First Acceptance Corporation
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 |
For the Fiscal Year Ended June 30, 2008
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission file number 001-12117
FIRST ACCEPTANCE CORPORATION
(Exact name of registrant as specified in its charter)
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Delaware
(State or other jurisdiction of
incorporation or organization)
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75-1328153
(I.R.S. Employer Identification No.) |
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3322 West End Ave. Ste. 1000, Nashville, Tennessee
(Address of principal executive offices)
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37203
(Zip Code) |
(615) 844-2800
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Title of Each Class
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Name of exchange on which registered |
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Common Stock, $.01 par value per share
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New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section
13 or 15(d) of the Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o |
Accelerated filer þ |
Non-accelerated filer o (Do not check if a smaller reporting company) |
Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Act). Yes o No þ
The aggregate market value of the voting stock held by non-affiliates of the registrant, based
on the closing price of these shares on the New York Stock Exchange on December 31, 2007, was
$70,532,976. For the purposes of this disclosure only, the registrant has assumed that its
directors, executive officers and beneficial owners of 5% or more of the registrants common stock
are the affiliates of the registrant.
As of September 10, 2008, there were 48,054,667 shares of the registrants common stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
All of the information called for by Part III of this report is incorporated by reference to
the Definitive Proxy Statement for our 2008 Annual Meeting of Shareholders, which will be held on
November 5, 2008.
FIRST ACCEPTANCE CORPORATION 10-K
Index to Annual Report on Form 10-K
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FIRST ACCEPTANCE CORPORATION 10-K
PART I
Item 1. Business
General
First Acceptance Corporation (the Company, we or us) is a retailer, servicer and
underwriter of non-standard personal automobile insurance based in Nashville, Tennessee. We
currently write non-standard personal automobile insurance in 12 states and are licensed as an
insurer in 13 additional states. Non-standard personal automobile insurance is made available to
individuals who are categorized as non-standard because of their inability or unwillingness to
obtain standard insurance coverage due to various factors, including payment history, payment
preference, failure in the past to maintain continuous insurance coverage, driving record and/or
vehicle type, and in most instances who are required by law to buy a minimum amount of automobile
insurance. As of September 1, 2008, we leased and operated 431 retail locations, staffed by
employee-agents. Our employee-agents exclusively sell non-standard automobile insurance products
either underwritten or serviced by us.
Our Business Strategy
We have grown as a provider of non-standard personal automobile insurance by adhering to a
focused business model and disciplined execution of our operating strategy. Our business model
includes the following core strategies:
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Integrated Operations. To meet the preference of our customers for convenient, personal
service, we have integrated the retail distribution, underwriting and service functions of
personal automobile insurance into one system. By doing so, we are able to provide prompt
and personal service to meet effectively the insurance needs of our customers, while
capturing revenue that would otherwise be shared with several participants under a
traditional, non-integrated insurance business model. Our integrated model is supported by
both point of sale agency and back office systems. |
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Extensive Office Network. We emphasize the use of employee-agents as the cornerstone of
our customer relationship. We believe our customers value face-to-face contact, speed of
service and convenient locations. Consequently, we train our employee-agents to cultivate
client relationships and utilize real-time service and information enabled by access to our
information systems. As of September 1, 2008, we leased and operated 431 retail sales
offices staffed with our employee-agents and located strategically in geographic markets to
reach and service our customers. |
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Favorable Customer Payment Plans. Our customers can initiate insurance coverage with a
modest down payment. Any remaining premium is paid in monthly installments over the term
of the policy. We believe this modest initial payment and favorable payment plan is a
major factor in our success in meeting the market demand for low monthly insurance
payments. |
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Strong Sales and Marketing. We build brand recognition and generate valuable sales
leads through extensive use of television advertising, Yellow Pages® advertisements and a
broad network of retail sales offices. |
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Efficient Systems. We have developed systems that enable timely and efficient
communication and data sharing among the various segments of our integrated operations. All
of our retail sales office computers transmit information directly to our central
processing computer where policy information, customer profiles, risk assessment and
underwriting criteria are entered and stored in our database. |
Our Business Model
We believe our operations benefit from our ability to identify and satisfy the needs of our
target customers and eliminate many of the inefficiencies associated with a traditional automobile
insurance model. We have developed our business model by drawing on significant experience in the automobile insurance
industry. We are a vertically integrated business that acts as the agency, servicer and
underwriter of non-standard personal automobile
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FIRST ACCEPTANCE CORPORATION 10-K
insurance. We own three insurance company
subsidiaries: First Acceptance Insurance Company, Inc. (FAIC), First Acceptance Insurance Company
of Georgia, Inc. (FAIC-GA) and First Acceptance Insurance Company of Tennessee, Inc. (FAIC-TN).
Our retail locations are staffed by employee-agents who exclusively sell insurance products
underwritten by us. Our vertical integration, combined with our conveniently located retail
locations, enables us to control the point of sale and to retain significant revenue that would
otherwise be lost in a traditional, non-integrated insurance business model. We generate additional
revenue by fully servicing our book of business, which often allows us to collect policy, billing
and other fees.
Our strategy is to offer customers automobile insurance with low down payments, competitive
equal monthly payments, convenient locations and a high level of personal service. This strategy
makes it easier for our customers to obtain automobile insurance, which is legally mandated in the
states in which we currently operate. In addition, we accept customers for our insurance who have
previously terminated coverage provided by us without imposing any additional requirements on such
customers. Currently, our policy renewal rate (the percentage of policies that are renewed after
completion of the full uninterrupted policy term) is approximately 36%, which, due to the payment
patterns of our customers, is lower than the average renewal rate of standard personal automobile
insurance providers. We are able to accept a low down payment because we process all business
through our centralized information systems. Our business model and systems allow us to issue
policies efficiently and, when necessary, cancel them to minimize the potential for credit loss
while adhering to regulatory cancellation notice requirements.
In addition to a low down payment and competitive monthly rates, we offer customers valuable
face-to-face contact and speed of service. Many of our customers prefer not to conduct business via
the internet or over the telephone. Substantially all of our customers make their payments at our
retail locations. For these consumers, our employee-agents are not only the face of the Company,
but also the preferred interface for buying insurance.
Our ability to process business quickly and accurately gives us an advantage over more
traditional insurance companies that produce business using independent agents. Our policies are
issued at the point of sale, and applications are processed within two business days, as opposed to
the two or more weeks that is often typical in the automobile insurance industry. The traditional
non-standard personal automobile insurance model typically involves interaction and paperwork
exchange between the insurance company, independent agent and premium finance provider. This
complicated interaction presents numerous opportunities for miscommunication, delays or lost
information. Accordingly, we believe that some of our competitors who rely on the traditional
independent agency model cannot match our efficiency in serving our customer base.
We believe that another distinct advantage of our model over the traditional independent
agency approach is that our employee-agents offer a single non-standard insurance product compared
to many products from many insurance companies. The typical independent agent selling non-standard
personal automobile insurance generally has multiple non-standard insurance companies and premium
finance sources from which to quote based on agent commission, price and other factors. This means
that insurance companies using the independent agent model must compete to provide the most
attractive agent commissions and absolute lowest prices to encourage the independent agent to sell
their product. Our employee-agents sell our non-standard automobile insurance products
exclusively. Therefore, we do not have to compete for the attention of those distributing our
product on the basis of agent commissions, price or other factors.
Personal Automobile Insurance Market
Personal automobile insurance is the largest line of property and casualty insurance in the
United States. According to A.M. Best, for the year ended
December 31, 2007, the total premiums
paid in the non-standard automobile insurance market segment in the United States were
approximately $37 billion, representing approximately 22% of the total personal automobile
insurance market. Personal automobile insurance provides drivers with coverage for liability to
others for bodily injury and property damage and for physical damage to the drivers vehicle from
collision and other perils.
The market for personal automobile insurance is generally divided into three product segments:
non-standard, standard and preferred insurance. Non-standard personal automobile insurance is
designed to be attractive to drivers who prefer to purchase only the minimum amount of coverage required by law or to
minimize the required payment during each payment period.
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FIRST ACCEPTANCE CORPORATION 10-K
Our Products
Our core business involves issuing automobile insurance policies to individuals who are
categorized as non-standard, based primarily on their inability or unwillingness to obtain
insurance coverage from standard carriers due to various factors, including their need for monthly
payment plans, failure to maintain continuous insurance coverage or driving record. We believe that
a majority of our customers seek non-standard insurance due to their failure to maintain continuous
coverage or their need for affordable monthly payments, rather than as a result of poor driving
records. The majority of our customers purchase the minimum amount of coverage required by law.
The average six-month premium on our policies currently in force is $682. We allow most
customers to pay for their insurance with an initial down payment and five equal monthly
installments, which includes a billing fee. We believe that our target customers prefer lower down
payments and level monthly payments over the payment options traditionally offered by other
non-standard providers. Because our centralized information systems enable us to control all
aspects of servicing our insurance policies, we can generally cancel the policy of a customer who
fails to make a payment without incurring a credit loss, while remaining within applicable
regulatory cancellation guidelines.
We use a single product template as the basis for our rates, rules and forms. Product
uniformity simplifies our business and allows speed to market when entering a new state, modifying
an existing program or introducing a new program. In addition, our retail agents, underwriters and
claims adjusters only need to be trained in one basic set of underwriting guidelines and one basic
automobile policy. Programming and systems maintenance are also simplified because we have one
basic product.
In addition to non-standard personal automobile insurance, we also offer our customers
optional products and policies that provide ancillary reimbursements and benefits in the event of
an automobile accident. Those products and policies generally provide reimbursements for medical
expenses and hospital stays as a result of injuries sustained in an automobile accident, automobile
towing and rental, bail bond premiums and ambulance services.
Our Growth Strategy
During fiscal 2008, our business and the non-standard personal automobile insurance industry
were negatively impacted by difficult economic conditions that adversely impacted our customers.
Our business was also negatively impacted by competitive pricing in our markets. As a result, we
did not enter into any new markets during fiscal 2008 and focused our growth strategy on developing
new business in our existing markets. We seek to increase the number of customers in our existing
markets through advertising campaigns and selectively opening new retail sales offices where
appropriate. In the future, we may explore additional growth opportunities by expanding into new
geographic markets through opening new sales offices, pursuing selective acquisitions, including
acquisitions of local agencies who write non-standard automobile insurance for other insurance
companies, and introducing additional insurance products. We anticipate that the current difficult
economic conditions will continue to impact our customers and our business during fiscal 2009.
Competition
The non-standard personal automobile insurance business is highly competitive. Based upon data
compiled from A.M. Best, we believe that, as of December 31, 2007, ten insurance groups accounted
for approximately 68% of the approximately $37 billion non-standard personal automobile insurance
market segment. We are not a member of these groups. We believe that our primary competition comes
not only from national companies or their subsidiaries, but also from non-standard insurers and
independent agents that operate in specific regions or states. We compete against other vertically
integrated insurance companies and independent agencies that market insurance on behalf of a number
of insurers. We compete with these other insurers on factors such as initial down payment,
availability of monthly payment plans, price, customer service and claims service. We believe that
our significant competitors are the Berkshire Hathaway insurance group (including GEICO), the
Bristol West insurance group, the Direct General insurance group, the Infinity insurance group, the
Progressive insurance group, the Safe Auto insurance group, the Permanent General insurance group,
and the AIG insurance group.
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FIRST ACCEPTANCE CORPORATION 10-K
Marketing and Distribution
Our marketing strategy is based on promoting brand recognition of our product and encouraging
prospective customers to visit one of our retail locations. Our advertising strategy combines
low-cost television advertising with local print media advertising, such as the Yellow Pages®. We
market our business under the name Acceptance Insurance in all areas except in the Chicago-area,
where we use the names Yale and Insurance Plus.
We primarily distribute our products through our retail sales offices. We believe the local
office concept is attractive to most of our customers, as they desire the face-to-face assistance
they cannot receive via the internet or over the telephone. Our advertisements promote local phone
numbers that are answered at either the local retail office or one of our regional customer service
centers, which are located in Nashville, Tennessee, Chicago, Illinois and Houston, Texas. We
provide quotes over the telephone highlighting our low down payment and monthly payments, and
direct prospective customers to the nearest local retail office to complete an application. The
entire sales process can be completed at the local retail office where the down payment is
collected and a policy issued. Future payments can be made either at the local office or mailed to
our customer service centers.
During the fiscal year ended June 30, 2008, we generated approximately 97% of our total
premiums earned from our retail locations. In select geographic areas in Tennessee, four
independently-owned insurance agencies write non-standard insurance policies through our insurance
company subsidiaries. Although these agencies operate under their own name and transact other
insurance business, they write all of their non-standard automobile insurance business through us
using our information systems.
Underwriting and Pricing
Our underwriting and rating systems are fully automated, including on-line driving records,
where available. We believe that our underwriting and pricing systems provide a competitive
advantage to us because they give us the ability to capture relevant pricing information, improve
efficiencies, increase the accuracy and consistency of underwriting decisions and reduce training
costs. Our systems can be modified easily on a state-by-state basis to reflect new rates and
underwriting guidelines.
We set premium rates based on the specific type of vehicle and the drivers age, gender,
marital status, driving experience and location. We review loss trends in each of the states in
which we operate to identify changes in the frequency and severity of accidents and to assess the
adequacy of our rates and underwriting standards. We adjust rates periodically, as necessary and as
permitted by applicable regulatory authorities, to maintain or improve underwriting results in each
market.
Claims Handling
Non-standard personal automobile insurance customers generally have a higher frequency of
claims than preferred and standard personal automobile insurance customers. We focus on controlling
the claims process and costs, thereby limiting losses, by internally managing the entire claims
process. We strive to promptly assess claims, manage against fraud, and identify loss trends and
capture information that is useful in establishing loss reserves and
determining premium rates. Our claims process is designed to promote expedient, fair and consistent
claims handling, while controlling loss adjustment expenses.
As of June 30, 2008, our claims operation had a staff of approximately 280 employees,
including adjusters, appraisers, re-inspectors, special investigators and claims administrative
personnel. We conduct our claims operations out of our Nashville office and through regional claims
offices in Tampa, Florida, Chicago, Illinois and Irving, Texas. Our employees handle all claims
from the initial report of the claim until the final settlement. We believe that directly employing
claims personnel, rather than using independent contractors, results in improved customer service,
lower loss payments and lower loss adjustment expenses. In territories where we do not believe a
staff appraiser would be cost-effective, we utilize the services of independent appraisers to
inspect physical damage to automobiles. The work of independent appraisers is supervised by
regional staff appraisal managers.
While we are strongly committed to settling promptly and fairly the meritorious claims of our
customers and claimants, we are equally committed to defending against non-meritorious claims.
Litigated claims and lawsuits are primarily managed by one of our specially trained litigation
adjusters. Suspicious claims are referred to a special
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FIRST ACCEPTANCE CORPORATION 10-K
investigation unit. When a dispute arises,
we seek to minimize our claims litigation defense costs by attempting to negotiate flat-fee
representation with outside counsel specializing in automobile insurance claim defense. We believe
that our efforts to obtain high quality claims defense litigation services at a fixed or carefully
controlled cost have helped us control claims losses and expenses.
Loss and Loss Adjustment Expense Reserves
Automobile accidents generally result in insurance companies making payments (referred to as
losses) to individuals or companies to compensate for physical damage to an automobile or other
property and/or an injury to a person. Months and sometimes years may elapse between the occurrence
of an accident, report of the accident to the insurer and payment of the claim. Insurers record a
liability for estimates of losses that will be paid for accidents reported to them, which are
referred to herein as case reserves. In addition, because accidents are not always reported
promptly, insurers estimate incurred but not reported, or IBNR, reserves to cover these expected
losses. Insurers also incur expenses in connection with the handling and settling of claims that
are referred to as loss adjustment expenses and record a liability for the estimated costs to
settle their expected unpaid losses.
We are directly liable for loss and loss adjustment expenses under the terms of the insurance
policies underwritten by our insurance company subsidiaries. Each of our insurance company
subsidiaries establishes a reserve for all unpaid losses, both case and IBNR reserves, and
estimates for the cost to settle the claims. We estimate our IBNR reserves by estimating our
ultimate unpaid liability for loss and loss adjustment expense reserves first, and then reducing
that amount by the amount of the cumulative paid claims and by the amount of our case reserves. We
rely primarily on historical loss experience in determining reserve levels on the assumption that
historical loss experience provides a good indication of future loss experience. We also consider
other factors, such as inflation, settlement patterns, legislative activity and litigation trends.
With the assistance of our internal actuarial staff, we review our loss and loss adjustment expense
reserve estimates on a quarterly basis and adjust those reserves each quarter to reflect any
favorable or unfavorable development as experience develops or new information becomes known.
We have experienced rapid and significant growth in recent years, primarily as a result of
expansion into new markets. Estimating our reserves for new markets is more difficult relative to
estimating our reserves in our larger, more mature markets. In new markets, we initially establish
our reserves using our loss experience from other states that we perceive as being similar. As our
historical loss experience in new markets develops, we revise our estimates accordingly. As a
result, we have experienced volatility in our incurred loss and loss adjustment expense for certain
of our new markets, the effect of which has impacted our results of operations and financial
condition.
We periodically review our methods of establishing case and IBNR reserves and update them if
necessary. Our internal actuarial staff, which includes a fully-credentialed actuary, performs
quarterly comprehensive reviews of our reserves and loss trends. We believe that the liabilities
that we have recorded for unpaid losses and loss adjustment expenses at June 30, 2008 are adequate
to cover the final net cost of losses and loss adjustment expenses incurred through that date.
The table below sets forth the year-end reserves since we began operations as an insurance
company following the 2004 acquisition of USAuto Holdings, Inc. (USAuto) and the subsequent
development of these reserves through June 30, 2008. The purpose of the table is to show a cumulative deficiency
or redundancy for each year which represents the aggregate amount by which original estimates of
reserves as of that year-end have changed in subsequent years. The top line of the table presents
the net reserves at the balance sheet date for each of the years indicated. This represents the
estimated amounts of losses and loss adjustment expenses for claims arising in all years that were
unpaid at the balance sheet date, including the IBNR reserve as of the end of each successive year.
The next portion of the table presents the re-estimated amount of the previously recorded reserves
based on experience as of the end of each succeeding year, including cumulative payments since the
end of the respective year. As more information becomes known about the payments and the frequency
and severity of claims for individual years, the estimate changes accordingly. Favorable loss
development, shown as a cumulative redundancy in the table, exists when the original reserve
estimate is greater than the re-estimated reserves. Adverse loss development, which would be shown
as a cumulative deficiency in the table, exists when the original reserve estimate is less than the
re-estimated reserves. Information with respect to the cumulative development of gross reserves,
without adjustment for the effect of reinsurance, also appears at the bottom portion of the table.
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FIRST ACCEPTANCE CORPORATION 10-K
In evaluating the information in the table below, you should note that each amount entered
incorporates the cumulative effect of all changes in amounts entered for prior periods. In
addition, conditions and trends that have affected the development of liability in the past may not
necessarily recur in the future.
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At June 30 (in thousands) |
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2004 |
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2005 |
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2006 |
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2007 |
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2008 |
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Net liability for loss and loss
adjustment expense reserves,
originally estimated |
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$ |
18,137 |
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$ |
39,289 |
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$ |
61,521 |
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$ |
91,137 |
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$ |
101,148 |
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Cumulative amounts paid as of: |
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One year later |
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13,103 |
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28,024 |
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51,420 |
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74,526 |
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Two years later |
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16,579 |
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34,754 |
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62,514 |
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Three years later |
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17,795 |
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37,320 |
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Four years later |
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18,532 |
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Liability re-estimated as of: |
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One year later |
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17,781 |
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37,741 |
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65,386 |
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89,738 |
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Two years later |
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17,244 |
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38,226 |
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68,491 |
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Three years later |
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16,973 |
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37,484 |
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Four years later |
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17,978 |
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Net cumulative redundancy (deficiency) |
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159 |
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1,805 |
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(6,970 |
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1,399 |
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Gross liability end of year |
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$ |
30,434 |
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$ |
42,897 |
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$ |
62,822 |
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$ |
91,446 |
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$ |
101,407 |
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Reinsurance receivables |
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12,297 |
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3,608 |
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1,301 |
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309 |
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259 |
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Net liability end of year |
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$ |
18,137 |
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$ |
39,289 |
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$ |
61,521 |
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$ |
91,137 |
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$ |
101,148 |
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Gross re-estimated liability latest |
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$ |
30,382 |
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$ |
40,926 |
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$ |
69,708 |
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$ |
90,191 |
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Re-estimated reinsurance receivables latest |
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12,404 |
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3,442 |
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1,217 |
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453 |
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Net re-estimated latest |
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$ |
17,978 |
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$ |
37,484 |
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$ |
68,491 |
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$ |
89,738 |
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Gross cumulative redundancy (deficiency) |
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$ |
52 |
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$ |
1,971 |
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$ |
(6,886 |
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$ |
1,255 |
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At June 30, 2008, we had $101.4 million of loss and loss adjustment expense reserves, which
included $63.5 million in IBNR reserves and $37.9 million in case reserves, all related to our
non-standard personal automobile insurance business. Through September 1, 2004, we maintained
quota-share reinsurance, the run-off of which resulted in a reinsurance receivable of $0.3 million
that is offset against the gross reserves of $101.4 million in the above table. For a
reconciliation of net loss and loss adjustment expense reserves from the beginning to the end of
the year for the last two fiscal years, see Note 10 to our consolidated financial statements.
As reflected in the table above, on reserves as of June 30, 2007, we have experienced a
favorable net reserve development of $1.4 million, which decreased our loss and loss adjustment
expense reserves for prior accident years and increased our income before income taxes for the 2008 fiscal year. We believe
that this development was attributable to the inherent imprecision in estimating reserves and was
not the result of any individual factor.
As reflected in the table above, on reserves as of June 30, 2006, we have experienced a
cumulative adverse net reserve development of $7.0 million. We believe that this development was
attributable to (i) the inherent imprecision in estimating reserves, (ii) the limited historical
loss experience in our new states which requires more judgment in determining our loss reserve
estimates for those states and (iii) an unanticipated increase in paid frequency in Florida related
to the bodily injury and Personal Injury Protection (PIP) coverages. We also experienced
volatility as a result of an unanticipated change in severity from a greater occurrence of large
losses (losses of $10,000 or above) in our mature states.
For the fiscal year ended June 30, 2008, our loss and loss adjustment expense reserves were
determined by our internal actuary. Loss and loss adjustment expense reserve estimates were
reviewed on a quarterly basis and
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FIRST ACCEPTANCE CORPORATION 10-K
adjusted each quarter to reflect any favorable or adverse
development. Development assumptions were based upon historical accident quarters. We analyzed our
reserves for each type of coverage, by state and for loss and loss adjustment expense to determine
our loss and loss adjustment expense reserves. To determine the best estimate, we reviewed the
results of five estimation methods, including the incurred development method, the paid development
method, the incurred Bornhuetter-Ferguson method, the paid Bornhuetter-Ferguson method, and the
counts/averages method for each set of data. Each review developed a point estimate for a subset of
our business. We did not prepare separate point estimates for our entire business using each of the
estimation methods. In determining our loss and loss adjustment expense reserves, we selected
different estimation methods as appropriate for the various subsets of our business, and the method
selected varied by coverage and by state, and considerations included the number and value of the
case reserves for open claims, incurred and paid loss relativities, and suspected biases for each
of the procedures. Other factors considered in establishing reserves include assumptions regarding
loss frequency and loss severity. We believe assumptions regarding loss frequency are reliable
because injured parties generally report their claims within a reasonably short period of time
after an accident. Loss severity is more difficult to estimate because severity is affected by
changes in underlying costs, including medical costs, jury verdicts and regulatory changes.
Based upon the foregoing, we calculated a single point estimate of our net loss and loss
adjustment expense reserves as of June 30, 2008. We believe that estimate is our best estimate of
our loss and loss adjustment expense reserves at June 30, 2008. The loss and loss adjustment
expense reserves in our financial statements for the fiscal year ended June 30, 2008 are equal to
the estimate determined by our internal actuary.
We believe the estimate regarding changes in loss severity is the most significant factor
impacting the IBNR reserves estimate. We believe that a one percent (1%) increase or decrease over
the expected change in loss severity is reasonably likely. A one percent (1%) increase over the
expected change in loss severity would result in adverse development of net loss and loss
adjustment expense reserve levels at June 30, 2008 of approximately $5.0 million. Conversely, a one
percent (1%) decrease in the expected change in loss severity would result in favorable development
of net loss and loss adjustment expense reserve levels at June 30, 2008 of approximately $5.0
million.
Reinsurance
Reinsurance is an arrangement in which a company called a reinsurer agrees in a contract,
often referred to as a treaty, to assume specified risks written by an insurance company, known as
a ceding company, by paying the insurance company all or a portion of the insurance companys
losses arising under specified classes of insurance policies. Insurance companies like us can use
reinsurance to reduce their exposures, to increase their underwriting capacity and to manage their
capital more efficiently. Through August 31, 2004, our insurance companies relied on quota-share
reinsurance to maintain our exposure to loss at or below a level that was within the capacity of
our capital resources. In quota-share reinsurance, the reinsurer agrees to assume a specified
percentage of the ceding companys losses arising out of a defined class of business (for example,
50% of all losses arising from non-standard personal automobile insurance written in a particular
state in a particular year) in exchange for a corresponding percentage of premiums, less a ceding
commission as compensation for underwriting costs incurred by the ceding company.
Historically, our insurance companies ceded a portion of their non-standard personal
automobile insurance premiums and losses to unaffiliated reinsurers in accordance with these
contracts. Through August 2004, we had in place a quota-share treaty whereby we ceded approximately
50% of the premiums written by our insurance company subsidiaries. Effective September 2004, as a result of available liquidity to increase the
statutory capital and surplus of our insurance company subsidiaries, we non-renewed our quota-share
reinsurance treaty.
Although FAIC is licensed in Texas, some of our business there is currently written by a
managing general agency subsidiary through a county mutual insurance company and is assumed by us
through 100% quota-share reinsurance.
At June 30, 2008, our reinsurance receivables totaled $0.3 million, which reflects the run-off
of the quota-share reinsurance. All reinsurance receivables were unsecured and due from
Transatlantic Reinsurance Company, a member of American International Group, Inc., which is rated
A+ (Superior) by A.M. Best.
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FIRST ACCEPTANCE CORPORATION 10-K
Technology
The effectiveness of our business model depends in part on the effectiveness of our
internally-developed information technology systems. Our information systems enable timely and
efficient communication and data-sharing among the various segments of our integrated operations,
including our retail sales offices, insurance underwriters and claims processors. We believe that
this sharing capability provides us with a competitive advantage over many of our competitors, who
must communicate with unaffiliated premium finance companies and with a large number of independent
agents, many of whom use different recordkeeping and information systems that may not be fully
compatible with the insurance companys systems.
