Description

Atlas Financial Holdings (AFHIF) common equity shares trade as a misunderstood and mispriced option. Investors have at least 10-12 months to be “right” as the country’s cities and local economies re-open, and taxi and other related transit options resume.

The shares offer 10x upside or more from current levels. Like any option, it could also expire worthless.

History

Atlas was formerly an underwriter of taxi, limousine, and non-emergency paratransit business.  At it’s peak it wrote over $300m of premium and had a book value as high as $10.50 per share.

In Q4 2016, the Company booked a large reserve charge that slammed the stock.  Three clean quarters followed until Q4 2017 when management revealed a significant reserve charge following the year end review by the Company’s external actuary.  By the end of 2018, it became clear that it was going to be hard to recover from the reserving missteps.  In Q4 2018, Atlas lost almost $40m ($286m of in-force premium) and book value had fallen to $4.00 per share. 

Atlas becomes a pure play MGA – shuts down risk taking entities

By early 2019, Atlas decided to stop writing insurance and embarked on a strategy that would “transition the business from insurance companies to alternative markets within a reasonable period of time using the existing platform of its managing general agency (MGA) to work with strategic external insurance and reinsurance partners.”

Several milestone events of the transformation:

April 2019:

Atlas appoints Sandler O’ Neill as Financial Advisor and part of Strategic Review Process…

“the Company is continuing to explore strategic alternatives, including, but not limited to, further strengthening its processes, reviewing its capital allocation and opportunities, a potential sale of the Company or certain assets, and balance sheet strengthening options. To assist the company in its review, Atlas has retained Sandler O'Neill + Partners, L.P. as its financial advisor. In this capacity, the firm will work on behalf of Atlas to manage the exploration and evaluation of a wide range of strategic opportunities with the goal of facilitating shareholder value generation.”

June 2019:

Atlas signed a definitive agreement with American Financial Group, Inc. (NYSE: AFG, $10b mcap). This deal with AFG targeted the paratransit line of business.  Atlas to serve as an MGA for AFG’s National Interstate sub.  The CEO of Atlas said at the time, “We are excited to partner with American Financial Group and National Interstate to transition this business in a strategic approach that we expect to benefit both companies. Continuing to provide our distribution partners and policyholders with the specialized customer-centric value proposition they expect from Atlas in partnership with one of the largest commercial auto focused companies in the country at a time when the market is hard is extremely valuable to all involved.”

Note:  As part of the deal, AFG obtained certain rights including a warrant to acquire 19.9% of the outstanding Atlas common stock for $0.69 per share, and also an option to acquire the renewal rights owned by the firm in the future.

July 2019:

Atlas insurance subs American Country and American Service subs put into rehabilitation by the Illinois Dept.

June 2020:

Atlas signs deal with Buckle. Insuretech co Buckle acquires Atlas insurance sub, Gateway. Buckle web site: buckleup.com – Buckle said it made the decision to purchase Gateway as a way to support a management general agency (MGA) owned by Atlas – Anchor Group Management Inc. By doing so, Buckle will now be working with Atlas to sell “comprehensive, affordable” auto insurance to the commercial auto market for clients including part-time rideshare and delivery drivers, full-time taxicab and limousine drivers, non-emergency paratransit drivers, and transportation network companies (TNCs). Buckle recently raised $31m (last Aug) and is based in Atlanta. In 2020 Buckle announced a partnership with Lyft, offering the ride-hailing company’s Georgia drivers savings between $50 and $200 per month.

July 2020:

Atlas extended its agreement with National Interstate Insurance Company (“National Interstate” or “NATL”), which was previously announced in June 2019.

As extended, Atlas subsidiaries will continue to act as underwriting manager for NATL and transition new and renewal paratransit business to NATL paper until at least August 2021 for fleets with seven or fewer vehicles and until November 2020 for accounts with eight or more vehicles. NATL continues to retain the option to purchase renewal rights on either of these segments at the expiration of the agreement periods.

November 2020:

Atlas sells some other non-strategic assets to Buckle and extends and expands agreement with NATL – receives $2.9m for the extension.

*****

So what is the path forward?

