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Atlas Financial Holdings Announces 2014 Second Quarter Financial Results

Stocks in this article: AFH

Atlas Financial Holdings, Inc. (NASDAQ:AFH) ("Atlas" or the "Company") today reported its financial results for the second quarter ended June 30, 2014.

Management Comments

Scott D. Wollney, Atlas’ President and CEO, stated, “Gross premium written growth in our core markets remained strong at more than 42% during the quarter. Focusing on our target market of small to mid-size operators, our growth rate was 57.1% and we see market conditions pointing to a continued high rate of growth. Our focus on bottom line execution has helped to drive improvements in our loss and expense ratios over the past several quarters resulting in a combined ratio of 91.9% in the second quarter. We are investing in infrastructure to support expected continued growth balancing the advantages of scale with the opportunity to fully benefit from improving market conditions.”

Financial and Operational Review

Net Income: Atlas generated net income of $2.6 million for the three month period ended June 30, 2014. This compares to net income of $1.7 million in the three month period ended June 30, 2013.

Premium Written: For the three month period ended June 30, 2014, gross premium written increased 37.7% to $22.8 million compared to $16.6 million in the three month period ended June 30, 2013. The $6.2 million improvement relative to the second quarter 2013 is attributable to Atlas' continued geographic penetration as a result of the positive response from both new and existing agents and insureds to Atlas' value proposition. Atlas targets primarily owner operators and small fleets within the taxi, limousine and paratransit segments. Our net written premium from these target accounts increased 57.1% in the second quarter of 2014 as compared to the second quarter of 2013.

Geographic Distribution: Atlas reported balanced growth throughout its markets during the second quarter, with no state representing more than 16% of its total gross written premium. The Company’s core products were actively distributed in 40 states plus Washington, D.C., and in 7 of those 40 states Atlas achieved over 100% growth due to continued marketing and underwriting efforts.

Combined Ratio:

Atlas' combined ratio improved for the three month period ended June 30, 2014 to 91.9%, compared to 95.0% for the corresponding prior year period. The table and details below indicates the comparisons of each component of the Company's combined ratio for the periods indicated:

     
Three Month Periods Ended
June 30, 2014   June 30, 2013
Loss ratio 61.9 %   64.6 %
Acquisition cost ratio 14.9 % 13.1 %
Other underwriting expense ratio 15.1 %     17.3 %  
Combined ratio 91.9 %     95.0 %  
  • Loss: The loss ratio relating to claims incurred in the three month period ended June 30, 2014 was 61.9% compared to 64.6% in the three month period ended June 30, 2013. The Company has continued to see incremental opportunities to increase price during the second quarter of 2014. Rate increases implemented in the past eighteen months served as the primary driver of improvement in loss ratio. Atlas leverages data accumulated over its many years spent focusing on our niche target markets to properly model potential risk.
  • Acquisition Costs: Acquisition costs were $3.5 million in the three month period ended June 30, 2014, or 14.9% of net premium earned, as compared to 13.1% in the three month period ended June 30, 2013. The increase in the ratio is primarily attributable to the ceding commissions received in 2013 related to the reinsurance on the run-off workers' compensation program which decreased the 2013 ratio by 1.4%. Geographic distribution of premium and the resulting impact on premium taxes also causes this ratio to vary quarter to quarter.
  • Other Underwriting Expenses: The other underwriting expense ratio was 15.1% in the three month period ended June 30, 2014, compared to 17.3% in the three month period ended June 30, 2013. As a result of continuing premium growth and increasing market opportunities, the Company has begun to hire in advance of expected growth in the second half of 2014 and 2015. Atlas has increased its employee count by 14% during 2014 to ensure that the Company can take advantage of favorable market conditions and continue to deliver its strong value proposition and above average underwriting results. As communicated in the first quarter of 2014, the Company also began accruing for expected management and director incentive compensation. This expense represented 2.2% of the other underwriting expense ratio, or $0.04 per diluted common share, in the three month period ended June 30, 2014.

Underwriting Results: Underwriting results increased to $1.9 million for the three month period ended June 30, 2014, compared to $828,000 the prior year same period.

