ATLAS FINANCIAL HOLDINGS, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes that appear elsewhere in this report. In this discussion and analysis, the term "common share" refers to the summation of restricted voting common shares, ordinary voting common shares and participative restricted stock units when used to describe earnings (loss) or book value per common share. All amounts are inU.S. dollars, except for amounts preceded by "C" as Canadian dollars, share and per share amounts. Forward-Looking Statements In addition to the historical consolidated financial information, this report contains "forward-looking statements," within the meaning of the Private Securities Litigation Reform Act of 1995, which may include, but are not limited to, statements with respect to estimates of future expenses, revenue and profitability; trends affecting financial condition, cash flows and results of operations; the availability and terms of additional capital; dependence on key suppliers and other strategic partners; industry trends; the competitive and regulatory environment; the successful integration of acquisitions; the impact of losing one or more senior executives or failing to attract additional key personnel; and other factors referenced in this report. Factors that could cause or contribute to these differences include those discussed below and elsewhere, particularly in 'Part I, Item 1A, Risk Factors.' Often, but not always, forward-looking statements can be identified by the use of words such as "plans," "expects," "is expected," "budget," "scheduled," "estimates," "forecasts," "intends," "anticipates," "believes" or variations (including negative variations) of such words and phrases, or state that certain actions, events or results "may," "could," "would," "might" or "will" be taken, occur or be achieved. Forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of Atlas to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Such factors include, among others, general business, economic, competitive, political, regulatory and social uncertainties. Although Atlas has attempted to identify important factors that could cause actual actions, events or results to differ materially from those described in forward-looking statements, there may be other factors that cause actions, events or results to differ from those anticipated, estimated or intended. Forward-looking statements contained herein are made as of the date of this report, and Atlas disclaims any obligation to update any forward-looking statements, whether as a result of new information, future events or results, or otherwise. There can be no assurance that forward-looking statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements. Accordingly, readers should not place undue reliance on forward-looking statements due to the inherent uncertainty in them. I. Company Overview We are a technology and analytics driven financial services holding company incorporated under the laws of theCayman Islands . Our primary business is generating, underwriting and servicing commercial automobile insurance inthe United States , with a niche market orientation and focus on insurance for the "light" commercial automobile sector. Our business currently focuses on a managing general agency strategy. Primarily through our wholly owned subsidiary, AGMI, our objective is recapturing business and maintaining we have historically written in the taxi, livery/limo, paratransit and transportation network company ("TNC") sectors as well as generating new business that fits our current underwriting parameters. We are also actively pursuing additional programs in the "light" commercial auto space where we believe our expertise, infrastructure and insurance technology will enable us to increase scale and profitability, but there can be no assurance that these programs will materialize. We believe that the specialized infrastructure and technology platforms we've developed over the years to support our traditional business will enable us to provide comparative advantages as a managing general agency in other commercial auto segments. In particular, we believe our ability to efficiently manage large numbers of small or highly transactional accounts through our technology platform and workflows is a differentiator. We are also evaluating opportunities to leverage our optOnTM insuretech platform which was developed to provide micro-duration commercial automobile insurance for gig-economy drivers via a proprietary mobile app based ecosystem. The sector on which we traditionally focused was comprised of taxi cabs, non-emergency para-transit, limousine, livery, including certain full-time TNC drivers/operators, and business auto. Our goal is to always be the preferred specialty insurance business in any geographic areas where our value proposition delivers benefit to all stakeholders. AGMI distributes our products through a network of independent retail agents, and actively wrote insurance in 41 states and theDistrict of Columbia 27 -------------------------------------------------------------------------------- Table of Contents during 2020. We embrace continuous improvement, analytics and technology as a means of building on the strong heritage our subsidiary companies cultivated in the niche markets we serve. Industry Trends The "light" commercial automobile sector is a subset of the broader commercial automobile insurance industry segment, which over the long term has been historically profitable. In more recent years, the commercial automobile insurance industry has seen profitability challenges. Data compiled by S&P Global indicates that in 2020 the total market for commercial automobile liability insurance was approximately$45 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 ("Soft Market") followed by periods of reduced underwriting capacity and higher premium rates ("Hard Market"). As of the filing of this report, commercial auto insurance has been in a prolongedHard Market with approximately 38 consecutive quarters of rate increases (source:U.S. Counsel of Insurance Agents and Brokers). Historically, operators of "light" commercial automobiles were expected to be less likely than other business segments within the commercial automobile insurance market to take vehicles out of service, as their businesses and business reputations rely heavily on availability. Our target market has changed in recent years as a result of TNC and other trends related to mobility. The significant expansion of TNC has resulted in a reduction in taxi vehicles available to insure; however, it has increased the number of livery operators. Market research also suggests that the combined addressable markets between traditional taxi, livery and TNC companies expanded during this period. Factors Affecting Our Results of Operations We generate commission revenue by selling policies in the commercial auto markets on behalf of our insurance carrier partners, which compensate us through first year and renewal commissions. We use our proprietary technology and processes to generate and obtain consumer leads and allocate those leads to agents whom we believe are best suited for those consumers. As a result, one of the primary factors affecting our growth is our total number of agents, comprised of both existing core agents and the number of new agents that we contract to sell new policies. In our traditional target markets, we view agents as a valuable component of helping consumers through the purchasing process to enable them to identify the most