Atlas Financial Holdings Announces 2017 Third Quarter Financial Results

Atlas Financial Holdings, Inc. (NASDAQ: AFH) ("Atlas” or the "Company”) today reported its financial results for the third quarter ended September 30, 2017.

Management Comments

Scott D. Wollney, Atlas’ President and CEO, stated, "Atlas reported solid third quarter results driven by underwriting performance and continued expansion of market share in limo/livery and paratransit. We are encouraged by consistent positive pricing action across our niche markets. Our expectation is that ongoing hardening commercial market conditions will enable our team to further leverage our analytics capability to optimize return on deployed capital, with the objective of building on our 14.5% annualized return-on-equity. We feel that Atlas’ focus on bottom line execution and expertise in our niche differentiates our business in the face of a challenging environment across broader commercial auto. Our hyper-focus coupled with underwriting and claim handling discipline led to a strong combined ratio of 87.9% in the third quarter, which we achieved despite expected quarterly fluctuations in deferred acquisition costs. With the infrastructure and capital planning tools we have in place, we believe we can continue to grow nationwide, increasing our operating leverage in a responsible and managed way to continue to increase ROE. In parallel, we continue to building on our foundational heritage to develop technology-based solutions for the expanding universe of ‘gig economy’ drivers utilizing light vehicles to move people and things with the objective of launching select products in 2018, subject to continuing successful market testing and regulatory approval.”

Financial and Operational Review

Premium Written: For the three month period ended September 30, 2017, gross premium written was $65.9 million compared to $60.7 million for the three month period ended September 30, 2016, representing an 8.5% increase. Gross premium written increased primarily due to growth in para-transit, limousine and livery accounts in New York, California, Missouri and New Jersey and taxi in Minnesota partially offset by a reduction in Michigan and certain more challenged taxi business in Louisiana, Pennsylvania and California.

Geographic Distribution: The Company is licensed in 49 states and the District of Columbia. Atlas actively writes its core business in 42 of these states plus the District of Columbia. Compared to the three month period ended September 30, 2016, Atlas experienced growth in gross premium written in its core business in 25 states for the three month period ended September 30, 2017. In 6 of those 25 states, Atlas experienced quarter over quarter growth of greater than 100% due to a continuing positive response from both new and existing agents to Atlas’ value proposition and the current market environment. The largest increases resulted from para-transit, limousine and livery business in New Jersey and Missouri and all lines in Minnesota. Based on the Company’s commitment to optimize return on deployed capital, the Company utilizes predictive analytics based pricing coupled with its strong value proposition to grow market share in environments that are favorable and is prepared to reduce exposure to those that are more challenging.

Combined Ratio: Atlas’ combined ratio increased for the three month period ended September 30, 2017 to 87.9%, compared to 83.5% in the prior year period.

• Loss Ratio: The loss ratio relating to claims incurred for the three month period ended September 30, 2017 was 59.5%, compared to 58.2% for the three month period ended September 30, 2016. The loss ratio increased year over year primarily due to the Company’s continued review of underwriting profitability by product and state and higher than expected claim costs associated with Atlas’ participation in non-voluntary assigned risk pools. Approximately $300,000 in physical damage claims related to Hurricane Harvey were also recorded in the quarter. The Company continues to see incremental opportunities to build on decades of experience in the claims area coupled with increasing use of analytics to increase expected margin in subsequent quarters. As previously announced, the Company is utilizing machine learning based predictive analytics in the claim area, in addition to using it as an underwriting tool, to further benefit from the data, experience and expertise within its organization. Atlas believes this approach amplifies the value of the assets accumulated over its operating subsidiaries’ many years spent focusing on niche target markets to model potential risk and deliver value for both our customers and stakeholders. On a year over year basis, the Company expects its loss ratio to continue to generally trend in a positive direction based on prior year and potential future pricing, underwriting and claims activities.
• Underwriting Expense Ratio: The underwriting expense ratio for the three month period ended September 30, 2017 was 28.4% compared to 25.3% for the three month period ended September 30, 2016.

The table below details the comparisons of each component of the Company’s combined ratio for the periods indicated (after accounting for the effect of quota share reinsurance):

Atlas’ underwriting expense ratio for the three month period ended September 30, 2017, excluding the impact of share-based compensation expenses and expenses related to stock purchase agreements, was 27.9% and falls outside the Company’s previously communicated annualized target range of 24.5% to 26.5% primarily due to decreased deferrable general expenses related to policy acquisition, increased accruals for bad debt and higher than average acquisition costs in the quarter. For the nine month period ended September 30, 2017, this ratio was 26.4% and continues to fall within the target range. Also, for comparison purposes, expenses in the amount of $1.9 million were recovered pursuant to the Gateway stock purchase agreement for the three month period ended September 30, 2016. While the underwriting ratio can vary quarter to quarter, on a full year basis, based on the Company’s current anticipated year over year growth trend, underwriting expenses are expected to be within, and on the high end, of this range. Atlas remains focused on continually enhancing its value proposition through re-investment into research and development to ensure that our organization is able to continue leading the industry in terms of existing and developing niche markets on which Atlas focuses.

