Atlas Financial Holdings Announces Unaudited Fourth Quarter 2018 Financial Results

Company to Hold Conference Call on Monday, March 4, 2019 at 5:00 p.m.
ET

Fourth Quarter 2018 Financial Performance Summary:

  • Gross premiums written were $57.7 million for the three months ended
    December 31, 2018 compared to $54.2 million for the three months ended
    December 31, 2017.
  • Total revenue was $52.1 million for the three months ended December
    31, 2018, a decrease of 11.7% from $59.0 million for the three months
    ended December 31, 2017.
  • Underwriting loss was $39.6 million in fourth quarter 2018 compared to
    $69.1 million in fourth quarter 2017.
  • The combined ratio was 175.5% in fourth quarter 2018 compared to
    220.3% in fourth quarter 2017.
  • Net loss was $53.6 million, or $4.47 loss per common share diluted, in
    fourth quarter 2018 compared to a net loss of $54.3 million, or $4.48
    loss per common share diluted, in fourth quarter 2017.
  • Annualized return on equity was a negative 250.3% in fourth quarter
    2018 compared to negative 184.8% in fourth quarter 2017.

Full Year 2018 Financial Performance Summary:

  • Gross premiums written were $286.6 million in 2018, an increase of
    3.9% from $276.0 million in 2017.
  • In-force premium was $286.1 million as of December 31, 2018, an
    increase of $17.6 million from $268.5 million as of December 31, 2017.
  • Total revenue was $221.8 million in 2018, a decrease of 0.1% from
    $222.0 million in 2017.
  • Underwriting loss was $21.2 million in 2018 compared to $48.5 million
    in 2017.
  • The combined ratio was 109.8% in 2018 compared to 122.5% in 2017.
  • Net loss was $36.9 million, or $3.08 loss per common share diluted, in
    2018 compared to a net loss of $38.8 million, or $3.22 loss per common
    share diluted, in 2017, representing an increase in earnings per
    common share diluted of $0.14.
  • Book value per common share decreased $3.34 to $4.08 as of December
    31, 2018 from $7.42 as of December 31, 2017. The decrease included a
    $3.06 decrease related to change in reserve estimates, a $0.10
    decrease related to goodwill impairment and $1.68 change related to
    establishment of a valuation allowance against deferred tax assets.
  • Return on equity was a negative 46.1% in 2018 as compared to negative
    35.6% in 2017.

CHICAGO–(BUSINESS WIRE)–Atlas Financial Holdings, Inc. (NASDAQ: AFH) (“Atlas” or the
“Company”)
today reported its unaudited financial results for the
fourth quarter and year ended December 31, 2018.

Management Comments

Scott D. Wollney, Atlas’ President and CEO, stated, “Our financial
results this year were impacted by our decision to make changes in our
claim reserve estimates. Actuarial work conducted in connection with
year-end indicated a need to increase reserve estimates for unpaid
losses due primarily to bodily injury claims from accident years 2016
and prior. These claims are showing higher severity and have been open
for longer periods than we had estimated. Specifically, we strengthened
reserves to account for the possibility of higher costs for the tail on
these prior accident years. While our use of predictive analytics in
underwriting and claims is having a positive impact on claim closures,
we are still addressing historic challenges affecting commercial
automobile insurance generally and in our book of business specifically.
However, we believe that claim closure data for more recent accident
years demonstrates the fundamental efficacy of our predictive
model-driven processes.”

Current Actions

To further strengthen its processes and review its capital allocation
and opportunities, the Company is engaging industry experts with broad
knowledge of insurance finance, analytics, claims-handling, reserve
estimation, financial risk management, and capital efficiency.
Management and the Company’s Board of Directors will examine the
conclusions and recommendations of this work and report the results by
mid-year.

Financial and Operational Review

Premiums Written: Gross premiums written was $57.7 million for
the three months ended December 31, 2018 compared to $54.2 million for
the three months ended December 31, 2017.

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
months ended December 31, 2017, Atlas experienced growth in gross
premiums written in its core business in 24 states for the three months
ended December 31, 2018. 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 will reduce exposure to
those that are more challenging.

Combined Ratio: Atlas’ combined ratio decreased for the three
months ended December 31, 2018 to 175.5%, compared to 220.3% in the
prior year period.