appropriate coverage that suits their needs. We have also developed proprietary technologies and processes that enable us to expand our lead acquisition efforts to maintain agent productivity. The amount of revenue we expect to recognize is based on multiple factors, including our commission rates with our insurance carrier partners and the market demand for the types of products we offer. The higher our hit ratios on new policies and the higher the our retention ratios, the more revenue we expect to generate. Additionally, we may earn certain volume-based compensation from some unrelated risk taking partners, which can include a renewal rights component. Our goal is to maximize policyholder lifetime value by optimizing efficiency and scale, which starts by providing consumers with a transparent, valuable and best-in-class consumer experience by endeavoring to support our distribution channel effectively and provide insurance solutions that meet the specific needs of our customers. Recent Events Prior to the strategic transition referenced above, our core business was the underwriting of commercial automobile insurance policies, focusing on the "light" commercial automobile sector, through American Country, American Service andGateway (collectively, the "ASI Pool Companies") and Global Liberty (together with the ASI Pool Companies, our "Insurance Subsidiaries"), along with our wholly owned managing general agency, AGMI. As previously announced, the ASI Pool Companies were placed in rehabilitation under the statutory control of theIllinois Department of Insurance during the second half of 2019. 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. The Company's current strategy focuses on AGMI's managing general agency operation as the primary go-forward business. During 2019 and 2020, we worked with insurance regulators and advisors to evaluate and take steps intended to achieve the best outcome for stakeholders in connection with our Insurance Subsidiaries pursuant to regulatory actions. See ''2020 Developments"" below for certain developments with respect to the Company and the Insurance Subsidiaries. As a result of management no longer having financial control of theASI Pool Companies, they have been deconsolidated from this report and in reports sinceOctober 1, 2019 . 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 discontinued operations sinceOctober 1, 2019 . These determinations impact the financial presentation in this report and are more fully described throughout. We feel that the current presentation best represents the aspects of Atlas' business on which the Company intends to focus going forward. 28 -------------------------------------------------------------------------------- Table of Contents InMarch 2020 , theWorld Health Organization formally declared the novel coronavirus ("COVID-19") outbreak a pandemic. With social distancing measures that have been implemented to curtail the spread of the virus, we enacted a robust business continuity plan, including a work-from-home policy for all of our employees. We believe our technology platform and pre-existing remote agent capabilities have allowed for a seamless transition to a remote working environment and that our technology platforms continue to provide agents with tools and company contacts necessary to quote our products to our markets. COVID-19 has dramatically reduced the addressable market. At the time of filing, it is difficult to estimate the near and longer-term impact on market size and potential revenue, and the impact of COVID-19 on our customers appears to have resulted in a reduction of trips and vehicles in operation in the range of approximately 52% to as much as 88% as compared to the end of 2019. This directly impacts our revenue and the ability to generate new business. 2020 Developments OnAugust 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 onSeptember 2, 2020 . Nasdaq filed a Form 25 Notification of Delisting with theSEC onOctober 27, 2020 notifying theSEC 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 onNovember 6, 2020 , ten days after the Form 25 was filed. In connection with the suspension of trading onThe Nasdaq Capital Market, the Company's common shares began to trade on the OTC Markets system effective with the open of the markets onSeptember 2, 2020 . OnMay 8, 2020 , American Acquisition and the Director (as defined below) as statutory rehabilitator ofGateway signed a stock purchase agreement withBuckle Corp. ("Buckle"), a technology-driven financial services company, to purchase the stock ofGateway andGateway's corporate charter and state licenses from its statutory rehabilitator in a collaborative transaction as an important next step in Atlas' strategic plan. Buckle's core business focuses on part-time TNC drivers and is complementary to Atlas' focus on full-time drivers in the livery, paratransit, taxi and TNC segments. OnJune 10, 2020 , the required court orders were entered to placeGateway in liquidation, with the Director of Insurance of theState of Illinois (the "Director") acting as the statutory liquidator. This was necessary to facilitate the above described transaction with Buckle. The sale of stock, charter and state licenses ofGateway to Buckle closed effectiveJune 16, 2020 . The Company and Buckle entered into an underwriting agreement wherebyGateway under Buckle's ownership became a risk-taking partner for AGMI. The Company and Buckle also entered into a professional services agreement in furtherance of related strategic activities. Subsequent to theGateway transaction, 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 onAugust 11, 2020 to place American Country and American Service in liquidation, with the Director acting as the statutory liquidator. American Acquisition and the Director as statutory liquidator of American County and American Service signed a stock purchase agreement onNovember 2, 2020 . The closing of this pending transaction is subject to regulatory approval and other conditions. InJuly 2020 , the Company announced that AGMI's underwriting agreement withNational Interstate Insurance Company ("National Interstate"), for paratransit business was extended and expanded. Further to the extension and expansion, the Company and National Interstate executed a renewal rights agreement with respect to paratransit accounts with eight or more vehicles ("Large Paratransit Accounts"). Pursuant to this agreement, the Company and National Interstate will work together to transition the handling of Large Paratransit Accounts to National Interstate. The Company received$2.9 million as consideration from National Interstate as consideration for this transaction. Under the previously announced expanded agreement AGMI, will manage owner operators and fleets with seven or less vehicles ("Small Paratransit Accounts") until at leastAugust 2021 . If the Small Paratransit Account program is not extended further, National Interstate continues to retain the option to purchase renewal rights on this segment at the expiration of the agreement period. Under the terms of the agreements, the Company will not compete with National Interstate for Large Paratransit Accounts for a period of three years following the Large Paratransit Account renewal rights transaction. Other previously disclosed material terms of the agreements between the parties remain unchanged. 