As the Company continues the use of quota share reinsurance, and potentially changes the percentage of ceded premiums under its contract, the impact on the individual ratios of acquisition cost and other underwriting expense will vary. On a pro-forma basis, as if there was no quota share reinsurance in place, the components of the underwriting expense ratio for the periods indicated would have been as follows:

Underwriting Results: Underwriting profit decreased to $6.8 million for the three month period ended September 30, 2017, compared to $7.1 million in the same period of the prior year, representing a 5.5% decrease. However, without the favorable impact of the stock purchase agreement impacts reflected in 2016, proforma underwriting profit for the three month period ending September 30, 2017 increased by $1.5 million or 28.6%.

Net Income before Taxes: Net income before taxes decreased to $7.9 million for the three month period ended September 30, 2017, compared to $9.0 million in the same period of the prior year, representing a 12.1% decrease. Eliminating the favorable impact of the stock purchase related impacts in 2016, proforma income before tax for the three month period ending September 30, 2017 increased by $800,000 or 11.3%.

Income Taxes: Atlas recognized tax expense of $2.8 million for the three month period ended September 30, 2017 compared to tax expense of $2.5 million in the same period of the prior year.

Net Income: Atlas reported net income of $5.1 million for the three month period ended September 30, 2017, compared to $6.5 million for the three month period ended September 30, 2016.

Earnings per share ("EPS”): Atlas generated $0.42 per common share diluted for the three month period ended September 30, 2017. This compares to $0.51 per common share diluted as reported for the three month period ended September 30, 2016.

Share Count: The following chart illustrates Atlas’ potential dilutive common shares for the three month periods ended September 30, 2017 and 2016:

Balance Sheet/Investment Overview

Book Value: Book value per common share was $11.96 based on 12,045,519 common shares outstanding as of September 30, 2017, compared to $10.54 based on 12,045,519 common shares outstanding as of December 31, 2016. Book value per common share of $11.96 increased by $1.42 relative to December 31, 2016 as follows:

$1.24 increase related to net income after tax and before items indicated below;

$0.05 increase related to the change in net realized investment gains after tax;

$0.06 increase related to the change in unrealized gains/losses after tax; and

$0.07 increase related to share-based compensation.

$1.42 total increase from December 31, 2016 book value per common share

Cash and Invested Assets: Cash and invested assets as of September 30, 2017 totaled $247.7 million as compared to $224.8 million as of December 31, 2016.

Investment Strategy: Atlas aligns its securities portfolio to support the liabilities and operating cash needs of its insurance subsidiaries, to preserve capital and to generate investment returns. Atlas invests predominantly in fixed income securities with overall maturities that correlate with the payout patterns of Atlas’ claims liabilities and other liquidity needs. Other than fixed income investments are limited to an appropriately small percentage of our portfolio and are generally opportunities identified through the Company’s specialty focus or by leveraging the resources of our business partners. As of September 30, 2017, the average life on the Company’s portfolio was 4.8 years with a duration of 3.9 years. The Company’s investment allocations will be regularly reviewed based on market conditions with a continued emphasis on capital preservation to support growth in its operating business.

Investment Income / Yield: Atlas generated net investment income of $902,000 and $1.4 million for the quarters ended September 30, 2017 and 2016, as well as $582,000 and $630,000 of realized gains, respectively. The gross annualized investment yield on the Company’s fixed income securities was 2.4% and 2.2% for the quarters ended September 30, 2017 and 2016, respectively. The gross annualized investment yield on the Company’s cash and cash equivalents was 0.4% and 0.1% for the quarters ended September 30, 2017 and 2016, respectively. The decrease in investment income from the prior year period was primarily the result of lower returns on equity method investments, particularly insurance linked securities, and higher investment expenses, partially offset by higher interest income on the Company’s fixed income securities portfolio and interest income on our collateral loans.

Board of Directors Update

The Company also announced that Larry G. Swets, Jr. will be retiring as a Director of AFH effective January 2, 2018. Mr. Swets was a founding director of the Company, serving on the Board beginning in 2011. With the departure of Mr. Swets, Atlas now has five members of its Board of Directors.

"On behalf of our entire organization, I want to thank Larry for his invaluable contribution to Atlas’ formation as well as our evolution over the past seven years,” Mr. Wollney commented, "we are sorry to see him leave the board and wish him the best in all future endeavors.”

