ATLAS FINANCIAL HOLDINGS, INC. - 10-Q - Management's Discussion and Analysis (MD&A) of Financial Condition and Results of Operations

(Edgar Glimpses Via Acquire Media NewsEdge) Section Description Page I. Overview 19 II. Consolidated Performance 23 III. Application of Critical Accounting Estimates 24 IV. Operating Results 26 V. Financial Condition 32 18-------------------------------------------------------------------------------- Table of Contents Forward-looking statements This report contains "forward-looking statements," within the meaning of the Private Securities Litigation Reform Act of 1995, which may include, but are not limited to, statements with respect to estimates of future expenses, revenue and profitability; trends affecting financial condition and results of operations; the availability and terms of additional capital; dependence on key suppliers, and other strategic partners; industry trends and the competitive and regulatory environment; the impact of losing one or more senior executives or failing to attract additional key personnel; and other factors referenced in this report.

Often, but not always, forward-looking statements can be identified by the use of words such as "plans", "expects", "is expected", "budget", "scheduled", "estimates", "forecasts", "intends", "anticipates", or "believes" or variations (including negative variations) of such words and phrases, or state that certain actions, events or results "may", "could", "would", "might" or "will" be taken, occur or be achieved. Forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of Atlas to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Such factors include, among others, general business, economic, competitive, political, regulatory and social uncertainties.

Although Atlas has attempted to identify important factors that could cause actual actions, events or results to differ materially from those described in forward-looking statements, there may be other factors that cause actions, events or results to differ from those anticipated, estimated or intended.

Forward-looking statements contained herein are made as of the date of this report and Atlas disclaims any obligation to update any forward-looking statements, whether as a result of new information, future events or results, or otherwise. There can be no assurance that forward-looking statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements. Accordingly, readers should not place undue reliance on forward-looking statements due to the inherent uncertainty in them.

Overview We are a financial services holding company incorporated under the laws of the Cayman Islands. Our core business is the underwriting of commercial automobile insurance policies, focusing on the "light" commercial automobile sector, which is carried out through our insurance subsidiaries, American Country Insurance Company, or American Country, and American Service Insurance Company, Inc., or American Service, together with American Country, which we refer to as our "insurance subsidiaries". This sector includes taxi cabs, non-emergency para-transit, limousine, livery and business auto. Our goal is to always be the preferred specialty commercial transportation insurer in any geographic areas where our value proposition delivers benefit to all stakeholders. We are licensed to write property and casualty, or P&C, insurance in 47 states in the United States. The insurance subsidiaries distribute their products through a network of independent retail agents, and are actively writing insurance in 31 states as of September 30, 2012.

Our core business is the underwriting of commercial automobile insurance policies, focusing on the "light" commercial automobile sector. The "light" commercial automobile policies we underwrite provide coverage for light weight commercial vehicles typically with the minimum limits prescribed by statute, municipal or other regulatory requirements. The majority of our policyholders are individual owner or small fleet operators.

Over the past two years, we have disposed of non-core assets and placed into run-off certain noncore lines of business previously written by the insurance subsidiaries. Our focus going forward is the underwriting of commercial automobile insurance in the U.S.

Substantially all of our new premiums written are in "light" commercial automobile lines of business.

Commercial Automobile The Company's primary target market is made up of taxi, limousine and paratransit operators with one to ten units. In certain jurisdictions like Chicago and New York, we have also been successful working with larger operators who retain a meaningful amount of their own risk of loss through self-insurance or self-funded captive insurance entity arrangements. In these cases, we provide support in the areas of day to day policy administration and claims handling consistent with the value proposition we offer to all of our insureds, generally on a fee for service basis. We may also provide excess coverage above the levels of risk retained by the insureds where a better than average loss ratio is expected. Through these arrangements, we are able to effectively utilize the significant specialized operating infrastructure we maintain to generate revenue from business segments that may otherwise be more price sensitive in the current market environment.

The "light" commercial automobile sector is a subset of the historically profitable commercial automobile insurance industry segment. Commercial automobile insurance has outperformed the overall P&C industry in each of the past ten years based on data compiled by the NAIC. A recent survey by A.M. Best & Company estimates the total market for commercial automobile liability insurance to be $24 billion. The size of the commercial automobile insurance market can be affected significantly by many factors, such as the underwriting capacity and underwriting criteria of automobile insurance carriers and general economic 19-------------------------------------------------------------------------------- Table of Contents conditions. Historically, the commercial automobile insurance market has been characterized by periods of price competition and excess capacity followed by periods of higher premium rates and shortages of underwriting capacity.

We believe that there is a positive correlation between the economy and commercial automobile insurance in general. Operators of "light" commercial automobiles may be less likely than other business segments within the commercial automobile insurance market to take vehicles out of service as their businesses and business reputations rely heavily on availability. With respect to certain business lines such as the taxi line, there are also other factors such as the cost and limited supply of medallions which may discourage a policyholder from taking vehicles out of service in the face of reduced demand for the use of the vehicle.

Non-Standard Automobile Non-standard automobile insurance is principally provided to individuals who do not qualify for standard automobile insurance coverage because of their payment history, driving record, place of residence, age, vehicle type or other factors.

Such drivers typically represent higher than normal risks and pay higher insurance rates for comparable coverage.

Consistent with Atlas' focus on commercial automobile insurance, Atlas has transitioned away from the non-standard auto line in 2012. Atlas ceased renewals of policies of this type in 2011, allowing surplus and resources to be devoted to the expected growth of the commercial automobile business. The negative written premium within the non-standard auto line reflects policies canceled mid-term.