As a MGA, Atlas earns a fee on insurance business placed through various carriers. This is not only a far superior business (capital and margin-wise), than the risk taking side of the equation, it leverages Atlas’ multi-decade long history and agency relationships in the core markets it serves.

What could the earnings profile of the MGA look like?

An MGA should be able to earn anywhere from 12-20% before agent costs on its book of business depending on the level of services it provides. We assume that Atlas is earning a smaller fee on its NATL book than the Buckle book. On a blended basis let’s call it 15%

Keep in mind that Atlas had over $300m in premium running through its carriers at its peak.

Atlas still has yet to file a 10-K for 2020.  Once they file, they will be completely caught up on filings and in a better position to talk to investors.

Balance Sheet

As of Sept 30, 2020, Atlas showed $3m in cash. A subsequent event shows a PPP loan of $2m was obtained (this will likely be forgiven). Thus we use $5m of cash before figuring in any Oct 2020 – current burn.

The Company has publicly traded debt (ticker: AFHBL) that trades for $7 on a face value of $25 per share or 28c on the dollar. The debt has no real covenants – was issued largely to retail. There are 1m shares out ($25m face) and the paper pays 6.625% per annum or roughly $1.5m of interest per year. Atlas has not defaulted on any payments. This debt will need to be dealt with in late April of 2022, giving us one year for the MGA to ramp its earnings to be in a place to refi the debt, or strike a deal with the debtholders in the interim. The debt was issued at a time when Atlas held substantial assets and its carrier licenses. The situation is quite different now for the debt holders. There is really nothing here to get to other than the fee earning entities, and with such a small issue outstanding, these are unlikely to be institutions that are apt to credit bid for the operations.

Atlas also owns their headquarters in Schaumburg, IL.  The building is for sale and is listed at $13m.  There is a $9m mortgage against it.

https://www.loopnet.com/Listing/953-American-Ln-Schaumburg-IL/21344074/

So what is the option worth?

First off, you have to get behind a reopening of the economy and the cities…

The pieces are certainly in place.

Last Sept, one of the largest holders of taxi medallion debt forgave $70m worth of loans.

In Mid March 2021, LYFT said that “Rideshare ride volume reached a new record level for 2021 and was our biggest week since March 2020.”

They also stated:

 ◦ "Yesterday, for the first time in a year, Lyft saw positive year-over-year growth in daily rideshare ride volume

 ◦ "Next week, we expect rideshare ride volume to grow in excess of 100% year-over-year as we begin to lap the significant impact of COVID-19 on our business a year ago

 ◦ "Finally, we continue to expect positive weekly rideshare growth measured on a year-over-year basis beginning this week - and every subsequent week through the end of 2021 (barring a significant worsening of COVID-19 conditions)

In early April, UBER announced a $250m stimulus to bring back riders on the platform.

On April 12, 2021, UBER announced:

◦ The company's Mobility business posted its best month since March 2020, crossing a $30B annualized Gross Bookings run-rate, with average daily Gross Bookings up 9% month-over-month. The company's Delivery business set another all-time record, crossing a $52B annualized Gross Bookings run-rate in March, growing more than 150% year-over-year.

 ◦ As vaccination rates increase in the United States, we are observing that consumer demand for Mobility is recovering faster than driver availability, and consumer demand for Delivery continues to exceed courier availability. On 7-Apr, Uber announced that it is increasing investments in driver incentives to improve driver availability in the near-term. We continue to believe that Uber is on track to reach quarterly Adjusted EBITDA profitability in 2021

Keep in mind that over 20% of the US population is currently vaccinated, with the number increasing every day.  In New York City, employers are generally expecting 45% of the workforce to return to work by September.

If you think that taxi volumes can rebound to even 33% of what they were at Atlas’ peak period of underwriting, the MGA should be performing at or above scale, and earnings could look like this (note that 100% represents 85% of the old premium as 12% of this premium are for lines that are no longer written):

Note that the FDSO number above ignores the American Financial Warrant.

What do MGAs trade for?

According to Chalice Wealth Partners, MGAs are red-hot right now when it comes to merger and acquisition activity.