"I became involved with Atlas when it was only a concept, and it has been a great pleasure to be a small part of the growth and success Scott and his team delivered over the last seven years.” Mr. Swets added, "My retirement makes room for other talented directors to help take Atlas to the next level and will allow me to focus on some recent new ventures.”

Outlook for 2017

Mr. Wollney concluded, "Atlas’ principle focus is to continue to profitably grow market share while conditions remain favorable while we simultaneously focus on the incremental integration of technology and analytics to optimize the entire ecosystem among our Company, our agents, and our insureds. We are focused on continuing to innovate and further enhance our differentiated market position. Our strategic objective is to ensure that as industry trends evolve, Atlas is best positioned to leverage our heritage and amplify our capabilities to ensure that we are able to continue to lead the industry as measured by returns on equity exceeding our peers by at least 500 to 1,000 basis points.”

Conference Call Details

To access the call, please dial-in approximately five minutes before the start time and, when asked, provide the operator with passcode "Atlas”.

An accompanying slide presentation will be available in .pdf format on the investor relations page of the Company’s website after issuance of the earnings release.

Webcast

The call will also be simultaneously webcast over the Internet via the "Investor Relations” section of Atlas’ website at www.atlas-fin.com/investorrelations or by clicking on the conference call link: http://atlas-fin.equisolvewebcast.com/q3-2017. Audio and a transcript of the call will be archived on the Company’s website.

About Atlas

The primary business of Atlas is commercial automobile insurance in the United States, with a niche market orientation and focus on insurance for the "light” commercial automobile sector including taxi cabs, non-emergency para-transit, limousine/livery (including certain transportation network company drivers) and business auto. The business of Atlas is carried on through its subsidiaries American Country Insurance Company, American Service Insurance Company, Inc., Gateway Insurance Company, Global Liberty Insurance Company of New York, Anchor Group Management, Inc., Plainview Premium Finance Company, Inc., and Plainview Premium Finance Company of California, Inc. Atlas’ insurance subsidiaries have decades of experience with a commitment to always being an industry leader in these specialized areas of insurance.

For more information about Atlas, please visit www.atlas-fin.com.

Financial Information

Atlas’ financial statements reflect consolidated results of Atlas’ subsidiaries: American Insurance Acquisition Inc., American Country Insurance Company, American Service Insurance Company, Inc., Gateway Insurance Company, Global Liberty Insurance Company of New York, Anchor Holdings Group, Inc., Anchor Group Management, Inc., Plainview Premium Finance Company, Inc., and Plainview Premium Finance Company of California, Inc. Additional information about Atlas, including a copy of Atlas’ 2016 Annual Report on Form 10-K financial statements and Management Discussion & Analysis, can be accessed via the U.S. Securities and Exchange Commission internet site at www.sec.gov or through Atlas’ website at http://www.atlas-fin.com/InvestorRelations/FinancialReports.aspx.

Forward-Looking Statements:

This release includes forward-looking statements regarding Atlas and its insurance subsidiaries and businesses. Such statements are based on the current expectations of the management of each entity. The words "anticipate”, "expect”, "believe”, "may”, "should”, "estimate”, "project”, "outlook”, "forecast” or similar words are used to identify such forward looking information. The forward-looking events and circumstances discussed in this release may not occur and could differ materially as a result of known and unknown risk factors and uncertainties affecting the Companies, including risks regarding the insurance industry, economic factors and the equity markets generally and the risk factors discussed in the "Risk Factors” section of the Company’s 2016 Annual Report on Form 10-K. No forward-looking statement can be guaranteed. Except as required by applicable securities laws, forward-looking statements speak only as of the date on which they are made and Atlas and its subsidiaries undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events, or otherwise.

Use of Non-U.S. GAAP Financial Measurements

Atlas uses these non-GAAP financial measures in order to present its financial condition and results of operations in the way it believes will be most meaningful and representative of its business results. The non-GAAP financial measures that Atlas presents may not be comparable to similarly-named measures reported by other companies.

Adjusted operating income, before tax includes both underwriting income and loss and net investment income, but excludes net realized capital gains and losses, legal and professional expense incurred related to business combinations, interest expense, net impairment charges recognized in earnings and other items. Underwriting income is derived by reducing net premiums earned by losses and loss adjustment expenses incurred, policy acquisition costs and general operating expenses.

Reconciliation of U.S. GAAP Net Income to Adjusted Operating Income, Before Tax ($ in ‘000s, except per share data)

After-tax return on average common equity is derived by subtracting preferred share dividends accrued from net income and dividing by average common equity. Common equity is total shareholders’ equity less preferred shares and cumulative preferred share dividends accrued. Average common equity is the average of common equity at the beginning and the ending of the reporting period.

Reconciliation of U.S. GAAP Shareholders’ Equity to Common Equity ($ in ‘000s)

Reconciliation of U.S. GAAP Return on Equity to Return on Common Equity ($ in ‘000s)

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