29 -------------------------------------------------------------------------------- Table of Contents II. Application of Critical Accounting Estimates The preparation of financial statements in conformity with accounting principles generally accepted inthe United States of America ("U.S. GAAP") requires management to adopt accounting policies and make estimates and assumptions that affect amounts reported in the consolidated financial statements. The most critical estimates include those used in determining: •Revenue recognition •Fair value of financial assets; •Impairment of financial assets; •Deferred policy acquisition costs; •Valuation of deferred tax assets. In making these determinations, management makes subjective and complex judgments that frequently require estimates about matters that are inherently uncertain. Many of these policies, estimates and related judgments are common in the insurance and financial services industries; others are specific to our businesses and operations. It is reasonably likely that changes in these items could occur from period to period and result in a material impact on our consolidated financial statements. A brief summary of each of these critical accounting estimates follows. For a more detailed discussion of the effect of these estimates on our consolidated financial statements, and the judgments and assumptions related to these estimates, see the referenced sections of this document. For a complete summary of our significant accounting policies, see 'Part II, Item 8, Note 1, Nature of Operations and Basis of Presentation,' in the Notes to Consolidated Financial Statements. Revenue Recognition In accordance with ASC 606, revenue is recognized when a customer obtains control of promised goods or services and is recognized in an amount that reflects the consideration that an entity expects to receive in exchange for those goods or services. We apply the following five-step model in order to determine this amount: (i) identification of the promised goods in the contract; (ii) determination of whether the promised goods are performance obligations, including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when (or as) we satisfy each performance obligation. Significant management judgments and estimates must be made in connection with determination of the revenue to be recognized in any accounting period. If we made different judgments or utilized different estimates for any period, material differences in the amount and timing of revenue recognized could result. The accounting estimates and judgments related to the recognition of revenue require us to make assumptions about numerous factors such as the determination of the policy price. Before the adoption of ASC 606, we were already using a similar method to calculate the revenue value of commission on premiums written through affiliates so we believe we have the ability to make reasonable estimates for these items and have the appropriate accounting policies and controls in place to do so. The uncertainty associated with the variable consideration is subsequently resolved when the policy is issued, renews, and any adjustments are recognized to the underlying premium in the period incurred. Fair Value of Financial Assets Atlas has used the following methods and assumptions in estimating fair value: Fair values for bonds and equity securities are based on quoted market prices, when available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments or values obtained from independent pricing services. Atlas employs a fair value hierarchy to categorize the inputs it uses in valuation techniques to measure the fair value. The hierarchy is comprised of quoted prices in active markets (Level 1), third party pricing models using available trade, bid and market information (Level 2) and internal models without observable market information (Level 3). The Company recognizes transfers between levels of the fair value hierarchy at the end of the period in which events occur impacting the availability of inputs to the fair value methodology. Typically, transfers from Level 2 to Level 3 occur due to collateral performance. Atlas' fixed income portfolio is managed by aSecurities and Exchange Commission ("SEC") registered investment adviser specializing in the management of insurance company portfolios. Management works directly with them to ensure that Atlas benefits from their expertise and also evaluates investments as well as specific positions independently using internal resources. Atlas' investment adviser has a team of credit analysts for all investment grade fixed income sectors. The investment process begins with an independent analyst review of each security's credit worthiness using both quantitative tools and qualitative 30 -------------------------------------------------------------------------------- Table of Contents review. At the issuer level, this includes reviews of past financial data, trends in financial stability, projections for the future, reliability of the management team in place and market data (credit spread, equity prices, trends in this data for the issuer and the issuer's industry). Reviews also consider industry trends and the macro-economic environment. This analysis is continuous, integrating new information as it becomes available. As ofDecember 31, 2020 , 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 help ensure that the values received from them are accurately recorded and that the data inputs and the valuation techniques utilized are appropriate, consistently applied, and that the assumptions are reasonable and consistent with the objective of determining fair value. For example, on a continuing basis, Atlas assesses the reasonableness of individual security values which have stale prices or whose changes exceed certain thresholds as compared to previous values received from our external portfolio manager or to expected prices. The portfolio is reviewed routinely for transaction volumes, new issuances, any changes in spreads, as well as the overall movement of interest rates along the yield curve to determine if sufficient activity and liquidity exists to provide a credible source for market valuations. When fair value determinations are expected to be more variable, they are validated through reviews by members of management or the Board of Directorswho have relevant expertise andwho are independent of those charged with executing investment transactions. Changes in inflation can influence the interest rates which can impact the fair value of our available-for-sale fixed income portfolio and yields on new investments. The Investment Committee of the Board of Directors considers inflation when providing guidance and analyzing the investment portfolio to provide a stable source of income to supplement underwriting income. 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. UnderU.S. GAAP, with respect to an investment in an impaired debt security, other-than-temporary impairment ("OTTI") occurs if (a) there is intent to sell the debt security, (b) it is more likely than not it will be required to sell the debt security before its anticipated recovery, or (c) it is probable that all amounts due will be unable to be collected such that the entire cost basis of the security will not be recovered. If Atlas intends to sell the debt security, or will more likely than not be required to sell the debt security before the anticipated recovery, a loss in the entire amount of the impairment is reflected in net realized gains (losses) on investments in the consolidated statements of operations. 