  • Loss Ratio: The loss ratio relating to claims incurred for the
    three months ended December 31, 2018 was 142.5%, compared to 189.5%
    for the three months ended December 31, 2017. The loss ratio decreased
    over the prior year period primarily as the result of disciplined risk
    selection and improved pricing partially offset by the strengthening
    of reserves on prior accident years.
  • While the Company’s year-to-date loss ratio for 2018 is carried higher
    than the prior year, incremental loss ratio improvement is expected to
    generally trend in a positive direction based on prior year and
    potential future pricing, underwriting and claims activities. 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 and experience
    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 customers and stakeholders.
  • Underwriting Expense Ratio: The underwriting expense ratio for
    the three months ended December 31, 2018 was 33.0% compared to 30.8%
    for the three months ended December 31, 2017. The ratio increased
    mainly because of increases in maintenance costs related to Atlas’
    enterprise policy management software, bank charges, bad debt,
    depreciation and amortization, partially offset by decreases in DPAC
    amortization, boards, bureaus and association expenses and insurance
    department assessments during the quarter. As previously indicated,
    due to seasonality and the timing of certain expenses, the Company
    believes the full year expense ratio is a more indicative measure of
    efficiency that the ratio in any given quarter. Atlas remains focused
    on continually enhancing its value proposition through re-investment
    into research and development to ensure that its organization is able
    to continue leading the industry in terms of existing and developing
    niche markets on which Atlas focuses.

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):

         

Three months ended
December 31,

Year ended December 31,

2018
(unaudited)

2017

2018
(unaudited)

2017
Loss Ratio:
Current accident year 33.6 % 59.2 % 54.4 % 59.5 %
Prior accident years 108.9   130.3   26.8   35.0  
Loss Ratio 142.5 189.5 81.2 94.5
Underwriting Expense Ratio:
Acquisition cost ratio 14.8 14.5 12.0 12.9
Other underwriting expense ratio 17.5 15.2 16.3 14.2
Deferred policy acquisition cost (“DPAC”) amortization ratio 0.1   0.6   (0.1 ) 0.4  
Underwriting expense ratio before expenses related to stock purchase
agreements and share-based compensation expenses
32.4 30.3 28.2 27.5
Expenses recovered related to stock purchase agreement ratio (0.2 )
Share-based compensation expense ratio 0.6   0.5   0.6   0.5  
Underwriting expense ratio 33.0   30.8   28.6   28.0  
Total combined ratio 175.5 % 220.3 % 109.8 % 122.5 %
 

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:

         

Three months ended
December 31,

Year ended December 31,

2018
(unaudited)

2017

2018
(unaudited)

2017
Acquisition costs 14.2 % 16.6 % 15.0 % 15.4 %
Other insurance general and administrative expenses 13.7 13.7 13.8 12.7
DPAC amortization 0.1 0.6 (0.1 ) 0.3
Expenses recovered related to stock purchase agreements (0.2 )
Share-based compensation expense 0.5   0.4   0.5   0.5  
Total underwriting expense ratio 28.5 % 31.3 % 29.0 % 28.9 %
 

Underwriting Results: Underwriting loss was $39.6 million for the
three months ended December 31, 2018 compared to $69.1 million in the
same period of the prior year.

Net Loss before Income Taxes: Net loss before income taxes was
$42.1 million for the three months ended December 31, 2018 compared to
$68.0 million in the same period of the prior year.

Income Taxes: Atlas recognized a net tax expense of $11.5 million
for the three months ended December 31, 2018, which included an
establishment of a valuation allowance against deferred tax assets, as
compared to a tax benefit of $13.7 million in the same period of the
prior year.

Net Loss: Atlas reported net loss of $53.6 million for the three
months ended December 31, 2018 compared to a net loss of $54.3 million
in the same period of the prior year.

Earnings per common share (“EPS”): Atlas generated $4.47 loss per
common share diluted for the three months ended December 31, 2018
compared to $4.48 loss per common share diluted in the same period of
the prior year.

Share Count: The following chart illustrates Atlas’ potential
dilutive common shares for the three months ended December 31, 2018 and
2017:

       
Three months ended December 31,
2018 (unaudited) 2017
Weighted average common shares outstanding 11,944,573 12,122,334
Dilutive average common shares outstanding 11,944,573 12,122,334
 

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. For the three months ended December 31, 2018 and
2017, all exercisable stock options were deemed to be anti-dilutive.