Other This line of business is primarily comprised of Atlas' surety business. Our surety program primarily consists of U.S. Customs bonds. We engage a former affiliate Avalon Risk Management to help coordinate marketing, customer service and claim handling for the surety bonds written. This program is 100% reinsured to an unrelated third party.

Competitive Strengths Our value proposition is driven by our competitive strengths, which include the following: Focus on niche commercial insurance business. We target niche markets that support adequate pricing and believe we are able to adapt to changing market needs ahead of our competitors through our strategic commitment and increasing scale. We develop and deliver superior specialty commercial automobile insurance products priced to meet our customers' needs and generate consistent underwriting profit for our insurance subsidiaries. We have experienced a favorable trend in loss ratios in 2012 attributable to the increased composition of commercial auto as a percentage of the total written premium. We expect the loss ratio to continue decreasing as we complete the transition away from non-standard automobile insurance and other non-core lines of business.

There are a limited number of competitors specializing in these lines of business. Management believes a strong value proposition is very important to attract new business and can result in desirable retention levels as policies renew on an annual basis. There are also a relatively limited number of agents who specialize in these lines of business. As a result, strategic agent relationships are important to ensure efficient distribution.

Strong market presence with recognized brands and long-standing distribution relationships. American Country and American Service have a long heritage as insurers of taxi, livery and para-transit businesses. Both of the insurance subsidiaries have strong brand recognition and long-standing distribution relationships in our target markets. Through regular interaction with our retail producers, we strive to thoroughly understand each of the markets we serve in order to deliver strategically priced products to the right market at the right time.

Sophisticated underwriting and claims handling expertise. Atlas has extensive experience and expertise with respect to underwriting and claims management in our specialty area of insurance. Our well-developed underwriting and claims infrastructure includes an extensive data repository, proprietary technologies, deep market knowledge and established market relationships. Analysis of the substantial data available through our operating companies drives our product and pricing decisions. Our underwriting and claims handling expertise provides enhanced risk selection, high quality service to our customers and greater control over claims expenses. We are committed to maintaining this underwriting and claims handling expertise as a core competency as our volume of business increases.

Scalable operations positioned for growth. Significant progress has also been made in aligning our cost base to our expected revenue base going forward. The core functions of the insurance subsidiaries were integrated into a common operating platform. We believe that both insurance subsidiaries are well positioned to begin returning to the volume of premium they wrote in the recent past with better than industry level profitability from the efficient operating infrastructure honed in 2011.

20-------------------------------------------------------------------------------- Table of Contents Experienced management team. We have a talented and experienced management team led by our President and Chief Executive Officer, Scott Wollney, who has more than 21 years of experience in the property and casualty insurance industry. Our senior management team has worked in the property and casualty industry for an average of 21 years and with the insurance subsidiaries, directly or indirectly, for an average of 12 years.

Strategy We seek to deploy our capital to maximize the return for our shareholders, either by investing in growing our operations or by pursuing other capital initiatives, depending upon insurance and capital market conditions. We focus on our key strengths and seek to expand our geographic footprint and products only to the extent these activities support our vision and mission. We will identify and prioritize market expansion opportunities based on the comparative strength of our value proposition relative to competitors, the market opportunity and the legal and regulatory environment.

We intend to continue to grow profitably by undertaking the following: Re-establish legacy distribution relationships. We are focused on re-establishing relationships with independent agents that have been our distribution partners in the past. We seek to develop and maintain strategic distribution relationships with a relatively small number of independent agents, with substantial market presence, in each state in which we currently operate.

We expect to continue to increase the distribution of our core products in the 31 states where we are actively writing insurance and re-capture insurance premium historically written by the insurance subsidiaries.

Expand our market presence. We are committed continuing to diversify geographically by leveraging our experience, historical data and market research to expand our business in previously untapped geographic markets. Utilizing our established brands and market relationships we have made significant inroads in new states where we had no presence in 2011. We will continue to expand into additional states where we are licensed, but not currently active, and states where we are not currently licensed to the extent that our market expansion criteria is met in a given state.

Acquire complementary books of business and insurance companies. We plan to opportunistically pursue acquisitions of complementary books of business and insurance companies provided market conditions support this activity. We will evaluate each acquisition opportunity based on its expected economic contribution to our results and support of our market expansion initiatives.

Revenues We derive our revenues primarily from premiums from our insurance policies and income from our investment portfolio. Our underwriting approach is to price our products to generate consistent underwriting profit for the insurance companies we own. As with all P&C insurance companies, the impact of price changes is reflected in our financial results over time. Price changes on our in-force policies occur as they are renewed, which generally takes twelve months for our entire book of business and up to an additional twelve months to earn a full year of premium at the renewal rate.

We approach investment and capital management with the intention of supporting insurance operations by providing a stable source of income to supplement underwriting income. The goals of our investment policy are to protect capital while optimizing investment income and capital appreciation and maintaining appropriate liquidity. We follow a formal investment policy and the Board reviews the portfolio performance at least quarterly for compliance with the established guidelines.

Expenses Net claims incurred expenses are a function of the amount and type of insurance contracts we write and of the loss experience of the underlying risks. We record net claims incurred based on an actuarial analysis of the estimated losses we expect to be reported on contracts written. We seek to establish case reserves at the maximum probable exposure based on our historical claims experience. Our ability to estimate net claims incurred accurately at the time of pricing our contracts is a critical factor in determining our profitability. The amount reported under net claims incurred in any period includes payments in the period net of the change in the value of the reserves for net claims incurred between the beginning and the end of the period.