Sales Office Automation. We have emphasized standardization and integration of our systems
among our subsidiaries to facilitate the automated capture of information at the earliest point in
the sales cycle. All of our retail sales offices transmit information directly to our central
office where policy information is added to our systems with little additional handling. Our sales
offices also have immediate access to current information on policies through a common network
interface or through a distributed database downloaded from our central office. Our systems enable
our retail sales offices to process new business, renewals and endorsements and issue policies,
declaration pages and identification cards.
Payment Processing. Most of our customers visit our sales offices at least once a month to
make a payment on their policies. System-generated receipts are required for all payments
collected in our sales offices. Our sales offices generate balancing reports at the end of each day
and bank deposits are made electronically through the use of check-imaging technology. Typically,
payments are automatically applied to the applicable policies during the night following their
collection in our sales offices. This results in fewer notices of intent to cancel being generated
and fewer policies being canceled that must be reinstated if a customers late payment is processed
after cancellation. We believe that our payment processing methods reduce mailing costs and limit
unwarranted policy cancellations.
Ratings
In January 2008, A.M. Best, which rates insurance companies based on factors of concern to
policyholders, reaffirmed the ratings of our property and casualty insurance company subsidiaries
at B (Fair). FAIC-TN also received its initial rating at B (Fair). The B (Fair) rating is
the seventh highest rating amongst a scale of 15 ratings, which currently range from A++
(Superior) to F (In Liquidation). Publications of A.M. Best indicate that the B (Fair) rating
is assigned to those companies that in A.M. Bests opinion have a fair ability to meet their
ongoing obligations to policyholders, but are financially vulnerable to adverse changes in
underwriting and economic conditions. In evaluating a companys financial and operating
performance, A.M. Best reviews the companys profitability, leverage and liquidity, as well as its
book of business, the adequacy and soundness of its reinsurance, the quality and estimated market
value of its assets, the adequacy of its loss reserves, the adequacy of its surplus, its capital
structure, the experience and competence of its management and its market presence. A.M. Bests
ratings reflect its opinion of an insurance companys financial strength, operating performance and
ability to meet its obligations to policyholders, and are not recommendations to potential or
current investors to buy, sell or hold our common stock.
Financial institutions and reinsurance companies sometimes use the A.M. Best ratings to help
assess the financial strength and quality of insurance companies. The current ratings of our
property and casualty insurance subsidiaries or their failure to maintain such ratings may dissuade
a financial institution or reinsurance company from conducting business with us or increase our
interest or reinsurance costs, respectively. We do not believe that the majority of our customers
are motivated to purchase our products and services based on our A.M. Best rating.
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FIRST ACCEPTANCE CORPORATION 10-K
Regulatory Environment
Insurance Company Regulation. We and our insurance company subsidiaries are regulated by
governmental agencies in the states in which we conduct business and by various federal statutes
and regulations. These state regulations vary by jurisdiction but, among other matters, usually
involve:
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regulating premium rates and forms; |
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setting minimum solvency standards; |
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setting capital and surplus requirements; |
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licensing companies, agents and, in some states, adjusters; |
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setting requirements for and limiting the types and amounts of investments; |
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establishing requirements for the filing of annual statements and other financial
reports; |
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conducting periodic statutory examinations of the affairs of insurance companies; |
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requiring prior approval of changes in control and of certain transactions with
affiliates; |
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limiting the amount of dividends that may be paid without prior regulatory approval; and |
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setting standards for advertising and other market conduct activities. |
Required Licensing. We operate under licenses issued by various state insurance authorities.
Such licenses may be of perpetual duration or periodically renewable, provided we continue to meet
applicable regulatory requirements. The licenses govern, among other things, the types of insurance
coverages and products that may be offered in the licensing state. Such licenses are typically
issued only after an appropriate application is filed and prescribed criteria are met. All of our
licenses are in good standing. Currently, we hold property and liability insurance licenses in the
following 25 states:
Alabama
Arizona
Arkansas
Colorado
Florida
Georgia
Illinois
Indiana
Iowa
Kansas
Kentucky
Louisiana
Mississippi
Missouri
Nevada
New Mexico
Ohio
Oklahoma
Pennsylvania
South Carolina
Tennessee
Texas
Utah
Virginia
West Virginia
In addition, as required by our current operations, we hold managing general agency licenses
in Texas and Florida and motor club licenses in Mississippi and Tennessee. To expand into a new
state or offer a new line of insurance or other new product, we must apply for and obtain the
appropriate licenses.
Insurance Holding Company Regulation. We operate as an insurance holding company system and
are subject to regulation in the jurisdictions in which our insurance company subsidiaries conduct
business. These regulations require that each insurance company in the holding company system
register with the insurance department of its state of domicile and furnish information concerning
the operations of companies within the holding company system which may materially affect the
operations, management or financial condition of the insurers within the holding company domiciled
in that state. We have insurance company subsidiaries that are organized and domiciled under the
insurance statutes of Texas, Georgia and Tennessee. The insurance laws in each of these states
similarly provide that all transactions among members of a holding company system be done at arms
length and be shown to be fair and reasonable to the regulated insurer. Transactions between
insurance company subsidiaries and their parents and affiliates typically must be disclosed to the
state regulators, and any material or extraordinary transaction requires prior approval of the
applicable state insurance regulator. In addition, a change of control of a domestic insurer or of
any controlling person requires the prior approval of the state insurance regulator. In general,
any person who acquires 10% or more of the outstanding voting securities of the insurer or its
parent company is presumed to have acquired control of the domestic insurer. To the best of our
knowledge, we are in compliance with the regulations discussed above.
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FIRST ACCEPTANCE CORPORATION 10-K
Restrictions on Paying Dividends. We rely on dividends from our insurance company
subsidiaries to meet corporate cash requirements. State insurance regulatory authorities require
insurance companies to maintain specified levels of statutory capital and surplus. The amount of an
insurers capital and surplus following payment of any dividends must be reasonable in relation to
the insurers outstanding liabilities and adequate to meet its financial needs. Prior approval from
state insurance regulatory authorities is generally required in order for an insurance company to
declare and pay extraordinary dividends. The payment of ordinary dividends is limited by the amount
of capital and surplus available to the insurer, as determined in accordance with state statutory
accounting practices and other applicable limitations. State insurance regulatory authorities that
have jurisdiction over the payment of dividends by our insurance company subsidiaries may in the
future adopt statutory provisions more restrictive than those currently in effect. See Note 21 to
our consolidated financial statements for a discussion of the ability of our insurance company
subsidiaries to pay dividends.
Regulation of Rates and Policy Forms. Most states in which our insurance company subsidiaries
operate have insurance laws that require insurance companies to file premium rate schedules and
policy or coverage forms for review and approval. In many cases, such rates and policy forms must
be approved prior to use. State insurance regulators have broad discretion in judging whether an
insurers rates are adequate, not excessive and not unfairly discriminatory. Generally, property
and casualty insurers are unable to implement rate increases until they show that the costs
associated with providing such coverage have increased. The speed at which an insurer can change
rates in response to competition or increasing costs depends, in part, on the method by which the
applicable states rating laws are administered. There are three basic rate administration systems:
(i) the insurer must file and obtain regulatory approval of the new rate before using it; (ii) the
insurer may begin using the new rate and immediately file it for regulatory review; or (iii) the
insurer may begin using the new rate and file it within a specified period of time for regulatory
review. Under all three rating systems, the state insurance regulators have the authority to
disapprove the rate subsequent to its filing. Thus, insurers who begin using new rates before the
rates are approved may be required to issue premium refunds or credits to policyholders if the new
rates are ultimately deemed excessive and disapproved by the applicable state insurance
authorities. In addition, in some states there has been pressure in the past years to reduce
premium rates for automobile and other personal insurance or to limit how often an insurer may
request increases for such rates. To the best of our knowledge, we are in compliance with all such
applicable rate regulations.
Guaranty Funds. Under state insurance guaranty fund laws, insurers doing business in a state
can be assessed for certain obligations of insolvent insurance companies to policyholders and
claimants. Maximum contributions required by law in any one year vary between 1% and 2% of annual
premiums written in that state. In most states, guaranty fund assessments are recoverable either
through future policy surcharges or offsets to state premium tax liability. To date, we have not
received any material unrecoverable assessments.
Investment Regulation. Our insurance company subsidiaries are subject to state laws and
regulations that require diversification of their investment portfolios and limitations on the
amount of investments in certain categories. Failure to comply with these laws and regulations
would cause non-conforming investments to be treated as non-admitted assets for purposes of
measuring statutory surplus and, in some instances, would require divestiture. If a non-conforming
asset is treated as a non-admitted asset, it would lower the affected subsidiarys surplus and
thus, its ability to write additional premiums and pay dividends. To the best of our knowledge, our
insurance company subsidiaries are in compliance with all such investment regulations.
Restrictions on Cancellation, Non-Renewal or Withdrawal. Many states have laws and
regulations that limit an insurers ability to exit a market. For example, certain states limit an
automobile insurers ability to cancel or not renew policies. Some states prohibit an insurer from
withdrawing one or more lines of business from the state, except pursuant to a plan approved by the
state insurance department. The state insurance department may disapprove a plan that may lead to
market disruption. Laws and regulations that limit cancellations and non-renewals and that subject
business withdrawals to prior approval requirements may restrict an insurers ability to exit
unprofitable markets. To the best of our knowledge, we are in compliance with all such laws and
regulations.
Privacy Regulations. In 1999, the United States Congress enacted the Gramm-Leach-Bliley Act,
which protects consumers from the unauthorized dissemination of certain personal information.
Subsequently, the majority of states have implemented additional regulations to address privacy
issues. These laws and regulations apply to all financial institutions, including insurance
companies, and require us to maintain appropriate procedures for managing and protecting certain
personal information of our customers and to fully disclose our privacy practices to our customers.
We may also be exposed to future privacy laws and regulations, which could impose additional costs
10
FIRST ACCEPTANCE CORPORATION 10-K
and impact our results of operations or financial condition. To the best of our knowledge, we are
in compliance with all current privacy laws and regulations.
Licensing of Our Employee-Agents and Adjusters. All of our employees who sell, solicit or
negotiate insurance are licensed, as required, by the state in which they work, for the applicable
line or lines of insurance they offer. Our employee-agents generally must renew their licenses
annually and complete a certain number of hours of continuing education. In certain states in which
we operate, our insurance claims adjusters are also required to be licensed and are subject to
annual continuing education requirements.
Unfair Claims Practices. Generally, insurance companies, adjusting companies and individual
claims adjusters are prohibited by state statutes from engaging in unfair claims practices which
could indicate a general business practice. Unfair claims practices include, but are not limited
to:
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misrepresenting pertinent facts or insurance policy provisions relating to coverages at
issue; |
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failing to acknowledge and act reasonably promptly upon communications regarding claims
arising under insurance policies; |
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failing to affirm or deny coverage of claims within a reasonable time after proof of
loss statements have been completed; |
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attempting to settle claims for less than the amount to which a reasonable person would
have believed such person was entitled; |
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attempting to settle claims on the basis of an application that was altered without
notice to, knowledge or consent of the insured; |
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making known to insureds or claimants a policy of appealing from arbitration awards in
favor of insureds or claimants for the purpose of compelling them to accept settlements or
compromises less than the amount awarded in arbitration; |
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delaying the investigation or payment of claims by requiring an insured, claimant or the
physician of either to submit a preliminary claim report and then requiring the subsequent
submission of formal proof of loss forms, both of which submissions contain substantially
the same information; |
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failing to settle claims promptly, where liability has become reasonably clear, under
one portion of the insurance policy coverage in order to influence settlements under other
portions of the insurance policy coverage; and |
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not attempting in good faith to effectuate prompt, fair and equitable settlements of
claims in which liability has become reasonably clear. |
We set business conduct policies and conduct regular training to make our employee-adjusters
and other claims personnel aware of these prohibitions, and we require them to conduct their
activities in compliance with these statutes. To the best of our knowledge, we have not engaged in
any unfair claims practices.
Quarterly and Annual Financial Reporting. We are required to file quarterly and annual
financial reports with states utilizing statutory accounting practices that are different from
generally accepted accounting principles (GAAP), which reflect our insurance company subsidiaries
on a going concern basis. The statutory accounting practices used by state regulators, in keeping
with the intent to assure policyholder protection, are generally based on a liquidation concept.
For statutory financial information on our insurance company subsidiaries, see Note 21 to our
consolidated financial statements included in this report.
Periodic Financial and Market Conduct Examinations. The state insurance departments that have
jurisdiction over our insurance company subsidiaries conduct on-site visits and examinations of the
insurers affairs, especially as to their financial condition, ability to fulfill their obligations
to policyholders, market conduct, claims practices and compliance with other laws and applicable
regulations. Typically, these examinations are conducted every three to five years. In addition, if
circumstances dictate, regulators are authorized to conduct special or target examinations of
insurers, insurance agencies and insurance adjusting companies to address particular concerns or
issues. The results of these examinations can give rise to regulatory orders requiring remedial,
injunctive or other corrective action on the part of the company that is the subject of the
examination. FAIC has been examined by the Tennessee Department of Commerce and Insurance for
financial condition through December 31, 2001. (FAIC redomesticated from Tennessee to Texas in
November 2006.) FAIC-GA has been examined by the Georgia Department of Insurance for financial
condition through December 31, 2004. FAIC-TN received an organizational
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FIRST ACCEPTANCE CORPORATION 10-K
examination by the Tennessee Department of Commerce and Insurance as of December 4, 2006.
Examinations of FAIC and FAIC-GA for financial condition through December 31, 2007 are currently in
process by the Texas Department of Insurance and Georgia Department of Insurance, respectively.
None of our insurance company subsidiaries have ever been the subject of a target examination.
Risk-Based Capital. In order to enhance the regulation of insurer solvency, the National
Association of Insurance Commissioners, or NAIC, has adopted a formula and model law to implement
risk-based capital, or RBC, requirements designed to assess the minimum amount of statutory
capital that an insurance company needs to support its overall business operations and to ensure
that it has an acceptably low expectation of becoming financially impaired. RBC is used to set
capital requirements based on the size and degree of risk taken by the insurer and taking into
account various risk factors such as asset risk, credit risk, underwriting risk, interest rate risk
and other relevant business risks. The NAIC model law provides for increasing levels of regulatory
intervention as the ratio of an insurers total adjusted capital decreases relative to its
risk-based capital, culminating with mandatory control of the operations of the insurer by the
domiciliary insurance department at the so-called mandatory control level. This calculation is
performed on a calendar year basis, and at December 31, 2007, FAIC, FAIC-GA and FAIC-TN all
maintained an RBC level that was in excess of an amount that would require any corrective actions
on their part.
RBC is a comprehensive financial analysis system affecting nearly all types of licensed
insurers, including our insurance company subsidiaries. It is designed to evaluate the relative
financial condition of the insurer by application of a weighting formula to the companys assets
and its policyholder obligations. The key RBC calculation is to recast total surplus, after
application of the RBC formula, in terms of an authorized control level RBC. Once the authorized
control level RBC is determined, it is contrasted against the companys total adjusted capital. A
high multiple generally indicates stronger capitalization and financial strength, while a lower
multiple reflects lesser capitalization and strength. Each states statutes also create certain RBC
multiples at which either the company or the regulator must take action. For example, there are
four defined RBC levels that trigger different regulatory events. The minimum RBC level is called
the company action level RBC and is generally defined as the product of 2.0 and the companys
authorized control level RBC. The authorized control level RBC is a number determined under the
risk-based capital formula in accordance with certain RBC instructions. Next is a regulatory action
level RBC, which is defined as the product of 1.5 and the companys authorized control level RBC.
Below the regulatory action level RBC is the authorized control level RBC. Finally, there is a
mandatory control level RBC, which means the product of 0.70 and the companys authorized control
level RBC.
As long as the companys total adjusted capital stays above the company action level RBC
(i.e., at greater than 2.0 times the authorized control level RBC), regulators generally will not
take any corrective action. However, if an insurance companys total adjusted capital falls below
the company action level RBC, but remains above the regulatory action level RBC, the company is
required to submit an RBC plan to the applicable state regulator(s) that identifies the conditions
that contributed to the substandard RBC level and identifies a remediation plan to increase the
companys total adjusted capital above 2.0 times its authorized control level RBC. If a companys
total adjusted capital falls below its regulatory action level RBC but remains above its authorized
control level RBC, then the regulator may require the insurer to submit an RBC plan, perform a
financial examination or analysis on the companys assets and liabilities, and may issue an order
specifying corrective action for the company to take to improve its RBC number. In the event an
insurance companys total adjusted capital falls below its authorized control level RBC, the state
regulator may require the insurer to submit an RBC plan or may place the insurer under regulatory
supervision. If an insurance companys total adjusted capital were to fall below its mandatory
control level RBC, the regulator is obligated to place the insurer under regulatory control, which
could ultimately include, among other actions, administrative supervision, rehabilitation or
liquidation.
At December 31, 2007, FAICs total adjusted capital was 3.2 times its authorized control level
RBC, requiring no corrective action on FAICs part. Likewise, at December 31, 2007, FAIC-GA and
FAIC-TN had total adjusted capital of 4.3 and 3.4, respectively, times their authorized control
level RBC.
IRIS Ratios. The NAIC Insurance Regulatory Information System, or IRIS, is part of a
collection of analytical tools designed to provide state insurance regulators with an integrated
approach to screening and analyzing the financial condition of insurance companies operating in
their respective states. IRIS is intended to assist state insurance regulators in targeting
resources to those insurers in greatest need of regulatory attention. IRIS consists of two phases:
statistical and analytical. In the statistical phase, the NAIC database generates key financial
ratio results based on financial information obtained from insurers annual statutory statements.
The analytical phase
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FIRST ACCEPTANCE CORPORATION 10-K
is a review of the annual statements, financial ratios and other automated solvency tools. The
primary goal of the analytical phase is to identify companies that appear to require immediate
regulatory attention. A ratio result falling outside the defined range of IRIS ratios is not
considered a failing result; rather, unusual values are viewed as part of the regulatory early
monitoring system. Furthermore, in some years, it may not be unusual for financially sound
insurance companies to have several ratios with results outside the defined ranges.
As of December 31, 2007, FAIC had one IRIS ratio outside the defined range and FAIC-TN had two
outside the defined range as follows:
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FAIC had a ratio outside of the defined range for the change in adjusted
policyholders surplus, which is between plus 25% and minus 10%. The change in adjusted
policyholders surplus excludes amounts related to paid in surplus. During the twelve
months ended December 31, 2007, FAIC reduced its adjusted policyholders surplus by 14%
primarily as the result of paying dividends during the year to its parent company. |
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FAIC-TN had a ratio outside of the defined range for the change in net premiums
written, which is plus or minus 33%, because 2007 was the first year it wrote any
business. FAIC-TN also had a ratio outside of the defined limit for net premiums
written to policyholders surplus, which is 300%. FAIC-TNs ratio of 305% was primarily
the result of a portfolio transfer from FAIC of its Tennessee business on January 1,
2007. Excluding the effect of this one-time transfer, FAIC-TN would have had a net
premiums written to policyholders surplus ratio of 228%. |
FAIC-GA did not have any IRIS ratios outside the defined ranges as of December 31, 2007. These
IRIS results were provided to regulators on February 21, 2008. Since that date, no regulatory
action has been taken, nor is any such action anticipated.
Employees
As of June 30, 2008, we had approximately 1,230 employees. Our employees are not covered by
any collective bargaining agreements.
Available Information
We file reports with the United States Securities and Exchange Commission (SEC), including
Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, and other reports from time to time.
The public may read and copy any materials filed with the SEC at the SECs Public Reference Room at
100 F Street, N.E., Room 1580, NW, Washington D.C. 20549. The public may obtain information about
the operation of the Public Reference Room on-line at www.sec.gov/info/edgar/prrrules.htm or by
calling the SEC at 1-800-SEC-0330. We are an electronic filer, and the SEC maintains an Internet
site at www.sec.gov that contains our reports, proxy and information statements, and other
information filed electronically. These website addresses are provided as inactive textual
references only, and the information provided on those websites is not part of this report and is
therefore not incorporated by reference unless such information is otherwise specifically
referenced elsewhere in this report.
Internet Website
We maintain an internet website at the following address: www.firstacceptancecorp.com. The
information on the Companys website is not incorporated by reference in this Annual Report on Form
10-K. We make available on or through our website certain reports and amendments to those reports
that we file with or furnish to the SEC in accordance with the Securities Exchange Act of 1934, as
amended. These include our annual reports on Form 10-K, our quarterly reports on Form 10-Q and our
current reports on Form 8-K. We make this information available on our website free of charge as
soon as reasonably practicable after we electronically file the information with, or furnish it to,
the SEC.
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FIRST ACCEPTANCE CORPORATION 10-K
Item 1A. Risk Factors
Our loss and loss adjustment expenses may exceed our reserves, which would adversely impact our
results of operations and financial condition.
We establish reserves for the estimated amount of claims under terms of the insurance policies
underwritten by our insurance company subsidiaries. The amount of the reserve is determined based
on historical claims information, industry statistics and other factors. The establishment of
appropriate reserves is an inherently uncertain process due to a number of factors, including the
difficulty in predicting the frequency and severity of claims, the rate of inflation, the rate and
direction of changes in trends, ongoing interpretation of insurance policy provisions by courts,
inconsistent decisions in lawsuits regarding coverage and broader theories of liability. Any
changes in claims settlement practices can also lead to changes in loss payment patterns, which are
used to estimate reserve levels. Recently, our ability to accurately estimate our loss and loss
adjustment expense reserves has been made more difficult by our rapid growth and entry into new
states. If our reserves prove to be inadequate, we will be required to increase our loss reserves
and the amount of any such increase would reduce our income in the period that the deficiency is
recognized. The historic development of reserves for loss and loss adjustment expenses may not
necessarily reflect future trends in the development of these amounts. Consequently, our actual
losses could materially exceed our loss reserves, which would have a material adverse effect on our
results of operations and financial condition.
Our results may fluctuate as a result of cyclical changes in the non-standard personal automobile
insurance industry.
The non-standard personal automobile insurance industry is cyclical in nature. Likewise,
adverse economic conditions impact our customers and many will choose to go uninsured during a weak
economy. In the past, the industry has been characterized by periods of price competition and
excess capacity followed by periods of high premium rates and shortages of underwriting capacity.
If new competitors enter this market, existing competitors may attempt to increase market share by
lowering rates. Such conditions could lead to reduced prices, which would negatively impact our
revenues and profitability. We believe that between 2002 and 2005, the underwriting results in the
non-standard personal automobile insurance industry improved as a result of favorable pricing and
competitive conditions that allowed for broad increases in rate levels by insurers. While we did
witness a stabilization in the industry during 2006 and a robust economy through 2007, more
recently, competitive pricing and the weakening economy have resulted in declines in premiums in
most states. Given the cyclical nature of the industry and the economy, these conditions may
negatively impact our revenues and profitability.
Our investment portfolio may suffer reduced returns or other-than-temporary losses, which could
reduce our profitability.
Our results of operations depend, in part, on the performance of our investment portfolio. As
of June 30, 2008, substantially all of our investment portfolio was invested either directly or
indirectly in debt securities, primarily in state, municipal, corporate and federal government
bonds and collateralized mortgage obligations. Fluctuations in interest rates affect our returns
on, and the fair value of, debt securities. Unrealized gains and losses on debt securities are
recognized in other comprehensive income (loss) and increase or decrease our stockholders equity.
As of June 30, 2008, the amortized cost of our investment portfolio exceeded the fair value by $0.5
million. We believe the unrealized loss is temporary; however, an increase in interest rates could
further reduce the fair value of our investments in debt securities. As of June 30, 2008, the
impact of an immediate 100 basis point increase in market interest rates on our fixed maturities
portfolio would have resulted in an estimated decrease in fair value of 4.2%, or approximately $7.9
million. In addition, defaults by third parties who fail to pay or perform obligations could reduce
our investment income and could also result in investment losses to our portfolio. See Critical
Accounting Policies Investments within Item 7 and Note 3 to our consolidated financial
statements regarding determination of other-than-temporary impairment losses on investment
securities.
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FIRST ACCEPTANCE CORPORATION 10-K
Our business is highly competitive, which may make it difficult for us to market our core products
effectively and profitably.
The non-standard personal automobile insurance business is highly competitive. We believe that
our primary insurance company competition comes not only from national insurance companies or their
subsidiaries, but also from non-standard insurers and independent agents that operate in a specific
region or single state in which we also operate. We believe that our significant competitors are
the Berkshire Hathaway insurance group (including GEICO), the Bristol West insurance group, the
Direct General insurance group, the Infinity insurance group, the Progressive insurance group, the
Safe Auto insurance group, the Permanent General insurance group, and the AIG insurance group.
Some of our competitors have substantially greater financial and other resources than us, and they
may offer a broader range of products or competing products at lower prices. Our revenues,
profitability and financial condition could be materially adversely affected if we are required to
decrease or are unable to increase prices to stay competitive or if we do not successfully retain
our current customers and attract new customers.
Our business may be adversely affected by negative developments in the states in which we operate.
We currently operate in 12 states located primarily in the Southeastern and Midwestern United
States. For the year ended June 30, 2008, approximately 69% of our premiums earned were generated
from non-standard personal automobile insurance policies written in five states. Our revenues and
profitability are affected by the prevailing regulatory, economic, demographic, competitive and
other conditions in the states in which we operate. Changes in any of these conditions could make
it more costly or difficult for us to conduct business. Adverse regulatory developments, which
could include reductions in the maximum rates permitted to be charged, restrictions on rate
increases, fundamental changes to the design or implementation of the automobile insurance
regulatory framework, or economic conditions that result in fewer customers purchasing or
maintaining insurance, could reduce our revenues, increase our expenses or otherwise have a
material adverse effect on our results of operations and financial condition. In addition, these
developments could have a greater effect on us, as compared with more diversified insurers that
also sell other types of automobile insurance products, write other additional lines of insurance
coverages or whose premiums are not as concentrated in a single line of insurance.
Our business may be adversely affected by negative developments in the non-standard personal
automobile insurance industry.
Substantially all of our gross premiums written are generated from sales of non-standard
personal automobile insurance policies. As a result of our concentration in this line of business,
negative developments in the economic, competitive or regulatory conditions affecting the
non-standard personal automobile insurance industry could reduce our revenues, increase our
expenses or otherwise have a material adverse effect on our results of operations and financial
condition. For example, the current difficult economic conditions in the United States have
resulted in fewer customers purchasing and maintaining non-standard personal automobile insurance
policies. In addition, developments affecting the non-standard personal automobile insurance
industry could have a greater effect on us compared with more diversified insurers that also sell
other types of automobile insurance products or write other additional lines of insurance.
Our ability to use net operating loss carryforwards to reduce future tax payments may be limited by
applicable law.
Based on our calculations and in accordance with the rules stated in the Internal Revenue Code
of 1986, as amended (the Code), we do not believe that any ownership change, as described in
the following paragraph and as defined in Section 382 of the Code, has occurred with respect to our
net operating losses (NOLs) and accordingly we believe that there is no existing annual
limitation under Section 382 of the Code on our ability to use NOLs to reduce our future taxable
income. We did not obtain, and currently do not plan to obtain, an Internal Revenue Service (IRS)
ruling or opinion of counsel regarding either of these conclusions.
