Atlas Financial Lays a Huge Egg-Again

Atlas Financial Holdings (NASDAQ:AFH) has once again surprised with a huge loss reserve taken in the quarter ended 12/31/2018. The reserve has sent the book value of the common shares down from $7.42 to $4.04.

AFH is a specialty insurer insuring taxi cabs, ride sharing vehicles etc.

AFH has a 6.625% baby bond outstanding (NASDAQ:AFHBL) which we have in the Medium Duration Income Portfolio. We had previously had a personal position in the baby bonds, but had exited last year.

It was 9 months ago that we wrote on improving earnings from the company which had followed a previous large loss and we had noted that it took a couple quarter, typically, to begin to have faith in a company and their management–this obviously is not the case with Atlas–their management is “bush league”.

We will not be selling the baby bonds-yet-in the model portfolio, although we may sell 1/2 the position in a week when markets get the news digested.

The earnings release can be found here.

23 thoughts on “Atlas Financial Lays a Huge Egg-Again”

  1. Someone is scooping these up in AH. I just put in limit of $18 and was gone instantaneously. If you want out, sell now.

    Bought a little at $17.65 for a flip and thought I might have made a mistake. Guess not.

    1. I was reviewing the day’s activity and saw the AH quote at $17.50, so quickly sold my position ( only 100 shares ) that I had bought during the regular session for $16.96.

      The only reason I bought was to flip. Selloff seemed to indicate panic and gross overreaction. Small profit is better than no profit. Enough to treat the wife to dinner tonight – unfortunately steak dinners would cost more than that, but we will have a good meal at the local Chinese Restaurant !!

  2. Well, my hat is off to the Underwriters that sold this stink bomb at 6.65%. I don’t know the future of this company but investing in a insurance company with insufficient reserves involves significant risk.

    1. At the time they sold it I thought the risk/reward was dicey–unfortunately we have so much money chasing yields these underwriters are getting away with murder. Of course the company didn’t fess up to their fake financials until last year and even then didn’t fess up to the whole story.

      1. Tim, you are absolutely right. This sold in a frenzy in 2017. The Underwriters took a little breather during rising rates and the December wake up call. They are right back at it now. The Underwriter job is to price things for the company, and with zero regard for investors. My rule is never trust a underwriter. I bet they were glad to get this one out of the office because their eyes were probably watering from the fumes coming off this turd.

  3. Holding the term bond 2022. Lost a lot on paper today, but there comes a point where I may as well ride it out.

  4. “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,” Chief Executive Scott D. Wollney said.

    This quote from the company suggests to me more pain to come. You can manipulate loss reserves for years and hope for a recovery. Looks like this may not make it. It’s a really tiny company too. 60% drop in the common today. Might as well go to Vegas and put $1K on black.

  5. The baby bond matures 2022. Do we think the business can’t survive until then? The fall seems to suggest that but is probably an over-reaction. With the short maturity, I am inclined to hang on unless the debt burden and financial picture are too bleak. Tim, thoughts about that? Others?

    1. I have read the Q4 financial results and must confess that I really don’t know enough about insurance company accounting to be able to interpret. Any of you have conclusions from reading? Thanks.

    2. Unfortunately, i dont know what to think. I followed Grid on this one. I flipped it twice last year with good profits. I have been out for awhile, and frankly forgot about it. I was always concerned about the small market cap, but thought they had some special niche with insurance of taxi cabs, and such. Seems it would rise and fall, and I would capitalize on that.

      I am on the sidelines, and not sure what to think. I won’t be entering this one again. In fact, yesterday I exited my ESGRP and sold my last of those as they entered agreements with Maiden Holdings.

    3. Wilson–this is going to take forever to turnaround. If I owned it I would be out of half of it on any bounce and then I would wait and see. The problem appears to be in the management (or lack thereof). I starting to think that these insurance companies (AmTrust, Maiden Holdings etc) are purely run to enrich the few–with any public holders be damned. I don’t worry about Allstate and the really big folks–but these others I may put on the ‘blacklist’.

    1. Gary–I see that – I would expect a big reaction and then sanity. With a more seasoned company I would say it it on ‘sale’—with this group only God knows where they are going–seems they are out of touch with the business they are running.

      1. Maturity in 2022 is 3 years away, the risk is that of insolvency or default and bankruptcy.

        The price is getting attractive, however, and maybe I will buy just a minimum amount for a flip.