Commissions and other underwriting expenses consist principally of brokerage and agent commissions and to a lesser extent premium taxes. The brokerage and agent commissions are reduced by ceding commissions received from assuming reinsurers that represent a percentage of the premiums on insurance policies and reinsurance contracts written and vary depending upon the amount and types of contracts written.

21-------------------------------------------------------------------------------- Table of Contents Other operating and general expenses consist primarily of personnel expenses (including salaries, benefits and certain costs associated with awards under our equity compensation plans, such as stock compensation expense) and other general operating expenses. Our personnel expenses are primarily fixed in nature and do not vary with the amount of premiums written.

Corporate Information The address of our registered office is Cricket Square, Hutchins Drive, PO Box 2681, Grand Cayman, KY1-1111, Cayman Islands. Our operating headquarters are located at 150 Northwest Point Boulevard, Elk Grove Village, Illinois 60007, USA. We maintain a website at http://www.atlas-fin.com. Information on our website or any other website does not constitute a part of this document.

In this discussion and analysis, the term "common share" refers to the summation of restricted voting shares and ordinary shares when used to describe loss or book value per common share.

22-------------------------------------------------------------------------------- Table of Contents II. CONSOLIDATED PERFORMANCE Third Quarter 2012 Highlights (Comparisons are to third quarter 2011 unless otherwise noted): • Gross premium written increased by 113.7%, which included an increase of 313.4% in our core commercial auto business.

• We actively distributed our core products in 31 states during the three month period ended September 30, 2012.

• The combined ratio improved by 22.1% to 97.6%, which represents the first quarter under 100% since our inception.

• Underwriting results improved by $2.0 million and returned to underwriting probability.

• Net income for the three month period ended September 30, 2012 was $1.7 million.

• Basic and diluted earnings per ordinary common share was $0.08, net of accounting treatment for preferred shares.

• Book value per diluted common share on September 30, 2012 was $2.15, compared to $2.05 at June 30, 2012.

• In October, Atlas announced the acquisition of Camelot Services, Inc. and its sole insurance subsidiary, Gateway Insurance Company ("Gateway") from Hendricks Holding Company, Inc. for a purchase price of approximately $23 million.

The following financial data is derived from Atlas' unaudited condensed consolidated financial statements for the for the three and nine month periods ended September 30, 2012 and September 30, 2011: Selected financial information (in '000s) Three Month Periods Ended Nine Month Periods Ended September 30, 2012 September 30, 2011 September 30, 2012 September 30, 2011 Gross premium written $ 23,353 $ 10,928 $ 44,349 $ 32,951 Net premium earned 10,934 8,797 26,795 26,668 Losses on claims 7,165 6,984 18,477 20,596 Acquisition costs 1,813 1,720 4,582 5,343 Other underwriting expenses 1,692 1,822 4,959 5,642 Net underwriting income/(loss) 264 (1,729 ) (1,222 ) (4,913 ) Net investment and other income 1,393 2,795 3,144 5,468 Net income before tax 1,657 1,066 1,922 555 Income tax expense - - - - Net income $ 1,657 $ 1,066 $ 1,922 $ 555 Key Financial Ratios: Loss ratio 65.5 % 79.4 % 69.0 % 77.2 % Acquisition cost ratio 16.6 % 19.6 % 17.1 % 20.0 % Other underwriting expense ratio 15.5 % 20.7 % 18.5 % 21.2 % Combined ratio 97.6 % 119.7 % 104.6 % 118.4 % Return on equity (annualized) 11.4 % 7.2 % 4.4 % 1.2 % Earnings/(loss) per common share, basic and diluted $ 0.08 $ 0.05 $ 0.07 $ - Book value per common share, basic and diluted $ 2.15 $ 2.19 $ 2.15 $ 2.19 Third Quarter 2012: Atlas' combined ratio for the three month period ended September 30, 2012 was 97.6%, compared to 119.7% for the three month period ended September 30, 2011 and 111.5% for the three month period ended June 30, 2012.

As planned, core commercial automobile lines continue to be the most significant component of Atlas' gross premium written as a result of the strategic focus on these core lines of business coupled with positive response from new and existing agents. Gross premium written related to these core commercial lines increased by 313.4% for the three month period ended September 30, 2012 as compared to three month period ended September 30, 2011. As a result, the overall loss ratio for the three month period ended September 30, 2012 improved to 65.5% compared to 79.4% in the three month period ended September 30, 2011 and 71.6% for the three month period ended June 30, 2012.

Net investment and other income generated $1.4 million of income for the three month period ended September 30, 2012, of which $779,000 are realized gains.

This resulted in a 4.6% annualized yield for the three month period ended September 30, 2012.

Overall, Atlas generated net income of $1.7 million for the three month period ended September 30, 2012. After taking the impact of the liquidation preference of the preferred shares into consideration, basic and diluted earnings per common share in the three month period ended September 30, 2012 was $0.08. This compares to net income of $1.1 million or earnings of $0.05 per common 23-------------------------------------------------------------------------------- Table of Contents share diluted in the three month period ended September 30, 2011 and income of $130,000 or a loss per share of $0.00 per common share diluted in the three month period ended June 30, 2012.

Year to Date September 30, 2012: Atlas' combined ratio for the nine month period ended September 30, 2012 was 104.6%, compared to 118.4% for the nine month period ended September 30, 2011.