Balance Sheet/Investment Overview

Book Value: Book value per common share was $4.08 based on
11,961,902 common shares outstanding as of December 31, 2018, compared
to $7.42 based on 12,178,857 common shares outstanding as of December
31, 2017. Book value per common share of $4.08 decreased by $3.34
relative to December 31, 2017 as follows:

   
$

1.73

 

increase related to net income after tax and before items indicated
below;
(3.06 ) decrease related to the loss reserve estimate change;
(0.10 ) decrease related to goodwill impairment; and

1.68

decrease related to valuation allowance against deferred tax assets
related to net operating losses;
(0.01 )

decrease related to the loss from change in fair value of equity
securities;

0.04 increase related to the change in net realized investment gains
after tax;
(0.23 ) decrease related to the change in unrealized gains/losses after tax;
(0.09 )

decrease related to share repurchases; and

0.06   increase related to share-based compensation.
$ (3.34 ) total decrease from December 31, 2017 book value per
common share
 

Cash and Invested Assets: Cash and invested assets as of December
31, 2018 totaled $200.6 million as compared to $243.5 million as of
December 31, 2017.

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 its
portfolio and are generally opportunities identified through the
Company’s specialty focus or by leveraging the resources of its business
partners. As of December 31, 2018, the average life on the Company’s
portfolio was 4.8 years with a duration of 3.8 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. During fourth quarter 2018, the
Company took steps to reduce its exposure to other than fixed income
investments. The Company plans to continue to reduce its exposure to
other than fixed income investments again in 2019.

Net Investment Losses / Net Investment Realized Gains: Atlas
generated net investment losses of $554,000 for the quarter ended
December 31, 2018 and net investment gains of $1.6 million for the
quarter ended December 31, 2017. Atlas had $72,000 of net realized gains
and $128,000 of net realized losses for the quarters ended December 31,
2018 and 2017, respectively. The decrease in net investment income
resulted from lower returns on equity method investments and less
interest income from collateral loans due to loan pay-offs, partially
offset by higher interest income on our fixed income securities
portfolio. The gross annualized investment yield on the Company’s fixed
income securities was 2.7% and 2.4% for the quarters ended December 31,
2018 and 2017, respectively. The increase in the gross annualized yield
was due to management’s decision to use the proceeds from the maturity
and sales of certain fixed income securities to purchase fixed income
securities with higher yields. The gross annualized investment yield on
the Company’s cash and cash equivalents was 0.7% and 0.3% for the
quarters ended December 31, 2018 and 2017, respectively. The increase in
the gross annualized yield on our cash investments was due to higher
interest rates on certain accounts and higher balances in accounts
earning greater interest. Net realized gains for the quarter ended
December 31, 2018 were primarily due to gains from the sale of equity
securities, partially offset by losses from the sale of fixed income
securities.

Beginning January 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. Atlas
recorded a loss of $101,000 through net income for the quarter ended
December 31, 2018 related to the changes in unrealized amounts on
equities held at fair value.

Outlook for 2019

Mr. Wollney concluded, “We believe our thesis and foundation for
long-term growth and underwriting profitability remain valid. We will be
re-evaluating our traditional business with a focus on reducing loss
ratio volatility while exploring ways to maximize new opportunities
we’re cultivating with transportation network companies and related
businesses. We also believe that increased deployment of in-vehicle
technologies coupled with our specialty focus and innovative processes
will overcome the challenges facing our business and the auto insurance
industry in general.”

     

Conference Call Details

 
Date/Time: Monday, March 4, 2019 – 5:00 p.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”.

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: : https://78449.themediaframe.com/dataconf/productusers/afh/mediaframe/28989/indexl.html.
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., and optOn Insurance Agency 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

All financial and operating information contained in this press release
for the fourth quarter and year ended December 31, 2018 is based on
unaudited results which are subject to change upon completion of the
audited financial statements for the year ended December 31, 2018.
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., UBI Holdings Inc., DriveOn Digital IP Inc. and
optOn Insurance Agency Inc. Additional information about Atlas,
including a copy of Atlas’ 2018 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 2018 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.

 

ATLAS FINANCIAL HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF (LOSS) INCOME AND
COMPREHENSIVE (LOSS) INCOME

($ in ‘000s, except for share and per share data)

           