Generally, an ownership change occurs if certain persons or groups increase their aggregate
ownership of our total capital stock by more than 50 percentage points in any three-year period. If
an ownership change occurs, our ability to use our NOLs to reduce income taxes is limited to an
annual amount (the Section 382 limitation) equal to the fair market value of our stock
immediately prior to the ownership change multiplied by the long term tax-exempt interest rate,
which is published monthly by the IRS. In the event of an ownership change, NOLs that exceed the
Section 382 limitation in any year will continue to be allowed as carryforwards for the remainder
of the carryforward period and such excess NOLs can be used to offset taxable income for years
within the carryforward
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FIRST ACCEPTANCE CORPORATION 10-K
period subject to the Section 382 limitation in each year. Regardless of whether an ownership
change occurs, the carryforward period for NOLs is either 15 or 20 years from the year in which the
losses giving rise to the NOLs were incurred, depending on when those losses were incurred. The
earliest losses that gave rise to our remaining NOLs were incurred in 1994 and will expire in 2009.
The most recent losses that gave rise to our NOLs were incurred in 2003 and will expire in 2023. If
the carryforward period for any NOL were to expire before that NOL had been fully utilized, the use
of the unutilized portion of that NOL would be permanently prohibited. Our use of new NOLs arising
after the date of an ownership change would not be affected by the Section 382 limitation, unless
there were another ownership change after those new NOLs arose.
It is impossible for us to state that an ownership change will not occur in the future. In
addition, limitations imposed by Code Section 382 and the restrictions contained in our certificate
of incorporation may limit our ability to issue additional stock to raise capital or acquire
businesses. To the extent not prohibited by our certificate of incorporation, we may decide in the
future that it is necessary or in our interest to take certain actions that could result in an
ownership change.
Code Section 269 permits the IRS to disallow any deduction, credit or allowance, including the
utilization of NOLs, that otherwise would not be available but for the acquisition of control of a
corporation, including acquisition by merger, for the principal purpose of avoiding federal income
taxes, including avoidance through the use of NOLs. If the IRS were to assert that the principal
purpose of the April 2004 acquisition of USAuto was the avoidance of federal income tax, we would
have the burden of proving that this was not the principal purpose. The determination of the
principal purpose of a transaction is purely a question of fact and requires an analysis of all the
facts and circumstances surrounding the transaction. Courts generally have been reluctant to apply
Code Section 269 where a reasonable business purpose existed for the timing and form of the
transaction, even if the availability of tax benefits was also an acknowledged consideration in the
transaction. We think that Code Section 269 should not apply to the acquisition of USAuto because
we can show that genuine business purposes existed for the USAuto acquisition and that tax
avoidance was not the principal purpose for the merger. Our primary objective of the merger was to
seek long-term growth for our stockholders through an acquisition. To that end, we redeployed a
significant amount of our existing capital and offered our existing stockholders the right to make
a substantial additional investment in the Company to facilitate the acquisition of USAuto. If,
nevertheless, the IRS were to assert that Code Section 269 applied and if such assertion were
sustained, our ability to utilize our existing NOLs would be severely limited or extinguished. Due
to the fact that the application of Code Section 269 is ultimately a question of fact, there can be
no assurance that the IRS would not prevail if it were to assert the application of Code Section
269.
We may have difficulties in managing our expansion into new markets.
Our future growth plans may include expanding into new states by opening new sales offices,
acquiring the business and assets of other companies and possibly introducing additional insurance
products. In order to grow our business successfully, we must apply for and maintain necessary
licenses, properly design and price our products and identify, hire and train new claims,
underwriting and sales employees. Our expansion will also place significant demands on our
management, operations, systems, accounting, internal controls and financial resources. If we fail
to do any one of these well, we may not be able to expand our business successfully. Even if we
successfully complete an acquisition, we face the risk that we may acquire business in states in
which market and other conditions may not be favorable to us. Any failure by us to manage growth
and to respond to changes in our business could have a material adverse effect on our business,
financial condition and results of operations.
We may not be successful in identifying acquisition candidates or integrating their operations,
which could harm our financial results.
In order to grow our business by acquisition, we must identify acquisition candidates and
integrate the acquired operations. If we are unable to identify and acquire appropriate acquisition
candidates, we may experience slower growth. If we do acquire additional companies or businesses,
we could face increased costs, or, if we are unable to successfully integrate the operations of the
acquired business into our operations, we could experience disruption of our business and
distraction of our management, which may not be offset by corresponding increases in revenues. The
integration of operations after an acquisition is subject to risks, including, among others, loss
of key personnel of the acquired company, difficulty associated with assimilating the personnel and
operations of the acquired company, potential disruption of ongoing business, maintenance of uniform standards,
controls, procedures and policies and impairment of the acquired companys reputation and
relationships with its employees and clients. Any of these may result in the loss of customers. It
is also possible that we may not realize, either at all or in a
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FIRST ACCEPTANCE CORPORATION 10-K
timely manner, any or all benefits from recent and future acquisitions and may incur
significant costs in connection with these acquisitions. Failure to successfully integrate future
acquisitions could materially adversely affect the results of our operations.
New pricing, claim and coverage issues and class action litigation are continually emerging in the
automobile insurance industry, and these new issues could adversely impact our revenues or our
methods of doing business.
As automobile insurance industry practices and regulatory, judicial and consumer conditions
change, unexpected and unintended issues related to claims, coverages and business practices may
emerge. These issues can have an adverse effect on our business by changing the way we price and
market our products, extending coverage beyond our underwriting intent, requiring us to obtain
additional licenses or increasing the size of claims. Recent examples of some emerging issues
include:
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concerns over the use of an applicants credit score or zip code as a factor in making
risk selections and pricing decisions; |
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a growing trend of plaintiffs targeting automobile insurers in purported class action
litigation relating to sales and marketing practices and claims-handling practices, such as
total loss evaluation methodology, the use of aftermarket (non-original equipment
manufacturer) parts and the alleged diminution in value to insureds vehicles involved in
accidents; and |
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consumer groups lobbying state legislatures to regulate and require separate licenses
for individuals and companies engaged in the sale of ancillary products or services. |
The effects of these and other unforeseen emerging issues could negatively affect our revenues
or our methods of doing business.
Our insurance company subsidiaries are subject to statutory capital and surplus requirements and
other standards, and their failure to meet these requirements or standards could subject them to
regulatory actions.
Our insurance company subsidiaries are subject to risk-based capital standards, which we refer
to as RBC standards, and other minimum statutory capital and surplus requirements imposed under the
laws of their respective states of domicile. The RBC standards, which are based upon the RBC Model
Act adopted by the NAIC, require our insurance company subsidiaries to annually report their
results of RBC calculations to the state departments of insurance and the NAIC.
Failure to meet applicable RBC requirements or minimum statutory capital and surplus
requirements could subject our insurance company subsidiaries to further examination or corrective
action imposed by state regulators, including limitations on their writing of additional business,
state supervision or even liquidation. Any changes in existing RBC standards or minimum statutory
capital and surplus requirements may require our insurance company subsidiaries to increase their
statutory capital and surplus levels, which they may be unable to do. This calculation is performed
on a calendar year basis, and at December 31, 2007, FAIC, FAIC-GA and FAIC-TN maintained an RBC
level in excess of an amount that would require any corrective actions on their part.
State regulators also screen and analyze the financial condition of insurance companies using
the NAIC Insurance Regulatory Information System, or IRIS. As part of IRIS, the NAIC database
generates key financial ratio results obtained from an insurers annual statutory statements. A
ratio result falling outside the defined range of IRIS ratios may result in further examination by
a state regulator to determine if corrective action is necessary. As of December 31, 2007, FAIC
and FAIC-TN had IRIS ratios outside the defined ranges that were reported to the appropriate
regulatory authorities, but no regulatory authority has informed the insurance company subsidiaries
that it intends to conduct a further examination of their financial condition. We cannot assure
you that regulatory authorities will not conduct any such examination of the financial condition of
our insurance company subsidiaries, or of the outcome of any such investigation. See Business
Regulatory Environment.
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FIRST ACCEPTANCE CORPORATION 10-K
We rely on our information technology and communication systems, and the failure of these systems
could materially adversely affect our business.
Our business is highly dependent on the proprietary integrated technology systems that enable
timely and efficient communication and data sharing among the various segments of our integrated
operations. These systems are used in all our operations, including quotation, policy issuance,
customer service, underwriting, claims, accounting, and communications. We have a technical staff
that develops, maintains and supports all elements of our technology infrastructure. However,
disruption of power systems or communication systems or any failure of our systems could result in
deterioration in our ability to respond to customers requests, write and service new business, and
process claims in a timely manner. We believe we have appropriate types and levels of insurance to
protect our real property, systems, and other assets. However, insurance does not provide full
reimbursement for all losses, both direct and indirect, that may result from an event affecting our
information technology and communication systems.
Due to our largely fixed cost structure, our profitability may decline if our sales volume were to
decline significantly.
Our reliance on leased retail sales offices staffed by employee-agents results in a cost
structure that has a high proportion of fixed costs. In times of increasing sales volume, our
acquisition cost per policy decreases, improving our expense ratio, which we believe is one of the
significant advantages of our business model. However, in times of declining sales volume, the
opposite occurs. During times of declining sales volume we may close some of our retail sales
offices or lay off some employee-agents to reduce our expenses.
Severe weather conditions and other catastrophes may result in an increase in the number and amount
of claims filed against us.
Our business is exposed to the risk of severe weather conditions and other catastrophes.
Catastrophes can be caused by various events, including natural events, such as severe winter
weather, hurricanes, tornados, windstorms, earthquakes, hailstorms, thunderstorms and fires, and
other events, such as explosions, terrorist attacks and riots. The incidence and severity of
catastrophes and severe weather conditions are inherently unpredictable. Severe weather conditions
generally result in more automobile accidents, leading to an increase in the number of claims filed
and/or the amount of compensation sought by claimants.
In the event that a severe weather condition or other major catastrophe were to occur
resulting in property losses to us, we would have to cover such losses using additional resources,
which could increase our losses incurred, cause our statutory capital and surplus to fall below
required levels or otherwise have a material adverse effect on our results of operations and
financial condition.
A few of our stockholders have significant control over us, and their interests may differ from
yours.
Three of our stockholders, Gerald J. Ford, our Chairman of the Board; Stephen J. Harrison, our
Chief Executive Officer and a current director; and Thomas M. Harrison, Jr., our former Executive
Vice President and Secretary and a current director, in the aggregate, control approximately 63% of
our outstanding common stock. If these stockholders acted or voted together, they would have the
power to control the election and removal of our directors. They would also have significant
control over other matters requiring stockholder approval, including the approval of major
corporate transactions and proposed amendments to our certificate of incorporation. In addition,
this concentration of ownership may delay or prevent a change in control of the Company, as well as
frustrate attempts to replace or remove current management, even when a change may be in the best
interests of our other stockholders. Furthermore, the interests of these stockholders may not
always coincide with the interests of the Company or other stockholders.
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FIRST ACCEPTANCE CORPORATION 10-K
Our insurance company subsidiaries are subject to regulatory restrictions on paying dividends to
us.
State insurance laws limit the ability of our insurance company subsidiaries to pay dividends
and require our insurance company subsidiaries to maintain specified minimum levels of statutory
capital and surplus. These restrictions affect the ability of our insurance company subsidiaries to
pay dividends to our holding company and may require our subsidiaries to obtain the prior approval
of regulatory authorities, which could slow the timing of such payments to us or reduce the amount
that can be paid. To the extent our holding company may need to rely, in part, on receiving
dividends from the insurance company subsidiaries to pay its obligations, the limit on the amount
of dividends that can be paid by the insurance company subsidiaries may affect our ability to pay
those obligations. The dividend-paying ability of the insurance company subsidiaries is discussed
in Note 21 to the consolidated financial statements.
We and our subsidiaries are subject to comprehensive regulation and supervision that may restrict
our ability to earn profits.
We and our subsidiaries are subject to comprehensive regulation and supervision by the
insurance departments in the states where our subsidiaries are domiciled and where our subsidiaries
sell insurance and ancillary products, issue policies and handle claims. Certain regulatory
restrictions and prior approval requirements may affect our subsidiaries ability to operate,
change their operations or obtain necessary rate adjustments in a timely manner or may increase our
costs and reduce profitability.
Among other things, regulation and supervision of us and our subsidiaries extends to:
Required Licensing. We and our subsidiaries operate under licenses issued by various state
insurance authorities. These licenses govern, among other things, the types of insurance coverages,
agency and claims services and motor club products that we and our subsidiaries may offer consumers
in the particular state. If a regulatory authority denies or delays granting any such license, our
ability to enter new markets or offer new products could be substantially impaired.
Transactions Between Insurance Companies and Their Affiliates. Our insurance company
subsidiaries are organized and domiciled under the insurance statutes of Texas, Georgia and
Tennessee. The insurance laws in these states provide that all transactions among members of an
insurance holding company system must be done at arms length and shown to be fair and reasonable
to the regulated insurer. Transactions between our insurance company subsidiaries and other
subsidiaries generally must be disclosed to the state regulators, and prior approval of the
applicable regulator generally is required before any material or extraordinary transaction may be
consummated. State regulators may refuse to approve or delay approval of such a transaction, which
may impact our ability to innovate or operate efficiently.
Regulation of Rates and Policy Forms. The insurance laws of most states in which our
insurance company subsidiaries operate require insurance companies to file premium rate schedules
and policy forms for review and approval. State insurance regulators have broad discretion in
judging whether our rates are adequate, not excessive and not unfairly discriminatory. The speed at
which we can change our rates in response to market conditions or increasing costs depends, in
part, on the method by which the applicable states rating laws are administered. Generally, state
insurance regulators have the authority to disapprove our requested rates. If as permitted in some
states, we begin using new rates before they are approved, we may be required to issue premium
refunds or credits to our policyholders if the new rates are ultimately disapproved by the
applicable state regulator. In addition, in some states, there has been pressure in past years to
reduce premium rates for automobile and other personal insurance or to limit how often an insurer
may request increases for such rates. In states where such pressure is applied, our ability to
respond to market developments or increased costs in that state may be adversely affected.
Investment Restrictions. Our insurance company subsidiaries are subject to state laws and
regulations that require diversification of their investment portfolios and that limit the amount
of investments in certain categories. Failure to comply with these laws and regulations would cause
non-conforming investments to be treated as non-admitted assets for purposes of measuring statutory
capital and surplus and, in some instances, would require
divestiture. If a non-conforming asset is treated as a non-admitted asset, it would lower the
affected subsidiarys capital and surplus and thus, its ability to write additional premiums and
pay dividends.
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FIRST ACCEPTANCE CORPORATION 10-K
Restrictions on Cancellation, Non-Renewal or Withdrawal. Many states have laws and
regulations that limit an insurers ability to exit a market. For example, certain states limit an
automobile insurers ability to cancel or not renew policies. Some states prohibit an insurer from
withdrawing from one or more lines of business in the state, except pursuant to a plan approved by
the state insurance department. The state insurance department may disapprove a plan that may lead
to market disruption. These laws and regulations that limit cancellations and non-renewals and that
subject business withdrawals to prior approval restrictions could limit our ability to exit
unprofitable markets or discontinue unprofitable products in the future.
Provisions in our certificate of incorporation and bylaws may prevent a takeover or a change in
management that you may deem favorable.
Our certificate of incorporation contains prohibitions on the transfer of our common stock to
avoid limitations on the use of the NOL carryforwards and other federal income tax attributes that
we inherited from our predecessor. These restrictions could prevent or inhibit a third party from
acquiring us. Our certificate of incorporation generally prohibits, without the prior approval of
our board of directors, any transfer of common stock, any subsequent issue of voting stock or stock
that participates in our earnings or growth, and certain options with respect to such stock, if the
transfer of such stock or options would (i) cause any group or person to own 4.9% or more, by
aggregate value, of the outstanding shares of our common stock, (ii) increase the ownership
position of any person or group that already owns 4.9% or more, by aggregate value, of the
outstanding shares of our common stock, or (iii) cause any person or group to be treated like the
owner of 4.9% or more, by aggregate value, of our outstanding shares of common stock for tax
purposes.
Our certificate of incorporation and bylaws also contain the following provisions that could
prevent or inhibit a third party from acquiring us:
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the requirement that only stockholders owning at least one-third of the outstanding shares of our common stock may call a special stockholders meeting; and |
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the requirement that stockholders owning at least two-thirds of the outstanding shares
of our common stock must approve any amendment to our certificate of incorporation
provisions concerning the transfer restrictions and the ability to call special
stockholders meetings. |
In addition, under our certificate of incorporation, we may issue shares of preferred stock on
terms that are unfavorable to the holders of our common stock. The issuance of shares of preferred
stock could also prevent or inhibit a third party from acquiring us. The existence of these
provisions could depress the price of our common stock, could delay or prevent a takeover attempt
or could prevent attempts to replace or remove incumbent management.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
We lease office space in Nashville, Tennessee for our corporate offices (approximately 21,000
square feet) and for our claims and customer service center (approximately 51,000 square feet). We
also lease office space in Chicago, Illinois, Tampa, Florida and Irving, Texas for our regional
claims offices and in Chicago, Illinois and Houston, Texas for our regional customer service
centers. Our retail locations are all leased and typically are located in storefronts in retail
shopping centers, and each location typically contains less than 1,000 square feet of space. See
Note 9 to our consolidated financial statements for further information about leases.
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FIRST ACCEPTANCE CORPORATION 10-K
Item 3. Legal Proceedings
We are a party to litigation in Alabama and Georgia in which allegations are made with respect
to our sales practices, primarily the sale of motor club memberships currently or formerly sold in
those states. Annette Rush v. Village Auto Insurance Company, Inc. (now known as First Acceptance
Insurance Company of Georgia, Inc.) was filed on October 26, 2005, as a putative class action in
the Superior Court of Fulton County, Georgia. Margaret Franklin v. Vesta Insurance Corp., et al.
was filed on July 14, 2006, as a putative class action in the Circuit Court of Bullock County,
Alabama. Keisha Milbry Monday, et al. v. First Acceptance Corp., et al. was filed on February 13,
2007, in the Circuit Court of Bullock County, Alabama. Carrie Jackson v. Alabama Acceptance
Insurance Agency, Inc. was filed on July 24, 2007, as a putative class action in the Circuit Court
of Bullock County, Alabama. Solomon and Catherine Warren, et al. v. First Acceptance Corp., et al.
was filed on November 9, 2007, in the Circuit Court of Barbour County, Alabama. The suits generally
allege that we implemented a program to convince our consumers who purchased automobile insurance
policies to also purchase motor club memberships or that we charged our consumers billing fees
associated with our products that were not properly disclosed, and seek unspecified damages and
attorneys fees. The Georgia Superior Court certified the class in the Georgia lawsuit in December
2006. The Georgia Court of Appeals affirmed the class certification decision and the Georgia
Supreme Court denied our Petition for Certiorari in January 2008. The court has not certified
classes of plaintiffs in the two Alabama putative class actions. We have denied all allegations of
wrongdoing, have vigorously defended the Company against these actions, and believe that we have
meritorious defenses to these claims.
Notwithstanding the foregoing, to avoid the uncertainty, risks and costs of further
litigation, we have determined to settle this litigation. Pursuant to the terms of the settlement agreement, the plaintiffs in the
Georgia litigation will be divided into two classes: (i) persons who were insured by the Company on
September 1, 2008 who purchased an automobile club membership with their automobile insurance and
(ii) persons who were insured by the Company prior to September 1, 2008 who purchased an automobile
club membership with their automobile insurance. Pursuant to the terms of the settlement, each
class member who was insured by the Company on September 1, 2008 will receive a premium credit equal to 100% of the amounts he or she paid for
automobile club memberships and deferred billing fees against the premium for new or renewal
automobile insurance policies for up to twelve months of liability or uninsured motorist coverage
issued by the Company prior to December 31, 2009, unless he or she elects, prior to December 31,
2008, to receive instead of the premium credit a reimbursement certificate that provides for cash
reimbursement of up to a maximum total payment of $50 for any rental or towing expenses incurred by
the class member on or before December 31, 2009 as a result of the disablement of his or her
vehicle because of an accident. Each class member who was insured by the Company prior to September
1, 2008 will receive a reimbursement certificate that provides for cash reimbursement of
up to a maximum total payment of $50 for any rental or towing expenses incurred by the class member
on or before December 31, 2009 as a result of the disablement of his or her vehicle because of an
accident, unless he or she elects, prior to December 31, 2008, to receive instead of the
reimbursement certificate, a premium credit equal to 100% of the amounts he or she paid for
automobile club memberships and deferred billing fees against the premium for new automobile
insurance policies for up to twelve months of liability or uninsured motorist coverage issued by
the Company prior to June 30, 2010. Any premium credits issued to class members as described above
will be prorated over a twelve-month term not to extend beyond June 30, 2010, and the class member
will be entitled to the prorated premium credit only so long as he or she keeps their insurance
premiums current during the twelve-month term. No benefits will be available to class members until
January 1, 2009. We have also agreed to strengthen our disclosures to customers of all relevant
fees, charges and coverages. In addition, we have agreed to pay $3.8 million in fees and expenses
for the attorneys for the Georgia plaintiffs and pay all costs associated with the administration
of the settlement. The settlement agreement is subject to approval by the court, and we expect the
court to hold a hearing to consider the settlement in November 2008.
We have also agreed upon preliminary settlement terms with the plaintiffs in the Alabama
litigation. The
preliminary settlement terms provide for benefits to the Alabama plaintiffs substantially similar
to the benefits to be paid to the Georgia plaintiffs, and a payment of $2.5 million in fees and
expenses for the attorneys for the Alabama plaintiffs. The settlement of
the Alabama litigation is subject to the negotiation of a definitive settlement agreement and
approval of the settlement agreement by the applicable courts.
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FIRST ACCEPTANCE CORPORATION 10-K
At this time, we are unable to estimate the total costs associated with the Georgia and
Alabama litigation settlements. The costs of the settlements will depend, among other factors, upon
whether class members receive premium credits or reimbursement certificates pursuant to the terms
of the settlements and the rate of redemption of the premium credits and reimbursement
certificates. We estimate that there are approximately 11,000 persons who were insured by the
Company on September 1, 2008 and approximately 155,000 persons who were insured by the Company
prior to September 1, 2008 that, pursuant to the terms of the settlement agreement, are members of
the plaintiff class in the Georgia litigation. We estimate that there are approximately 55,000
persons who were insured by the Company prior to September 1, 2008 that, pursuant to the proposed
settlement terms, would be eligible to be members of the plaintiff class in the Alabama litigation.
The total amount received by the Company relating to motor club memberships and deferred billing
fees is $24.7 million for the State of Georgia and $5.8 million for the State of Alabama.
At June 30, 2008, we accrued an aggregate of $6.7 million related to the expenses of the
litigation settlements, consisting of $6.3 million in plaintiffs attorneys fees and expenses and
$0.4 million in estimated costs associated with the administration of the settlement. We will
accrue additional amounts relating to the costs of the litigation settlements when those amounts
become reasonably estimable.
We are currently in discussions with our insurance carriers regarding coverage for the costs
and expenses incurred relating to the litigation settlements and are not able currently to estimate
the amount, if any, that we may receive from our insurance carriers. As a result, we have not
accrued any amount at June 30, 2008 for insurance recoveries that may offset the costs and expenses
relating to the litigation settlements. Any such insurance recoveries will be recorded in our
operating results during the periods in which the recoveries are probable.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of stockholders during the fourth quarter of the
fiscal year ended June 30, 2008.
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FIRST ACCEPTANCE CORPORATION 10-K
PART II
Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Market Information
Our common stock is currently quoted on the New York Stock Exchange under the symbol FAC.
The following table sets forth quarterly high and low bid prices for our common stock for the
periods indicated based upon quotations periodically published by the New York Stock Exchange. All
price quotations represent prices between dealers, without accounting for retail mark-ups,
mark-downs or commissions, and may not represent actual transactions.
|
|
|
|
|
|
|
|
|
|
|
Price Range |
|
|
High |
|
Low |
Year Ended June 30, 2007 |
|
|
|
|
|
|
|
|
First Quarter |
|
$ |
12.17 |
|
|
$ |
10.80 |
|
Second Quarter |
|
|
11.65 |
|
|
|
10.07 |
|
Third Quarter |
|
|
10.78 |
|
|
|
10.00 |
|
Fourth Quarter |
|
|
10.83 |
|
|
|
9.97 |
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, 2008 |
|
|
|
|
|
|
|
|
First Quarter |
|
$ |
10.37 |
|
|
$ |
4.60 |
|
Second Quarter |
|
|
5.46 |
|
|
|
3.12 |
|
Third Quarter |
|
|
4.52 |
|
|
|
2.85 |
|
Fourth Quarter |
|
|
4.33 |
|
|
|
2.90 |
|
Holders
According to the records of our transfer agent, there were 483 holders of record of our common
stock on September 10, 2008, including record holders such as banks and brokerage firms who hold
shares for beneficial holders, and 48,054,667 shares of our common stock were outstanding.
Dividends
We paid no dividends during the two most recent fiscal years. We do not anticipate paying cash
dividends in the future. Any future determination to pay dividends will be at the discretion of our
Board of Directors and will depend upon, among other factors, our results of operations, financial
condition, capital requirements and contractual restrictions. See Liquidity and Capital Resources
within Item 7 and Note 21 to our consolidated financial statements for a discussion of the legal
restrictions on the ability of our insurance company subsidiaries to pay dividends.
Stock Transfer Restrictions
Our certificate of incorporation (the Charter) contains prohibitions on the transfer of our
common stock to avoid limitations on the use of the net operating loss carryforwards and other
federal income tax attributes that we inherited from our predecessor. The Charter generally
prohibits, without the prior approval of our Board of Directors, any transfer of common stock, any
subsequent issue of voting stock or stock that participates in our earnings or growth, and certain
options with respect to such stock, if the transfer of such stock would cause any group or person
to own 4.9% or more (by aggregate value) of our outstanding shares or cause any person to be
treated like the owner of 4.9% or more (by aggregate value) of our outstanding shares for tax
purposes. Transfers in violation of this prohibition will be void, unless our Board of Directors
consents to the transfer. If void, upon our demand, the purported transferee must return the shares
to our agent to be sold, or if already sold, the purported transferee must forfeit some, or
possibly all, of the sale proceeds. In addition, in connection with certain changes in the
ownership of the holders of our shares, we may require the holder to dispose of some or all of such
shares. For this purpose, person is defined broadly to mean any individual, corporation, estate, debtor,
association, company, partnership, joint venture, or similar organization.