This improvement in the combined ratio was mostly attributable to the loss ratio reduction, from 77.2% to 69.0%, as a result of the exiting of the non-standard automobile lines. Our commercial automobile lines of business grew 183.0% during the nine month period ended September 30, 2012 versus the nine month period ended September 30, 2011.

Investment performance and other income generated $3.1 million of income for the nine month period ended September 30, 2012, of which $1.1 million are realized gains. This resulted in a 3.2% annualized yield for the nine month period ended September 30, 2012. Cash and invested assets were $121.7 million as of the period ended September 30, 2012 and were $6.2 million lower than December 31, 2011, resulting primarily from the payment of claim settlements. This reduction in cash and invested assets is in line with expectations.

Overall, Atlas generated net income of $1.9 million for the nine month period ended September 30, 2012. After taking the impact of the liquidation preference of the preferred shares into consideration, basic and diluted earnings per common share in the nine month period ended September 30, 2012 was $0.07. This compares to net income of $555,000 or a loss of $0.00 per common share diluted in the nine month period ended September 30, 2011.

Book value per common share diluted as of the period ended September 30, 2012 was $2.15, compared to $2.19 as of the period ended September 30, 2011 and $2.05 as at the three month period ended June 30, 2012.

III. APPLICATION OF CRITICAL ACCOUNTING ESTIMATES The preparation of financial statements in conformity with U.S. GAAP requires management to adopt accounting policies and make estimates and assumptions that affect amounts reported in the consolidated financial statements. The most critical estimates include those used in determining: Fair value and impairment of financial assets; Deferred policy acquisition costs recoverability; Reserve for property-liability insurance claims and claims expense estimation; and Deferred tax asset valuation.

In making these determinations, management makes subjective and complex judgments that frequently require estimates about matters that are inherently uncertain. Many of these policies, estimates and related judgments are common in the insurance and financial services industries; others are specific to our businesses and operations. It is reasonably likely that changes in these items could occur from period to period and result in a material impact on our consolidated financial statements.

A brief summary of each of these critical accounting estimates follows. For a more detailed discussion of the effect of these estimates on our consolidated financial statements, and the judgments and assumptions related to these estimates, see the referenced sections of this document. For a complete summary of our significant accounting policies, see the notes to the consolidated financial statements.

Fair values of financial instruments - Atlas has used the following methods and assumptions in estimating its fair value disclosures: Fair values for bonds and equity securities are based on quoted market prices, when available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments or values obtained from independent pricing services through a bank trustee.

Atlas' fixed income portfolio is managed by Asset Allocation Management ("AAM"), an SEC registered investment advisor specializing in the management of insurance company portfolios. Management works directly with AAM to ensure that Atlas benefits from their expertise and also evaluates investments as well as specific positions independently using internal resources. AAM has a team of credit analysts for all investment grade fixed income sectors. The investment process begins with an independent analyst review of each security's credit worthiness using both quantitative tools and qualitative review. At the issuer level, this includes reviews of past financial data, trends in financial stability, projections for the future, reliability of the management team in place, market data (credit spread, equity prices, trends in this data for the issuer and the issuer's industry). Reviews also consider industry trends and the macro-economic environment. This analysis is continuous, integrating new information as it becomes available. In short, Atlas does not rely on rating agency ratings to make investment decisions, but instead with the support of its independent investment advisors, does independent fundamental credit analysis to find the best securities possible. AAM has found that over time this process creates an ability to sell securities prior to rating agency downgrades or to buy securities before 24-------------------------------------------------------------------------------- Table of Contents upgrades. As of the period ended September 30, 2012, this process did not generate any significant difference in the rating assessment between Atlas' review and the rating agencies.

Atlas employs specific control processes to determine the reasonableness of the fair value of its financial assets. These processes are designed to supplement those performed by AAM to ensure that the values received from them are accurately recorded and that the data inputs and the valuation techniques utilized are appropriate, consistently applied, and that the assumptions are reasonable and consistent with the objective of determining fair value. For example, on a continuing basis, Atlas assesses the reasonableness of individual security values which have stale prices or whose changes exceed certain thresholds as compared to previous values received from AAM or to expected prices. The portfolio is reviewed routinely for transaction volumes, new issuances, any changes in spreads, as well as the overall movement of interest rates along the yield curve to determine if sufficient activity and liquidity exists to provide a credible source for market valuations. When fair value determinations are expected to be more variable, they are validated through reviews by members of management or the Board of Directors who have relevant expertise and who are independent of those charged with executing investment transactions.

Impairment of financial assets - Atlas assesses, on a quarterly basis, whether there is objective evidence that a financial asset or group of financial assets is impaired. An investment is considered impaired when the fair value of the investment is less than its cost or amortized cost. When an investment is impaired, the Company must make a determination as to whether the impairment is other-than-temporary.

Under U.S. GAAP, with respect to an investment in an impaired debt security, other-than temporary impairment (OTTI) occurs if (a) there is intent to sell the debt security, (b) it is more likely than not it will be required to sell the debt security before its anticipated recovery, or (c) it is probable that all amounts due will be unable to be collected such that the entire cost basis of the security will not be recovered. If Atlas intends to sell the debt security, or will more likely than not be required to sell the debt security before the anticipated recovery, a loss in the entire amount of the impairment is reflected in net realized gains (losses) on investments in the consolidated statements of comprehensive income. If Atlas determines that it is probable it will be unable to collect all amounts and Atlas has no intent to sell the debt security, a credit loss is recognized in net realized gains (losses) on investments in the consolidated statements of comprehensive income to the extent that the present value of expected cash flows is less than the amortized cost basis; any difference between fair value and the new amortized cost basis (net of the credit loss) is reflected in other comprehensive income (losses), net of applicable income taxes.

