NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Atlas Financial Holdings, Inc. ("Atlas" or the "Company") commenced operations on December 31, 2010. The primary business of Atlas is underwriting commercial automobile insurance in the United States, with a niche market orientation and focus on insurance for the “light” commercial automobile sector. This sector includes taxi cabs, non-emergency para-transit, limousine, livery and business autos. Automobile insurance products provide insurance coverage in three major areas: liability, accident benefits and physical damage. Liability insurance provides coverage, subject to policy terms and conditions where the insured is determined to be responsible and/or liable for an automobile accident, for the payment for injuries and property damage to third parties. Accident benefit policies or personal injury protection policies provide coverage for loss of income, medical and rehabilitation expenses for insured persons who are injured in an automobile accident, regardless of fault. Physical damage coverage subject to policy terms and conditions provides for the payment of damages to an insured automobile arising from a collision with another object or from other risks such as fire or theft. In the short run, automobile physical damage and liability coverage generally provides more predictable results than automobile accident benefit or personal injury insurance.

Atlas' business is carried out through its insurance subsidiaries: American Country Insurance Company (“American Country”), American Service Insurance Company, Inc. (“American Service”) and, as of January 1, 2013, Gateway Insurance Company ("Gateway"). The insurance subsidiaries distribute their insurance products through a network of retail independent agents. Together, the insurance subsidiaries are licensed to write property and casualty insurance in 49 states and the District of Columbia in the United States. Atlas' core products are actively distributed in 40 of those states plus Washington, D.C. The insurance subsidiaries share common management and operating infrastructure.

Atlas' ordinary voting common shares were previously listed on the TSX Venture Exchange (“TSXV”) under the symbol “AFH” from January 6, 2011 to June 4, 2013, when Atlas' application for the voluntary delisting of its ordinary voting common shares from the TSXV was approved.

Atlas ordinary voting common shares became listed on the NASDAQ stock exchange on February 11, 2013 , under the same symbol, AFH.

On December 7, 2012, a shareholder meeting was held where a one-for-three reverse stock split was unanimously approved. When the reverse stock split took effect on January 29, 2013, it decreased the authorized and outstanding ordinary voting common shares and restricted voting common shares at a ratio of one-for-three. The primary objective of the reverse stock split was to increase the per share price of Atlas' common shares to meet certain listing requirements of the NASDAQ Capital Market. Unless otherwise noted, all historical share and per share values in this quarterly report on Form 10-Q reflect the one-for-three reverse stock split.

Basis of presentation - These statements have been prepared in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP"). All significant intercompany accounts and transactions have been eliminated. It is the opinion of management that these financial statements reflect all adjustments necessary for a fair statement of the interim results.

The results for the three and six month periods ended June 30, 2014 are not necessarily indicative of the results expected for the full calendar year.

The accompanying unaudited condensed consolidated financial statements, in accordance with Securities and Exchange Commission (“SEC”) rules for interim periods, do not include all of the information and notes required by accounting principles generally accepted in the United States of America for complete financial statements and should be read in conjunction with the Atlas' Annual Report on Form 10-K for the year ended December 31, 2013 , which provides a more complete understanding of the Company’s accounting policies, financial position, operating results, business properties, and other matters.

Seasonality - The property and casualty (P&C) insurance business is seasonal in nature. While Atlas' net premiums earned are generally stable from quarter to quarter, Atlas' gross premiums written follow the common renewal dates for the "light" commercial risks that represent its core lines of business. For example, January 1 and March 1 are common taxi cab renewal dates in Illinois and New York, respectively. Net underwriting income is driven mainly by the timing and nature of claims, which can vary widely. Atlas' ability to generate written premium is also impacted by the timing of policy periods in the states in which Atlas operates.

The accounting policies followed in these unaudited condensed consolidated financial statements are comparable to those applied in Atlas' audited annual consolidated financial statements in the Annual Report on Form 10-K for the period ended December 31, 2013 . Atlas has consistently applied the same accounting policies throughout all periods presented.

2. NEW ACCOUNTING STANDARDS

None.

3. ACQUISITION OF GATEWAY INSURANCE COMPANY

On January 2, 2013 Atlas acquired Camelot Services, Inc. ("Camelot Services"), a privately owned insurance holding company, and its sole subsidiary, Gateway, from Hendricks Holding Company, Inc. ("Hendricks"), an unaffiliated third party. Gateway provides specialized commercial insurance products, including commercial automobile insurance to niche markets such as taxi, black car and sedan service owners and operators.