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 operations to the extent that the fair value is less than the amortized cost basis; any difference between fair value and the new amortized cost basis (net of the credit loss) is reflected in accumulated other comprehensive (loss) income, net of applicable income taxes. For equity securities, the Company evaluates its ability to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. Evidence considered to determine anticipated recovery are analysts' reports on the near-term prospects of the issuer and the financial condition of the issuer or the industry, in addition to the length and extent of the market value decline. If an OTTI is identified, the equity security is adjusted to fair value through a charge to earnings (see 'Part II, Item 8, Note 6, Investments' in the Notes to Consolidated Financial Statements). Deferred Policy Acquisition Costs Atlas defers brokers' commissions, premium taxes and other underwriting and marketing costs directly relating to the successful acquisition of premiums written to the extent they are considered recoverable. The other underwriting and marketing costs include a percentage of salary and related expense, payroll taxes and travel of our marketing and underwriting employees. The percentage is derived from an annual persistency rate study using policy and vehicle counts to compute a hit ratio. The deferred costs are then expensed as the related premiums are earned. The method followed in determining the deferred policy acquisition costs ("DPAC") limits the deferral to its realizable value by giving consideration to estimated future claims and expenses to be incurred as premiums are earned. Changes in estimates, if any, are recorded in the accounting period in which they are determined. Anticipated investment income is included in determining the realizable value of the DPAC. Atlas' DPAC are reported net of deferred ceding commissions. 31 -------------------------------------------------------------------------------- Table of Contents Valuation of Deferred Tax Assets Deferred taxes are recognized using the asset and liability method of accounting. Under this method, the future tax consequences attributable to temporary differences in the tax basis of assets, liabilities and items recognized directly in equity and the financial reporting basis of such items are recognized in the financial statements by recording deferred tax assets ("DTAs") or deferred tax liabilities ("DTLs"). DTAs related to the carry-forward of unused tax losses and credits, and those arising from temporary differences are recognized only to the extent that it is probable that future taxable income will be available against which they can be utilized. DTAs and DTLs are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on future tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the date of enactment or substantive enactment. In assessing the need for a valuation allowance, Atlas considers both positive and negative evidence related to the likelihood of realization of the DTAs. Atlas performs an assessment of recoverability of its DTAs on a quarterly basis. If, based on the weight of available evidence, it is more likely than not the DTAs will not be realized, a valuation allowance is recognized in income in the period that such determination is made. Atlas has recorded a valuation allowance of$33.4 million and$32.5 million for its gross future deferred tax assets as ofDecember 31, 2020 and 2019, respectively. III. Operating Results Highlights •Due to the deconsolidation of the ASI Pool Companies and the discontinued operation classification of Global Liberty, the fourth quarter 2019 and go forward continuing operating results do not and will not include insurance company financial impacts other than those related to discontinued operations and will solely consist of the results of Atlas, including AGMI. All references and comparisons to 2019 throughout this document reflect this impact. •Gross commission income was$5.2 million in 2020, a decrease of 30.3% from$7.5 million in 2019. •Total revenue was$9.5 million in 2020 compared to$120.6 million in 2019. 2019 included$110.2 million of net earned premiums related to the deconsolidated entities of the ASI Pool Companies. •Underwriting loss was$15.9 million in 2020 compared to an underwriting loss of$9.0 million in 2019. •Net loss from continuing operations was$13.0 million , or$1.08 loss per common share diluted, in 2020 compared to a net loss from continuing operations of$13.0 million (including a$4.4 million of loss on deconsolidation of the ASI Pool Companies), or$1.09 loss per common share diluted, in 2019, representing an increase in earnings per common share diluted of$0.01 . •Net income from discontinued operations was$238,000 , or$0.02 earnings per common share diluted in 2020 compared to a net loss from discontinued operations of$7.4 million , or$0.62 loss per common share diluted, in 2019, representing an increase in earnings per common share diluted of$0.64 . •Including the change in accounting treatment in the fourth quarter of 2019, book value per common share decreased$1.05 to$(1.76) as ofDecember 31, 2020 from$(0.71) as ofDecember 31, 2019 . 32 -------------------------------------------------------------------------------- Table of Contents Consolidated Performance ($ in '000s, except per share data) Year ended December 31, 2020 2019 Gross premiums written $ -$ 160,684 Net premiums earned - 110,241 Commission income 5,195 7,458 Net claims incurred - 80,767 Underwriting expense: Acquisition costs 2,934 11,825 DPAC amortization - 1,498 Other underwriting expenses 18,133 32,651 Total underwriting expenses 21,067 45,974 Underwriting loss (15,872) (9,042) Net investment income - 1,902 Intangible asset impairment loss - (740) Loss from operating activities, before income taxes (15,872) (7,880) Interest expense, net (1,931) (1,466) Loss from change in fair value of equity securities - (277) Realized gains and other income 4,351 1,274 Loss on disposal of subsidiaries - (4,427) Net loss before income taxes (13,452) (12,776) Income tax (benefit) expense (484) 223 Income (loss) from discontinued operations, net of tax 238 (7,427) Net loss$ (12,730) $ (20,426) Key Financial Ratios Loss per common share diluted$ (1.08) $ (1.09) Book value per common share$ (1.76) $ (0.71) 33
-------------------------------------------------------------------------------- Table of Contents Revenues Historically, our revenues were derived primarily from premiums from our insurance policies and income from our investment portfolio. As a larger percentage of our premium is written by AGMI with unrelated strategic risk-taking partners, commission and fee income is expected to represent the majority of the Company's revenue going forward. Our underwriting approach is to price our products with the objective of generating underwriting profit for the insurance companies we own and with whom we partner. The Company's philosophy is to prioritize improvement in profit margin over top line growth. As with all P&C insurance businesses, the impact of price changes, other underwriting activities and market conditions is reflected in our financial results over time. Underwriting changes on our in-force policies occur as these policies 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 and recognize commissions at the renewal rate. We approach investment and capital management with the intention of supporting our MGA operations by providing a stable source of income. The goals of our investment policy are to protect capital while optimizing investment income and capital appreciation and