Deferred policy acquisition costs - Atlas defers brokers' commissions, premium taxes and other underwriting and marketing costs directly relating to the successful acquisition of premiums written to the extent they are considered recoverable. These costs are then expensed as the related premiums are earned.

The method followed in determining the deferred policy acquisition costs limits the deferral to its realizable value by giving consideration to estimated future claims and expenses to be incurred as premiums are earned. Changes in estimates, if any, are recorded in the accounting period in which they are determined.

Anticipated investment income is included in determining the realizable value of the deferred policy acquisition costs. Atlas' deferred policy acquisition costs are reported net of deferred ceding commissions.

Valuation of deferred tax assets - Deferred taxes are recognized using the asset and liability method of accounting. Under this method the future tax consequences attributable to temporary differences in the tax basis of assets, liabilities and items recognized directly in equity and the financial reporting basis of such items are recognized in the financial statements by recording deferred tax liabilities or deferred tax assets.

Deferred tax assets related to the carry-forward of unused tax losses and credits and those arising from temporary differences are recognized only to the extent that it is probable that future taxable income will be available against which they can be utilized. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on future tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the date of enactment or substantive enactment.

In assessing the need for a valuation allowance, Atlas considers both positive and negative evidence related to the likelihood of realization of the deferred tax assets. If, based on the weight of available evidence, it is more likely than not the deferred tax assets will not be realized or if it is deemed premature to conclude that these assets will be realized in the near future, a valuation allowance is recorded.

Claims liabilities - The provision for unpaid claims represent the estimated liabilities for reported claims, plus those incurred but not yet reported and the related estimated loss adjustment expenses. Unpaid claims expenses are determined using case-basis evaluations and statistical analyses, including insurance industry loss data, and represent estimates of the ultimate cost of all claims incurred. Although considerable variability is inherent in such estimates, management believes that the liability for unpaid claims is adequate.

The estimates are continually reviewed and adjusted as necessary; such adjustments are included in current operations and are accounted for as changes in estimates.

25-------------------------------------------------------------------------------- Table of Contents IV. OPERATING RESULTS Gross Premium Written The following table summarizes gross premium written by line of business.

Gross premium written by line of business (in '000s) Three Month Periods Ended Nine Month Periods Ended September 30, September 30, September 30, 2012 2011 % Change September 30, 2012 2011 % Change Commercial automobile $ 22,119 $ 5,350 313.4 % $ 41,045 $ 14,504 183.0 % Non-standard automobile (31 ) 4,342 (100.7 )% (540 ) 14,012 (103.9 )% Other 1,265 1,236 2.3 % 3,843 4,435 (13.3 )% $ 23,353 $ 10,928 113.7 % $ 44,348 $ 32,951 34.6 % Third Quarter 2012: For the three month period ended September 30, 2012, gross premium written was $23.4 million compared to $10.9 million in the three month period ended September 30, 2011, and $9.2 million in the three month period ended June 30, 2012, representing a 113.7% increase and 152.7% increase, respectively. The increase relative to the three month period ended September 30, 2011 is due primarily to the substantial growth of the core commercial auto business, which offset the exit of the non-standard auto line of business. In the three month period ended September 30, 2012, we implemented a significant arrangement in New York to provide excess coverage above the levels of risk retained by the insured. Total premium related to this program was $12.4 million in the three month period ended September 30, 2012 and is included in the "commercial automobile" line of business. Below we will refer to the arrangement as the "excess taxi program" where it is relevant to explain certain variances. The increase relative to three month period ended June 30, 2012 is primarily the result of the excess taxi program.

In the three month period ended September 30, 2012, gross premium written from commercial automobile was $22.1 million, representing a 313.4% increase relative to the three month period ended September 30, 2011 and a 169.5% increase compared to the three month period ended June 30, 2012. This substantial increase is primarily the result of the excess taxi program but also the planned expansion of the commercial auto business. Removing the impact of the excess taxi program, our traditional commercial automobile premium written was $9.7 million, an increase of 80.9% versus the three month period ended September 30, 2011 and 17.9% relative to the three month period ended June 30, 2012. The cessation of non-standard auto written premium allowed Atlas to focus its resources on its core line of business. As a percentage of the insurance subsidiaries' overall book of business, commercial auto gross premium written represented 94.7% of gross premium written in the three month period ended September 30, 2012 compared to 49.0% during the three month period ended September 30, 2011 and 88.8% in the three month period ended June 30, 2012.

Commercial automobile insurance has outperformed the overall P&C industry in each of the past ten years based on data compiled by the NAIC. Each of the specialty business lines on which Atlas' strategy is focused is a subset of this industry segment.

Year to Date September 30, 2012: For the nine month period ended September 30, 2012, gross premium written was $44.3 million compared to $33.0 million in the nine month period ended September 30, 2011, representing a 34.6% increase. This increase was attributable to significant gains in commercial automobile premium. Our exit from the non-standard auto line of business is having a lesser impact on total premium written as the year goes forward.

In the nine month period ended September 30, 2012, gross premium written from commercial automobile was $41.0 million, representing a 183.0% increase relative to nine month period ended September 30, 2011. As a percentage of the insurance subsidiaries' overall book of business, commercial auto gross premium written represented 92.6% of gross premium written in the nine month period ended September 30, 2012 compared to 44.0% during the nine month period ended September 30, 2011.