Under the terms of the stock purchase agreement, the purchase price equaled the tangible GAAP book value of Camelot Services at December 31, 2012, subject to certain pre and post-closing adjustments, including, among others, claim development between the signing of the stock purchase agreement and December 31, 2012. Additional consideration may be paid to the seller, or returned to Atlas by the seller, depending upon, among other things, the future development of Gateway's actual loss reserves for certain lines of business and the utilization of certain deferred tax assets, which expire 5 years and 20 years from the date of acquisition, respectively. Gateway also wrote a workers' compensation insurance program which is being run-off. However, an indemnity reinsurance agreement was entered into pursuant to which 100% of Gateway's workers' compensation business was ceded to a third party captive reinsurer funded and collateralized by the seller as part of the transaction.

The total purchase price for all of Camelot Services’ outstanding shares was $14.3 million, consisting of a combination of cash and Atlas preferred shares. Consideration consisted of a $6.0 million dividend paid by Gateway immediately prior to the closing, $2.0 million of Atlas preferred shares (consisting of a total of 2,000,000 preferred shares) and $6.3 million in cash. The agreement includes contractual protections to offset up to $2.0 million of future reserve development. Atlas has also agreed to provide the sellers up to $2.0 million in additional consideration in the event of favorable reserve development. As of June 30, 2014, there have been no additional developments that would require additional consideration to or from Hendricks.

The Gateway acquisition was accounted for using the purchase method. Atlas began consolidating Gateway on January 1, 2013 , therefore their financial results are included in Atlas' consolidated financial results for all periods reported.

The value of certain assets and liabilities acquired were subject to adjustment as additional information was obtained, including, but not limited to, valuation of separately identifiable intangibles, the preferred stock issued to the seller, and deferred taxes. The valuations were finalized within 12 months of the close of the acquisition (not including loss reserve consideration). The changes upon finalization to the preliminary valuation of assets and liabilities resulted in an adjustment to identifiable intangible assets and goodwill. Changes to the purchase price allocation were adjusted in the first quarter of 2013. The following table presents assets acquired and liabilities assumed for the Gateway acquisition based on its estimated fair value on January 1, 2013 .

The acquisition of Gateway resulted in the recognition of intangible assets, comprised entirely of state insurance licenses valued at $740,000 . The state insurance licenses are considered to have an indefinite life and will not be amortized, but will be evaluated for impairment at least annually. Thus, Atlas recognized no amortization expense during the three or six month periods ended June 30, 2014 or June 30, 2013 related to intangible assets acquired in the Gateway transaction.

Atlas incurred $406,000 in legal and professional fee expenses related to the transaction during the six month period ended June 30, 2013.

Atlas also incurred $337,000 in one-time employee termination costs during the twelve month period ended December 31, 2013, plans for which were formulated and expenses recorded in the first quarter of 2013. These expenses are included in "Other Underwriting Expenses" on the Condensed Consolidated Statements of Income and Comprehensive Income (Unaudited) for the six month period ended June 30, 2013 .

4. EARNINGS PER SHARE

Earnings per ordinary voting common share and restricted voting common share (collectively, the "common shares") for the three and six month periods ended June 30, 2014 and June 30, 2013 are as follows:

Earnings per diluted common share is computed by dividing net income attributable to Atlas by the weighted average number of common shares outstanding each period plus the incremental number of shares added as a result of converting dilutive potential ordinary voting common shares, calculated using the treasury stock method (or, in the case of the convertible preferred shares, the "if-converted" method).

Originally, in computing the earnings per diluted common share for the three and six month periods ended June 30, 2013 , the Company did not include the dilutive impact of the exercised warrants as if they were exercised at the beginning of the periods. This dilutive impact increased the denominator in the diluted earnings per share computation for the three and six month periods ended June 30, 2013 by 35,445 and 53,055 shares, respectively; however, this has no impact on the actual earnings used for the numerator in the EPS computation. The table above has been corrected to include the dilutive impact of the exercised warrants as if they were exercised at the beginning of the three and six month periods ended June 30, 2013 . As a result, there were 8,131,450 and 7,591,092 weighted average common shares outstanding used to compute basic earnings per share and 11,003,849 and 10,399,880 for earnings per diluted common share for the three and six month periods ended June 30, 2013 , respectively. The previously reported earnings per diluted common share for the three and six month periods ended June 30, 2013 were $0.16 and $0.22 , respectively.