to maintain appropriate liquidity. We follow a formal investment policy, and the Board of Directors reviews the portfolio performance at least quarterly for compliance with the established guidelines. The Investment Committee of the Board of Directors provides interim guidance and analysis with respect to asset allocation, as deemed appropriate. Expenses Historically, net claims incurred expenses were a function of the amount and type of insurance contracts we wrote and of the claims experience of the underlying risks underwritten by the insurance companies we own and owned. We recorded net claims incurred based on an actuarial analysis of the estimated claims we expected to be reported on contracts that were written. Our objective had been to establish case reserves at our Insurance Subsidiaries at the maximum probable exposure, based on our historical claims experience and, beginning in 2016, the use of claim related analytics. The amount reported under net claims incurred in any period included payments in the period net of the change in the value of the reserves for net claims incurred between the beginning and the end of the period, as well as estimation of potential future trends or changes. While the Company had always relied on independent actuarial professionals and internal controls in this regard, the estimation of reserves is inherently uncertain. As a result of the ASI Pool Companies being placed in rehabilitation by theIllinois Department of Insurance , management of the Company no longer has the authority to establish reserves for these entities. The strategic shift undertaken by the Company coupled with regulatory actions related to the ASI Pool Companies had a major effect on our business. Expenses related to the deconsolidated entities no longer have an impact on our operating results beginning onOctober 1, 2019 . Also, sinceOctober 1, 2019 , Global Liberty has been classified as a discontinued operation and its expenses are considered as such. Acquisition costs at our Insurance Subsidiaries consist principally of brokerage and agent commissions and, to a lesser extent, premium taxes. The commissions paid to our external producers are reduced by ceding commissions received from assuming reinsurers that represent a percentage of the premiums on insurance policies and reinsurance contracts written and vary depending upon the amount and types of contracts written. Other underwriting expenses consist primarily of personnel related expenses (including salaries, benefits and certain costs associated with awards under our equity compensation plans, such as share-based compensation expense) and other general operating expenses incurred primarily in connection with our MGA and holding company operations. We believe that because a portion of our personnel expenses are relatively fixed in nature, changes in premium writings may impact our operating scale and operating expense ratios. Commissions and other fee related revenue were earned and recognized in connection with policies managed by AGMI. Gross Premiums Written Gross Premiums Written by Line of Business ($ in '000s) Year ended December 31, % Change 2020 2019 2020 vs. 2019 Commercial automobile $ -$ 138,034 (100.0) % Other - 22,650 (100.0) Total $ -$ 160,684 (100.0) % Gross premiums written decreased 100% in 2020 compared to 2019. The decrease is related to the deconsolidation of the ASI Pool Companies. See "Part II, Item 7, 2020 Developments" for certain developments with respect to the Company and the Insurance Subsidiaries. 34 -------------------------------------------------------------------------------- Table of Contents Geographic Concentration Gross Premiums Written by State ($ in '000s) Year ended December 31, 2020 2019 New York $ - - %$ 61,902 38.5 % California - - 33,062 20.6 Virginia - - 7,840 4.9 Illinois - - 6,439 4.0 Minnesota - - 4,203 2.6 Louisiana - - 4,190 2.6 Texas - - 3,753 2.3 Georgia - - 3,670 2.3 Ohio - - 3,282 2.0 Nevada - - 2,678 1.7 Other - - 29,665 18.5 Total $ - - %$ 160,684 100.0 % Ceded Premiums Written Ceded premiums written is equal to premiums ceded under the terms of Atlas' in force reinsurance treaties. Atlas generally purchased reinsurance in an effort to limit net exposure on any one claim to a maximum amount of$500,000 with respect to commercial automobile liability claims. This Excess of Loss reinsurance was primarily secured throughGeneral Reinsurance Corporation ("Gen Re"), a subsidiary of Berkshire Hathaway, Inc. Atlas also purchased reinsurance from Gen Re in an effort to protect against awards in excess of its policy limits. Ceded premiums written decreased 100.0% to$0 in 2020 compared to$72.9 million in 2019, respectively, due to the deconsolidation of the ASI Pool Companies and classification of Global Liberty as a discontinued operation. During 2019, the Company received notice from Gen Re that effectiveJuly 31, 2019 , the XOL reinsurance coverage for the ASI Pool Companies would terminate on a cut-off basis. Additionally, effectiveSeptember 30, 2019 , theASI Pool Companies' Quota Share contract with Swiss Re was terminated on a run-off basis. During 2020, the Company received notice from Gen Re that effectiveJanuary 1, 2020 , the XOL reinsurance coverage for Global Liberty terminated on a run-off basis. See "Part II, Item 7, 2020 Developments" for certain developments with respect to the Company and the Insurance Subsidiaries. Net Premiums Written Net premiums written is equal to gross premiums written less the ceded premiums written under the terms of Atlas' in-force reinsurance treaties. Net premiums written decreased 100.0%, or$87.8 million from 2019. The change is due to the deconsolidation of the ASI Pool Companies. Net Premiums Earned Premiums are earned ratably over the term of the underlying policy. Net premiums earned decreased 100.0%, or$110.2 million from 2019. The change is due to the deconsolidation of the ASI Pool Companies. Commission Income AGMI earns commission for the sale of first year and renewal policies from our insurance carrier partners, which are presented in our consolidated statements of operations as commission revenue. Our contracts with our insurance carrier partners contain a commission percentage that is used to compute the total commission due per policy written. We also generate fee income in connection with individual policies as well as professional services provided to our business partners under contractual arrangements. Our commission revenue is recognized upon the sale or renewal of a policy. After a policy is sold, we have policy management obligations to the policyholder and the insurance carrier partner, including, but not limited to, policy endorsements, policy cancellations and policy restatements. Therefore, we do incur additional expense related to our policy management requirements. Most costs associated with the sale of an individual policy are incurred prior to or at the time of the initial sale of an individual policy and are characterized in our financial statements as Other Underwriting Expenses. 