Geographic Concentration 26-------------------------------------------------------------------------------- Table of Contents Gross premium written by state (in '000s) Three Month Periods Ended Nine Month Periods Ended September 30, 2012 September 30, 2011 September 30, 2012 September 30, 2011 New York $ 12,991 55.6 % $ 323 3.0 % $ 15,324 34.6 % $ 1,487 4.5 % Louisiana 2,436 10.4 % 1,388 12.7 % 2,739 6.2 % 1,391 4.2 % Michigan 1,561 6.7 % 930 8.5 % 5,285 11.9 % 2,648 8.0 % Illinois 1,538 6.6 % 5,303 48.5 % 8,551 19.3 % 20,618 62.6 % Minnesota 566 2.4 % 663 6.1 % 2,160 4.9 % 1,745 5.3 % Virginia 482 2.1 % 23 0.2 % 1,143 2.6 % 7 - % Texas 308 1.3 % 95 0.9 % 1,164 2.6 % 435 1.3 % Indiana 253 1.1 % 710 6.5 % 368 0.8 % 2,330 7.1 % Georgia 208 0.9 % - - % 811 1.8 % - - % Other 3,010 12.9 % 1,493 13.6 % 6,803 15.3 % 2,290 7.0 % Total $ 23,353 100.0 % $ 10,928 100.0 % $ 44,348 100.0 % $ 32,951 100.0 % Third Quarter 2012: As illustrated by the data in Table 3 above, 55.6% of Atlas' gross premium written three month period ended September 30, 2012 came from New York and 72.7% came from the three states currently producing the most premium volume (New York, Louisiana, Michigan), as compared to 69.7% in the three month period ended September 30, 2011 (Illinois, Michigan, Louisiana) and 47.8% in the three month period ended June 30, 2012 (Illinois, Minnesota, Michigan). This is the first quarter where Atlas' largest top three states by premium volume did not include Illinois, further highlighting the results of its commitment to diversifying geographically by expanding in new areas of the country, leveraging experience, historical data and research. Our increase in New York is primarily due to the excess taxi program. The decline in Illinois is primarily attributable to Atlas' exit from non-standard insurance lines as well as re-allocation of resources to pursuits in new markets.

Though we built an expanded presence in New York, we don't believe our exposure to be material in that state as a result of Hurricane Sandy.

Year to Date September 30, 2012: Atlas saw similar geographic diversification in the nine month period ended September 30, 2012 compared to the nine month period ended September 30, 2011.

65.8% of our premium volume came from the top three states (Michigan, Illinois, New York) in 2012, compared to 77.7% in 2011 (Illinois, Michigan, Indiana).

The decline of written premiums for the nine month period ended September 30, 2012 versus the nine month period ended September 30, 2011 in Illinois and Indiana is primarily attributable to Atlas' exiting the non-standard automobile insurance lines as well as re-allocating resources to pursuits in new markets.

The majority of the 2011 non-standard automobile written premiums came from those two states. This was mostly offset by gains in commercial auto premiums in other states, both in established markets such as Michigan and New York and new states.

Ceded Premium Written Ceded premium written is equal to premium ceded under the terms of Atlas' inforce reinsurance treaties. Ceded premium written increased 38.6% to $2.0 million for the three month period ended September 30, 2012 compared with $1.4 million for the three month period ended September 30, 2011, and increased 37.7% from $1.4 million for the three month period ended June 30, 2012. This change is the result of the business mix within our total premium base.

In the nine month period ended September 30, 2012, ceded premium written increased 6.5% to $4.9 million from $4.6 million for the nine month period ended September 30, 2011.

Net Premium Written Net premium written is equal to gross premium written less the ceded premium written under the terms of Atlas' inforce reinsurance treaties. Net premium written increased 124.9% to $21.4 million for the three month period ended September 30, 2012 compared with $9.5 million for the three month period ended September 30, 2011 but increased 173.7% versus the three month period ended June 30, 2012. These changes are attributed to the combined effects of the issues cited in the 'Gross Premium Written' and 'Ceded Premium Written' sections above.

The success of our focus on commercial auto insurance in 2012 is more pronounced when viewed in terms of net premium written. As a percentage of the total net premium written, commercial auto represented 100.1% for the three month period ended September 30, 2012 and 101.5% for the three month period ended June 30, 2012, versus only 53.3% in the three month period ended September 30, 2011.

Premium credits in the non-standard personal lines caused the percentage of core commercial auto premium to exceed 100% of the total net written premium for each of the last two three month periods.

27-------------------------------------------------------------------------------- Table of Contents Similarly, in the nine month period ended September 30, 2012, commercial auto insurance comprised 101.0% of the total net premium written versus just 49.5% in the nine month period ended September 30, 2011. As indicated above, premium credits in the non-standard personal lines caused the percentage of core commercial auto premium to exceed 100% of the total net written premium for the nine month period ended September 30, 2012.

Net Premium Earned Premiums are earned ratably over the term of the underlying policy. Net premium earned was $10.9 million in the three month period ended September 30, 2012, a 24.3% increase compared with $8.8 million in the three month period ended September 30, 2011 and a 44.8% increase versus the three month period ended June 30, 2012.

In the nine month period ended September 30, 2012, net premium earned was $26.8 million, an 0.5% increase compared to $26.7 million for the nine month period ended September 30, 2011.

The increase in net premiums earned is attributable to the excess taxi program and strong growth in commercial lines. Net earned premiums on our core lines were $10.5 million in the three month period ended September 30, 2012, a 161.8% increase compared with $4,013 in the three month period ended September 30, 2011 and a 68.8% increase versus the three month period ended June 30, 2012.