23
FIRST ACCEPTANCE CORPORATION 10-K
Performance Graph
The following graph compares the total cumulative shareholder return for $100 invested in our
common shares against the cumulative total return of the Russell 3000 Index and the S&P Property &
Casualty Insurance Index on June 30, 2003 to the end of the most recently completed fiscal year.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
2003 |
|
2004 |
|
2005 |
|
2006 |
|
2007 |
|
2008 |
First Acceptance Corporation |
|
|
100.00 |
|
|
|
128.91 |
|
|
|
174.22 |
|
|
|
216.94 |
|
|
|
187.11 |
|
|
|
58.93 |
|
Russell 3000 |
|
|
100.00 |
|
|
|
120.46 |
|
|
|
130.16 |
|
|
|
142.60 |
|
|
|
171.22 |
|
|
|
149.50 |
|
S&P Property & Casualty Insurance |
|
|
100.00 |
|
|
|
118.77 |
|
|
|
135.01 |
|
|
|
142.90 |
|
|
|
163.45 |
|
|
|
114.44 |
|
24
FIRST ACCEPTANCE CORPORATION 10-K
Item 6. Selected Financial Data
The following tables provide selected historical consolidated financial and operating data of
the Company as of the dates and for the periods indicated. In conjunction with the data provided
in the following tables and in order to more fully understand our historical consolidated financial
and operating data, you should also read Managements Discussion and Analysis of Financial
Condition and Results of Operations and our consolidated financial statements and the accompanying
notes included in this report. We derived our selected historical consolidated financial data as
of June 30, 2008 and 2007 and for the years ended June 30, 2008, 2007 and 2006 from our
consolidated financial statements included in this report. We derived our selected historical
consolidated financial data as of June 30, 2006, 2005 and 2004 and for the years ended June 30,
2005 and 2004 from our consolidated financial statements not included in this report. The results
for past accounting periods are not necessarily indicative of the results to be expected for any
future accounting period.
The actual results for the year ended June 30, 2004 reflect only the results of USAutos
operations since the date of acquisition (April 30, 2004). The unaudited pro forma results for the
year ended June 30, 2004 give effect to the USAuto acquisition and related transactions as if they
had been consummated on July 1, 2003.
The unaudited pro forma results should not be considered indicative of actual results that
would have been achieved had the USAuto acquisition and related transactions been consummated on
July 1, 2003 and do not purport to indicate results of operations for any future period.
25
FIRST ACCEPTANCE CORPORATION 10-K
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proforma |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual |
|
|
2004 |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
(unaudited) |
|
|
|
(in thousands, except per share data) |
|
Statement of Operations Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned |
|
$ |
285,914 |
|
|
$ |
300,661 |
|
|
$ |
208,771 |
|
|
$ |
132,677 |
|
|
$ |
11,728 |
|
|
$ |
57,716 |
|
Commission and fee income |
|
|
36,479 |
|
|
|
37,324 |
|
|
|
26,757 |
|
|
|
26,821 |
|
|
|
4,401 |
|
|
|
26,275 |
|
Investment income |
|
|
11,250 |
|
|
|
8,863 |
|
|
|
5,762 |
|
|
|
3,353 |
|
|
|
958 |
|
|
|
1,431 |
|
Other |
|
|
(1,244 |
) |
|
|
789 |
|
|
|
7,712 |
|
|
|
3,944 |
|
|
|
6,066 |
|
|
|
14,901 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
332,399 |
|
|
|
347,637 |
|
|
|
249,002 |
|
|
|
166,795 |
|
|
|
23,153 |
|
|
|
100,323 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and loss adjustment expenses |
|
|
219,943 |
|
|
|
241,908 |
|
|
|
140,845 |
|
|
|
87,493 |
|
|
|
7,167 |
|
|
|
36,616 |
|
Insurance operating expenses |
|
|
98,433 |
|
|
|
97,629 |
|
|
|
75,773 |
|
|
|
49,921 |
|
|
|
7,194 |
|
|
|
41,142 |
|
Other operating expenses |
|
|
2,415 |
|
|
|
2,623 |
|
|
|
2,494 |
|
|
|
2,775 |
|
|
|
6,235 |
|
|
|
2,278 |
|
Litigation settlement |
|
|
7,468 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation |
|
|
1,507 |
|
|
|
1,063 |
|
|
|
500 |
|
|
|
332 |
|
|
|
7,850 |
|
|
|
|
|
Depreciation and amortization |
|
|
1,679 |
|
|
|
1,624 |
|
|
|
1,463 |
|
|
|
1,920 |
|
|
|
648 |
|
|
|
1,366 |
|
Interest expense |
|
|
4,977 |
|
|
|
1,874 |
|
|
|
898 |
|
|
|
351 |
|
|
|
44 |
|
|
|
318 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
336,422 |
|
|
|
346,721 |
|
|
|
221,973 |
|
|
|
142,792 |
|
|
|
29,138 |
|
|
|
81,720 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
(4,023 |
) |
|
|
916 |
|
|
|
27,029 |
|
|
|
24,003 |
|
|
|
(5,985 |
) |
|
|
18,603 |
|
Provision (benefit) for income taxes |
|
|
13,822 |
|
|
|
17,586 |
|
|
|
(1,039 |
) |
|
|
(2,153 |
) |
|
|
(2,189 |
) |
|
|
6,983 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(17,845 |
) |
|
$ |
(16,670 |
) |
|
$ |
28,068 |
|
|
$ |
26,156 |
|
|
$ |
(3,796 |
) |
|
$ |
11,620 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Share Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
(0.37 |
) |
|
$ |
(0.35 |
) |
|
$ |
0.59 |
|
|
$ |
0.56 |
|
|
$ |
(0.15 |
) |
|
$ |
0.25 |
|
Diluted |
|
$ |
(0.37 |
) |
|
$ |
(0.35 |
) |
|
$ |
0.57 |
|
|
$ |
0.53 |
|
|
$ |
(0.15 |
) |
|
$ |
0.24 |
|
Number of shares used to calculate net
income (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
47,628 |
|
|
|
47,584 |
|
|
|
47,487 |
|
|
|
47,055 |
|
|
|
24,965 |
|
|
|
46,405 |
|
Diluted |
|
|
47,628 |
|
|
|
47,584 |
|
|
|
49,576 |
|
|
|
48,989 |
|
|
|
24,965 |
|
|
|
47,883 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
2008 |
|
2007 |
|
2006 |
|
2005 |
|
2004 |
|
|
(in thousands, except per share data) |
Balance Sheet Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities, available-for-sale at fair value |
|
$ |
189,570 |
|
|
$ |
176,555 |
|
|
$ |
127,828 |
|
|
$ |
74,840 |
|
|
$ |
33,243 |
|
Cash, cash equivalents and other invested assets |
|
|
38,646 |
|
|
|
34,161 |
|
|
|
31,534 |
|
|
|
35,682 |
|
|
|
38,352 |
|
Deferred tax asset, net |
|
|
17,593 |
|
|
|
30,936 |
|
|
|
48,068 |
|
|
|
48,106 |
|
|
|
45,493 |
|
Total assets |
|
|
473,230 |
|
|
|
498,892 |
|
|
|
435,327 |
|
|
|
331,645 |
|
|
|
286,450 |
|
Total liabilities |
|
|
247,771 |
|
|
|
259,408 |
|
|
|
181,904 |
|
|
|
103,316 |
|
|
|
92,224 |
|
Total stockholders equity |
|
|
225,459 |
|
|
|
239,484 |
|
|
|
253,423 |
|
|
|
228,329 |
|
|
|
194,226 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Book value per common share |
|
$ |
4.69 |
|
|
$ |
5.03 |
|
|
$ |
5.33 |
|
|
$ |
4.81 |
|
|
$ |
4.17 |
|
26
FIRST ACCEPTANCE CORPORATION 10-K
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with our consolidated financial
statements and accompanying notes included in this report. This discussion contains forward-looking
statements that involve risks and uncertainties. Our actual results could differ materially from
those anticipated in these forward-looking statements as a result of various factors, including
those discussed below and elsewhere in this report, particularly under the caption Risk Factors.
General
We are principally a retailer, servicer and underwriter of non-standard personal automobile
insurance, based in Nashville, Tennessee. Non-standard personal automobile insurance is made
available to individuals who are categorized as non-standard because of their inability or
unwillingness to obtain standard insurance coverage due to various factors, including payment
history, payment preference, failure in the past to maintain continuous insurance coverage, driving
record and/or vehicle type. Generally, our customers are required by law to buy a minimum amount of
automobile insurance.
Prior to our April 30, 2004 acquisition of USAuto Holdings, Inc., we were engaged in pursuing
opportunities to acquire one or more operating companies. In addition, we marketed for sale a
portfolio of foreclosed real estate. We will continue to market the remaining real estate we hold,
consisting of two tracts of land in San Antonio, Texas, and will attempt to sell it on a basis that
provides us with the best economic return. We do not anticipate any new investments in real estate.
As of September 1, 2008, we leased and operated 431 retail locations (or stores), staffed by
employee-agents. Our employee-agents exclusively sell non-standard insurance products either
underwritten or serviced by us. As of September 1, 2008, we wrote non-standard personal automobile
insurance in 12 states and were licensed in 13 additional states.
The following table shows the number of our retail locations for the periods presented. Retail
location counts are based upon the date that a location commenced or ceased writing business.
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
2008 |
|
2007 |
Retail locations beginning of period |
|
|
462 |
|
|
|
460 |
|
Opened |
|
|
4 |
|
|
|
18 |
|
Closed |
|
|
(35 |
) |
|
|
(16 |
) |
|
|
|
|
|
|
|
|
|
Retail locations end of period |
|
|
431 |
|
|
|
462 |
|
|
|
|
|
|
|
|
|
|
The following table shows the number of our retail locations by state.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
2008 |
|
2007 |
|
2006 |
|
|
Alabama |
|
|
25 |
|
|
|
25 |
|
|
|
25 |
|
Florida |
|
|
40 |
|
|
|
41 |
|
|
|
39 |
|
Georgia |
|
|
61 |
|
|
|
62 |
|
|
|
63 |
|
Illinois |
|
|
80 |
|
|
|
81 |
|
|
|
86 |
|
Indiana |
|
|
19 |
|
|
|
24 |
|
|
|
26 |
|
Mississippi |
|
|
8 |
|
|
|
8 |
|
|
|
8 |
|
Missouri |
|
|
14 |
|
|
|
15 |
|
|
|
18 |
|
Ohio |
|
|
29 |
|
|
|
30 |
|
|
|
30 |
|
Pennsylvania |
|
|
19 |
|
|
|
25 |
|
|
|
25 |
|
South Carolina |
|
|
28 |
|
|
|
28 |
|
|
|
21 |
|
Tennessee |
|
|
20 |
|
|
|
20 |
|
|
|
20 |
|
Texas |
|
|
88 |
|
|
|
103 |
|
|
|
99 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
431 |
|
|
|
462 |
|
|
|
460 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27
FIRST ACCEPTANCE CORPORATION 10-K
Consolidated Results of Operations
Overview
Our primary focus is the selling, servicing and underwriting of non-standard personal
automobile insurance. Our real estate and corporate segment consists of activities related to the
disposition of foreclosed real estate held for sale, interest expense associated with debt, and
other general corporate overhead expenses.
The following table presents selected financial data for our insurance operations and real
estate and corporate segments for the periods presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
(in thousands) |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Insurance |
|
$ |
332,219 |
|
|
$ |
347,431 |
|
|
$ |
244,557 |
|
Real estate and corporate |
|
|
180 |
|
|
|
206 |
|
|
|
4,445 |
|
|
|
|
|
|
|
|
|
|
|
Consolidated total |
|
$ |
332,399 |
|
|
$ |
347,637 |
|
|
$ |
249,002 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes: |
|
|
|
|
|
|
|
|
|
|
|
|
Insurance |
|
$ |
4,685 |
|
|
$ |
6,252 |
|
|
$ |
26,476 |
|
Real estate and corporate |
|
|
(8,708 |
) |
|
|
(5,336 |
) |
|
|
553 |
|
|
|
|
|
|
|
|
|
|
|
Consolidated total |
|
$ |
(4,023 |
) |
|
$ |
916 |
|
|
$ |
27,029 |
|
|
|
|
|
|
|
|
|
|
|
Our insurance operations generate revenues from selling, servicing and underwriting
non-standard personal automobile insurance policies in 12 states. We conduct our underwriting
operations through three insurance company subsidiaries: First Acceptance Insurance Company, Inc.,
First Acceptance Insurance Company of Georgia, Inc. and First Acceptance Insurance Company of
Tennessee, Inc. Our insurance revenues are primarily generated from:
|
|
|
premiums earned, including policy and renewal fees, from sales of policies written
and assumed by our insurance company subsidiaries; |
|
|
|
|
fee income, including installment billing fees on policies written, agency fees and
fees for other ancillary services (principally motor club and bond card products); and |
|
|
|
|
investment income earned on the invested assets of the insurance company
subsidiaries. |
The following table presents premiums earned by state and includes policies written and
assumed by the insurance company subsidiaries through quota-share reinsurance. Although we are
licensed in Texas, we currently write some business in Texas through the Texas county mutual
insurance company system that is assumed 100% by one of our insurance company subsidiaries.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
(in thousands) |
|
Premiums earned: |
|
|
|
|
|
|
|
|
|
|
|
|
Georgia |
|
$ |
60,928 |
|
|
$ |
70,312 |
|
|
$ |
68,905 |
|
Florida |
|
|
43,017 |
|
|
|
55,117 |
|
|
|
26,320 |
|
Texas |
|
|
33,769 |
|
|
|
32,480 |
|
|
|
18,595 |
|
Illinois |
|
|
32,009 |
|
|
|
31,201 |
|
|
|
7,679 |
|
Alabama |
|
|
28,780 |
|
|
|
30,316 |
|
|
|
28,942 |
|
South Carolina |
|
|
23,634 |
|
|
|
14,797 |
|
|
|
1,238 |
|
Tennessee |
|
|
20,772 |
|
|
|
23,800 |
|
|
|
24,378 |
|
Ohio |
|
|
15,416 |
|
|
|
16,455 |
|
|
|
14,043 |
|
Pennsylvania |
|
|
10,041 |
|
|
|
6,937 |
|
|
|
1,994 |
|
Indiana |
|
|
7,131 |
|
|
|
8,186 |
|
|
|
6,161 |
|
Missouri |
|
|
5,630 |
|
|
|
6,087 |
|
|
|
5,331 |
|
Mississippi |
|
|
4,787 |
|
|
|
4,973 |
|
|
|
5,185 |
|
|
|
|
|
|
|
|
|
|
|
Total premiums earned |
|
$ |
285,914 |
|
|
$ |
300,661 |
|
|
$ |
208,771 |
|
|
|
|
|
|
|
|
|
|
|
28
FIRST ACCEPTANCE CORPORATION 10-K
The following table presents the change in the total number of policies in force for the
insurance operations for the periods presented. Policies in force increase as a result of new
policies issued and decrease as a result of policies that are canceled or expire and are not
renewed.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
2008 |
|
2007 |
|
2006 |
Policies in force beginning of period |
|
|
226,974 |
|
|
|
200,401 |
|
|
|
119,422 |
|
Net increase (decrease) during period |
|
|
(32,895 |
) |
|
|
26,573 |
|
|
|
80,979 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policies in force end of period |
|
|
194,079 |
|
|
|
226,974 |
|
|
|
200,401 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance companies present a combined ratio as a measure of their overall underwriting
profitability. The components of the combined ratio are as follows.
Loss Ratio Loss ratio is the ratio (expressed as a percentage) of losses and loss
adjustment expenses incurred to premiums earned and is a basic element of underwriting
profitability. We calculate this ratio based on all direct and assumed premiums earned.
Expense Ratio Expense ratio is the ratio (expressed as a percentage) of operating expenses
to premiums earned. This is a measurement that illustrates relative management efficiency in
administering our operations. Insurance operating expenses are reduced by fee income from insureds
and, for the period from January 1, 2006 through December 31, 2006, a transaction service fee we
received for servicing the run-off business previously written by the Chicago non-standard
insurance agencies whose business we acquired in January 2006 (Chicago acquisition).
Combined Ratio Combined ratio is the sum of the loss ratio and the expense ratio. If the
combined ratio is at or above 100%, an insurance company cannot be profitable without sufficient
investment income. The following table presents the loss, expense and combined ratios for our
insurance operations for the periods presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
2008 |
|
2007 |
|
2006 |
Loss and loss adjustment expense |
|
|
76.9 |
% |
|
|
80.4 |
% |
|
|
67.5 |
% |
Expense |
|
|
21.7 |
% |
|
|
19.8 |
% |
|
|
21.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined |
|
|
98.6 |
% |
|
|
100.2 |
% |
|
|
89.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
The expense ratio for the year ended June 30, 2008 includes expenses of $1.3 million related
to (i) severance and related benefits charges of $1.0 million incurred in connection with
separation agreements with certain officers and retail management
personnel and (ii) costs of $0.3
million associated with the closure of poor performing stores. The effect of these expenses had a
negative impact of 40 basis points on the expense ratio for the year ended June 30, 2008.
The non-standard personal automobile insurance industry is cyclical in nature. Likewise,
adverse economic conditions impact our customers and many will choose to go uninsured during a weak
economy. In the past, the industry has been characterized by periods of price competition and
excess capacity followed by periods of high premium rates and shortages of underwriting capacity.
If new competitors enter this market, existing competitors may attempt to increase market share by
lowering rates. Such conditions could lead to reduced prices, which would negatively impact our
revenues and profitability. We believe that between 2002 and 2005, the underwriting results in the
non-standard personal automobile insurance industry improved as a result of favorable pricing and
competitive conditions that allowed for broad increases in rate levels by insurers. While we did
witness a stabilization in the industry during 2006 and a robust economy through 2007, more
recently, competitive pricing and the weakening economy have resulted in declines in premiums in
most states. Given the cyclical nature of the industry and the economy, these conditions may
negatively impact our revenues and profitability.
29
FIRST ACCEPTANCE CORPORATION 10-K
Investments
We use the services of an independent investment manager to manage our fixed investment
portfolio. The investment manager conducts, in accordance with the Companys investment policy, all
of the investment purchases and sales for our insurance company subsidiaries. Our investment policy
has been established by the Investment Committee of our Board of Directors and specifically
addresses overall investment goals and objectives, authorized investments, prohibited securities,
and guidelines as to asset allocation, duration and credit quality. The portfolio is compared with
a customized Lehman Brothers index. We do not invest in equity securities. Management and the
Investment Committee meet regularly to review the performance of the portfolio and compliance with
the Companys investment guidelines, including the approval of all purchase and sale transactions.
The invested assets of the insurance company subsidiaries consist substantially of marketable,
investment grade, U.S. government securities, municipal bonds, corporate bonds and collateralized
mortgage obligations. We also invest a portion of the portfolio in certain securities issued by
political subdivisions which enable our insurance company subsidiaries to obtain premium tax
credits. Investment income is comprised primarily of interest earned on these securities, net of
related investment expenses. Realized gains and losses, which are included in other revenues in our
consolidated statements of operations, may occur from time to time as changes are made to our
holdings to obtain premium tax credits or based upon changes in interest rates.
Our consolidated investment portfolio was $189.6 million at June 30, 2008 and consisted of
fixed maturity securities, all carried at fair value with unrealized gains and losses reported as a
separate component of stockholders equity on an after-tax basis. We had net unrealized losses of
$0.5 million on fixed maturity securities at June 30, 2008.
At June 30, 2008, 99.8% of our investment portfolio was rated investment grade (a credit
rating of AAA to BBB) by nationally recognized rating agencies. The average credit rating of our
fixed maturity portfolio was AA+ at June 30, 2008. Investment grade securities generally bear lower
yields and lower degrees of risk than those that are unrated or non-investment grade. Management
believes that a high quality investment portfolio is more likely to generate a stable and
predictable investment return.
Investments in collateralized mortgage obligations (CMOs) were $68.9 million at June 30,
2008 and represented 36% of our fixed maturity portfolio. CMOs are subject to significant extension
risk in periods of rising interest rates as mortgages may be repaid slower than expected. As of
June 30, 2008, all of our CMOs were considered investment grade. In addition, 96% of the CMOs were
rated AAA and 77% of our CMOs were backed by agencies of the United States government. Of the
non-agency CMOs, 83% were rated AAA.
The following table summarizes our fixed maturity securities at June 30, 2008 (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
U.S. government and agencies |
|
$ |
32,046 |
|
|
$ |
1,112 |
|
|
$ |
(1 |
) |
|
$ |
33,157 |
|
State |
|
|
7,423 |
|
|
|
168 |
|
|
|
(77 |
) |
|
|
7,514 |
|
Political subdivisions |
|
|
3,606 |
|
|
|
7 |
|
|
|
(28 |
) |
|
|
3,585 |
|
Revenue and assessment |
|
|
30,066 |
|
|
|
288 |
|
|
|
(440 |
) |
|
|
29,914 |
|
Corporate bonds |
|
|
47,381 |
|
|
|
154 |
|
|
|
(1,006 |
) |
|
|
46,529 |
|
Collateralized mortgage obligations |
|
|
69,518 |
|
|
|
650 |
|
|
|
(1,297 |
) |
|
|
68,871 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
190,040 |
|
|
$ |
2,379 |
|
|
$ |
(2,849 |
) |
|
$ |
189,570 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30
FIRST ACCEPTANCE CORPORATION 10-K
The following table sets forth the scheduled maturities of our fixed maturity securities at
June 30, 2008 based on their fair values (in thousands). Actual maturities may differ from
contractual maturities because certain securities may be called or prepaid by the issuers.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities with No |
|
|
All |
|
|
|
Securities with |
|
|
Securities with |
|
|
Unrealized Gains or |
|
|
Fixed Maturity |
|
|
|
Unrealized Gains |
|
|
Unrealized Losses |
|
|
Losses |
|
|
Securities |
|
One year or less |
|
$ |
7,352 |
|
|
$ |
980 |
|
|
$ |
225 |
|
|
$ |
8,557 |
|
After one through five years |
|
|
40,287 |
|
|
|
16,227 |
|
|
|
|
|
|
|
56,514 |
|
After five through ten years |
|
|
20,085 |
|
|
|
24,732 |
|
|
|
|
|
|
|
44,817 |
|
After ten years |
|
|
2,730 |
|
|
|
8,081 |
|
|
|
|
|
|
|
10,811 |
|
No single maturity date |
|
|
39,730 |
|
|
|
27,559 |
|
|
|
1,582 |
|
|
|
68,871 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
110,184 |
|
|
$ |
77,579 |
|
|
$ |
1,807 |
|
|
$ |
189,570 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, 2008 Compared with the Year Ended June 30, 2007
Consolidated Results
Revenues for the year ended June 30, 2008 decreased 4% to $332.4 million from $347.6 million
in the prior year. Net loss for the year ended June 30, 2008 was $17.8 million, compared with a
net loss of $16.7 million for the year ended June 30, 2007. Basic and diluted net loss per share
was $0.37 for the year ended June 30, 2008, compared with $0.35 for the year ended June 30, 2007.
Insurance Operations
Revenues from insurance operations were $332.2 million for the year ended June 30, 2008,
compared with $347.4 million for the year ended June 30, 2007. Income before income taxes from
insurance operations for the year ended June 30, 2008 was $4.7 million, compared with $6.3 million
for the year ended June 30, 2007.
Premiums Earned
Premiums earned decreased by $14.7 million, or 5%, to $285.9 million for the year ended June
30, 2008, from $300.7 million for the year ended June 30, 2007. This decline was due to the
decrease in the number of policies written, which was partially offset by higher average premiums
per policy as a result of rate increases taken in a number of states to improve underwriting
profitability. The decrease in the policies written was due to the current weak economic conditions
impacting our customers, rate increases taken in a number of states to improve underwriting
profitability and the closure of 45 poor performing stores since January 2007.
Premiums earned in Florida, Georgia and Tennessee for the year ended June 30, 2008 declined by
$24.5 million over the prior year. These markets collectively accounted for 44% of premiums earned
during fiscal 2008, down from 50% in the prior year. Our premiums earned in these states were
adversely affected by a decline in used car sales, which have historically been a significant
contributor to new policy growth in these markets. Additionally, the decline in our Florida market
was due to a January 1, 2008 rate increase to improve our underwriting profitability and the
decline in our Georgia market was due to state legislation intended to curb illegal immigration.
The decline in premiums earned was partially offset by premium growth of $11.9 million in our
emerging markets of South Carolina and Pennsylvania.
The total number of insured policies in force at June 30, 2008 decreased 15% over the same
date in 2007 from 226,974 to 194,079. At June 30, 2008, we operated 431 stores, compared with 462
stores at June 30, 2007.
31
FIRST ACCEPTANCE CORPORATION 10-K
Commission and Fee Income
Commission and fee income decreased 2% to $36.5 million for the year ended June 30, 2008, from
$37.3 million for the year ended June 30, 2007. The decrease was a result of the decrease in
policies in force noted above partially offset by higher fee income in Illinois and Florida.
Investment Income
Investment income increased during the year ended June 30, 2008 as invested assets increased
as a result of cash provided by operating activities and the proceeds received from the sale of
debentures in June 2007. The tax-equivalent book yields for our fixed maturities portfolio were
5.1% and 5.2% at June 30, 2008 and 2007, respectively, with effective durations of 3.69 years and
3.43 years at June 30, 2008 and 2007, respectively. The yields for the comparable Lehman Brothers
indices were 4.8% and 5.5% at June 30, 2008 and 2007, respectively.
Other
Included in other revenues during the year ended June 30, 2008 are $1.4 million of charges
related to the other-than-temporary impairment of certain non-agency CMOs in our investment
portfolio. Due to the deterioration in liquidity in the credit markets during calendar 2008, yields
on certain non-agency CMOs declined below projected book yields requiring the $1.4 million
impairment of these securities under the guidance set forth in Emerging Issues Task Force Issue No.
99-20 Recognition of Interest Income and Impairment on Purchased Beneficial Interests and
Beneficial Interests That Continue to Be Held by a Transferor in Securitized Financial Assets
(EITF 99-20).
Other revenues for the year ended June 30, 2007 are primarily comprised of $0.9 million in
transaction service fees earned for servicing the run-off business previously written by the
Chicago non-standard insurance agencies whose assets we acquired in January 2006. We received the
transaction service fee from the effective date of the acquisition in January 2006 through December
31, 2006.
Loss and Loss Adjustment Expenses
The loss and loss adjustment expense ratio was 76.9% for the year ended June 30, 2008,
compared with 80.4% for the same period last year. During fiscal 2007, we experienced a higher than
anticipated loss and loss adjustment expense ratio primarily as a result of significant
unanticipated increases in (i) the frequency of Personal Injury Protection (PIP) coverage losses
in Florida, (ii) the severity of bodily injury losses in Florida
and Georgia, and (iii) the severity
of property damage losses in Georgia and other states. This higher than anticipated severity in
Georgia bodily injury losses in fiscal 2007 was driven by a higher than anticipated occurrence of
large losses (losses of $10,000 or above). Additionally, the loss and loss adjustment expense ratio
for fiscal 2008 improved due to rate increases in Florida taken in connection with the
reinstatement of Floridas Motor Vehicle No-Fault Law (PIP coverage). This law and the related
coverage expired September 30, 2007 but was reinstated effective January 1, 2008. Our loss ratio
(exclusive of loss adjustment expenses) for Floridas PIP coverage improved to 97.2% for the year
ended June 30, 2008 from 105.1% for the prior fiscal year. Premiums earned on Floridas PIP
coverage decreased to $13.6 million from $15.5 million over the same period.