35 -------------------------------------------------------------------------------- Table of Contents Commission income relating to the business processed by AGMI decreased by$2.3 million , or 30.3%, from$7.5 million in 2019 to$5.2 million in 2020. The decrease is related to the decrease of written premiums for policies that were part of the ASI Pool Companies that AGMI earned commission income during 2019. Net Claims Incurred The loss ratio relating to the net claims incurred was 73.3% in 2019. The loss ratio decreasing to 0% in 2020 was the result of the deconsolidation of the ASI Pool Companies. Acquisition Costs Acquisition costs of$2.9 million in 2020 represent commissions paid to retail agentswho sell insurance policies. Acquisition costs of$11.8 million in 2019 represented commissions and taxes incurred on net premiums earned offset by ceding commission on business reinsured. The decrease in acquisition costs resulted from the deconsolidation of the ASI Pool Companies. Deferred Policy Acquisition Costs (DPAC) Our assessment of the historic DPAC definition, methodology and computation that was utilized when the organization was insurance company focused is no longer relevant based upon the new strategic direction to a managing general agency. Historically, the Company computed DPAC based on its costs to obtain insurance policy quotes (the prior definition of the "contract"). This computation deferred a percentage of underwriting expenses based upon the activities of certain underwriting departments that supported the new and renewal business activities and the actual amount of bound and issued policies as a percentage of quote/submission activities. Due to the strategic shift that occurred in 2019, the Company determined that the historic DPAC asset of$1.2 million was impaired as ofOctober 1, 2019 and written down to zero. Other Underwriting Expenses Other underwriting expenses including share based compensation and amortization of intangible assets decreased$14.5 million to$18.1 million in 2020 compared to$32.7 million in 2019. The$14.5 million decrease related to the deconsolidation of the ASI Pool Companies' expenses of$20.5 million offset by an increase of$6.0 million mainly related to increases in severance costs, salaries and benefits, corporate insurance, and depreciation and amortization of business systems and software offset by decreases in banking charges and professional fees. The Company's expense structure is expected to continue to be modified to reflect the change from its historic insurance company structure to its continuing operation primarily as a managing general agency. Net Investment Income Net investment income is primarily comprised of interest income, dividend income, and income from other invested assets which were held by our Insurance Subsidiaries, net of investment expenses, which are comprised of investment management fees, custodial fees and allocated salaries. Net investment income, net of investment expenses, decreased by 100.0% to$0 in 2020 compared to$1.9 million in 2019. Equity method investments and collateral loans generated investment income of$0 in 2020 and investment losses of$793,000 in 2019, respectively. The decreases from 2020 to 2019 were a result of the deconsolidation of the ASI Pool Companies. Intangible Asset Impairment Loss In 2019, the Company fully impaired intangible assets not subject to amortization in the amount of$740,000 relating to theGateway acquisition. There were no intangible assets impaired during 2020. Interest Expense, Net OnApril 26, 2017 , Atlas issued$25 million of five-year 6.625% senior unsecured notes and received net proceeds of approximately$23.9 million after deducting underwriting discounts and commissions and other offering expenses. Interest expense related to the senior unsecured notes was$1.9 million for each of the years ended 2020 and 2019, respectively. OnNovember 10, 2016 , American Acquisition 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. Interest expense in 2020 and 2019 totaled$364,000 and$97,000 , respectively. Prior toOctober 1, 2019 , the interest expense payments related to the mortgage had been eliminated in consolidation. OnMay 1, 2020 , American Acquisition entered into a PPP Loan pursuant to the CARES Act that bears interest at a rate of 1.0% per annum. Interest expense related to the PPP Loan for 2020 totaled$31,000 . American Acquisition entered into subordinated surplus debentures ("Surplus Notes") with the ASI Pool Companies inApril 2015 that had a maturity date ofApril 30, 2020 . Interest income related to the Surplus Notes for 2020 totaled$308,000 . Prior toOctober 1, 2019 , the interest income related to the Surplus Notes had been eliminated in consolidation. 36 -------------------------------------------------------------------------------- Table of Contents Loss from Change in Fair Value ofEquity Securities BeginningJanuary 1, 2018 , Atlas adopted Accounting Standards Update 2016-01, which requires changes in the unrealized market value of equities held at fair value to be recorded through net income. In 2020 and 2019, Atlas recorded losses of$0 and$277,000 , respectively, through net income related to the changes in the unrealized amounts on equities held at fair value. The decrease from 2020 to 2019 was a result of the deconsolidation of the ASI Pool Companies. Net Realized Investment Gains (Losses) Net realized investment gains is comprised of the gains and losses from the sales of investments and property and equipment. Net realized investment returns decreased 100.4% to a net loss of$(3,000) in 2020 from a net gain of$821,000 in 2019, due to gains from the sales of fixed income and equity securities that occurred during 2019. Other Income Atlas recorded other income of$4.4 million and$453,000 in 2020 and 2019, respectively. The increase related primarily to the Company receiving$2.9 million related to a sale of renewal rights on the paratransit program book of business. Loss before Income Taxes Atlas generated pre-tax loss from continuing operations of$13.5 million and$12.8 million for each of the years ended in 2020 and 2019, respectively. The causes of these changes in pre-tax losses are attributed to the combined effects of the reasons cited in the 'Net Premiums Earned, 'Commission Income', 'Net Claims Incurred,' 'Acquisition Costs,' 'Other Underwriting Expenses,' 'Net Investment Income,' 'Intangible Asset Impairment Loss,' 'Interest Expense, Net,' 'Loss from Change in Fair Value ofEquity Securities ,' 'Net Realized Investment Gains (Losses)' and 'Other Income' sections above. Income Taxes Atlas recorded income tax (benefit) expense of$(484,000) and$223,000 in 2020 and 2019, respectively. Tax Rate Reconciliation ($ in '000s) Year ended December 31, 2020 2019
Provision for taxes at
$ (2,825) 21.0 %$ (2,683) 21.0 % Provision for deferred tax assets deemed unrealizable (valuation allowance) 1,744 (13) 2,779 (21.8) Nondeductible expenses (3) - 28 (0.2) Tax-exempt income - - (3) - State tax (net of federal benefit) (3) - 71 (0.6) Stock compensation 630 (4.7) 31 (0.2) Nondeductible acquisition accounting adjustment (42) 0.3 - - Other 15 (0.1) - -
Provision for income taxes for continuing operations
3.5 %
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
Net Operating Losses ("NOL's) that will expire unused as a result of the yearly
limitation.
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In assessing the need for a valuation allowance, Atlas considers both positive
and negative evidence related to the likelihood of realization of the deferred
tax assets.
Positive evidence evaluated when considering the need for a valuation allowance
includes:
•current year profit;
•management's expectations of future profit; and
•positive growth trends in gross premiums produced.
Negative evidence evaluated when considering the need for a valuation allowance
includes:
•net losses generated in the three most recent years; and
•yearly limitation as required by IRC Section 382 on net operating loss
carryforwards generated prior to 2013.