        Watching and waiting. Tomorrow may bring more decline when folks come home and see what transpired.

    2. I must admit i did not expect the baby bond to lose 25%! Are people expecting them to go out of business?

      1. I took the 25% loss. I blame myself. First you have all that insider selling before last years under-reserved surprise. Then you have 3 quarters of solid claw back with management saying new systems are working. Then you have one director buying stock in the summer. Then just before earnings that director resigns (cus ain’t nobody clued him in that his shares would fall by 75%). Then management brings in a new auditor who decides they are under-reserved even more and this cuts the book value almost in half and shareholders equity to what $48 million against $25 million in bonds.

        Then the management thinks cutting and pasting industry charts on rates is what is important to emphasize rather than addressing the massive hole in the company and the steps they are going to take to make sure it doesn’t happen again. Instead we get.

        Question: And you referenced a work by outside parties that will deliver a midyear report. Is that including the sale of the company? Is that part of the thought process there?

        Answer: It’s not an explicit decision in that regard at all, but I think the company and the board want to make sure that we aren’t ruling anything out either. So the scope is as broad, as we referenced in the press release and I reiterated on the call. We want to bring in a number of experts, some that we’ve worked with before, others that we haven’t with the objective of really evaluating all of the assets within the business, the opportunities that we have in front of us given the market conditions, but also take that external and objective view of some of the challenges we’ve been facing also, whether that’s specific to Atlas or it affected everyone in commercial auto. The reality of it is….

        The reality of it is that a small non-diversified company insuring owner-operated vehicles takes on a lot of risk… and management needs to know what the hell they are doing… not hoping some new AI program will help, or some outside consultants will tell them how to run the damn company.

        The share price is too low to sell new shares to create more of a buffer. Who wants to further split up $48m in equity?

        No, the only way forward is to hope they do better and demonstrate again several quarters of claw back. Hopefully a return of some of the reserves and then those baby bond prices will come back. At a price of $17 the YTM is 21% so someone other than I might want to take the risk for that potential. But as I told GrayhawkAZ when you sell premium through options you have many levers you can pull but with bonds you’re just stuck… its you against time… which isn’t so bad until you discover what the other-side has been doing with the time you sold ’em.

    3. I couldn’t resist. In order to stay awake I picked up a dab @18.45 just to see if it bounces in a couple of days.

      1. . . . and a couple more dabs as it continues down. I was just looking for a quick steak dinner but I just might pay for my new ergonomic desk chair (since I’m spending so much time in front of the computer these days ;-).

        1. Mikeo, you cant put a price tag on comfort…Buy it anyways! :). I cant play in this sandbox. Before I hit the buy button, I try to ask myself it this thing drops a buck after I buy would I still be comfortable holding. I cant say yes here, because I dont have any type of financial understanding of this company.

          1. I understand your reticence Grid. For me, this isn’t about the company’s financial picture (Horror of HORRORS!), its about the over-reaction of sellers and the time it takes for them to realize the world is not ending. Then it is just scalping a buck or two as it climbs out of the pit. This isn’t my grocery money BTW, and if I don’t sell until x-div in April I’ll add $0.41/share to my pot.

            I guess I can sleep at night because I’m an x-daytrader and x-crypto-currency trader. That stuff gives me the sweats now, that’s why I’m x-both.

            1. Mikeo, I bet your strategy pays off 95% of the time which more than makes up for any that dont. I would be the one that would somehow manage to buy the 5% ones all the time I am sure! :)..You can calmly wait and let it play out..Me it would be…Get out its going bankrupt. 🙂 .But I did make a sympathy trade with you. All State is an insurer, lol… And I bought 1500 of ALL-E knowing it is living on for another divi. There is a ZERO percent chance this trades at par on exD date.
              ALL-D is in exact same boat as ALL-E yet E could be bought under par plus divi, while D is 15 cents higher than par plus divi.. Somehow I dont think I will make as much money off this as you will yours. Im willing to scrap nickels off the road as long as its 6.62% and Baa2 rated. Im such a daring investor. 🙂
              I appreciate the fellow poster tipping me off. This is in my running lane.

                1. Geo, I am worried this may be a dry hole. 2Whiteroses found out the call notice on last issuance was sent 3 days after divi declaration. Though it was all done earlier in cycle than this one. So we wont be in the clear until Friday. Oddly though the D series keeps trading about a dime above par plus divi. This will get called I am sure. I was just trying to sneak a divi payment in.

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