Similarly, net earned premiums on our core lines for the nine month period ended September 30, 2012 were $21.9 million, a 91.7% increase compared to the nine month period ended September 30, 2011.

Claims Incurred The loss ratio relating to the claims incurred in the three month period ended September 30, 2012 was 65.5% compared to 79.4% in the three month period ended September 30, 2011 and 71.6% for the three month period ended June 30, 2012.

For the nine month period ended September 30, 2012, the loss ratio was 69.0%, compared to 77.2% for the nine month period ended September 30, 2011.

Loss ratios improved in the three month period ended September 30, 2012 relative to prior periods. This is primarily attributable to the increased composition of commercial auto as a percentage of the total written premium, which has historically had a better overall underwriting result. Further, the excess taxi program also contributed significantly to favorable loss results in the three month period ended September 30, 2012 as we expect better than average claim experience from this program. We believe that our extensive experience and expertise with respect to underwriting and claims management in all our commercial lines will allow us to continue this decreasing trend since we expect 100% of net earned premium to be related to core lines of business in 2013. The Company is committed to retain this claim handling expertise as a core competency as the volume of business increases.

Acquisition Costs Acquisition costs represent commissions and taxes incurred on net premium earned. Acquisition costs were $1.8 million in the three month period ended September 30, 2012 or 16.6% of net premium earned, as compared to 19.6% in the three month period ended September 30, 2011 and 18.5% in the three month period ended June 30, 2012.

For the nine month period ended September 30, 2012, the ratio was 17.1% as compared to 20.0% in the nine month period ended September 30, 2011.

The favorable trend in acquisition costs is primarily due to the shift away from non-standard automobile insurance which carries higher commission rates.

Other Underwriting Expenses The other underwriting expense ratio was 15.5% in the three month period ended September 30, 2012 compared to 20.7% in the three month period ended September 30, 2011 and 21.4% in the three month period ended June 30, 2012. This decline is attributable to a significant increase in premium earned in the three month period ended September 30, 2012 as well as a reduction in head count since 2011.

For the nine month period ended September 30, 2012, this ratio was 18.5%, as compared to 21.2% for the nine month period ended September 30, 2011. However, 2011 includes $627,000 in non-recurring expenses (detailed below) which unfavorably impacted the year-to-date ratio by 2.4%. After adjustment for these non-recurring expenses, other underwriting expenses remained static year over year.

28-------------------------------------------------------------------------------- Table of Contents First Quarter 2011 Non-recurring Expenses (in '000s) Expense Item Description Non-recurring Expense Licenses, taxes and assessments Amounts paid in Q1 2011 $ 198 Professional fees Legal and Accounting fees 121 Salary and benefits Q1 staff reduction impacts 174 Decommissioning software expenses EDP expense previously capitalized 84 Occupancy/Miscellaneous expense Straight-line lease adjustment 50 Total non-recurring expenses $ 627 Net Investment Income Investment Results (in '000s) Three Month Periods Ended Nine Month Periods Ended September 30, 2012 September 30, 2011 September 30, 2012 September 30, 2011 Average securities at cost1 $ 120,734 $ 144,028 $ 123,245 $ 153,753 Interest income after expenses 613 719 1,878 2,651 Percent earned on average investments (annualized) 2.0 % 2.0 % 2.0 % 2.3 % Net realized gains $ 779 $ 1,962 $ 1,098 $ 2,813 Total investment income 1,392 2,681 2,976 5,464 Total realized yield (annualized) 4.6 % 7.4 % 3.2 % 4.7 % 1 - includes cash as well as the investment in Oak Street (see note 5 to condensed consolidated financial statements) Investment income (excluding net realized gains) decreased by 14.7% to $613,000 in the three month period ended September 30, 2012, compared to $719,000 in the three month period ended September 30, 2011, and decreased by 6.8% from $657,000 for the three month period ended June 30, 2012. These amounts are primarily comprised of interest income. This is attributable to the timing of asset disposals and the mix of securities on hand. The annualized realized yield on invested assets (including net realized gains of $779,000) in the three month period ended September 30, 2012 decreased to 4.6% as compared with 7.4% in the three month period ended September 30, 2011 and increased compared to 3.2% for the three month period ended June 30, 2012. This is primarily due to the relative absence of realized gains during the three month period ended June 30, 2012 versus those periods.

On a year-to-date basis, interest income decreased by 29.2% to $1.9 million from $2.7 million for the nine month period ended September 30, 2011. This decrease correlates with a similar decline in the average securities held, which is consistent with our expectations for claim payout patterns. The annualized realized yield on invested assets (including realized gains) decreased to 3.2% from 4.7%, due primarily to a reduction in realized gains year over year.

Net Realized Investment Gains (Losses) Net realized investment gains in the three month period ended September 30, 2012 were $779,000 compared to $2.0 million in the three month period ended September 30, 2011 and $291,000 during the three month period ended June 30, 2012. On a year-to-date basis, realized gains were $1.1 million in the nine month period ended September 30, 2011 compared to $2.8 million for the nine month period ended September 30, 2012. The difference is the result of management's decision to sell certain securities consistent with the Company's liquidity needs and expected duration of claim payment triangles during favorable market conditions.

Miscellaneous Income (Loss) Atlas recorded miscellaneous income in the three month period ended September 30, 2012 of $1,000 compared to $113,000 for the three month period ended September 30, 2011 and $51,000 in the three month period ended June 30, 2012.