Net Loss and Loss per Common Share
Atlas had net loss of $12.7 million and $20.4 million in 2020 and 2019,
respectively. Loss per common share diluted was $1.08 and $1.09 in 2020 and
2019, respectively.
Potential Dilutive Common Shares
Year ended
2020 2019
Basic weighted average common shares outstanding 11,957,268 11,954,494
Dilutive potential ordinary shares:
Dilutive stock options - -
Diluted weighted average common shares outstanding 11,957,268 11,954,494
The effects of convertible instruments are excluded from the computation of earnings per common share diluted in periods in which the effect would be anti-dilutive. In 2020 and 2019, all exercisable stock options were deemed to be anti-dilutive.
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IV. Financial Condition
The following presentation and analysis reflects the deconsolidation of the ASI
Pool Companies as of October 1, 2019 and Global Liberty being classified as
discontinued operations.
Consolidated Statements of Financial Condition
($ in '000s, except for share and per share data) December 31,
2020 2019
Assets
Cash and cash equivalents $ 5,238 $ 9,025
Restricted cash 5,287 7,122
Premiums receivable (net of allowance of $800 and $800 ,
respectively) 13,442 38,607
Intangible assets, net 2,235 2,625
Property and equipment, net 18,815 21,793
Right-of-use asset 888 1,592
Notes receivable 18,017 17,709
Other assets 1,895 1,086
Assets held for sale 53,885 51,302
Total assets $ 119,702 $ 150,861
Liabilities
Premiums payable $ 19,416 $ 43,988
Lease liability 1,091 1,993
Due to deconsolidated affiliates 19,170 11,172
Notes payable, net 36,168 32,100
Other liabilities and accrued expenses 4,342 7,302
Liabilities held for sale 60,407 62,767
Total liabilities $ 140,594 $ 159,322
Shareholders' Deficit
Ordinary voting common shares,
$
37
- -
Additional paid-in capital
81,840 81,548
(3,000) (3,000)
Retained deficit (100,199) (87,469)
Accumulated other comprehensive income, net of tax 430 424
Total shareholders' deficit $ (20,892) $ (8,461)
Total liabilities and shareholders' deficit $ 119,702 $ 150,861
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Deferred Tax Assets
Components of Deferred Tax
($ in '000s) As of December 31,
2020 2019
Gross deferred tax assets:
Losses carried forward $ 16,408 $ 10,264
Claims liabilities and unearned premium reserves 496 554
Investment in affiliates 23,870 24,450
Bad debts 168 168
Stock compensation 279 873
Other 203 81
Valuation allowance (33,420) (32,522)
Total gross deferred tax assets 8,004 3,868
Gross deferred tax liabilities:
Deferred policy acquisition costs 134 112
Investments 122 116
Fixed assets 1,344 2,099
Intangible assets 469 551
Other 5,935 990
Total gross deferred tax liabilities 8,004 3,868
Net deferred tax assets $ - $ -
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, Atlas has established a valuation allowance of $33.4 million and
$32.5 million for its gross future deferred tax assets as of December 31, 2020
and 2019, respectively.
The Company had a change in control for Federal income tax purposes in 2019. As
a result, the Company's net operating losses are subject to a yearly limitation
by the Internal Revenue Code.
Net Operating Loss Carryforward as of December 31, 2020 by Expiry
($ 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 4,973
2019 Indefinite 6,306
2020 2040 31,300
2020 Indefinite 4,686
Total $ 78,134
40-------------------------------------------------------------------------------- Table of Contents Buildings and Land In the fourth quarter of 2016, Atlas purchased a building and land for$9.3 million to serve as its corporate headquarters. The Company purchased furnishings and made improvements to this building of$8,300 and$16,500 in 2020 and 2019, respectively. See 'Part II, Item 8, Note 9, Property and Equipment' in the Notes to Consolidated Financial Statements for further discussion of the corporate headquarters. Claims Liabilities As a result of the deconsolidation of the ASI Pool Companies and the classification of Global Liberty as discontinued operations, all claims liabilities have been reduced to$0 . Changes in the Provision for Unpaid Claims and Claims Adjustment Expenses, Net of Reinsurance Recoverables ($ in '000s) Year endedDecember 31, 2020 2019
Unpaid claims and claims adjustment expenses, beginning of period $
-$ 226,487 Less: reinsurance recoverable - 55,265 Net unpaid claims and claims adjustment expenses, beginning of period - 171,222 Incurred related to: Current year - 78,612 Prior years - 2,155 - 80,767 Paid related to: Current year - 22,176 Prior years - 89,970 - 112,146 Reduction in liability from deconsolidation
- 139,843
Net unpaid claims and claims adjustment expenses, end of period $
- $ - Add: reinsurance recoverable - -
Unpaid claims and claims adjustment expenses, end of period $
- $ -
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. As ofSeptember 30, 2019 , the results of the ASI Pool Companies have been deconsolidated. ThroughSeptember 30, 2019 , the incurred related to prior years primarily related to unfavorable development on involuntary assigned risk pools and run-off commercial auto. Assigned risk pools are established by state governments to cover high-risk insuredswho cannot purchase insurance through conventional means. Off-Balance Sheet Arrangements As ofDecember 31, 2020 and 2019 we did not have any material off-balance sheet arrangements within the meaning of Item 303 of Regulation S-K. 41 -------------------------------------------------------------------------------- Table of Contents Changes in Shareholders' (Deficit) Equity ($ in '000s) Ordinary Voting Restricted Additional Accumulated Other Common Voting Common Paid-In Treasury Retained Comprehensive Income Total Shareholders' Shares Shares Capital Stock Deficit (Loss) Equity (Deficit) Balance December 31, 2018$ 36 $ -$ 202,298 $ (3,000) $ (190,503) $ (3,132) $ 5,699 Deconsolidation ofASI Pool Companies - - (121,622) - 123,460 (604) 1,234 Net loss - - - - (20,426) - (20,426) Other comprehensive income - - - - - 4,160 4,160 Share-based compensation - - 872 - - - 872 Balance December 31, 2019$ 36 $ -$ 81,548 $ (3,000) $ (87,469) $ 424 $ (8,461) Net loss - - - - (12,730) - (12,730) Other comprehensive loss - - - - - 6 6 Share-based compensation 1 - 292 - - - 293 Balance December 31, 2020$ 37 $ -$ 81,840 $ (3,000) $ (100,199) $ 430$ (20,892) As ofDecember 31, 2020 , there were 11,993,293 ordinary voting common shares outstanding and no preferred shares outstanding. OnDecember 31, 2018 , the