Three months ended
December 31,

  Year ended December 31,
Condensed Consolidated Statements of (Loss) Income 2018   2017   2018   2017
(unaudited)     (unaudited)  
Net premiums earned $ 52,506 $ 57,431 $ 218,218 $ 215,771
Net investment income (554 ) 1,586 2,647 4,897
Loss from change in fair value of equity securities (101 ) (198 )
Net realized gains (losses) 72 (128 ) 573 872
Other income 160     103     526     435  
Total revenue 52,083 58,992 221,766 221,975
Net claims incurred 74,835 108,846 177,232 203,873
Acquisition costs 7,758 8,299 26,115 27,885
Other underwriting expenses 9,463 9,270 36,225 32,140
Amortization of intangible assets 98 98 390 390
Goodwill impairment loss 1,530 1,530
Interest expense 488 461 1,869 1,840
Expenses recovered pursuant to stock purchase agreement         (520 )    
Total expenses 94,172     126,974     242,841     266,128  
Loss from operations before income taxes (42,089 ) (67,982 ) (21,075 ) (44,153 )
Income tax expense (benefit) 11,507     (13,685 )   15,811     (5,343 )
Net loss attributable to common shareholders $ (53,596 )   $ (54,297 )   $ (36,886 )   $ (38,810 )
 
Basic weighted average common shares outstanding 11,944,573 12,122,334 11,992,808 12,064,880
Earnings per common share, basic $ (4.47 ) $ (4.48 ) $ (3.08 ) $ (3.22 )
Diluted weighted average common shares outstanding 11,944,573 12,122,334 11,992,808 12,064,880
Earnings per common share, diluted $ (4.47 ) $ (4.48 ) $ (3.08 ) $ (3.22 )
 
Condensed Consolidated Statements of Comprehensive (Loss) Income
 
Net loss $ (53,596 ) $ (54,297 ) $ (36,886 ) $ (38,810 )
 
Other comprehensive income (loss:)
Changes in net unrealized investment gains (losses) 930 (789 ) (3,078 ) 437
Reclassification to net income 93 134 284 (49 )
Effect of income taxes (802 )   229         (136 )
Other comprehensive income (loss) 221     (426 )   (2,794 )   252  
Total comprehensive loss $ (53,375 )   $ (54,723 )   $ (39,680 )   $ (38,558 )
 
 

ATLAS FINANCIAL HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

($ in ‘000s, except for share and per share data)

           
December 31, 2018   December 31, 2017

Assets

(unaudited)  
Investments
Fixed income securities, available for sale, at fair value
(amortized cost $133,213 and $158,411)
$ 129,991 $ 157,984
Equity securities, at fair value (cost $5,650 and $7,969) 5,929 8,446
Short-term investments 4,745
Other investments 25,043     31,438  
Total Investments 165,708 197,868
Cash and cash equivalents 34,902 45,615
Accrued investment income 749 1,248
Premiums receivable (net of allowance of $5,115 and $3,418) 88,596 79,664
Reinsurance recoverables on amounts paid 12,388 7,982
Reinsurance recoverables on amounts unpaid 57,001 53,402
Prepaid reinsurance premiums 36,898 12,878
Deferred policy acquisition costs 7,309 14,797
Deferred tax asset, net 16,985
Goodwill, net 1,196 2,726
Intangible assets, net 3,755 4,145
Property and equipment, net 31,363 24,439
Other assets 19,899     20,754  
Total Assets $ 459,764     $ 482,503  
 

Liabilities

Claims liabilities $ 218,296 $ 211,648
Unearned premium reserves 134,040 128,043
Due to reinsurers 15,849 8,411
Notes payable, net 24,255 24,031
Other liabilities and accrued expenses 18,499     19,725  
Total Liabilities $ 410,939     $ 391,858  
 

Shareholders’ Equity

Ordinary voting common shares, $0.003 par value, 266,666,667 shares
authorized, shares issued: December 31, 2018 – 12,192,475 and
December 31, 2017 – 12,164,041; shares outstanding: December 31,
2018 – 11,936,970 and December 31, 2017 – 12,164,041
$ 36 $ 36
Restricted voting common shares, $0.003 par value, 33,333,334 shares
authorized, shares issued and outstanding: December 31, 2018 and
December 31, 2017 – 0
Additional paid-in capital 202,298 201,105
Treasury stock, at cost: December 31, 2018 – 255,505 and December
31, 2017 – 0 shares of ordinary voting common shares
(3,000 )
Retained deficit (147,377 ) (110,535 )
Accumulated other comprehensive (loss) income, net of tax (3,132 )   39  
Total Shareholders’ Equity 48,825     90,645  
Total Liabilities and Shareholders’ Equity $ 459,764     $ 482,503  
 

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.

Contacts

At the Company
Atlas Financial Holdings, Inc.
Scott Wollney,
CEO
847-700-8600
swollney@atlas-fin.com
www.atlas-fin.com

Investor Relations
The Equity Group Inc.
Adam Prior, Senior
Vice President
212-836-9606
aprior@equityny.com
www.theequitygroup.com

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