 30,
|
Nine months ended September 30,
|
|
|
2020
|
2019
|
2020
|
2019
|
|
Net income (loss)
|
$
|
39
|
|
$
|
747
|
|
$
|
(121)
|
|
$
|
(23)
|
|
|
|
|
|
|
|
|
Other comprehensive income:
|
|
|
|
|
|
Changes in net unrealized investments gains
|
54
|
|
(60)
|
|
299
|
|
540
|
|
|
Reclassification to net income (loss)
|
(3)
|
|
167
|
|
(96)
|
|
450
|
|
|
Other comprehensive income
|
51
|
|
107
|
|
203
|
|
990
|
|
|
Total comprehensive income
|
$
|
90
|
|
$
|
854
|
|
$
|
82
|
|
$
|
967
|
|
|
|
|
|
|
|
The assets and liabilities of Global Liberty are presented as discontinued operations in the condensed consolidated statements of financial position at September 30, 2020 and December 31, 2019 and are detailed as follows:
|
|
|
|
|
|
|
|
|
|
|
($ in ‘000s)
|
September 30, 2020
|
December 31, 2019
|
|
Assets
|
|
|
|
Investments
|
|
|
|
Fixed income securities, available for sale, at fair value (amortized cost $7,516 and $14,016)
|
$
|
7,942
|
|
$
|
14,239
|
|
|
Short-term investments, at cost
|
—
|
|
491
|
|
|
Other investments
|
1,306
|
|
1,315
|
|
|
Total investments
|
9,248
|
|
16,045
|
|
|
Cash and cash equivalents
|
1,178
|
|
7,712
|
|
|
Accrued investment income
|
52
|
|
78
|
|
|
Reinsurance recoverables on amounts paid
|
1,115
|
|
2,227
|
|
|
Reinsurance recoverables on amounts unpaid
|
14,358
|
|
18,339
|
|
|
Prepaid reinsurance premiums
|
15,574
|
|
3,765
|
|
|
Deferred policy acquisition costs
|
682
|
|
534
|
|
|
Property and equipment, net
|
—
|
|
1,741
|
|
|
Other assets
|
4,405
|
|
861
|
|
|
Total assets
|
$
|
46,612
|
|
$
|
51,302
|
|
|
|
|
|
|
Liabilities
|
|
|
|
Claims liabilities
|
$
|
27,338
|
|
$
|
46,771
|
|
|
Unearned premium reserves
|
21,652
|
|
12,423
|
|
|
Due to reinsurers
|
32
|
|
1,019
|
|
|
Other liabilities and accrued expenses
|
3,740
|
|
2,554
|
|
|
Total liabilities
|
$
|
52,762
|
|
$
|
62,767
|
|
|
|
|
|
19. Subsequent Events
As previously disclosed, the Company was unable to timely file this Quarterly Report on Form 10-Q due to delays in the 2019 year end audit process, which delayed our filing of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019 and Quarterly Reports on Form 10-Q for the periods ended March 31, 2020 and June 30, 2020 and, as a result, our filing of this quarterly report. As a result of this delay, the Company received delinquency notices from Nasdaq related to these filings as well as other matters. On August 31, 2020, the Company filed a Current Report on Form 8-K advising that Nasdaq would suspend trading in the Company’s securities effective at the open of business on September 2, 2020. Nasdaq filed a Form 25 Notification of Delisting with the SEC on October 27, 2020 notifying the SEC of Nasdaq’s determination to remove the Company’s common shares from listing on Nasdaq under Section 12(b) of the Exchange Act. The formal delisting of the Company’s common shares from Nasdaq became effective on November 6, 2020, ten days after the Form 25 was filed. In connection with the suspension of trading on The Nasdaq Capital Market, the Company’s common shares began to trade on the OTC Markets system effective with the open of the markets on September 2, 2020.
Subsequent to the Gateway transaction (see Part I, Item 2, 2020 Developments), Buckle proposed terms to acquire the stock, charter and state licenses of American Country and American Service. In connection therewith, a required court order was entered on August 11, 2020 to place American Country and American Service in liquidation, with the Director acting as the statutory liquidator. AIAI and the Director as statutory liquidator of American County and American Service signed a stock purchase agreement on November 2, 2020. The closing of this pending transaction is subject to regulatory approval and other conditions.
On February 7, 2021, AIAI entered into a Paycheck Protection Program promissory note with respect to a loan of $2,000,000 (the “Second PPP Loan”) from Fifth Third Bank, National Association (“Fifth Third”). The Second PPP Loan was obtained pursuant to the Small Business Administration’s Paycheck Protection Program Second Draw Loans under the Small Business Act (“SB Act”), and is subject to the terms and conditions of the SB Act, the Coronavirus Aid, Relief, and Economic Security Act and related legislation and regulations (the “PPP Rules”). The Company was eligible for this Second PPP loan because our equity securities are not a National Markets System stock traded on a national securities exchange as defined by Section 6 of the Securities Exchange Act of 1934. The Second PPP Loan matures on February 7, 2026 and bears interest at a rate of 1.00% per annum. The Company will not be obligated to make any payments of principal or interest if the Company submits a loan forgiveness application to Fifth Third within 10 months after the end of the Company’s covered loan forgiveness period (as defined and interpreted by the PPP Rules) and such loan forgiveness is allowed. If the Company does not submit a loan forgiveness application within 10 months after the end of the Company’s loan forgiveness covered period (and such forgiveness is not allowed), the Company must begin paying principal and interest after that period (or after notice that such forgiveness is not allowed).
The Company’s Current Reports on Form 8-K and press releases since September 30, 2020 provide more detailed disclosures regarding the above events.