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Atlas Financial Holdings Announces 2013 Second Quarter Financial Results

Atlas Financial Holdings, Inc. (NASDAQ: AFH) ("Atlas" or the "Company") today reported its financial results for the second quarter ended June 30, 2013.

Management Comments

Scott D. Wollney, Atlas' President & CEO stated, “In the second quarter of 2013 Atlas successfully built on a number of important first quarter milestones. We have successfully integrated Gateway into the Atlas platform following our acquisition of the company earlier this year. We also continued to grow our core commercial auto business, increased Operating Income, and improved on key operating metrics during the quarter. We are now actively distributing our core products in 40 states plus Washington D.C. (with premium generated in 39) and have further diversified our book of business geographically. At this point, we believe that our Company is poised to benefit from continuing favorable market conditions, particularly in the niche taxi / limo / para-transit sectors that we write. Finally, we expect that the recently announced discounted redemption of outstanding preferred shares will have a favorable impact on our results in future quarters."

Financial and Operational Review

  • Net Income: Atlas generated net income of $1.7 million, or $0.16 per diluted common share, for the three month period ended June 30, 2013. This compares to net income of $130,000 or a loss of $0.01 per diluted common share in the three month period ended June 30, 2012.
  • Purchase and Cancellation of Preferred Shares: On August 1, 2013, Atlas agreed to purchase all outstanding preferred shares that are eligible for redemption, for 90% of liquidation value, or $16.2 million. The below chart outlines the transaction's pro forma impact on earnings per share in the three month period ended June 30, 2013 "as if" the redemption had occurred in the second quarter of 2013:
  (in '000s, except per share values)   Three Month Period Ended June 30, 2013
Actuals   Pro Forma
Basic:  
Net income attributable to Atlas $ 1,701 $ 1,701
Less: Preferred share dividends 225 23
Add: Accretion related to discounted purchase of preferred stock     1,800
Net income attributable to common shareholders 1,476 3,478
Weighted average basic common shares outstanding 8,131,450 8,131,450
Basic earnings per common share $ 0.18 $ 0.43
Diluted:
Weighted average basic common shares outstanding 8,131,450 8,131,450
Add:
Dilutive stock options outstanding 44,161 44,161
Dilutive warrants 252,794 252,794
Preferred shares 2,540,000     254,000
Dilutive average common shares outstanding 10,968,405 8,682,405
Dilutive earnings per common share $ 0.16     $ 0.40
Related to:
Net income attributable to common shareholders $ 0.19
Accretion related to discounted purchase of preferred stock $ 0.21

On a pro forma basis post-redemption, book value per share would have been $6.29, had the transaction occurred in the second quarter.

  • Gross Premium Written: For the three month period ended June 30, 2013, gross premium written was $16.6 million compared to $9.2 million in the three month period ended June 30, 2012, representing a 79.2% increase. In the three month period ended June 30, 2013, gross premium written from commercial automobile was $15.6 million, representing a 90.6% increase relative to the three month period ended June 30, 2012. Of the increase in commercial auto premium written, $2.7 million resulted from the Gateway acquisition, without which the growth would have been 58.1%.
  • Loss and Combined Ratio: The loss ratio relating to the claims incurred in the three month period ended June 30, 2013 was 64.6% compared to 71.6% in the three month period ended June 30, 2012. Atlas' combined ratio improved for the three month period ended June 30, 2013 to 95.0%, compared to 111.5% for the corresponding prior year period. The table below indicates the comparisons of each component of our combined ratio for the periods indicated:
  Three Month Periods Ended     Six Month Periods Ended  
June 30, 2013   June 30, 2012   June 30, 2013   June 30, 2012
Loss ratio 64.6 %   71.6 %   64.6 %   71.3 %
Acquisition cost ratio 13.1 % 18.5 % 13.7 % 17.5 %
Other underwriting expense ratio 17.3 % 21.4 % 18.2 % 20.6 %
Combined ratio 95.0 %   111.5 %   96.5 %   109.4 %
  • Underwriting Results: Underwriting results improved by $1.7 million to $828,000 three month period ended June 30, 2013 compared to a loss of $868,000 in the three month period ended June 30, 2012.
  • Operating Income: Atlas' Operating Income for the three month period ended June 30, 2013 was $1.3 million, or $0.12 per diluted common share, compared to an operating loss of $211,000 in the three month period ended June 30, 2012, or a loss of $0.03 per diluted common share. In both of these periods, substantially all the difference between net income and Operating Income was gain realized on the sale of investments. On a pro forma basis, Operating Income per diluted common share for the three month period ended June 30, 2013 was $0.15, had the preferred share redemption transaction occurred during the second quarter.

Operating Income is an internal performance measure used in the management of the Company's operations. It represents after-tax operational results excluding, as applicable, net realized gains or losses, net impairment charges recognized in earnings and other items. Operating Income should not be viewed as a substitute for U.S. GAAP net income.

Balance Sheet/Investment Overview

  • Book Value: Book value per diluted common share on June 30, 2013 was $6.07, compared to $6.15 at June 30, 2012 and $6.55 at December 31, 2012. Year to date in 2013, book value was reduced relative to December 31, 2012 as follows: a reduction of $0.37 related to dilution from our company's U.S. IPO, a reduction of $0.04 from legal and professional fees related to its acquisition of Gateway, an increase of $0.27 from net income attributable to common shareholders, and a decrease of $0.34 related to the change in unrealized gains and losses. The impact on book value per common share related to the preferred share redemption, which was completed on August 1, 2013, is $0.22 per common share outstanding (the redemption of these shares is expected to result in accretion to book value in this amount in the third quarter).
  • Cash and Invested Assets: Cash and invested assets as of the period ended June 30, 2013 totaled $145.0 million, consisting primarily of fixed income securities.
  • Investment Strategy: Atlas aligns its securities portfolio to support the liabilities and operating cash needs of our insurance subsidiaries, to preserve capital and to generate investment returns. Atlas invests predominantly in corporate and government bonds with relatively short durations that correlate with the payout patterns of Atlas' claims liabilities and other liquidity needs. At June 30, 2013, the Company's average duration on its portfolio was 3.8 years.
  • Investment and Other Income: During the three month period ended June 30, 2013, Atlas reported investment income and other revenues of $945,000, of which $395,000 are realized gains.
  • Investment Yield: The investment income and other revenues generated by the investment portfolio resulted in a 2.6% annualized yield for the three month period ended June 30, 2013, versus 3.2% in the prior period. A portion of this yield relates to capital gains. Excluding the effect of these capital gains the annual investment yield for the year was 1.5%.
  • Impact of Interest Rate Change: Based on Atlas' invested assets in the quarter, a 1% increase or decrease in interest rates would result in an approximate increase or decrease, respectively, to investment income of $104,000. In the quarter ending June 30, 2013, Atlas had $3.9 million of unrealized losses as a result of the impact of rising interest rates on the market value of some of the securities we own. The duration of Atlas' portfolio is well matched to our liquidity needs and the Company expects to hold these assets until maturity. Therefore, Atlas does not expect the near term change in market value of these securities to be realized and anticipates the impact of the unrealized losses to reverse over time as the underlying securities mature.

Conference Call Details

   
Date / Time: Tuesday, August 13, 2013 - 8:30 a.m. ET
Participant Dial-In Numbers: (United States): 877-423-9817
(International): 201-493-6770

To access the call, please dial-in approximately five minutes before the start time and, when asked, provide the operator with passcode "Atlas". Questions will be taken at the end of the call.

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