Atlas’ dilutive potential ordinary voting common shares consist of outstanding restricted stock units, stock options to purchase ordinary voting common shares, warrants to purchase ordinary voting common shares of Atlas (2013 only), and preferred shares potentially convertible to ordinary voting common shares at the option of the holders at any date after December 31, 2013 ( 18,000,000 preferred shares) and December 31, 2015 ( 2,000,000 preferred shares) at the rate of 0.1270 ordinary voting common shares for each preferred share. The effects of these convertible instruments are excluded from the computation of earnings per

diluted common share in periods in which the effect would be anti-dilutive. Convertible preferred shares are anti-dilutive when the amount of dividend declared or accumulated in the current period per common share obtainable upon conversion exceeds basic earnings per share. In the three and six month periods ended June 30, 2014 , stock options and all of the remaining convertible preferred shares were deemed to be dilutive.

On July 7, 2013, Atlas entered into a non-binding letter of intent to purchase all outstanding preferred shares that were eligible for redemption (all 18,000,000 shares), for 90% of their liquidation value. Definitive agreements in connection with this transaction were executed on August 1, 2013 (collectively, the "Share Repurchase Agreement"). Upon execution of the Share Repurchase Agreement, an initial amount of $8.3 million (which included dividends accrued and declared through August 1, 2013 ) was paid against the total purchase price of $16.2 million, leaving a remaining amount due of $7.9 million, which carries a non-compounding annual interest rate of 4.5% . The remaining amount due, plus accrued interest, was paid during the fourth quarter of 2013 in accordance with the terms of the Share Repurchase Agreement.

5. INVESTMENTS

The amortized cost, gross unrealized gains and losses and fair value for Atlas’ investments in fixed maturities, equity investments and other investments are as follows. Atlas' other investments are in limited partnerships and insurance linked securities. Atlas' interests in these investments are not deemed minor, and as a result, the Company uses the equity method of accounting. As of June 30, 2014 , the carrying values of these other investments were approximately $9.0 million versus approximately $1.2 million as of December 31, 2013 . The carrying values of these other investments were equal to Atlas' share of the net book value, an amount that approximates fair value (all amounts in '000s):

The following tables summarize carrying amounts of fixed income securities by contractual maturity. As certain securities and debentures have the right to call or prepay obligations, the actual settlement dates may differ from contractual maturity.

Management performs a quarterly analysis of Atlas’ investment holdings to determine if declines in fair value are other than temporary (equities may require more timely review in some cases). The analysis includes some or all of the following procedures as deemed appropriate by management:

The risks and uncertainties inherent in the assessment methodology utilized to determine declines in market value that are other than temporary include, but may not be limited to, the following:

There were no other than temporary impairments recorded in the three and six month periods ended June 30, 2014 as a result of the above analysis performed by management. As of June 30, 2014 , Atlas' portfolio was in an unrealized gain position. This was primarily driven by the change in interest rates during the first six months of 2014. All securities in an unrealized loss position as of June 30, 2014 and as of December 31, 2013 have been in said position for less than 12 months. The total fair value of the securities currently in an unrealized loss position was $68.4 million at June 30, 2014 with a total temporary impairment relating to unrealized losses of $987 ,000. Atlas has the ability and intent to hold these securities until their fair value is recovered. Therefore, Atlas does not expect the market value loss position of these investments to be realized in the near term.

The following table summarizes the components of net investment income for the three and six months ended June 30, 2014 and 2013 (all amounts in '000s):

The following table summarizes the components of net investment gains for the three and six months ended June 30, 2014 and 2013 (all amounts in '000's):

Collateral pledged:

As of June 30, 2014 and as of December 31, 2013 , bonds and term deposits with a fair value of $14.5 million were on deposit with state and provincial regulatory authorities. Also, from time to time, the Company pledges securities to third parties to collateralize liabilities incurred under its policies of insurance. As of June 30, 2014 and as of December 31, 2013 , the amount of such pledged securities was $6.9 million and $7.9 million , respectively. Collateral pledging transactions are conducted under terms that are common and customary to standard collateral pledging and are subject to the Company’s standard risk management controls. These assets and investment income related thereto remain the property of the Company while pledged. Neither the state and/or provincial regulatory authorities nor any other third party has the right to re-pledge or sell said securities held on deposit.