For the year ended June 30, 2008, we experienced favorable development for prior accident
periods of approximately $1.4 million. For the year ended June 30, 2007, we experienced negative
development for losses occurring in prior accident periods of approximately $3.9 million. We
believe this development for the year ended June 30, 2008 was due to the inherent uncertainty in
the estimation process and was not the result of any individual factor. The estimation process for
the year ended June 30, 2007 was impacted by our limited historical loss experience in our newer
states which required more judgment in determining our loss reserve estimates for those states.
Excluding development for prior accident periods, for those premiums earned during the years
ended June 30, 2008 and 2007, the loss and loss adjustment expense ratios were 77.4% and 79.2%,
respectively. We believe that this improvement was the result of (i) the absence of the negative
factors experienced during fiscal 2007, (ii) the impact of rate increases taken during fiscal 2008
in Florida (January 2008), Indiana (February 2008), Texas (March 2008) and South Carolina (May
2008) and (iii) improvements in our underwriting and claim handling practices.
32
FIRST ACCEPTANCE CORPORATION 10-K
Operating Expenses
Insurance operating expenses increased 1% to $98.4 million for the year ended June 30, 2008
from $97.6 million for the year ended June 30, 2007. This
increase was primarily a result of (i)
severance and related benefits charges of $1.0 million incurred in connection with separation
agreements with certain officers and retail management personnel, (ii) expenses of $0.3 million
associated with the closure of poor performing stores and (iii) costs relating to the increased
investment in our product, actuarial and information technology functions to support our
rate-making capabilities. The increased costs were partially offset by cost savings related to the
decline in the number of active retail locations.
The expense ratio increased from 19.8% for the year ended June 30, 2007 to 21.7% for the year
ended June 30, 2008. This increase was primarily due to the year-over-year decline in premiums
earned and the net effect of the expenses discussed above which had a negative impact of 40 basis
points on the expense ratio during the year ended June 30, 2008 and the positive impact on the
expense ratio during the year ended June 30, 2007 from the transaction service fee of $0.9 million,
or 30 basis points, earned through December 31, 2006 in connection with the Chicago acquisition.
Overall, the combined ratio decreased to 98.6% for the year ended June 30, 2008 from 100.2%
for the year ended June 30, 2007.
Litigation Settlement
Litigation settlement costs for the year ended June 30, 2008 of $7.5 million relate to the
provision of $6.3 million associated with estimated payments of the fees and costs of plaintiffs
counsel, $0.4 million in estimated costs associated with the administration of the settlement as
well as $0.8 million incurred in connection with our defense of the litigation in Alabama and
Georgia. We have entered into a settlement agreement relating to the Georgia litigation, which is
subject to approval by the court, and have agreed upon preliminary settlement terms with the
plaintiffs in the Alabama actions. The settlement of the Alabama litigation is
subject to negotiation of a definitive settlement agreement and approval by the applicable courts.
Pursuant to the litigation settlements, we would (i) provide the plaintiffs with either a premium
credit towards a future insurance policy or a reimbursement certificate for certain future towing
and rental expenses, (ii) strengthen our disclosures to customers of all relevant fees, charges
and coverages, (iii) pay an aggregate of $6.3 million in fees and expenses for the attorneys for
the plaintiffs and (iv) pay the costs associated with the administration of the settlements.
At this
time, we are unable to estimate the total costs associated with the Georgia and Alabama litigation
settlements. The costs of the settlements will depend, among other factors, upon whether class
members receive premium credits or reimbursement certificates pursuant to the terms of the
settlements and the rate of redemption of the premium credits and reimbursement certificates. The
litigation settlement costs are set forth separately in the consolidated statements of operations.
We anticipate that our payment of the $6.3 million in plaintiffs attorneys fees and expenses and
the $0.4 million in estimated costs associated with the administration of the settlement, both of
which were accrued at June 30, 2008, will occur in calendar year
2009, after the final approvals
from the courts.
We are currently in discussions with our insurance carriers regarding coverage for the costs
and expenses incurred relating to the litigation settlements and are not able currently to estimate
the amount, if any, that we may receive from our insurance carriers. As a result, we have not
accrued any amount at June 30, 2008 for insurance recoveries that may offset the costs and expenses
relating to the litigation settlements. Any such insurance recoveries will be recorded in our
operating results during the periods in which the recoveries are probable. For additional
information with respect to the litigation settlements, see
Item 3. Legal Proceedings.
33
FIRST ACCEPTANCE CORPORATION 10-K
Provision for Income Taxes
The provision for income taxes for the year ended June 30, 2008 includes a charge of $11.4
million related to the expiration of certain federal net operating loss carryforwards as well as an
increase in the valuation allowance for the deferred tax asset of $3.6 million resulting in a
charge totaling $15.0 million. The provision for income taxes for the year ended June 30, 2007
includes an increase in the valuation allowance for the deferred tax asset of $6.9 million as well
as $10.0 million related to the expiration of certain net operating loss carryforwards resulting in
a deferred tax asset charge totaling $16.9 million. The changes during the years ended June 30,
2008 and 2007 related to the valuation allowance were due to revisions in estimates for our future
taxable income based on the most recent fiscal year results. The charges during the years ended
June 30, 2008 and 2007 related to the expiration of net operating loss carryforwards were due to
taxable income for the most recent fiscal year being less than our prior estimates.
Real Estate and Corporate
Loss before income taxes for the year ended June 30, 2008 was $8.7 million, compared with $5.3
million for the year ended June 30, 2007. Segment losses consist of other operating expenses not
directly related to the insurance operations, interest expense and stock-based compensation offset
by investment income on corporate invested assets. During the year ended June 30, 2008, interest
expense in connection with borrowings under our credit facility decreased to $0.7 million from $1.7
million during the year ended June 30, 2007 as a result of lower outstanding indebtedness. In
addition, we incurred $3.9 million and $0.2 million of interest expense during the years ended June
30, 2008 and 2007, respectively, related to the debentures issued in June 2007. Other operating
expenses for the year ended June 30, 2008 also included a $0.5 million accrual for disputed Texas
franchise taxes on sales of foreclosed real estate held for sale and $0.2 million in costs
associated with amendments made to our credit agreement.
Year Ended June 30, 2007 Compared with the Year Ended June 30, 2006
Consolidated Results
Revenues for the year ended June 30, 2007 increased 40% to $347.6 million from $249.0 million
in the prior year. Net loss for the year ended June 30, 2007 was $16.7 million, compared with net
income of $28.1 million for the year ended June 30, 2006. Basic and diluted net income (loss) per
share was $(0.35) for the year ended June 30, 2007, compared with $0.59 and $0.57, respectively,
for the year ended June 30, 2006.
Net income per share for the year ended June 30, 2006 included gains on sales of foreclosed
real estate held for sale of $3.6 million ($0.05 per share on a diluted basis).
Insurance Operations
Revenues from insurance operations were $347.4 million for the year ended June 30, 2007,
compared with $244.6 million for the year ended June 30, 2006. Income before income taxes from
insurance operations for the year ended June 30, 2007 was $6.3 million, compared with $26.5 million
for the year ended June 30, 2006.
Premiums Earned
For the year ended June 30, 2007, premiums earned increased by $91.9 million, or 44%, to
$300.7 million from $208.8 million for the year ended June 30, 2006. The increase was due primarily
to the expansion of our business. Approximately 87% of the premium growth was in Florida, Texas and
South Carolina, where we opened 102 locations in fiscal 2006, and Chicago, where we acquired 72
locations in January 2006. The total number of insured policies in force at June 30, 2007 increased
13% over the same date in 2006 from 200,401 to 226,974. At June 30, 2007, we operated 462 stores,
compared with 460 stores at June 30, 2006.
Commission and Fee Income
Commission and fee income increased 39% to $37.3 million for the year ended June 30, 2007,
from $26.8 million for the year ended June 30, 2006. This increase was the result of the growth in
net premiums earned. However, fee income increased at a rate lower than our increase in premiums
earned because we charge lower fees in Florida compared with our other states.
34
FIRST ACCEPTANCE CORPORATION 10-K
Investment Income
Investment income increased primarily as a result of the increase in the amount of invested
assets. The tax-equivalent book yields for our fixed maturities portfolio were 5.2% and 5.6% at
June 30, 2007 and 2006, respectively, with effective durations of 3.43 years and 3.83 years at June
30, 2007 and 2006, respectively. The yields for the comparable Lehman Brothers indices were 5.5% at
June 30, 2007 and 2006.
Other
Other revenues for the year ended June 30, 2007 included $0.9 million, compared with $4.1
million for the prior year, from a transaction service fee earned through December 2006 in
connection with the Chicago acquisition for servicing the run-off business previously written by
the Chicago agencies whose assets we acquired in January 2006. We received the transaction service
fee from the effective date of the acquisition in January 2006 through December 31, 2006.
Loss and Loss Adjustment Expenses
The loss and loss adjustment expense ratio was 80.4% for the year ended June 30, 2007,
compared with 67.5% for the same period last year. For the year ended June 30, 2007, we experienced
a negative development for losses occurring in prior accident periods of approximately $3.9
million. For the premiums earned during this fiscal year, the loss and loss adjustment expense
ratio was 79.2%. During fiscal 2007, we experienced significant unanticipated increases in (1) the
frequency of PIP losses in Florida, (2) the severity of bodily injury losses in Florida and
Georgia, and (3) the severity of property damage losses in Georgia and other states. The higher
than anticipated severity in Georgia bodily injury losses in fiscal 2007 was somewhat driven by a
higher than anticipated occurrence of large losses (losses of $10,000 or above). To a lesser
extent, the increase in the loss and loss adjustment expense ratio for fiscal 2007 was the result
of a change in our business mix resulting from premium growth in our emerging states of Florida and
Texas where we anticipated higher loss ratios. Our loss ratio (exclusive of loss adjustment
expenses) for Floridas PIP coverage was 105.1% for the year ended June 30, 2007 on premiums earned
of $15.5 million.
In January 2007, we hired a new head of product management with significant experience in rate
making for the non-standard automobile insurance sector. In addition, we filed new rates in
Florida (December 2006), South Carolina and Georgia (March 2007) and Pennsylvania (September 2007).
Operating Expenses
Insurance operating expenses increased 29% to $97.6 million for the year ended June 30, 2007
from $75.8 million for the year ended June 30, 2006. This increase was primarily due to the fiscal
2006 addition of new stores (including those acquired in Chicago) and expenses, such as
advertising, employee-agent compensation, rent and premium taxes that vary along with the increase
in premiums earned.
The expense ratio decreased from 21.5% for the year ended June 30, 2006 to 19.8% for the year
ended June 30, 2007. This decrease is primarily a result of the increase in premiums earned from
new stores without a corresponding increase in fixed operating costs (such as advertising, rent and
base compensation of our employee-agents).
Overall, the combined ratio increased to 100.2% for the year ended June 30, 2007 from 89.0%
for the year ended June 30, 2006 as a result of the higher loss and loss adjustment expense ratio.
Provision (Benefit) for Income Taxes
The provision for income taxes for the year ended June 30, 2007 includes an increase in the
valuation allowance for the deferred tax asset of $6.9 million as well as $10.0 million related to
the expiration of certain net operating loss carryforwards resulting in a deferred tax asset charge
totaling $16.9 million, while the benefit from income taxes for the year ended June 30, 2006
includes a decrease in the valuation allowance for the deferred tax asset of $10.5 million. The
increase in the valuation allowance for the year ended June 30, 2007 was due to revisions in
estimates for our future taxable income based on the results for the most recent fiscal year, while
the charge
35
FIRST ACCEPTANCE CORPORATION 10-K
related to the expiration of net operating loss carryforwards was due to taxable income during
fiscal 2007 being less than prior estimates. The decrease in the valuation allowance for the year
ended June 30, 2006 was the result of our taxable income exceeding the previous estimate used in
establishing the valuation allowances in addition to revisions in estimates for our future taxable
income.
Real Estate and Corporate
Loss before income taxes from real estate and corporate for the year ended June 30, 2007 was
$5.3 million versus income before income taxes of $0.6 million for the year ended June 30, 2006.
The year ended June 30, 2006 included gains on sales of foreclosed real estate held for sale of
$3.6 million. There were no gains on sales of foreclosed real estate held for sale during the year
ended June 30, 2007. In addition, during the year ended June 30, 2007, we incurred $1.7 million of
interest expense in connection with borrowings related to the credit facility compared with $0.9
million for the year ended June 30, 2006.
Liquidity and Capital Resources
Our primary sources of funds are premiums, fee income and investment income. Our primary uses
of funds are the payment of claims and operating expenses. Operating activities for the year ended
June 30, 2008 provided $18.4 million of cash, compared with $36.7 million provided in the same
period in fiscal 2007. The decrease in cash provided by operating activities was the result of an
increase in paid loss and loss adjustment expenses and a decrease in cash collected on premiums
written. Net cash provided by investing activities for the year ended June 30, 2008 was $5.4
million, compared with net cash used in investing activities of $75.5 million in fiscal 2007. Both
periods reflect net additions to our investment portfolio, while the year ended June 30, 2008
includes the settlement of a $20.0 million receivable for securities in July 2007. Financing
activities for the year ended June 30, 2008 included debt principal repayments of $16.0 million
which were comprised of (i) the repayment of $5.0 million on our revolving credit facility in July
2007, (ii) the required principal prepayment of $6.0 million on our term loan facility in October
2007 made in accordance with an amendment to the credit agreement, and (iii) an additional
prepayment of $5.0 million on our term loan facility in January 2008. During the years ended June
30, 2008 and 2007, we made scheduled quarterly principal payments on our term loan facility of $3.1
million and $5.6 million, respectively. We also made an additional principal prepayment of $1.0
million on our term loan facility in August 2008 and we are required to repay the remaining $2.5
million principal balance of our term loan facility by October 31, 2008.
During the year ended June 30, 2008, the insurance company subsidiaries paid ordinary
dividends to the holding company of $6.5 million in October 2007 and $5.5 million in December 2007.
These dividends were used to repay the $11.0 million in unscheduled debt payments noted above as
well as for general corporate activities.
At June 30, 2008, we had $2.9 million available in unrestricted cash and investments outside
of the insurance company subsidiaries. These funds and the additional unrestricted cash from the
sources described in the next paragraph were used to pay the principal prepayment of $1.0 million
noted above and will be used to pay the final payment on our term loan facility of $2.5 million on
October 31, 2008 and the amounts to be paid by the Company related to the litigation settlements.
For additional information with respect to the litigation
settlements, see Item 3. Legal Proceedings.
We are part of an insurance holding company system with substantially all of our operations
conducted by our insurance company subsidiaries. Accordingly, the holding companys primary sources
of cash are dividends from our insurance company subsidiaries and from our non-insurance company
subsidiaries that sell ancillary products to our insureds. The holding company will also receive
cash from operating activities as a result of investment income and the ultimate liquidation of our
foreclosed real estate held for sale. In addition, as a result of our NOL carryforwards, taxable
income generated by the insurance company subsidiaries through June 30, 2009 will provide cash to
the holding company through an intercompany tax allocation agreement through which the insurance
company subsidiaries reimburse the holding company for current tax benefits utilized through
recognition of the NOL carryforwards. Cash could also be made available through the issuance of
securities and loans from financial institutions.
36
FIRST ACCEPTANCE CORPORATION 10-K
State insurance laws limit the amount of dividends that may be paid from our insurance company
subsidiaries. These limitations relate to statutory capital and surplus and net income. In
addition, the National Association of Insurance Commissioners Model Act for risk-based capital
(RBC) provides formulas to determine the amount of statutory capital and surplus that an
insurance company needs to ensure that it has an acceptable expectation of not becoming financially
impaired. A low RBC ratio would prevent an insurance company from paying dividends. Statutory
guidelines suggest that the insurance company subsidiaries should not exceed a ratio of net
premiums written to statutory capital and surplus of 3-to-1. We believe that our insurance company
subsidiaries have sufficient financial resources available to support their net premium writings in
both the short-term and the reasonably foreseeable future.
Based on our December 31, 2007 statutory capital and surplus, our ordinary dividend capacity
for calendar 2008 is approximately $11 million. Such amount is limited however to the amount of
earned surplus of FAIC. At June 30, 2008, our ordinary dividend capacity was approximately $3
million. However, available ordinary dividends from FAICs wholly-owned insurance company
subsidiaries can increase the earned surplus of FAIC to $7 million. The timing of ordinary dividend
payments during calendar 2008 is affected by the amount of dividend payments made in the preceding
twelve-month period. Therefore, subject to the sufficiency of earned surplus, FAIC is permitted to
pay an ordinary dividend of $6.5 million in October 2008 and an additional $4.5 million in December
2008.
Should the above-mentioned cash flows not be sufficient to meet the funding requirements
outside of the insurance company subsidiaries, FAIC has the ability to request approval from the
Texas Department of Insurance to pay an extraordinary dividend. Approval of such extraordinary
dividend would be based upon the reasonableness of FAICs remaining surplus after payment of the
dividend in relation to its outstanding liabilities and the adequacy of surplus relative to FAICs
financial needs. For the twelve months ended June 30, 2008, FAICs ratio of net premiums written to
policyholders surplus was 175%, which was within the IRIS defined limit of 300%.
We believe that existing cash and investment balances, when combined with anticipated cash
flows as noted above, will be adequate to meet our expected liquidity needs in both the short-term
and the reasonably foreseeable future. Our growth strategy may require external financing, and we
may from time to time seek to obtain external financing. We cannot assure you that additional
sources of financing will be available to us on favorable terms, or at all, or that any such
financing would not negatively impact our results of operations.
Credit Facility
In connection with the Chicago acquisition, we entered into, and borrowed under, a credit
agreement with two banks consisting of a $5.0 million revolving facility and a $25.0 million term
loan facility, both maturing on June 30, 2010. Through September 13, 2007, both facilities bore
interest at LIBOR plus 175 basis points per annum. Subsequently, amended terms increased the
interest rate by 75 basis points. We entered into an interest rate swap agreement on January 17,
2006 that fixed the interest rate on the term loan facility at 6.63% through June 30, 2010. At
June 30, 2008, the swap had a negative fair value of $0.1 million and is included within other
assets. Payments/receipts associated with the swap are reported in the statement of operations as a
part of interest expense. The term loan facility was originally due in equal quarterly installments
through June 30, 2010. Both facilities are secured by the common stock and certain assets of our
non-regulated subsidiaries. For the year ended June 30, 2008, we incurred $0.7 million of interest
expense in connection with the noted credit agreement. At June 30, 2008, the unpaid balance due
under the facilities was $3.9 million.
At June 30, 2008, we were not in compliance with our financial covenants in the credit
agreement regarding a minimum fixed charge coverage ratio, a minimum consolidated tangible net
worth ratio and a minimum net income requirement. Our lenders waived this non-compliance as of June
30, 2008 and we entered into an amendment to the credit agreement dated September 10, 2008. The
amended terms (i) required us to make a prepayment of $1.0 million in principal on August 8, 2008,
(ii) accelerated the maturity date of the term loan facility to
October 31, 2008, (iii) eliminated the
revolving credit facility and (iv) removed all financial covenants for the remaining term.
37
FIRST ACCEPTANCE CORPORATION 10-K
Trust Preferred Securities
On June 15, 2007, First Acceptance Statutory Trust I (FAST I), our newly formed wholly-owned
unconsolidated subsidiary trust entity, completed a private placement whereby FAST I issued 40,000
shares of preferred securities at $1,000 per share to outside investors and 1,240 shares of common
securities to us, also at $1,000 per share. FAST I used the proceeds from the sale of the preferred
securities to purchase $41.2 million of junior subordinated debentures from us. The debentures will
mature on July 30, 2037 and are redeemable by the Company in whole or in part beginning on July 30,
2012, at which time the preferred securities are callable. The debentures pay a fixed rate of
9.277% until July 30, 2012, after which the rate becomes variable (LIBOR plus 375 basis points).
The obligations of the Company under the junior subordinated debentures represent full and
unconditional guarantees by the Company of FAST Is obligations for the preferred securities.
Dividends on the preferred securities are cumulative, payable quarterly in arrears and are
deferrable at the Companys option for up to five years. The dividends on these securities are the
same as the interest on the debentures. The Company cannot pay dividends on its common stock during
any such deferments. FAST I does not meet the requirements for consolidation of Financial
Accounting Standards Board (FASB) Interpretation No. 46(R), Consolidation of Variable Interest
Entities An Interpretation of ARB No. 51.
Off-Balance Sheet Arrangements
We use off-balance sheet arrangements (e.g., operating leases) where the economics and sound
business principles warrant their use. Refer to Trust Preferred Securities section above
regarding an off-balance sheet arrangement.
Contractual Obligations
The following table summarizes all of our contractual obligations by period as of June 30,
2008 (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due By Period |
|
|
|
Total |
|
|
Less than 1 year |
|
|
1-3 Years |
|
|
3-5 Years |
|
|
More than 5 years |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss adjustment expense
reserves (1) |
|
$ |
101,407 |
|
|
$ |
60,844 |
|
|
$ |
36,507 |
|
|
$ |
3,752 |
|
|
$ |
304 |
|
Notes payable (2) |
|
|
3,987 |
|
|
|
3,987 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Debentures payable (3) |
|
|
124,219 |
|
|
|
3,826 |
|
|
|
7,652 |
|
|
|
6,614 |
|
|
|
106,127 |
|
Capitalized lease obligations |
|
|
211 |
|
|
|
210 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
Operating leases (4) |
|
|
25,476 |
|
|
|
9,214 |
|
|
|
11,989 |
|
|
|
2,769 |
|
|
|
1,504 |
|
Litigation settlement (5) |
|
|
6,721 |
|
|
|
6,721 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance agreement obligations |
|
|
862 |
|
|
|
661 |
|
|
|
201 |
|
|
|
|
|
|
|
|
|
Other |
|
|
1,105 |
|
|
|
452 |
|
|
|
516 |
|
|
|
137 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual cash obligations |
|
$ |
263,988 |
|
|
$ |
85,915 |
|
|
$ |
56,866 |
|
|
$ |
13,272 |
|
|
$ |
107,935 |
|
|
|
|
(1) |
|
Loss and loss adjustment expense reserves do not have contractual maturity dates;
however, based on historical payment patterns, the amount presented is our estimate of the
expected timing of these payments. The timing of these payments is subject to significant
uncertainty. We maintain a portfolio of marketable investments with varying maturities and a
substantial amount of cash and cash equivalents intended to provide adequate cash flows for
such payments. The noted payments due by period of $101.4 million include $0.3 million
related to reinsurance receivables. |
|
(2) |
|
Payments assume a fixed interest rate of 7.38% consistent with the interest rate
swap agreement effective through the maturity date of October 31, 2008. |
|
(3) |
|
Payments due by period assume a contractual fixed interest rate of 9.277% until
July 30, 2012, after which the rate becomes variable (LIBOR plus 375 basis points, or 6.53%
as of June 30, 2008). |
|
(4) |
|
Consists primarily of rental obligations under real estate leases related to our
retail locations and corporate offices. |
|
(5) |
|
Consists of the provision associated with the settlement agreement relating to the
Georgia litigation and the preliminary settlement terms relating to the Alabama litigation.
Other costs associated with the litigation cannot be reasonably estimated at this time. For
additional information with respect to the litigation settlements,
see Item 3. Legal Proceedings. |
38
FIRST ACCEPTANCE CORPORATION 10-K
Critical Accounting Policies
The preparation of consolidated financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that affect amounts
reported in the consolidated financial statements. As more information becomes known, these
estimates and assumptions could change, thus having an impact on the amounts reported in the
future. The following are considered to be our critical accounting policies.
Valuation of deferred tax asset
We maintain income taxes in accordance with Statement of Financial Accounting Standards
(SFAS) No. 109, Accounting for Income Taxes, whereby deferred income tax assets and liabilities
result from temporary differences. Temporary differences are differences between the tax basis of
assets and liabilities and operating loss and tax credit carryforwards and their reported amounts
in the consolidated financial statements that will result in taxable or deductible amounts in
future years. Valuation of the deferred tax asset is considered a critical accounting policy
because the determination of our ability to utilize the asset involves a number of management
assumptions relating to future operations that could materially affect the determination of the
ultimate value and, therefore, the carrying amount of our deferred tax asset.
After considering the recent declines in premiums written, premiums earned and policies in
force, we assessed the realization of our net operating loss (NOL) carryforwards, which comprises
the majority of our deferred tax asset. We concluded that it was appropriate to increase our
valuation allowance for the deferred tax asset related to the NOL carryforwards. Further, during
the year ended June 30, 2008, the provision for income taxes included charges related to the
expiration of certain NOL carryforwards due to taxable income for the current fiscal year being
less than our prior estimates. As in our prior assessments, we considered our historical and
expected taxable income to determine the sufficiency of our valuation allowance. We remain
optimistic about the Companys future outlook and expect to generate taxable income sufficient to
realize our remaining net deferred tax asset. However, our evaluation includes multiple assumptions
and estimates that may change over time. If future taxable income is less than current projections,
an additional valuation allowance may become necessary that could have a materially adverse impact
on our results of operations and financial position. See Note 13 to our consolidated financial
statements regarding the valuation of our deferred tax asset.
Goodwill and identifiable intangible assets
Goodwill and other identifiable intangible assets are attributable to our insurance operations
and are recorded at their estimated fair values at the date of acquisition. Goodwill and other
intangible assets having an indefinite useful life are not amortized for financial statement
purposes. We perform an annual impairment test. In the event that facts and circumstances indicate
that the goodwill and other identifiable intangible assets may be impaired, an interim impairment
test would be required. Intangible assets with finite lives are amortized over their useful lives
and are periodically reviewed to ensure that no conditions exist indicating the recorded amount is
not recoverable from future undiscounted cash flows.
As a part of our annual impairment test to evaluate the recoverability of such assets, recent
trends in our results, including premiums written, premiums earned and policies in force as well as
the estimated future discounted cash flows associated with these assets, were compared with their
carrying amounts to determine if a write down to market value or discounted cash flow value was
necessary. Based on this evaluation, we concluded that goodwill and other identifiable intangible
assets were fully realizable as of June 30, 2008. However, our evaluation includes multiple
assumptions, including estimated discounted cash flows and estimates that may change over time. If
future discounted cash flows become less than those projected by the Company, an impairment charge
may become necessary that could have a materially adverse impact on our results of operations and
financial position.
Investments
Our investments are recorded at fair value, which is typically based on publicly available
quoted prices. From time to time, the carrying value of our investments may be temporarily impaired
because of the inherent volatility of publicly-traded investments. Management reviews investments
for impairment on a quarterly basis. A decline in the fair value of any available-for-sale security below cost that is deemed to be
other-than-temporary would result in a charge against income.