Company awarded grants for ordinary voting common shares of the Company to its external directors pursuant to a director equity award agreement datedDecember 31, 2018 . The awards, which were approved by the Company's Board of Directors inMarch 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 one share of Company ordinary voting common share at the close of market onApril 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$179,000 . The RSUs will vest 33.3% onJanuary 1 of each year with the last vesting period being 2021. There were 3,301 and 11,682 non-vested RSUs issued as ofDecember 31, 2020 and 2019, respectively. The RSUs are participative and are included in the computations of earnings per common share and book value per common share for these periods. During 2020, the Company issued 8,381 ordinary voting common shares as a result of the vesting of RSUs. During 2019, the Company issued 5,842 ordinary voting common shares as a result of the vesting of RSUs and 27,195 ordinary voting common shares, then immediately canceled 6,169 shares, as a result of a cashless exercise of options. Mezzanine Equity There were no preferred shares outstanding as ofDecember 31, 2020 and 2019. Book Value
Book Value per Common Share
($ in '000s, except for share and per share data) December 31,
2020 2019
Shareholders' equity $ (20,892) $ (8,461)
Less: Accumulated dividends on preferred stock - -
Common equity $ (20,892) $ (8,461)
Common shares:
Common shares outstanding 11,993,293 11,942,812 Restricted stock units 3,301 11,682 Total common shares 11,996,594 11,954,494 Book value per common share outstanding$ (1.74) $
(0.71)
The changes to book value per common share are attributed to the combined
effects of the reasons cited in the 'Net Premiums Earned,' 'Commission Income,'
'Net Claims Incurred,' 'Acquisition Costs,' 'Other Underwriting Expenses,' 'Net
Investment
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Income,' 'Intangible Asset Impairment Loss,' 'Interest Expense, Net,' 'Loss from
Change in Fair Value of Equity Securities ,' 'Net Realized Investment Gains
(Losses)' and 'Other Income' subsections of the 'Operating Results' section.
Liquidity and Capital Resources
Liquidity Management
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, commissions and general expenses. The sources and uses of cash have
changed as a result of the Company's strategic shift from a traditional
insurance carrier based operation to a managing general agency.
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. AGMI funds its obligations primarily through commission revenue
generated by the production of insurance premiums for related and third party
entities. The Insurance Subsidiaries fund their obligations primarily through
premiums collected, investment income and proceeds from the sales and maturity
of investments, and capital contributions from their parents. 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 Atlas are inadequate to service its obligations,
Atlas would need to raise capital, sell assets or incur debt obligations. See
"Part II, Item 7, 2020 Developments."
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. From time to time the
Company may seek to repurchase Company debt through cash repurchases in the open
market or otherwise. Such repurchases, if any, will be on the terms and prices
determined by the Company and will depend upon market conditions, liquidity
needs and other factors. The amount of such repurchases may be material.
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.
Summary of Consolidated Cash Flows
($ in '000s) Year
ended
2020 2019
Net cash flows used in operating activities $ (24,531) $ (48,758)
Net cash flows provided by investing activities 10,381 67,742
Net cash flows provided by (used in) financing activities 3,845 (183)
Net (decrease) increase in cash $
(5,622)
Cash used in operations during 2020 was primarily a result of the strategic shift from insurance company operations to managing general agency operations. Cash used in operations during 2019 was primarily a result of the effect of deconsolidation of the ASI Pool Companies and the discontinued operation classification of Global Liberty. Cash provided by investing activities during 2020 resulted from the net sales and maturities of fixed income securities and short-term investments partially offset by the purchase of property and equipment. Cash provided by investing activities during 2019 was due to liquidation of investments of theASI Pool Companies to support the run-off of claims and operating activities while these companies were in rehabilitation and the effect of the discontinued operation classification of Global Liberty. 43 -------------------------------------------------------------------------------- Table of Contents Cash provided by financing activities during 2020 was a result of the Company receiving a PPP Loan offset by mortgage payments made to the ASI Pool Companies. Cash used in financing activities during 2019 was primarily a result of the deconsolidation of the ASI Pool Companies and the repayment during the fourth quarter of 2019 of principal on mortgage notes due to the deconsolidation entities. From time to time the Company may seek to repurchase Company debt through cash repurchases in the open market or otherwise. Such repurchases, if any, will be on terms and prices determined by the Company and will depend upon market conditions, liquidity needs and other factors. The amount of such repurchases may be material. Capital Resources 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 (loss) income. As a holding company, Atlas could derive cash from its subsidiaries generally in the form of dividends to meet its obligations, which will primarily consist of operating expense payments and debt payments. Atlas subsidiaries fund their obligations primarily through commission and fee income. Ability to Meet Financial Obligations As discussed in greater detail in "Part II, Item 8, Note 20", Going Concern, there is substantial doubt about whether the Company will have sufficient capital to operate through or beyondApril 2022 unless the Company is successful in taking certain mitigating action (see Part II, Item 8, Note 20). Item 7A. Quantitative and Qualitative Disclosures about Market Risk We are a smaller reporting company as defined in Rule 12b-2 of the Exchange Act; therefore, pursuant to Regulation S-K, we are not required to make disclosures under this item. 44
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