6. FINANCIAL AND CREDIT RISK MANAGEMENT

At June 30, 2014 , Atlas' allowance for bad debt was $686 ,000. Atlas decreased its allowance for doubtful accounts by $90 ,000 in the six month period ended June 30, 2014 compared to the balance at December 31, 2013 . This decrease relates to the net impact between: 1) a decrease of $239 ,000 related to the run-off worker's compensation program write-offs, and 2) an increase of $149 ,000 related to the formulaic modeling correlating to the changes in accounts receivable balances in our core lines during the six month period ended June 30, 2014 .

Fair value - Fair value amounts represent estimates of the consideration that would currently be agreed upon between knowledgeable, willing parties who are under no compulsion to act.

Atlas records the available for sale securities held in its securities portfolio at their fair value. Atlas primarily uses the services of external securities pricing vendors to obtain these values. The securities are valued using quoted market prices or prices established using observable market inputs. In volatile market conditions, these quoted market prices or observable market inputs can change rapidly causing a significant impact on fair value and financial results recorded.

Atlas employs a fair value hierarchy to categorize the inputs it uses in valuation techniques to measure the fair value. The hierarchy is comprised of quoted market prices (Level 1), third party models using observable market information (Level 2) and internal models without observable market information (Level 3). The following table summarizes Atlas' investments at fair value as of June 30, 2014 and as of December 31, 2013 (all amounts in '000s):

Of the total portfolio of fixed income securities, only holdings of U.S. Treasury Securities are classified within Level 1. There were no transfers in or out of Level 2 or Level 3 during either period.

The fair value of the fixed income security in Level 3 was calculated using risk-adjusted value ranges and estimates, and the asset is the same at June 30, 2014 as at December 31, 2013 . In the six month period ended June 30, 2014 , approximately $251 ,000 was recognized in investment income from this investment. The other investments in Level 3 at June 30, 2014 had an effect on income for the six month period ended June 30, 2014 of $93 ,000. These securities received Level 3 classification due to the absence of fair value quotes from Atlas' third party valuation service provider.

Though Atlas believes its valuation methods are appropriate, the use of different methodologies or assumptions to determine its fair value could result in a different fair value as of June 30, 2014 and December 31, 2013 . Management does not believe that reasonable changes to the inputs to its valuation methodology would result in a significantly higher or lower fair value measurement.

Capital management - The Company manages capital using both regulatory capital measures and internal metrics. The Company’s capital is primarily derived from common shareholders’ equity, retained deficit and accumulated other comprehensive income (loss).

As a holding company, Atlas could derive cash from its insurance subsidiaries generally in the form of dividends to meet its obligations, which will primarily consist of operating expense payments. Atlas’ insurance subsidiaries fund their obligations primarily through premium and investment income and maturities in the securities portfolio. The insurance subsidiaries require regulatory approval for the return of capital and, in certain circumstances, prior to the payment of dividends. In the event that dividends available to the holding company are inadequate to cover its operating expenses, the holding company would need to raise capital, sell assets or incur future debt.

The insurance subsidiaries must each maintain a minimum statutory capital and surplus of $1.5 million and $2.4 million under the provisions of the Illinois Insurance Code and the Missouri Insurance Code, respectively. Dividends may only be paid from statutory unassigned surplus, and payments may not be made if such surplus is less than a stipulated amount. The dividend restriction is the greater of statutory net income or 10% of total statutory capital and surplus.

At June 30, 2014 our insurance subsidiaries had a combined statutory surplus of $60.7 million and had combined net written premiums and combined net income for the six months ended June 30, 2014 of $50.6 million and $3.3 million , respectively.

At December 31, 2013 our insurance subsidiaries had a combined statutory surplus of $53.1 million and had combined net written premiums and combined net income for the twelve months ended December 31, 2013 of $80.5 million and $7.3 million , respectively.

Atlas did not declare or pay any dividends to its common shareholders during the six month period ended June 30, 2014 or in the year ended December 31, 2013 .

As of June 30, 2014 , Atlas held a cash balance of $23.7 million at its holding company as a result of the equity raise during the second quarter of 2014.

7. INCOME TAXES

Due to the reversal of the valuation allowance which has offset our tax expense, Atlas' effective tax rate was 3.8% and 2.1% for the three and six month periods ended June 30, 2014 , respectively, compared to the U.S. statutory income tax rate of 34% as shown below (all amounts in '000s):