39
FIRST ACCEPTANCE CORPORATION 10-K
The determination of whether unrealized losses are other-than-temporary requires judgment
based on subjective as well as objective factors. We routinely monitor our fixed maturities
portfolio for changes in fair value that might indicate potential impairments and perform detailed
reviews on such securities. Changes in fair value are evaluated to determine the extent to which
such changes are attributable to (i) fundamental factors specific to the issuer or (ii)
market-related factors such as interest rates or sector declines.
Securities with declines attributable to issuer-specific fundamentals are reviewed to identify
all available evidence to estimate the potential for impairment. Resources used include historical
financial data included in SEC filings for corporate bonds and performance data regarding the
underlying loans for collateralized mortgage obligations. Securities with declines attributable to
market or sector declines where we have the intent and ability to hold these securities for a
period of time sufficient to allow for any anticipated recovery in fair value are not deemed to be
other-than-temporary.
If we determine that the value of an investment is other-than-temporarily impaired, the
impairment would be charged against income, a new cost basis for the security would be established
and the amount of the impairment would be amortized through income over the remaining life of the
security. Our evaluations during the year ended June 30, 2008 resulted in other-than-temporary
impairment charges totaling $1.4 million related to certain non-agency CMOs in our investment
portfolio. Due to the deterioration in liquidity in the credit markets during calendar 2008, yields
on certain non-agency CMOs declined below projected book yields requiring the impairment under the
guidance set forth in EITF 99-20. Other than the decline in the yields of these securities
resulting from changes in prepayment assumptions, the underlying assets of these securities
continue to perform within expectations.
At June 30, 2008, the investment portfolio had gross unrealized losses of $2.8 million. Since
it is not possible to accurately predict if or when a specific security will become
other-than-temporarily impaired, total impairment charges could be material to the consolidated
results of operations in a future period. However, management believes that it is not likely that
such impairment charges will have a significant effect on our liquidity.
Losses and loss adjustment expense reserves
Loss and loss adjustment expense reserves represent our best estimate of our ultimate
liability for losses and loss adjustment expenses relating to events that occurred prior to the end
of any given accounting period but have not been paid. Months and potentially years may elapse
between the occurrence of an automobile accident covered by one of our insurance policies, the
reporting of the accident and the payment of the claim. We record a liability for estimates of
losses that will be paid for accidents that have been reported, which is referred to as case
reserves. In addition, since accidents are not always reported when they occur, we estimate
liabilities for accidents that have occurred but have not been reported, which are referred to
herein as incurred but not reported (IBNR) reserves.
We are directly liable for loss and loss adjustment expenses under the terms of the insurance
policies that our insurance company subsidiaries underwrite. Each of the insurance company
subsidiaries establishes a reserve for all of its unpaid losses and loss adjustment expenses,
including case and IBNR reserves, and estimates for the cost to settle the claims. We estimate our
IBNR reserves by estimating our ultimate unpaid liability for loss and loss adjustment expense
reserves first, and then reducing that amount by the amount of cumulative paid claims and by the
amount of our case reserves. We rely primarily on historical loss experience in determining reserve
levels, on the assumption that historical loss experience provides a good indication of future loss
experience. We also consider various other factors, such as inflation, claims settlement patterns,
legislative activity and litigation trends. Our internal actuarial staff continually monitors these
estimates on a state and coverage level. We utilize our internal actuarial staff to determine
appropriate reserve levels. As experience develops or new information becomes known, we increase
or decrease the level of our reserves in the period in which changes to the estimates are
determined. Accordingly, the actual losses and loss adjustment expenses may differ materially from
the estimates we have recorded. See Business Loss and Loss Adjustment Expense Reserves within
Item 1 for additional information.
40
FIRST ACCEPTANCE CORPORATION 10-K
Revenue Recognition
Insurance premiums earned are recognized on a pro-rata basis over the respective terms of the
policies. Written premiums are recorded as of the effective date of the policies for the full
policy premium, although most policyholders elect to pay on a monthly installment basis. Policy
and renewal fees are included in premiums earned and are recognized on a pro-rata basis over the
respective terms of the policies. Premiums are generally collected in advance of providing risk
coverage, minimizing our exposure to credit risk. Premiums receivable are recorded net of an
estimated allowance for uncollectible amounts.
Commission income and related policy fees, written for affiliated and unaffiliated insurance
companies, are recognized at the date the customer is initially billed or as of the effective date
of the insurance policy, whichever is later. Commissions on premium endorsements are recognized
when premiums are processed. Motor club fees written by an affiliate are earned on a pro-rata
basis over the respective terms of the contracts and included within commission and fee income.
Fees are paid monthly by motor club members and are generally collected in advance of providing
coverage, minimizing our exposure to credit risk.
Fee income includes agency and installment fees to compensate us for the costs of providing
installment payment plans, as well as late payment, policy cancellation, policy rewrite and
reinstatement fees. We recognize these fees on a collected basis. Installment billing fees paid by
policyholders are recognized as revenue when each installment is billed.
Forward-Looking Statements
This report contains forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. All statements made in the report, other than statements of historical fact, are
forward-looking statements. You can identify these statements from our use of the words may,
should, could, potential, continue, plan, forecast, estimate, project, believe,
intent, anticipate, expect, target, is likely, will, or the negative of these terms and
similar expressions. These statements are made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. These forward-looking statements may include,
among other things:
|
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statements and assumptions relating to future growth, income, income per share and
other financial performance measures, as well as managements short-term and long-term
performance goals; |
|
|
|
|
statements relating to the anticipated effects on results of operations or financial
condition from recent and expected developments or events; |
|
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|
|
statements relating to our business and growth strategies; and |
|
|
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|
any other statements or assumptions that are not historical facts. |
We believe that our expectations are based on reasonable assumptions. However, these
forward-looking statements involve known and unknown risks, uncertainties and other important
factors that could cause our actual results, performance or achievements, or industry results to
differ materially from our expectations of future results, performance or achievements expressed or
implied by these forward-looking statements. In addition, our past results of operations do not
necessarily indicate our future results. We discuss these and other uncertainties in the Risk
Factors section, as well as other sections, of this report.
You should not place undue reliance on any forward-looking statements. These statements speak
only as of the date of this report. Except as otherwise required by applicable laws, we undertake
no obligation to publicly update or revise any forward-looking statements or the risk factors
described in this report, whether as a result of new information, future events, changed
circumstances or any other reason after the date of this report.
41
FIRST ACCEPTANCE CORPORATION 10-K
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Market risk represents the potential economic loss arising from adverse changes in the fair
value of financial instruments. Our exposures to market risk relate primarily to our investment
portfolio, which is exposed primarily to interest rate risk and credit risk. The fair value of our
fixed maturity portfolio is directly impacted by changes in market interest rates; generally, the
fair value of fixed-income investments moves inversely with movements in market interest rates. Our
fixed maturity portfolio is comprised of substantially all fixed rate investments with primarily
short-term and intermediate-term maturities. This portfolio composition allows flexibility in
reacting to fluctuations of interest rates. The portfolios of our insurance company subsidiaries
are managed to achieve an adequate risk-adjusted return while maintaining sufficient liquidity to
meet policyholder obligations.
Interest Rate Risk
The fair values of our fixed maturity investments fluctuate in response to changes in market
interest rates. Increases and decreases in prevailing interest rates generally translate into
decreases and increases, respectively, in the fair values of those instruments. Additionally, the
fair values of interest rate sensitive instruments may be affected by the creditworthiness of the
issuer, prepayment options, relative values of alternative investments, the liquidity of the
instrument and other general market conditions.
The following table summarizes the estimated effects of hypothetical increases and decreases
in interest rates resulting from parallel shifts in market yield curves on our fixed maturity
portfolio (in thousands). It is assumed that the effects are realized immediately upon the change
in interest rates. The hypothetical changes in market interest rates do not reflect what could be
deemed best or worst case scenarios. Variations in market interest rates could produce significant
changes in the timing of repayments due to prepayment options available. For these reasons, actual
results might differ from those reflected in the table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sensitivity to Instantaneous Interest Rate Changes (basis points) |
|
|
|
(100) |
|
|
(50) |
|
|
0 |
|
|
50 |
|
|
100 |
|
|
200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of fixed
maturity
portfolio |
|
$ |
197,126 |
|
|
$ |
193,393 |
|
|
$ |
189,570 |
|
|
$ |
185,651 |
|
|
$ |
181,697 |
|
|
$ |
173,861 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table provides information about our fixed maturity investments at June 30, 2008
which are sensitive to interest rate risk. The table shows expected principal cash flows (at par
value, which differs from amortized cost as a result of discounts at the time of purchase and
other-than-temporary impairment) by expected maturity date for each of the five subsequent years
and collectively for all years thereafter (in thousands). Callable bonds and notes are included
based on call date or maturity date depending upon which date produces the most conservative yield.
CMOs and sinking fund issues are included based on maturity year adjusted for expected payment
patterns. Actual cash flows may differ from those expected.
|
|
|
|
|
Year Ended June 30, |
|
Amount |
|
2009 |
|
$ |
22,416 |
|
2010 |
|
|
14,716 |
|
2011 |
|
|
13,961 |
|
2012 |
|
|
23,885 |
|
2013 |
|
|
17,513 |
|
Thereafter |
|
|
99,529 |
|
|
|
|
|
Total |
|
$ |
192,020 |
|
|
|
|
|
|
|
Fair value |
|
$ |
189,570 |
|
|
|
|
|
With regards to interest rate risk on our outstanding debt, at June 30, 2008, the unpaid
balance due under the amended credit facility was $3.9 million. The interest rate on this borrowing
is fixed through an interest rate swap agreement. This debt is scheduled to be repaid in full on
October 31, 2008. On June 15, 2007, our newly
formed wholly-owned unconsolidated trust entity, First Acceptance Statutory Trust I, used the
proceeds from its sale of trust preferred securities to purchase $41.2 million of junior
subordinated debentures. The debentures pay a fixed rate of 9.277% until July 30, 2012, after which
the rate becomes variable (LIBOR plus 375 basis points).
42
FIRST ACCEPTANCE CORPORATION 10-K
Credit Risk
Credit risk is managed by diversifying the portfolio to avoid concentrations in any single
industry group or issuer and by limiting investments in securities with lower credit ratings. The
largest investment in any one fixed maturity security, excluding U.S. government and agency
securities, is $1.9 million or 1% of the fixed maturity portfolio. The top five investments make up
5% of the fixed maturity portfolio. The average credit quality rating for our fixed maturity
portfolio was AA+ at June 30, 2008. There are no fixed maturities in the portfolio that have not
produced investment income during the previous twelve months.
The following table shows our fixed maturity portfolio by Standard & Poors Corporation rating
as of June 30, 2008 (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
Amortized |
|
|
Amortized |
|
|
Fair |
|
|
Fair |
|
Comparable S&P Rating |
|
Cost |
|
|
Cost |
|
|
Value |
|
|
Value |
|
AAA |
|
$ |
107,354 |
|
|
|
56.5 |
% |
|
$ |
108,127 |
|
|
|
57.0 |
% |
AA+, AA, AA- |
|
|
35,387 |
|
|
|
18.6 |
% |
|
|
35,139 |
|
|
|
18.5 |
% |
A+, A, A- |
|
|
39,930 |
|
|
|
21.0 |
% |
|
|
39,128 |
|
|
|
20.7 |
% |
BBB+, BBB, BBB- |
|
|
6,861 |
|
|
|
3.6 |
% |
|
|
6,753 |
|
|
|
3.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment grade |
|
|
189,532 |
|
|
|
99.7 |
% |
|
|
189,147 |
|
|
|
99.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BB+,
BB, BB- |
|
|
508 |
|
|
|
0.3 |
% |
|
|
423 |
|
|
|
0.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-investment grade |
|
|
508 |
|
|
|
0.3 |
% |
|
|
423 |
|
|
|
0.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
190,040 |
|
|
|
100.0 |
% |
|
$ |
189,570 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
During fiscal 2008, the mortgage industry experienced a rise in mortgage delinquencies and
foreclosures, particularly among lower quality exposures (sub-prime and Alt-A). As a result of
these increasing delinquencies and foreclosures, many CMOs with underlying sub-prime and Alt-A
mortgages as collateral experienced significant drops in fair value. We have only modest exposure
to sub-prime investments and no exposure to Alt-A investments. At June 30, 2008, our fixed maturity
portfolio included 3 CMOs having sub-prime exposure with a fair value of $1.4 million, all of which were rated investment
grade. These securities are paying their principal and periodic interest timely and the underlying
assets of these securities continue to perform within expectations.
In early 2008, several municipal bond insurers had their credit ratings downgraded or placed
under review by the major nationally recognized credit rating agencies. Fitch, one of the
nationally recognized credit rating agencies, downgraded AMBAC to a rating of AA from AAA. Our
investment portfolio consists of $41.0 million of municipal bonds, of which $29.2 million are
insured. Of the insured bonds, 47% are insured with MBIA, 18% with FGIC, 21% with AMBAC and 14%
with XL Capital. These securities are paying their principal and periodic interest timely.
The following table presents the underlying ratings, represented by the lower of either
Standard and Poors or Fitchs ratings, of the municipal bond portfolio (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insured |
|
|
Uninsured |
|
|
Total |
|
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
Fair |
|
|
Fair |
|
|
Fair |
|
|
Fair |
|
|
Fair |
|
|
Fair |
|
|
|
Value |
|
|
Value |
|
|
Value |
|
|
Value |
|
|
Value |
|
|
Value |
|
AAA |
|
$ |
|
|
|
|
|
|
|
$ |
3,812 |
|
|
|
32 |
% |
|
$ |
3,812 |
|
|
|
9 |
% |
AA+, AA, AA- |
|
|
16,232 |
|
|
|
56 |
% |
|
|
8,015 |
|
|
|
68 |
% |
|
|
24,247 |
|
|
|
59 |
% |
A+, A, A- |
|
|
11,470 |
|
|
|
39 |
% |
|
|
|
|
|
|
|
|
|
|
11,470 |
|
|
|
28 |
% |
BBB+, BBB, BBB- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NR (not rated) |
|
|
1,484 |
|
|
|
5 |
% |
|
|
|
|
|
|
|
|
|
|
1,484 |
|
|
|
4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
29,186 |
|
|
|
100 |
% |
|
$ |
11,827 |
|
|
|
100 |
% |
|
$ |
41,013 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43
FIRST ACCEPTANCE CORPORATION 10-K
Item 8. Financial Statements and Supplementary Data
44
FIRST ACCEPTANCE CORPORATION 10-K
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
First Acceptance Corporation
We have audited the accompanying consolidated balance sheets of First Acceptance Corporation and
subsidiaries (the Company) as of June 30, 2008 and 2007, and the related consolidated statements
of operations, stockholders equity, and cash flows for each of the three years in the period ended
June 30, 2008. Our audits also included the financial statement schedules listed in the index at
Item 15(a). These financial statements and schedules are the responsibility of the Companys
management. Our responsibility is to express an opinion on these consolidated financial statements
and schedules based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of First Acceptance Corporation and subsidiaries as
of June 30, 2008 and 2007 and the consolidated results of their operations and their cash flows for
each of the three years in the period ended June 30, 2008, in conformity with U.S. generally
accepted accounting principles. Also, in our opinion, the related financial statement schedules,
when considered in relation to the basic financial statements taken as a whole, present fairly, in
all material respects, the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the effectiveness of First Acceptance Corporation and subsidiaries internal
control over financial reporting as of June 30, 2008, based on criteria established in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated September 10, 2008 expressed an unqualified opinion thereon.
Nashville, Tennessee
September 10, 2008
45
FIRST ACCEPTANCE CORPORATION 10-K
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
First Acceptance Corporation
We have audited First Acceptance Corporation and subsidiaries (the Company) internal control over
financial reporting as of June 30, 2008, based on criteria established in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (the COSO criteria). The Companys management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting included in the accompanying Managements Annual Report on
Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the
Companys internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material risk exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk,
and performing such other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, First Acceptance Corporation maintained, in all material respects, effective
internal control over financial reporting as of June 30, 2008, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheets of the Company as of June 30, 2008 and 2007,
and the related consolidated statements of operations, stockholders equity, and cash flows for
each of the three years in the period ended June 30, 2008, and our report dated September 10, 2008
expressed an unqualified opinion thereon.
Nashville, Tennessee
September 10, 2008
46
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
2008 |
|
|
2007 |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities, available-for-sale at fair value (amortized
cost of $190,040 and $179,328, respectively) |
|
$ |
189,570 |
|
|
$ |
176,555 |
|
Cash and cash equivalents |
|
|
38,646 |
|
|
|
34,161 |
|
Premiums and fees receivable, net of allowance of $651 and $606 |
|
|
63,377 |
|
|
|
71,771 |
|
Reinsurance receivables |
|
|
283 |
|
|
|
326 |
|
Receivable for securities |
|
|
|
|
|
|
19,973 |
|
Deferred tax asset, net |
|
|
17,593 |
|
|
|
30,936 |
|
Other assets |
|
|
9,894 |
|
|
|
11,396 |
|
Property and equipment, net |
|
|
4,876 |
|
|
|
4,116 |
|
Deferred acquisition costs |
|
|
4,549 |
|
|
|
5,166 |
|
Goodwill |
|
|
138,082 |
|
|
|
138,082 |
|
Identifiable intangible assets |
|
|
6,360 |
|
|
|
6,410 |
|
|
|
|
|
|
|
|
TOTAL ASSETS |
|
$ |
473,230 |
|
|
$ |
498,892 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss adjustment expense reserves |
|
$ |
101,407 |
|
|
$ |
91,446 |
|
Unearned premiums and fees |
|
|
77,237 |
|
|
|
88,831 |
|
Notes payable and capitalized lease obligations |
|
|
4,124 |
|
|
|
23,490 |
|
Debentures payable |
|
|
41,240 |
|
|
|
41,240 |
|
Payable for securities |
|
|
1,045 |
|
|
|
999 |
|
Other liabilities |
|
|
22,718 |
|
|
|
13,402 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
247,771 |
|
|
|
259,408 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity: |
|
|
|
|
|
|
|
|
Preferred stock, $.01 par value, 10,000 shares authorized |
|
|
|
|
|
|
|
|
Common stock, $.01 par value, 75,000 shares authorized;
48,055 and 47,615 shares issued and outstanding,
respectively |
|
|
481 |
|
|
|
476 |
|
Additional paid-in capital |
|
|
462,601 |
|
|
|
460,968 |
|
Accumulated other comprehensive loss |
|
|
(470 |
) |
|
|
(2,652 |
) |
Accumulated deficit |
|
|
(237,153 |
) |
|
|
(219,308 |
) |
|
|
|
|
|
|
|
Total stockholders equity |
|
|
225,459 |
|
|
|
239,484 |
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
|
$ |
473,230 |
|
|
$ |
498,892 |
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
47
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned |
|
$ |
285,914 |
|
|
$ |
300,661 |
|
|
$ |
208,771 |
|
Fee income |
|
|
36,479 |
|
|
|
37,324 |
|
|
|
26,757 |
|
Investment income |
|
|
11,250 |
|
|
|
8,863 |
|
|
|
5,762 |
|
Other |
|
|
(1,244 |
) |
|
|
789 |
|
|
|
7,712 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
332,399 |
|
|
|
347,637 |
|
|
|
249,002 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Losses and loss adjustment expenses |
|
|
219,943 |
|
|
|
241,908 |
|
|
|
140,845 |
|
Insurance operating expenses |
|
|
98,433 |
|
|
|
97,629 |
|
|
|
75,773 |
|
Other operating expenses |
|
|
2,415 |
|
|
|
2,623 |
|
|
|
2,494 |
|
Litigation settlement |
|
|
7,468 |
|
|
|
|
|
|
|
|
|
Stock-based compensation |
|
|
1,507 |
|
|
|
1,063 |
|
|
|
500 |
|
Depreciation and amortization |
|
|
1,679 |
|
|
|
1,624 |
|
|
|
1,463 |
|
Interest expense |
|
|
4,977 |
|
|
|
1,874 |
|
|
|
898 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
336,422 |
|
|
|
346,721 |
|
|
|
221,973 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
(4,023 |
) |
|
|
916 |
|
|
|
27,029 |
|
Provision (benefit) for income taxes |
|
|
13,822 |
|
|
|
17,586 |
|
|
|
(1,039 |
) |
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(17,845 |
) |
|
$ |
(16,670 |
) |
|
$ |
28,068 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
(0.37 |
) |
|
$ |
(0.35 |
) |
|
$ |
0.59 |
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
(0.37 |
) |
|
$ |
(0.35 |
) |
|
$ |
0.57 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares used to calculate net
income (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
47,628 |
|
|
|
47,584 |
|
|
|
47,487 |
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
47,628 |
|
|
|
47,584 |
|
|
|
49,576 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of net income (loss) to
comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(17,845 |
) |
|
$ |
(16,670 |
) |
|
$ |
28,068 |
|
Unrealized change in investments |
|
|
2,303 |
|
|
|
690 |
|
|
|
(3,765 |
) |
Other |
|
|
(121 |
) |
|
|
121 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15,663 |
) |
|
|
(15,859 |
) |
|
|
24,303 |
|
Applicable provision for income taxes |
|
|
|
|
|
|
|
|
|
|
353 |
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) |
|
$ |
(15,663 |
) |
|
$ |
(15,859 |
) |
|
$ |
23,950 |
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
48
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
other |
|
|
|
|
|
|
Total |
|
|
|
Common Stock |
|
|
paid-in |
|
|
comprehensive |
|
|
Accumulated |
|
|
stockholders |
|
|
|
Shares |
|
|
Amount |
|
|
capital |
|
|
income (loss) |
|
|
deficit |
|
|
equity |
|
Balances at July 1, 2005 |
|
|
47,455 |
|
|
$ |
475 |
|
|
$ |
457,905 |
|
|
$ |
655 |
|
|
$ |
(230,706 |
) |
|
$ |
228,329 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,068 |
|
|
|
28,068 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized change on
investments (net of tax of $353) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,118 |
) |
|
|
|
|
|
|
(4,118 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation |
|
|
3 |
|
|
|
|
|
|
|
500 |
|
|
|
|
|
|
|
|
|
|
|
500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of shares under Employee
Stock Purchase Plan |
|
|
22 |
|
|
|
|
|
|
|
223 |
|
|
|
|
|
|
|
|
|
|
|
223 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options |
|
|
55 |
|
|
|
|
|
|
|
421 |
|
|
|
|
|
|
|
|
|
|
|
421 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at June 30, 2006 |
|
|
47,535 |
|
|
|
475 |
|
|
|
459,049 |
|
|
|
(3,463 |
) |
|
|
(202,638 |
) |
|
|
253,423 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16,670 |
) |
|
|
(16,670 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized change on
investments (net of tax of $0) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
690 |
|
|
|
|
|
|
|
690 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized change on interest rate
swap agreement |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
121 |
|
|
|
|
|
|
|
121 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale of common stock |
|
|
50 |
|
|
|
1 |
|
|
|
590 |
|
|
|
|
|
|
|
|
|
|
|
591 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation |
|
|
5 |
|
|
|
|
|
|
|
1,063 |
|
|
|
|
|
|
|
|
|
|
|
1,063 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of shares under Employee
Stock Purchase Plan |
|
|
25 |
|
|
|
|
|
|
|
266 |
|
|
|
|
|
|
|
|
|
|
|
266 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at June 30, 2007 |
|
|
47,615 |
|
|
|
476 |
|
|
|
460,968 |
|
|
|
(2,652 |
) |
|
|
(219,308 |
) |
|
|
239,484 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17,845 |
) |
|
|
(17,845 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized change on
investments (net of tax of $0) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,303 |
|
|
|
|
|
|
|
2,303 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized change on interest rate
swap agreement |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(121 |
) |
|
|
|
|
|
|
(121 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of restricted common stock |
|
|
400 |
|
|
|
4 |
|
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation |
|
|
5 |
|
|
|
1 |
|
|
|
1,506 |
|
|
|
|
|
|
|
|
|
|
|
1,507 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of shares under Employee
Stock Purchase Plan |
|
|
35 |
|
|
|
|
|
|
|
131 |
|
|
|
|
|
|
|
|
|
|
|
131 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at June 30, 2008 |
|
|
48,055 |
|
|
$ |
481 |
|
|
$ |
462,601 |
|
|
$ |
(470 |
) |
|
$ |
(237,153 |
) |
|
$ |
225,459 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
49
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(17,845 |
) |
|
$ |
(16,670 |
) |
|
$ |
28,068 |
|
Adjustments to reconcile net income (loss) to cash provided by
operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
1,679 |
|
|
|
1,624 |
|
|
|
1,463 |
|
Stock-based compensation |
|
|
1,507 |
|
|
|
1,063 |
|
|
|
500 |
|
Deferred income taxes |
|
|
13,343 |
|
|
|
17,132 |
|
|
|
(1,533 |
) |
Gains on sales of foreclosed real estate |
|
|
|
|
|
|
|
|
|
|
(3,638 |
) |
Other-than-temporary impairment on investment securities |
|
|
1,414 |
|
|
|
|
|
|
|
|
|
Other |
|
|
(57 |
) |
|
|
193 |
|
|
|
906 |
|
Change in: |
|
|
|
|
|
|
|
|
|
|
|
|
Premiums and fees receivable |
|
|
8,349 |
|
|
|
(6,614 |
) |
|
|
(21,634 |
) |
Deferred acquisition costs |
|
|
617 |
|
|
|
164 |
|
|
|
(2,059 |
) |
Loss and loss adjustment expense reserves |
|
|
9,961 |
|
|
|
28,624 |
|
|
|
19,925 |
|
Unearned premiums and fees |
|
|
(11,594 |
) |
|
|
10,500 |
|
|
|
28,307 |
|
Litigation settlement |
|
|
6,721 |
|
|
|
|
|
|
|
|
|
Other |
|
|
4,273 |
|
|
|
711 |
|
|
|
2,564 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
18,368 |
|
|
|
36,727 |
|
|
|
52,869 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of fixed maturities, available-for-sale |
|
|
(44,408 |
) |
|
|
(101,295 |
) |
|
|
(82,144 |
) |
Maturities and paydowns of fixed maturities, available-for-sale |
|
|
13,697 |
|
|
|
7,048 |
|
|
|
8,748 |
|
Sales of fixed maturities, available-for-sale |
|
|
18,719 |
|
|
|
45,932 |
|
|
|
15,400 |
|
Sale of investment in mutual fund |
|
|
|
|
|
|
|
|
|
|
10,920 |
|
Net change in receivable/payable for securities |
|
|
20,019 |
|
|
|
(22,889 |
) |
|
|
3,915 |
|
Purchase of common stock in trust |
|
|
|
|
|
|
(1,240 |
) |
|
|
|
|
Capital expenditures |
|
|
(2,422 |
) |
|
|
(1,769 |
) |
|
|
(2,265 |
) |
Cash paid for acquisitions, net of cash acquired |
|
|
|
|
|
|
(1,037 |
) |
|
|
(29,853 |
) |
Proceeds from sales of foreclosed real estate |
|
|
|
|
|
|
|
|
|
|
4,512 |
|
Other |
|
|
(253 |
) |
|
|
(254 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
5,352 |
|
|
|
(75,504 |
) |
|
|
(70,767 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from borrowings |
|
|
|
|
|
|
5,000 |
|
|
|
30,431 |
|
Payments on borrowings |
|
|
(19,366 |
) |
|
|
(5,693 |
) |
|
|
(6,405 |
) |
Proceeds from issuance of debentures |
|
|
|
|
|
|
41,240 |
|
|
|
|
|
Net proceeds from issuance of common stock |
|
|
131 |
|
|
|
857 |
|
|
|
223 |
|
Exercise of stock options |
|
|
|
|
|
|
|
|
|
|
421 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
(19,235 |
) |
|
|
41,404 |
|
|
|
24,670 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents |
|
|
4,485 |
|
|
|
2,627 |
|
|
|
6,772 |
|
Cash and cash equivalents, beginning of year |
|
|
34,161 |
|
|
|
31,534 |
|
|
|
24,762 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year |
|
$ |
38,646 |
|
|
$ |
34,161 |
|
|
$ |
31,534 |
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
50
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. |
|
Summary of Significant Accounting Policies |
General
First Acceptance Corporation (the Company) is a holding company based in Nashville,
Tennessee with operating subsidiaries whose primary operations include the selling, servicing and
underwriting of non-standard personal automobile insurance. The Company writes non-standard
personal automobile insurance in 12 states and is licensed as an insurer in 13 additional states.