“It has been noted that a significant number of private equity firms, carriers and brokers have all shown interest in acquiring MGAs, with some going for EBITDA multiples in the high teens.

Historically, these types of businesses tend to sell in the range of around 8x to 12x, which shows the extent of buyer enthusiasm at this time.”

There has been no shortage of deals over the past few years though it is not always possible to know what multiple the deal went off at.

·         H.W. Kaufman Financial Group and Burns & Wilcox Canada acquired the high-value homeowner’s insurance practice from Quebec-based XN Financial Services Inc. (XN), which is a subsidiary of The Henner Group in France.

·         Hull & Co., a wholesale insurance subsidiary of giant Brown & Brown, acquired the commercial managing general agency operations of Insurance House.

·         Beazley expanded its presence in Canada with the acquisition of the specialist managing general agent, Creechurch Underwriters.

·         Alliant Insurance Services acquired SES Insurance Brokerage Services in Santa Ana, Calif.

·         Markel Canada, the Toronto-based subsidiary of Markel International, acquired the remaining 50 percent stake in Allsport Insurance Marketing Ltd.

·         San Diego-based K2 Insurance Services acquired Star & Shield Insurance, a Georgia affinity distributor to the public safety community.

·         Dallas-based insurance exchange MarketScout sold its workers’ compensation managing general agency business to Specialty Program Group.

·         Bridger purchased Pleasanton, Calif.-based SCJ Insurance Services.

·         JenCap Holdings agreed to acquire privately held Special Risks Facilities Inc., an MGA in Sterling Heights, Michigan.

·         U.S. Risk Insurance Group acquired Strategic Insurance Underwriters, a specialist trucking MGA and broker headquartered in Sarasota, Fla.

·         The Hanover Insurance Group Inc. announced that Chaucer, the company’s international specialty insurance group, acquired SLE Holdings, Lloyd’s managing general underwriting agency based in Australia.

·         Bermuda-based Aspen Insurance acquired Blue Waters Insurers Corp., a Puerto Rico specialist marine managing general agency.

·         Markel International bought Galleon Marine Insurance Agency, a London MGA that specializing in marine professional indemnity and cargo liability business.

·         Nexus Underwriting Management Ltd. bought Hong Kong-domiciled Beacon Underwriters Ltd., a marine managing general agent.

·         Global Risk Partners completed its backing of the management buyout of LONMAR Global Risks, the London-based specialist Lloyd’s broker.

·         Brown & Brown Inc. purchased Morstan General Agency Inc. of Manhasset, New York.

According to Andrew Beecroft, Head of M&A Advisory, GC Securities,

“In the continuing competitive market, it’s difficult for insurance companies to grow premiums organically,” explains Rowlands. “Therefore, insurers value MGAs’ specialist product and geographic expertise and distribution, which give the MGA the ability to opportunistically take advantage of market conditions. Insurers are able to strategically grow and diversify with lower execution risk and costs.”

Beecroft notes that while historic multiples for MGA deals were generally in the range of 8 to 12 times EBITDA, some recent acquisition multiples have hit the high-teens.

 “Because of growth and cost synergies, trade players tend to pay higher multiples than private equity buyers,” Beecroft explains. “However, the ultimate buyer will often be determined by the MGA management’s desire to retain independence. Even in these situations, if the asset is sufficiently desirable and competition strong enough, such as the recent sale of CFC Underwriting where only financial buyers participated, the sales process still achieved a very high multiple.”

Note that Next Insurance, a MGA with $400m in premium was just valued at $4b

Link: https://bit.ly/323UvqI

Again, the true value of this MGA will depend on how much business “comes back” to the underwriters.

In the case of Atlas, a strategic would realize enormous SG&A synergies and avoid duplicative public company and audit costs, etc.   We will use a conservative $1.5m add back.

Catalyst

·         Company completes its 10-K filing for FY 2020 and can start talking to investors.

·         Sandler finds a buyer for the Company or helps the company strike a deal to eliminate the overhang from the debt.

·         Economies open and cities begin to see taxi traffic calibrate back to “normal” levels.