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. Generally Accepted Accounting Principles (U.S. GAAP) net income. The table below reconciles U.S. GAAP net income to operating income ($ in '000's):

     
Three Month Periods Ended
June 30, 2014   June 30, 2013
U.S. GAAP net income $ 2,559   $ 1,701
Less: Net realized gains 97 395
Less: Other income -     3
Operating Income $ 2,462     $ 1,303

Operating Income: Atlas' Operating Income for the three month period ended June 30, 2014 was $2.5 million compared to $1.3 million in the three month period ended June 30, 2013.

Earnings per share ( "EPS" ): Atlas generated $0.24 per share basic and $0.23 per share diluted for the three month period ended June 30, 2014. This compares to $0.18 per share basic and $0.15 per share diluted in the three month period ended June 30, 2013.

Share Count: In the second quarter, the Company completed the previously announced equity offering. As of June 30, 2014, there were 11,771,586 total common shares outstanding and 37,038 restricted stock units. The following table indicates the weighted average common share amounts for basic and dilutive for the three and six month periods ending June 30, 2014 and June 30, 2013.

         
Three Month Periods Ended   Six Month Periods Ended
June 30, 2014   June 30,2013   June 30, 2014   June 30, 2013
Weighted average common shares - basic 10,597,515   8,131,450 10,051,291   7,591,092
Dilutive potential ordinary shares:
Dilutive stock options 156,124 44,161 143,201 31,719
Dilutive warrants - 288,238 - 237,069
Dilutive shares upon preferred share conversion 254,000   2,540,000   254,000   2,540,000
Weighted average common shares - diluted 11,007,639   11,003,849   10,448,492   10,399,880

Balance Sheet/Investment Overview

Book Value: Book value per common share was $7.96 based on 11,808,624 common shares outstanding at June 30, 2014, compared to $6.54 based on 9,424,734 common shares outstanding at December 31, 2013. Book value changed relative to December 31, 2013 as follows: an increase of $0.90 related to the issuance of 2,161,000 common shares during the second quarter of 2014, an increase of $0.26 related to net income after tax, an increase of $0.15 related to change in net realized gains/losses after tax, an increase of $0.14 related to the change in deferred tax valuation allowance, and a decrease of $0.03 related to share based compensation.

Cash and Invested Assets: Cash and invested assets as of the period ended June 30, 2014 totaled $177.7 million as compared to $139.9 million as at December 31, 2013. The increase was largely due to the Company’s completion of its public offering in May 2014.

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 overall durations that correlate with the payout patterns of Atlas' claims liabilities and other liquidity needs. At June 30, 2014 the Company's contractual duration on its portfolio was 3.7 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 $679,000 for the three month period ended June 30, 2014, as well as $97,000 of realized gains and other income. This resulted in a 1.9% annualized yield for the three month period ended June 30, 2014, compared to 2.6% in the prior year period. The decreases in yield for the three and six month period ended June 30, 2014 is attributable to the common stock offering in May 2014 and increased the Company's cash and cash equivalent balances which are included in the average securities at cost.

Deferred Tax Assets: Atlas carries a $0.66 per share allowance against its deferred tax assets as of June 30, 2014. In recent quarters, the Company has been consistently reducing its valuation allowance against deferred tax assets by an amount equal to the amount of income tax expense generated for the period. The Company will continue this process in the third quarter of 2014. A comprehensive analysis of this policy will take place during the 2014 year-end audit which could result in future reductions or the elimination of the valuation allowance. This reassessment will include but is not limited to continued underwriting profitability, the lack of significant prior year loss reserve development, continuing favorable market conditions, continued positive trend in taxable earnings, and other such indications deemed positive.

Outlook for 2015

Mr. Wollney continued, “We routinely evaluate the size and makeup of the specialty niche markets on which we focus. Based on data collected with an outside data analytics firm, we believe that the number of vehicles in our target markets increased 19% over the past two years. Coupling this growth in market size with the steady pricing improvements we have seen during the same period, we believe that our addressable market has grown approximately 30% from $1.5 billion to nearly $2 billion. Our goal is to progress towards proportionate market share of 20% of this market, always putting a priority on underwriting results over top line growth. We intend to deploy the additional capital raised in our recent secondary offering to facilitate expected growth over the next 12-18 months. Return on equity remains our priority and our objective will always be to deliver better than industry level results based on our specialized focus.”

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