The Company issues policies of insurance through three wholly-owned subsidiaries, First Acceptance
Insurance Company, Inc., First Acceptance Insurance Company of Georgia, Inc. and First Acceptance
Insurance Company of Tennessee, Inc. (the Insurance Companies). The Company has limited
activities related to its attempts to market and dispose of foreclosed real estate held for sale.
Basis of Consolidation and Reporting
The accompanying consolidated financial statements include the accounts of the Company and its
subsidiaries which are all wholly owned. These financial statements have been prepared in
conformity with accounting principles generally accepted in the United States. All intercompany
accounts and transactions have been eliminated in consolidation.
Reclassifications
Certain reclassifications have been made to the prior years consolidated financial statements
to conform with the current year presentation.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting
principles (GAAP) requires management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. It also requires disclosure of
contingent assets and liabilities at the date of the consolidated financial statements and the
reported amounts of revenue and expenses during the period. Actual results could differ from those
estimates.
Investments
Fixed maturities, available-for-sale, include bonds with fixed principal payment schedules and
loan-backed securities which are amortized using the retrospective method. These securities are
carried at fair value with the corresponding unrealized appreciation or depreciation, net of
deferred income taxes, reported in other comprehensive income or loss.
Premiums and discounts on collateralized mortgage obligations (CMOs) are amortized over a
period based on estimated future principal payments, including prepayments. Prepayment assumptions
are reviewed periodically and adjusted to reflect actual prepayments and changes in expectations.
The most significant determinants of prepayments are the difference between interest rates on the
underlying mortgages and the current mortgage loan rates and the structure of the security. Other
factors affecting prepayments include the size, type and age of underlying mortgages, the
geographic location of the mortgaged properties and the credit worthiness of the borrowers.
Variations from anticipated prepayments will affect the life and yield of these securities.
Investment securities are exposed to various risks such as interest rate, market and credit risk.
Fair values of securities fluctuate based on the magnitude of changing market conditions;
significant changes in market conditions could materially affect portfolio value in the near term.
Management reviews investments for impairment on a quarterly basis. Fair values of investments are
based on prices quoted in the most active market for each security. If quoted prices are not
available, fair value is estimated based on the fair value of comparable securities, discounted
51
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
cash flow models or similar methods. Any decline in the fair value of any available-for-sale
security below cost that is deemed to be other-than-temporary would result in a reduction in the
carrying amount of the security to fair value. The impairment would be charged against income, a
new cost basis for the security would be established and the amount of the impairment would be
amortized through income over the remaining life of the security.
Realized gains and losses on sales of securities are computed based on specific identification
and are included within other revenues.
Cash and Cash Equivalents
Cash and cash equivalents consist of bank demand deposits and highly-liquid investments. All
investments with original maturities of three months or less are considered cash equivalents.
Revenue Recognition
Insurance premiums earned are recognized on a pro-rata basis over the respective terms of the
policies. Written premiums are recorded as of the effective date of the policies for the full
policy premium, although most policyholders elect to pay on a monthly installment basis. Policy
and renewal fees are included in premiums earned and are recognized on a pro-rata basis over the
respective terms of the policies. Premiums are generally collected in advance of providing risk
coverage, minimizing the Companys exposure to credit risk. Premiums receivable are recorded net of
an estimated allowance for uncollectible amounts.
Commission income and related policy fees, written for affiliated and unaffiliated insurance
companies, are recognized at the date the customer is initially billed or as of the effective date
of the insurance policy, whichever is later. Commissions on premium endorsements are recognized
when premiums are processed. Motor club fees written by an affiliate are earned on a pro-rata
basis over the respective terms of the contracts and included within commission and fee income.
Fees are paid monthly by motor club members and are generally collected in advance of providing
coverage, minimizing the Companys exposure to credit risk.
Fee income includes agency and installment fees to compensate the Company for the costs of
providing installment payment plans, as well as late payment, policy cancellation, policy rewrite
and reinstatement fees. The Company recognizes these fees on a collected basis. Installment billing
fees paid by policyholders are recognized as revenue when each installment is billed.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and their respective tax
bases. 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 deferred tax assets and liabilities of a change in tax rates is recognized
in income in the period that includes the enactment date.
A valuation allowance for the deferred tax asset is established based upon managements
estimate of whether it is more likely than not that the Company would not realize tax benefits in
future periods to the full extent available. Changes in the valuation allowance are recognized in
income during the period in which the circumstances that cause such a change in managements
estimate occur.
Advertising Costs
Advertising costs are expensed when incurred. Advertising expense for the years ended June 30,
2008, 2007 and 2006 was $11.9 million, $11.7 million and $9.4 million, respectively. At June 30,
2008 and 2007, prepaid
advertising costs, which are included in other assets within the accompanying consolidated balance
sheet, were $2.4 million and $3.0 million.
52
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Property and Equipment
Property and equipment are recorded at cost. Depreciation is provided over the estimated
useful lives of the assets (generally ranging from three to seven years) using the straight-line
method. Leasehold improvements are amortized over the shorter of the lives of the respective leases
or the service lives of the improvements. Repairs and maintenance are charged to expense as
incurred. Equipment under capitalized lease obligations is stated at the present value of the
minimum lease payments at the beginning of the lease term.
Foreclosed Real Estate Held for Sale
Foreclosed real estate held for sale is recorded at the lower of cost or fair value less
estimated costs to sell. The Company periodically reviews its portfolio of foreclosed real estate
held for sale using current information including (i) independent appraisals, (ii) general economic
factors affecting the area where the property is located, (iii) recent sales activity and asking
prices for comparable properties and (iv) costs to sell and/or develop that would serve to lower
the expected proceeds from the disposal of the real estate. Gains (losses) realized on liquidation
are recorded directly to operations and included within other revenues. Foreclosed real estate held
for sale assets at June 30, 2008 and 2007 of $0.6 million and $0.3 million, respectively, are
included within other assets.
Deferred Acquisition Costs
Deferred acquisition costs include premium taxes and other variable underwriting and direct
sales costs incurred in connection with writing business. These costs are deferred and amortized
over the policy period in which the related premiums are earned, to the extent that such costs are
deemed recoverable from future unearned premiums and anticipated investment income. Amortization
expense for the years ended June 30, 2008, 2007 and 2006 was $18.2 million, $20.5 million and $15.2
million, respectively.
Goodwill and Other Identifiable Intangible Assets
Goodwill and other identifiable intangible assets are attributable to the Companys insurance
operations and are recorded at their estimated fair values at the date of acquisition. Goodwill and
other intangible assets having an indefinite useful life are not amortized for financial statement
purposes. The Company performs an annual impairment test. In the event that facts and circumstances
indicate that the goodwill and other identifiable intangible assets may be impaired, an interim
impairment test would be required. Intangible assets with finite lives are amortized over their
useful lives and are periodically reviewed to ensure that no conditions exist indicating the
recorded amount is not recoverable from future undiscounted cash flows.
As a part of the Companys annual impairment test to evaluate the recoverability of such
assets, recent trends in the Companys results, including premiums written, premiums earned and
policies in force as well as the estimated future discounted cash flows associated with these
assets, were compared with their carrying amounts to determine if a write down to market value or
discounted cash flow value was necessary. Based on this evaluation, the Company concluded that
goodwill and other identifiable intangible assets were fully realizable as of June 30, 2008.
However, the Companys evaluation includes multiple assumptions, including estimated discounted
cash flows and estimates that may change over time. If future discounted cash flows become less
than those projected by the Company, an impairment charge may become necessary that could have a
materially adverse impact on the Companys results of operations and financial position.
Loss and Loss Adjustment Expense Reserves
Loss and loss adjustment expense reserves are undiscounted and represent case-basis estimates
of reported losses and estimates based on certain actuarial assumptions regarding the past
experience of reported losses, including an estimate of losses incurred but not reported.
Management believes that the loss and loss adjustment reserves are adequate to cover the ultimate
liability. However, such estimate may be more or less than the amount ultimately paid when the
claims are finally settled.
53
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Stock-Based Compensation
Effective July 1, 2005, the Company adopted Statement of Financial Accounting Standards No.
123 (Revised), Share Based Payment (SFAS No. 123R). SFAS No. 123R requires all share-based
payments to employees, including grants of employee stock options, to be recognized in the
financial statements based on their fair values. Regarding the adoption of SFAS No. 123R, there was
no effect on net income (loss) and net income (loss) per share for the years ended June 30, 2008,
2007 and 2006 since all stock options issued under Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, were fully vested prior to July 1, 2004.
Recent Accounting Pronouncements
Effective July 1, 2007, the Company adopted the provisions of Financial Accounting Standards
Board (FASB) Interpretation No. 48, Accounting for Uncertainty in Income Taxes An
Interpretation of FASB Statement No. 109 (FIN 48). FIN 48 clarifies the accounting for
uncertainty in income taxes recognized in an enterprises financial statements in accordance with
FASB Statement No. 109, Accounting for Income Taxes. FIN 48 also prescribes a recognition threshold
and measurement attribute for the financial statement recognition and measurement of a tax position
taken or expected to be taken in a tax return, as well as providing guidance on de-recognition,
classification, interest and penalties, accounting in interim periods, disclosure and transition.
The Company recognized no additional liability or reduction in deferred tax asset for unrecognized
tax benefits and the Company had no FIN 48 tax liabilities at the time of adoption or as of June
30, 2008. Any interest and penalties incurred in connection with income taxes are recorded as a
component of the provision (benefit) for income taxes. The Company is generally not subject to U.S.
federal, state or local income tax examinations by tax authorities for taxable years prior to June
30, 2003.
In September 2006, the FASB issued Statement No. 157, Fair Value Measurements (SFAS 157),
which defines fair value, establishes a framework for measuring fair value in GAAP and expands
disclosures about fair value measurements. This statement applies under other accounting
pronouncements that require or permit fair value measurements, the FASB having previously concluded
in those accounting pronouncements that fair value is the relevant measurement attribute.
Accordingly, this statement does not require any new fair value measurements. SFAS 157 is effective
for financial statements issued for fiscal years beginning after November 15, 2007, and interim
periods within those fiscal years. Based on the current use of fair value measurements, the Company
does not expect the adoption of SFAS 157 to have a material impact on the results of operations or
financial position of the Company.
In February 2007, the FASB issued Statement No. 159, Establishing the Fair Value Option for
Financial Assets and Liabilities (SFAS 159), which includes an amendment to FASB Statement No.
115, Accounting for Certain Investments in Debt and Equity Securities (SFAS 115). SFAS 159
permits entities to choose to measure many financial instruments and certain other items at fair
value. The election is made on an instrument-by-instrument basis and is irrevocable. If the fair
value is elected for an instrument, SFAS 159 specifies that unrealized gains and losses are
reported at each subsequent reporting date. This statement applies to all entities and most of the
provisions of this statement apply only to entities that elect the fair value option. However, the
amendment to SFAS 115 applies to all entities with available-for-sale and trading securities. SFAS
159 is effective for fiscal years beginning after November 15, 2007. The Company does not expect
the adoption of SFAS 159 to have a material
impact on the Companys results of operations or financial position given that the Company does not
anticipate making the election set forth in the pronouncement.
In March 2008, the FASB issued Statement No. 161, Disclosures about Derivative Instruments and
Hedging Activities (SFAS 161), which includes an amendment to FASB Statement No. 133, Accounting
for Derivative Instruments and Hedging Activities (SFAS 133). SFAS 161 applies to all derivative
instruments and related hedged items accounted for under SFAS 133. SFAS 161 requires entities to
provide greater transparency about (i) how and why an entity
uses derivative instruments, (ii) how
derivative instruments and related hedged items are accounted for under SFAS 133 and its related
interpretations, and (iii) how derivative instruments and related hedged items affect an entitys
financial position, results of operations, and cash flows. SFAS 161 is effective for financial
statements issued for fiscal years and interim periods beginning after November 15, 2008. The
54
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Company has not evaluated the requirements of SFAS 161 and has not yet determined if SFAS 161 will
have a material impact on its future consolidated financial statements.
Supplemental Cash Flow Information
During the years ended June 30, 2008, 2007 and 2006, the Company paid $0.5 million, $0.8
million and $0.9 million, respectively, in income taxes and $4.3 million, $1.7 million and $0.6
million, respectively, in interest.
Basic and Diluted Net Income (Loss) Per Share
Basic net income (loss) per share is computed by dividing net income (loss) available to
common shareholders by the weighted average number of common shares, while diluted net income
(loss) per share is computed by dividing net income (loss) available to common shareholders by the
weighted average number of such common shares and dilutive share equivalents. Dilutive share
equivalents result from the assumed conversion of employee stock options and restricted common
stock and are calculated using the treasury stock method.
USAuto Holdings
On April 30, 2004, the Company consummated an agreement dated December 15, 2003 to acquire
100% of the outstanding common stock of USAuto Holdings, Inc. (USAuto), a non-standard automobile
insurance agency based in Nashville, Tennessee. The consideration consisted of $76.0 million in
cash, 13,250,000 shares of the Companys common stock issued at closing and 750,000 shares issued
in 2005 upon the attainment of certain financial targets. The aggregate purchase price of $166.8
million was allocated to the tangible and intangible assets acquired and the liabilities assumed
based upon their respective fair values as of the date of the acquisition. Total goodwill and
identifiable intangible assets recorded from the acquisition were $110.0 million, which was net of
a $41.3 million reduction in the deferred tax allowance based upon projections of USAutos future
taxable income. Acquired identifiable intangible assets included $4.8 million assigned to state
insurance licenses and trademark and trade names, which are not subject to amortization. The
results of operations of the business acquired are included in the Companys statements of
operations beginning on April 30, 2004, the date of acquisition.
Texas Insurance Agency
Effective January 1, 2005, the Company acquired the assets (principally the book of business
and 15 retail locations) of a non-standard automobile insurance agency in Texas for $4.0 million in
cash. Goodwill and identifiable intangible assets from this acquisition are deductible for tax
purposes. As a result of this acquisition, the Company is now writing business through
company-operated retail locations in Texas. Of the total purchase price, $3.8 million has been
recorded as goodwill and $0.2 million has been assigned to an identifiable intangible asset
related to the value of policy renewals, which was amortized over a 7-month period in proportion to
anticipated policy expirations.
Pro forma financial information has not been presented for this acquisition since the nature
of the revenue-producing activity of this business has changed from a managing general agency to
the underwriting results of an insurance company. The results of operations of the business
acquired are included in the Companys statements of operations beginning on January 1, 2005, the
date of acquisition.
Chicago Insurance Agencies
Effective January 12, 2006, the Company acquired certain assets (principally the trade names,
customer lists and relationships and the lease rights to 72 retail locations) of two non-standard
automobile insurance agencies under common control in Chicago, Illinois for $30.0 million in cash
plus $0.2 million in acquisition expenses. Goodwill and identifiable intangible assets from this
acquisition are deductible for tax purposes. The purchase price was financed through a newly
executed credit agreement (see Note 11). In accordance with the terms of the acquisition, $1.0
million of additional consideration was paid in March 2007 based on attainment of certain financial
55
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
targets. As a result of this acquisition, the Company is now writing business from these
locations. The Company also received a monthly fee from the seller through December 31, 2006
totaling $5.0 million as compensation for servicing the run-off of business previously written by
the agencies through other insurance companies. Fees of $0.9 million and $4.1 million were
recognized and included within other revenues during the years ended June 30, 2007 and 2006,
respectively.
The following table summarizes the estimated fair values of the assets acquired at the date of
acquisition (in thousands).
|
|
|
|
|
Net tangible assets |
|
$ |
330 |
|
Identifiable intangible assets |
|
|
2,570 |
|
Goodwill |
|
|
28,320 |
|
|
|
|
|
Total assets acquired |
|
$ |
31,220 |
|
|
|
|
|
Of the $2.6 million in acquired identifiable intangible assets, $1.6 million was assigned to
trademark and trade names, which are not subject to amortization. The remaining $1.0 million of
acquired identifiable intangible assets relates to the value of customer lists and relationships
and was amortized over a 30-month period through June 30, 2008 in proportion to anticipated policy
expirations. The Company estimated the fair value of the customer lists and relationships acquired
by discounting to present value the estimated future earnings available from future conversions and
renewals of insurance policies existing as of the closing date.
Pro forma financial information has not been presented for this acquisition since the nature
of the revenue-producing activity of this business has changed from a retail insurance agency to
the underwriting results of an insurance company. The results of the operations of the business
acquired are included in the Companys statements of operations beginning on January 12, 2006, the
date of acquisition.
For the years ended June 30, 2008, 2007 and 2006, amortization related to all identifiable
intangible assets was $0.1 million, $0.4 million and $0.6 million, respectively. At June 30, 2008,
there were no remaining identifiable intangible assets subject to amortization.
Restrictions
At June 30, 2008, fixed maturities and cash equivalents with a fair value of $6.5 million
(amortized cost of $6.4 million) were on deposit with various insurance departments as a
requirement of doing business in those states. In addition, cash equivalents of $2.5 million were
on deposit with another insurance company as collateral for an assumed reinsurance contract (see
Note 4).
Investment Income and Net Realized Gains and Losses
The major categories of investment income follow (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
Fixed maturities, available-for-sale |
|
$ |
9,747 |
|
|
$ |
7,770 |
|
|
$ |
4,411 |
|
Investment in mutual fund |
|
|
|
|
|
|
|
|
|
|
674 |
|
Cash and cash equivalents |
|
|
1,824 |
|
|
|
1,520 |
|
|
|
983 |
|
Other |
|
|
117 |
|
|
|
5 |
|
|
|
|
|
Investment expenses |
|
|
(438 |
) |
|
|
(432 |
) |
|
|
(306 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
11,250 |
|
|
$ |
8,863 |
|
|
$ |
5,762 |
|
|
|
|
|
|
|
|
|
|
|
56
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Net realized capital gains (losses) on investments, which are included in other revenues within the
consolidated statements of operations, from fixed maturities available-for-sale follow (in
thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
Gains |
|
$ |
424 |
|
|
$ |
90 |
|
|
$ |
88 |
|
Losses |
|
|
(254 |
) |
|
|
(151 |
) |
|
|
(164 |
) |
Other-than-temporary impairment |
|
|
(1,414 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(1,244 |
) |
|
$ |
(61 |
) |
|
$ |
(76 |
) |
|
|
|
|
|
|
|
|
|
|
Fixed Maturities, Available-for-sale
The composition of the portfolio follows (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
June 30, 2008 |
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
U.S. government and agencies |
|
$ |
32,046 |
|
|
$ |
1,112 |
|
|
$ |
(1 |
) |
|
$ |
33,157 |
|
State |
|
|
7,423 |
|
|
|
168 |
|
|
|
(77 |
) |
|
|
7,514 |
|
Political subdivisions |
|
|
3,606 |
|
|
|
7 |
|
|
|
(28 |
) |
|
|
3,585 |
|
Revenue and assessment |
|
|
30,066 |
|
|
|
288 |
|
|
|
(440 |
) |
|
|
29,914 |
|
Corporate bonds |
|
|
47,381 |
|
|
|
154 |
|
|
|
(1,006 |
) |
|
|
46,529 |
|
Collateralized mortgage obligations |
|
|
69,518 |
|
|
|
650 |
|
|
|
(1,297 |
) |
|
|
68,871 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
190,040 |
|
|
$ |
2,379 |
|
|
$ |
(2,849 |
) |
|
$ |
189,570 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
June 30, 2007 |
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
U.S. government and agencies |
|
$ |
40,118 |
|
|
$ |
66 |
|
|
$ |
(411 |
) |
|
$ |
39,773 |
|
State |
|
|
7,445 |
|
|
|
46 |
|
|
|
(131 |
) |
|
|
7,360 |
|
Political subdivisions |
|
|
4,389 |
|
|
|
7 |
|
|
|
(65 |
) |
|
|
4,331 |
|
Revenue and assessment |
|
|
26,876 |
|
|
|
57 |
|
|
|
(463 |
) |
|
|
26,470 |
|
Corporate bonds |
|
|
32,696 |
|
|
|
17 |
|
|
|
(626 |
) |
|
|
32,087 |
|
Collateralized mortgage obligations |
|
|
67,804 |
|
|
|
6 |
|
|
|
(1,276 |
) |
|
|
66,534 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
179,328 |
|
|
$ |
199 |
|
|
$ |
(2,972 |
) |
|
$ |
176,555 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The composition of contractual maturities of the portfolio at June 30, 2008 follows (in
thousands).
|
|
|
|
|
|
|
|
|
|
|
Amortized |
|
|
Fair |
|
|
|
Cost |
|
|
Value |
|
One year or less |
|
$ |
8,498 |
|
|
$ |
8,557 |
|
After one through five years |
|
|
55,917 |
|
|
|
56,514 |
|
After five through ten years |
|
|
44,860 |
|
|
|
44,817 |
|
After ten years |
|
|
11,247 |
|
|
|
10,811 |
|
No single maturity date |
|
|
69,518 |
|
|
|
68,871 |
|
|
|
|
|
|
|
|
|
|
$ |
190,040 |
|
|
$ |
189,570 |
|
|
|
|
|
|
|
|
Expected maturities will differ from contractual maturities because borrowers may have the
right to call or prepay obligations with or without prepayment penalties.
57
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The fair value and gross unrealized losses of fixed maturities, available-for-sale, by the
length of time that individual securities have been in a continuous unrealized loss position
follows (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 months |
|
|
12 months or longer |
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Gross |
|
|
Total Gross |
|
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
|
Unrealized |
|
June 30, 2008 |
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
|
Losses |
|
U.S. government and agencies |
|
$ |
1,000 |
|
|
$ |
(1 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
(1 |
) |
State |
|
|
1,056 |
|
|
|
(77 |
) |
|
|
|
|
|
|
|
|
|
|
(77 |
) |
Political subdivisions |
|
|
1,540 |
|
|
|
(6 |
) |
|
|
537 |
|
|
|
(22 |
) |
|
|
(28 |
) |
Revenue and assessment |
|
|
13,237 |
|
|
|
(439 |
) |
|
|
23 |
|
|
|
(1 |
) |
|
|
(440 |
) |
Corporate bonds |
|
|
30,055 |
|
|
|
(566 |
) |
|
|
2,572 |
|
|
|
(440 |
) |
|
|
(1,006 |
) |
Collateralized mortgage obligations |
|
|
20,302 |
|
|
|
(443 |
) |
|
|
7,257 |
|
|
|
(854 |
) |
|
|
(1,297 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
67,190 |
|
|
$ |
(1,532 |
) |
|
$ |
10,389 |
|
|
$ |
(1,317 |
) |
|
$ |
(2,849 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 months |
|
|
12 months or longer |
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Gross |
|
|
Total Gross |
|
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
|
Unrealized |
|
June 30, 2007 |
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
|
Losses |
|
U.S. government and agencies |
|
$ |
21,343 |
|
|
$ |
(150 |
) |
|
$ |
8,571 |
|
|
$ |
(262 |
) |
|
$ |
(412 |
) |
State |
|
|
2,469 |
|
|
|
(68 |
) |
|
|
1,833 |
|
|
|
(63 |
) |
|
|
(131 |
) |
Political subdivisions |
|
|
912 |
|
|
|
(9 |
) |
|
|
2,296 |
|
|
|
(56 |
) |
|
|
(65 |
) |
Revenue and assessment |
|
|
13,400 |
|
|
|
(303 |
) |
|
|
6,655 |
|
|
|
(160 |
) |
|
|
(463 |
) |
Corporate bonds |
|
|
17,761 |
|
|
|
(488 |
) |
|
|
9,215 |
|
|
|
(138 |
) |
|
|
(626 |
) |
Collateralized mortgage obligations |
|
|
39,037 |
|
|
|
(755 |
) |
|
|
13,243 |
|
|
|
(520 |
) |
|
|
(1,275 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
94,922 |
|
|
$ |
(1,773 |
) |
|
$ |
41,813 |
|
|
$ |
(1,199 |
) |
|
$ |
(2,972 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The number of securities with gross unrealized gains and losses follows. Gross unrealized
losses are further segregated by the length of time that individual securities have been in a
continuous unrealized loss position.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Unrealized Losses |
|
Gross |
|
|
Less than |
|
12 months |
|
Unrealized |
As of: |
|
12 months |
|
or longer |
|
Gains |
June 30, 2008
|
|
|
79 |
|
|
|
16 |
|
|
|
108 |
|
June 30, 2007
|
|
|
142 |
|
|
|
68 |
|
|
|
32 |
|
The fair value and gross unrealized losses of those securities in a continuous unrealized loss
position for longer than 12 months at June 30, 2008 follows. Gross unrealized losses are further
segregated by the percentage of amortized cost.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number |
|
|
|
|
|
|
Gross |
|
|
|
of |
|
|
Fair |
|
|
Unrealized |
|
Gross Unrealized Losses |
|
Securities |
|
|
Value |
|
|
Losses |
|
Less than 10% |
|
|
8 |
|
|
$ |
5,346 |
|
|
$ |
(126 |
) |
Greater than 10% |
|
|
8 |
|
|
|
5,043 |
|
|
|
(1,191 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
16 |
|
|
$ |
10,389 |
|
|
$ |
(1,317 |
) |
|
|
|
|
|
|
|
|
|
|
There were no securities with gross unrealized losses greater than 10% of their
amortized cost at June 30, 2007.