Miscellaneous income prior to June 30, 2012 was primarily comprised of rental income from our corporate headquarters in Elk Grove Village, Illinois, which has subsequently been sold.

Combined Ratio Underwriting profitability, as opposed to overall profitability or net earnings, is measured by the combined ratio. The combined ratio is the sum of the loss and loss adjustment (LAE) expense ratio, the acquisition cost ratio and the underwriting expense ratio. Atlas' combined ratio for the three month periods ended September 30, 2012 and 2011 are summarized in the table below. The underwriting loss is attributable to the factors described in the 'Claims Incurred', 'Acquisition Costs', and 'Other Underwriting Expenses' sections above. This is the first quarter that we have achieved a combined ratio below 100% since our inception in December 2010.

29-------------------------------------------------------------------------------- Table of Contents Combined Ratios (in '000s) Three Month Periods Ended September 30, 2012 September 30, 2011 June 30, 2012 Net premium earned $ 10,934 $ 8,797 $ 7,552 Underwriting expenses * 10,670 10,526 8,420 Combined ratio 97.6 % 119.7 % 111.5 % Nine Month Periods Ended September 30, 2012 September 30, 2011 Net premium earned $ 26,795 $ 26,669 Underwriting expenses * 28,018 31,582 Combined ratio 104.6 % 118.4 % *Underwriting expenses are the combination of claims incurred, acquisition costs, and other underwriting expenses Income/Loss before Income Taxes Atlas generated pre-tax income of $1.7 million in the three month period ended September 30, 2012, compared to pre-tax income of $1.1 million in three month period ended September 30, 2011 and pre-tax income of $130,000 in the three month period ended June 30, 2012.

In the nine month period ended September 30, 2012, Atlas generated pre-tax income of $1.9 million compared to income of $555,000 in the nine month period ended September 30, 2011.

Income Tax Benefit Atlas recognized no tax expense in the three month period ended September 30, 2012, nor during the three month period ended September 30, 2011 or the three month period ended June 30, 2012. The following table reconciles tax benefit from applying the statutory U.S. Federal tax rate of 34.0% to the actual percentage of pre-tax income provided for the three month periods ended September 30, 2012 and 2011: Tax Rate Reconciliation (in '000s) Three Month Periods Ended Nine Month Periods Ended September 30, 2012 September 30, 2011 September 30, 2012 September 30, 2011 Amount % Amount % Amount % Amount % Expected income tax benefit at statutory rate $ 563 34.0 % $ 362 34.0 % $ 653 34.0 % $ (174 ) 34.0 % Valuation allowance (566 ) (34.2 )% (384 ) (56.0 )% (658 ) (34.2 )% 131 (25.6 )% Nondeductible expenses 5 0.3 % 22 22.0 % 10 0.5 % 43 (8.4 )% Other (2 ) (0.1 )% - % (5 ) (0.3 )% - % Total $ - - % $ - - % $ - - % $ - - % Upon the transaction forming Atlas on December 31, 2010, a yearly limitation as required by U.S. tax law Section 382 that applies to changes in ownership on the future utilization of Atlas' net operating loss carry-forwards was calculated.

The insurance subsidiaries' prior parent retained those tax assets previously attributed to the insurance subsidiaries which could not be utilized by Atlas as a result of this limitation. As a result, Atlas' ability to recognize future tax benefits associated with a portion of its deferred tax assets generated during prior years and the current year have been permanently limited to the amount determined under U.S. tax law Section 382. The result is a maximum expected net deferred tax asset which Atlas has available after the merger which is believed more-likely-than-not to be utilized in the future, after consideration of valuation allowance.

Net Income/Loss and Earnings/Loss per Common Share Atlas earned $1.7 million during the three month period ended September 30, 2012 versus income of $1.1 million during the three month period ended September 30, 2011 and income of $130,000 for the three month period ended June 30, 2012.

After taking the impact of the liquidation preference of the preferred shares into consideration, the basic and diluted earnings per common share in the three month period ended September 30, 2012 was $0.08 versus earnings per common share of $0.05 in three month period ended September 30, 2011 and a loss per common share of $0.00 in the three month period ended June 30, 2012.

For the three month period ended September 30, 2012, there were 18,433,153 weighted average common shares outstanding used to compute basic earnings per share and 18,447,902 used for diluted earnings per share. For the three month period ended September 30, 2011, there were 18,374,968 weighted average common shares outstanding used to compute basic earnings per share and 30-------------------------------------------------------------------------------- Table of Contents 18,415,488 shares for diluted earnings per common share. Finally, there were 18,433,153 common shares used to compute basic and diluted loss per common share for the three month period ended June 30, 2012.

Atlas earned $1.9 million during the nine month period ended September 30, 2012 compared to income of $555,000 during the nine month period ended September 30, 2011. The basic and diluted earnings per common share in the nine month period ended September 30, 2012 was $0.07 compared to $0.00 in the nine month period ended September 30, 2011.

Book Value per Ordinary Share Book value per ordinary share was as follows: (in '000s, except for shares and per share data) September 30, 2012 June 30, 2012 September 30, 2011 Shareholders' Equity 59,103 57,031 58,781 Preferred stock in Equity 18,000 18,000 18,000 Accumulated dividends on preferred stock 1,416 1,212 606 Common Equity 39,687 37,819 40,175 Shares outstanding 18,433,153 18,433,153 18,376,887 Book value per common share outstanding $ 2.15 $ 2.05 $ 2.19 31-------------------------------------------------------------------------------- Table of Contents

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