58
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table sets forth the amount of gross unrealized loss by severity (as compared to
amortized cost) and length of time that individual securities have been in a continuous unrealized
loss position at June 30, 2008 (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value of |
|
|
|
|
|
|
|
|
|
|
Securities with |
|
|
|
|
|
|
Severity of Gross Unrealized Losses |
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
|
|
|
|
Greater |
|
Gross Unrealized Losses |
|
Unrealized |
|
|
Unrealized |
|
|
Less |
|
|
5% to |
|
|
than |
|
Less than or Equal to: |
|
Losses |
|
|
Losses |
|
|
than 5% |
|
|
10% |
|
|
10% |
|
Three months |
|
$ |
50,385 |
|
|
$ |
(1,018 |
) |
|
$ |
(836 |
) |
|
$ |
|
|
|
$ |
(182 |
) |
Six months |
|
|
14,487 |
|
|
|
(409 |
) |
|
|
(369 |
) |
|
|
(40 |
) |
|
|
|
|
Nine months |
|
|
2,318 |
|
|
|
(105 |
) |
|
|
(77 |
) |
|
|
(28 |
) |
|
|
|
|
Twelve months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total less than twelve months |
|
|
67,190 |
|
|
|
(1,532 |
) |
|
|
(1,282 |
) |
|
|
(68 |
) |
|
|
(182 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Greater than twelve months |
|
|
10,389 |
|
|
|
(1,317 |
) |
|
|
(172 |
) |
|
|
(136 |
) |
|
|
(1,009 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total greater than twelve
months |
|
|
10,389 |
|
|
|
(1,317 |
) |
|
|
(172 |
) |
|
|
(136 |
) |
|
|
(1,009 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
77,579 |
|
|
$ |
(2,849 |
) |
|
$ |
(1,454 |
) |
|
$ |
(204 |
) |
|
$ |
(1,191 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The determination of whether unrealized losses are other-than-temporary requires judgment
based on subjective as well as objective factors. The Company routinely monitors its fixed
maturities portfolio for changes in fair value that might indicate potential impairments and
performs detailed reviews on such securities. Changes in fair value are evaluated to determine the
extent to which such changes are attributable to (i) fundamental factors specific to the issuer or
(ii) market-related factors such as interest rates or sector declines.
Securities with declines attributable to issuer-specific fundamentals are reviewed to identify
all available evidence to estimate the potential for impairment. Resources used include historical
financial data included in SEC filings for corporate bonds and performance data regarding the
underlying loans for collateralized mortgage obligations. Securities with declines attributable to
market or sector declines where the Company has the intent and ability to hold these securities for
a period of time sufficient to allow for any anticipated recovery in fair value are not deemed to
be other-than-temporary.
During
the year ended June 30, 2008, the Company recognized $1.4 million of charges related to
the other-than-temporary impairment of certain non-agency CMOs in our investment portfolio. Due to
the deterioration in liquidity in the credit markets during calendar 2008, yields on certain
non-agency CMOs declined below projected book yields requiring the impairment of these securities
under the guidance set forth in Emerging Issues Task Force Issue No. 99-20 Recognition of Interest
Income and Impairment on Purchased Beneficial Interests and Beneficial Interests That Continue to
Be Held by a Transferor in Securitized Financial Assets. Other than the decline in the yields of
these securities resulting from changes in prepayment assumptions, the underlying assets of these
securities continue to perform within expectations. Based on a review of the remaining securities
having unrealized losses at June 30, 2008, the Company does not believe that these securities were
other-than-temporarily impaired. The Company has the ability and intent to hold these securities
for a period of time sufficient to allow for recovery of their impairment.
4. Reinsurance
Prior to September 1, 2004, the Company reinsured risks on a quota-share basis with another
insurance organization to provide it with additional underwriting capacity and minimize its risk.
Such reinsurance was not renewed as of that date on a cut-off basis whereby the reinsurer is not
liable for any losses occurring after such date. Subsequent to this date through April 14, 2006,
the Company utilized only excess-of-loss basis reinsurance for catastrophic automobile physical
damage exposures. Effective April 14, 2006, the Company elected to not renew its catastrophic
reinsurance. Although the reinsurance agreements contractually obligate the reinsurers to reimburse
the Company for their share of losses, they do not discharge the primary liability of the Company,
which remains contingently liable in the event the reinsurers are unable to meet their contractual
obligations.
59
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The Insurance Companies had unsecured aggregate reinsurance receivables from a single
reinsurance entity which are summarized as follows (in thousands).
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
2008 |
|
|
2007 |
|
Unpaid losses |
|
$ |
259 |
|
|
$ |
309 |
|
Paid losses receivable |
|
|
24 |
|
|
|
17 |
|
|
|
|
|
|
|
|
|
|
$ |
283 |
|
|
$ |
326 |
|
|
|
|
|
|
|
|
Ceded premiums earned and reinsurance receivables on losses and loss adjustment expenses
(LAE) were as follows (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
2008 |
|
2007 |
|
2006 |
Ceded premiums earned |
|
$ |
|
|
|
$ |
|
|
|
$ |
81 |
|
Reinsurance receivables (payables) on losses and LAE |
|
|
192 |
|
|
|
(437 |
) |
|
|
(188 |
) |
The Company also has assumed private-passenger non-standard automobile insurance premiums from
another insurance company produced by its managing general agency subsidiary in Texas.
Net premiums written and earned are summarized as follows (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
Written |
|
|
Earned |
|
|
Written |
|
|
Earned |
|
|
Written |
|
|
Earned |
|
Direct |
|
$ |
253,807 |
|
|
$ |
265,630 |
|
|
$ |
290,784 |
|
|
$ |
280,946 |
|
|
$ |
216,131 |
|
|
$ |
186,833 |
|
Assumed |
|
|
20,167 |
|
|
|
20,284 |
|
|
|
19,872 |
|
|
|
19,715 |
|
|
|
21,581 |
|
|
|
22,019 |
|
Ceded |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(81 |
) |
|
|
(81 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net |
|
$ |
273,974 |
|
|
$ |
285,914 |
|
|
$ |
310,656 |
|
|
$ |
300,661 |
|
|
$ |
237,631 |
|
|
$ |
208,771 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The percentages of premiums assumed to net premiums written for the years ended June 30, 2008,
2007 and 2006 were 7%, 6% and 9%, respectively.
5. Stock-Based Compensation Plans
Employee Stock-Based Incentive Plan
The Company has issued stock options and restricted common stock (Restricted Stock Awards)
to employees under its 2002 Long Term Incentive Plan (the Plan). At June 30, 2008, there were
2,192,322 shares remaining available for issuance under the Plan. Awards are generally granted
with an exercise price equal to the market price of the Companys stock at the date of grant. The
stock options expire over ten years and generally vest equally in annual installments over four or
five years, while the Restricted Stock Awards vest in designated installments through October 1,
2011. Certain awards provide for accelerated vesting if there is a change in control (as defined in
the Plan).
In March 2008, the Company issued 400,000 shares of Restricted Stock Awards to an executive
officer pursuant to the Plan and a Restricted Stock Award Agreement. Pursuant to the Restricted
Stock Award Agreement, 160,000 shares will vest on July 1, 2009 and 80,000 shares will vest on each
subsequent October 1st through October 1, 2011. Compensation expense related to the
issuance of this Restricted Stock Award was $1.2 million, of which $0.2 million was amortized
through June 2008 and the remaining $1.0 million will be amortized through September 2011.
60
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Compensation expense related to stock options is calculated under the fair value method and is
recorded on a straight-line basis over the vesting period. Fair value of the stock options was
estimated at the grant dates using the Black-Scholes option pricing model based on the following
assumptions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
2008 |
|
2007 |
|
2006 |
Expected option term |
|
10 years |
|
10 years |
|
10 years |
Annualized volatility rate |
|
|
31 to 43 |
% |
|
|
32 to 33 |
% |
|
|
32 to 38 |
% |
Risk-free rate of return |
|
|
3.48 to 5.02 |
% |
|
|
4.74 to 4.77 |
% |
|
|
4.02 to 5.25 |
% |
Dividend yield |
|
|
0 |
% |
|
|
0 |
% |
|
|
0 |
% |
A summary of the status of the Plan as of June 30, 2008, 2007 and 2006 and changes during the
years then ended is presented below (in thousands, except per share data).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Aggregate |
|
|
|
|
|
|
|
Exercise |
|
|
Exercise |
|
|
Intrinsic |
|
|
|
Options |
|
|
Price |
|
|
Price |
|
|
Value |
|
Options outstanding at July 1, 2005 |
|
|
4,136 |
|
|
$ |
3.00-$8.13 |
|
|
$ |
3.42 |
|
|
|
|
|
Granted |
|
|
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
Exercised |
|
|
(55 |
) |
|
$ |
3.00-$8.13 |
|
|
$ |
7.66 |
|
|
|
|
|
Forfeited |
|
|
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at June 30, 2006 |
|
|
4,081 |
|
|
$ |
3.00-$8.13 |
|
|
$ |
3.37 |
|
|
|
|
|
Granted |
|
|
635 |
|
|
$ |
10.12-$11.81 |
|
|
$ |
11.61 |
|
|
|
|
|
Exercised |
|
|
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
Forfeited |
|
|
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at June 30, 2007 |
|
|
4,716 |
|
|
$ |
3.00-$11.81 |
|
|
$ |
4.48 |
|
|
|
|
|
Granted |
|
|
955 |
|
|
$ |
3.04-$10.08 |
|
|
$ |
3.26 |
|
|
|
|
|
Exercised |
|
|
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
Forfeited |
|
|
(215 |
) |
|
$ |
3.04-$11.81 |
|
|
$ |
7.89 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at June 30, 2008 |
|
|
5,456 |
|
|
$ |
3.00-$11.81 |
|
|
$ |
4.13 |
|
|
$ |
882 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable/vested at June 30, 2008 |
|
|
4,129 |
|
|
$ |
3.00-$11.81 |
|
|
$ |
3.54 |
|
|
$ |
746 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average estimated fair value of stock options granted during the years ended June
30, 2008 and 2007 was $1.90 and $6.27, respectively. There were no options granted during the year
ended June 30, 2006. As of June 30, 2008, the weighted average remaining contractual life of
options outstanding and exercisable/vested is approximately 5.9 years and 4.8 years, respectively.
Employee Stock Purchase Plan
The Companys Board of Directors has adopted the First Acceptance Corporation Employee Stock
Purchase Plan (ESPP) whereby eligible employees may purchase shares of the Companys common stock
at a price equal to the lower of the closing market price on the first or last trading day of a
six-month period. ESPP participants can authorize payroll deductions, administered through an
independent plan custodian, of up to 15% of their salary to purchase semi-annually (June 30 and
December 31) up to $25,000 of the Companys common stock during each calendar year. The Company has
reserved 200,000 shares of common stock for issuance under the ESPP. Employees purchased
approximately 34,000, 25,000 and 22,000 shares during the years ended June 30, 2008, 2007 and 2006,
respectively. Compensation expense attributable to subscriptions to purchase shares under the ESPP
was $27,000, $25,000 and $22,000 for the years ended June 30, 2008, 2007 and 2006. At June 30,
2008, 106,771 shares remain available for issuance under the ESPP.
61
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The Company sponsors a defined contribution retirement plan (401k Plan) under Section 401(k)
of the Internal Revenue Code. The 401k Plan covers substantially all employees who meet specified
service requirements. Under the 401k Plan, the Company may, at its discretion, match 100% of the
first 3% of an employees salary plus 50% of the next 2% up to the maximum allowed by the Internal
Revenue Code. The Companys contributions to the 401k Plan for the years ended June 30, 2008, 2007
and 2006 were $0.7 million, $0.7 million and $0.4 million, respectively.
The components of other revenues are as follows (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
Net gains (losses) on sales of investments |
|
$ |
170 |
|
|
$ |
(61 |
) |
|
$ |
(76 |
) |
Other-than-temporary impairment on
investment securities |
|
|
(1,414 |
) |
|
|
|
|
|
|
|
|
Transaction service fee |
|
|
|
|
|
|
850 |
|
|
|
4,150 |
|
Gain on sale of foreclosed real estate |
|
|
|
|
|
|
|
|
|
|
3,638 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(1,244 |
) |
|
$ |
789 |
|
|
$ |
7,712 |
|
|
|
|
|
|
|
|
|
|
|
8. |
|
Property and Equipment |
The components of property and equipment are as follows (in thousands).
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
2008 |
|
|
2007 |
|
Furniture and equipment |
|
$ |
7,967 |
|
|
$ |
5,876 |
|
Leasehold improvements |
|
|
2,060 |
|
|
|
1,980 |
|
Capitalized leases |
|
|
588 |
|
|
|
588 |
|
Aircraft |
|
|
190 |
|
|
|
190 |
|
|
|
|
|
|
|
|
|
|
|
10,805 |
|
|
|
8,634 |
|
Less: accumulated depreciation |
|
|
(5,929 |
) |
|
|
(4,518 |
) |
|
|
|
|
|
|
|
Total property and equipment, net |
|
$ |
4,876 |
|
|
$ |
4,116 |
|
|
|
|
|
|
|
|
Depreciation and amortization expense related to property and equipment was $1.6 million, $1.2
million and $0.9 million for the years ended June 30, 2008, 2007 and 2006, respectively.
The Company is committed under various lease agreements for office space and equipment.
Certain lease agreements contain renewal options and rent escalation clauses. Rental expense for
2008, 2007 and 2006 was $12.2 million, $11.6 million and $8.1 million, respectively. Future minimum
lease payments under these agreements follow (in thousands).
|
|
|
|
|
Year Ended June 30, |
|
Amount |
|
2009 |
|
$ |
9,050 |
|
2010 |
|
|
7,403 |
|
2011 |
|
|
4,259 |
|
2012 |
|
|
1,806 |
|
2013 |
|
|
830 |
|
Thereafter |
|
|
1,504 |
|
|
|
|
|
Total |
|
$ |
24,852 |
|
|
|
|
|
62
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Effective with the USAuto acquisition and in accordance with the terms of the severance
agreement of the Companys former President and Chief Executive Officer and current director, the
Company has assigned and transferred to a new entity all of the Companys rights, title and
interest in its lease for office space in Chicago, Illinois. Such entity has assumed all
obligations under the lease and such obligations will be reimbursed to the entity by the Company
during the term of the lease. The total future cost of this obligation was $1.1 million and such
amount was accrued as of the acquisition date in the consolidated financial statements by the
Company as part of the severance cost. At June 30, 2008, $0.3 million remained to be paid under
this obligation through August 2009.
10. |
|
Losses and Loss Adjustment Expenses Incurred and Paid |
Information regarding the reserve for unpaid losses and LAE is as follows (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
Liability for unpaid losses and LAE at beginning of year, gross |
|
$ |
91,446 |
|
|
$ |
62,822 |
|
|
$ |
42,897 |
|
Reinsurance balances receivable |
|
|
(309 |
) |
|
|
(1,301 |
) |
|
|
(3,608 |
) |
|
|
|
|
|
|
|
|
|
|
Liability for unpaid losses and LAE at beginning of year, net |
|
|
91,137 |
|
|
|
61,521 |
|
|
|
39,289 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Add: Provision for losses and LAE: |
|
|
|
|
|
|
|
|
|
|
|
|
Current year |
|
|
221,342 |
|
|
|
238,043 |
|
|
|
142,436 |
|
Prior years |
|
|
(1,399 |
) |
|
|
3,865 |
|
|
|
(1,548 |
) |
Accretion of net risk margin/discounting as of the date of acquisition |
|
|
|
|
|
|
|
|
|
|
(43 |
) |
|
|
|
|
|
|
|
|
|
|
Net losses and LAE incurred |
|
|
219,943 |
|
|
|
241,908 |
|
|
|
140,845 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Losses and LAE paid: |
|
|
|
|
|
|
|
|
|
|
|
|
Current year |
|
|
135,406 |
|
|
|
160,872 |
|
|
|
90,589 |
|
Prior years |
|
|
74,526 |
|
|
|
51,420 |
|
|
|
28,024 |
|
|
|
|
|
|
|
|
|
|
|
Net losses and LAE paid |
|
|
209,932 |
|
|
|
212,292 |
|
|
|
118,613 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability for unpaid losses and LAE at end of year, net |
|
|
101,148 |
|
|
|
91,137 |
|
|
|
61,521 |
|
Reinsurance balances receivable |
|
|
259 |
|
|
|
309 |
|
|
|
1,301 |
|
|
|
|
|
|
|
|
|
|
|
Liability for unpaid losses and LAE at end of year, gross |
|
$ |
101,407 |
|
|
$ |
91,446 |
|
|
$ |
62,822 |
|
|
|
|
|
|
|
|
|
|
|
Management believes that the favorable changes in the estimates of unpaid loss and loss
adjustment expenses of $1.4 million and $1.5 million for the years ended June 30, 2008 and 2006,
respectively, were primarily a result of the inherent uncertainty in the estimation process and
were not the result of any individual factor.
The unfavorable change in the estimate of unpaid loss and loss adjustment expenses of $3.9
million for the year ended June 30, 2007 was impacted by the limited historical loss experience in
the Companys newer states which required more judgment in determining loss reserve estimates for
those states. Such unfavorable change was primarily related to the bodily injury and Personal
Injury Protection coverages in Florida.
11. |
|
Notes Payable and Capitalized Lease Obligations |
In connection with the acquisition of the Chicago, Illinois non-standard automobile insurance
agencies, on January 12, 2006, the Company entered into, and borrowed under, a credit agreement
with two banks consisting of a $5.0 million revolving facility and a $25.0 million term loan
facility, both maturing on June 30, 2010. At June 30, 2008, the Company had no outstanding
borrowings under the revolving facility. Through September 13, 2007, outstanding borrowings under
the term loan facility bore interest at LIBOR plus 175 basis points per annum. The Company entered
into an interest rate swap agreement on January 17, 2006 that fixed the interest rate on the term
loan facility at 6.63% through June 30, 2010. The term loan facility was due in equal quarterly
installments through June 30, 2010. Both facilities are secured by the common stock and certain
assets of selected subsidiaries.
63
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
As a result of non-compliance with regards to certain financial covenants, the Company entered
into amendments to the credit agreement, dated September 13, 2007 and February 6, 2008. The amended
terms have less restrictive financial covenants, increased the interest rate by 75 basis points and
required the Company to make a prepayment of at least $6.0 million in principal before December 31,
2007. In addition, the availability under the revolving credit facility was permanently reduced
from $5.0 million to $2.0 million. The amended credit agreement contained certain financial
covenants regarding (i) a minimum fixed charge coverage ratio,
(ii) a minimum consolidated tangible
net worth, (iii) a maximum net premiums written to surplus
ratio, (iv) a maximum combined ratio, (v) a
minimum RBC and (vi) a minimum net income requirement.
During the year ended June 30, 2008, the Company made prepayments on its term loan facility
including the required principal prepayment of $6.0 million in October 2007 made in accordance with
the amendment to the credit agreement in September 2007 and an additional principal prepayment of
$5.0 million in January 2008.
At June 30, 2008, the Company was not in compliance with the financial covenants in the
amended credit agreement regarding a minimum fixed charge coverage ratio, a minimum consolidated
tangible net worth ratio and a minimum net income requirement. The lenders waived this
non-compliance as of June 30, 2008 and the Company entered into an amendment to the credit
agreement dated September 10, 2008. The amended terms (i) required the Company to make a prepayment
of $1.0 million in principal on August 8, 2008, (ii) accelerated the maturity date of the term loan
facility to October 31, 2008, (iii) eliminated the
revolving credit facility and (iv) removed all
financial covenants for the remaining term.
The maturities of the notes payable and capitalized lease obligations secured by equipment as
of June 30, 2008 are as follows (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized |
|
|
|
|
|
|
|
|
|
Lease |
|
|
Notes |
|
|
|
|
Year Ended June 30, |
|
Obligations |
|
|
Payable |
|
|
Total |
|
2009 |
|
$ |
214 |
|
|
$ |
3,913 |
|
|
$ |
4,127 |
|
2010 |
|
|
1 |
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
215 |
|
|
$ |
3,913 |
|
|
$ |
4,128 |
|
|
|
|
|
|
|
|
|
|
|
|
Less: Amount representing executory costs |
|
|
(14 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net minimum lease payments |
|
|
201 |
|
|
|
|
|
|
|
|
|
Less: Amount representing interest |
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Present value of net minimum lease
payments |
|
$ |
197 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In June 2007, First Acceptance Statutory Trust I (FAST I), a wholly-owned unconsolidated
subsidiary trust of the Company, issued 40,000 shares of preferred securities at $1,000 per share
to outside investors and 1,240 shares of common securities to the Company, also at $1,000 per
share. The sole assets of FAST I are $41.2 million of junior subordinated debentures issued by the
Company. The debentures will mature on July 30, 2037 and are redeemable by the Company in whole or
in part beginning on July 30, 2012, at which time the preferred securities are callable. The
debentures pay a fixed rate of 9.277% until July 30, 2012, after which the rate becomes variable
(LIBOR plus 375 basis points).
The obligations of the Company under the junior subordinated debentures represent full and
unconditional guarantees by the Company of FAST Is obligations for the preferred securities.
Dividends on the preferred securities are cumulative, payable quarterly in arrears and are
deferrable at the Companys option for up to five years. The dividends on these securities are the
same as the interest on the debentures. The Company cannot pay dividends on its common stock during
such deferments.
The debentures are classified as debentures payable on the Companys consolidated balance
sheets and the interest paid on these debentures is classified as interest expense in the
consolidated statements of operations.
64
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
13. Income Taxes
The provision (benefit) for income taxes consisted of the following (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
Federal: |
|
|
|
|
|
|
|
|
|
|
|
|
Current |
|
$ |
31 |
|
|
$ |
75 |
|
|
$ |
161 |
|
Deferred |
|
|
13,496 |
|
|
|
17,132 |
|
|
|
(1,533 |
) |
State income taxes |
|
|
295 |
|
|
|
379 |
|
|
|
333 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
13,822 |
|
|
$ |
17,586 |
|
|
$ |
(1,039 |
) |
|
|
|
|
|
|
|
|
|
|
The provision (benefit) for income taxes differs from the amounts computed by applying the
statutory federal corporate tax rate of 35% to income (loss) before income taxes as a result of the
following (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
Provision (benefit) for income taxes at
statutory rate |
|
$ |
(1,408 |
) |
|
$ |
321 |
|
|
$ |
9,460 |
|
Tax effect of: |
|
|
|
|
|
|
|
|
|
|
|
|
Tax-exempt investment income |
|
|
(32 |
) |
|
|
(78 |
) |
|
|
(221 |
) |
Change in the beginning of the year
balance of the valuation allowance for
deferred tax assets allocated to income
taxes |
|
|
3,571 |
|
|
|
6,882 |
|
|
|
(10,540 |
) |
Net operating loss carryforward expirations |
|
|
11,380 |
|
|
|
9,990 |
|
|
|
302 |
|
State income taxes, net of federal income
tax benefit and state valuation allowance |
|
|
139 |
|
|
|
246 |
|
|
|
216 |
|
Other |
|
|
172 |
|
|
|
225 |
|
|
|
(256 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
13,822 |
|
|
$ |
17,586 |
|
|
$ |
(1,039 |
) |
|
|
|
|
|
|
|
|
|
|
The tax effects of temporary differences that give rise to the net deferred tax asset at June
30, 2008 and 2007 are presented below (in thousands).
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Net operating loss carryforwards |
|
$ |
33,884 |
|
|
$ |
46,549 |
|
Stock option compensation |
|
|
3,475 |
|
|
|
3,063 |
|
Unearned premiums and loss and loss adjustment expense reserves |
|
|
7,316 |
|
|
|
8,254 |
|
Net unrealized change on investments |
|
|
164 |
|
|
|
929 |
|
Alternative minimum tax (AMT) credit carryforwards |
|
|
1,314 |
|
|
|
1,232 |
|
Accrued expenses |
|
|
3,993 |
|
|
|
809 |
|
Other |
|
|
1,377 |
|
|
|
261 |
|
|
|
|
|
|
|
|
|
|
|
51,523 |
|
|
|
61,097 |
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Deferred acquisition costs |
|
|
(1,592 |
) |
|
|
(1,808 |
) |
Goodwill |
|
|
(2,264 |
) |
|
|
(1,320 |
) |
|
|
|
|
|
|
|
|
|
|
(3,856 |
) |
|
|
(3,128 |
) |
|
|
|
|
|
|
|
|
|
Total net deferred tax assets |
|
|
47,667 |
|
|
|
57,969 |
|
Less: Valuation allowance: |
|
|
|
|
|
|
|
|
Net operating loss carryforwards |
|
|
(29,676 |
) |
|
|
(26,104 |
) |
Net unrealized change on investments |
|
|
(164 |
) |
|
|
(929 |
) |
Other |
|
|
(234 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(30,074 |
) |
|
|
(27,033 |
) |
|
|
|
|
|
|
|
Net deferred tax assets |
|
$ |
17,593 |
|
|
$ |
30,936 |
|
|
|
|
|
|
|
|
65
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The net changes in the total valuation allowance for the years ended June 30, 2008 and 2007 were
increases of $3.0 million and $6.6 million, while the year ended June 30, 2006 included a decrease
of $9.3 million. In addition, during the years ended June 30, 2008 and 2007, the provision for
income taxes included charges of $11.4 million and $10.0 million, respectively, related to the
expiration of certain net operating loss (NOL) carryforwards due to taxable income for the
respective fiscal year being less than the Companys estimates of respective fiscal year taxable
income. Prior to the acquisition of USAuto, a full valuation allowance had been established, as the
Company believed that it was more likely than not that the benefits of the loss carryforwards would
not be realized. However, as result of the USAuto acquisition in April 2004, the Company reduced
the valuation allowance based upon internally-prepared projected operating results. At December
31, 2007, after considering recent trends in the Companys results, including premiums written,
premiums earned and policies in force, the Company assessed the realization of its NOL
carryforwards and concluded that it was appropriate to increase its valuation allowance for the
deferred tax asset related to the NOL carryforwards that expire in fiscal years 2008 and 2009 by
$11.6 million.
At June 30, 2008 and 2007, $0.2 million and $0.9 million, respectively, of the valuation
allowance was related to the net unrealized change on investments as the Company believes that it
is more likely than not that this tax benefit will not be realized. For the years ended June 30,
2008, 2007 and 2006, the change in the valuation allowance related to the net unrealized change on
investments of $0.8 million, $0.3 million and $1.2 million, respectively, is included as part of
other comprehensive loss. In addition, at June 30, 2008, the Company had state NOL carryforwards of
$5.3 million that begin to expire in 2019 and AMT credit carryforwards of $1.3 million that have no
expiration date.
At June 30, 2008, the Company had gross NOL carryforwards for federal income tax purposes of
$96.8 million, which are available to offset future federal taxable income. On a tax-affected
basis, the Company had $33.9 million of remaining NOL carryforwards at June 30, 2008, of which
$29.7 million related to NOL carryforwards expiring in fiscal 2009 that have been fully reserved
for through a valuation allowance. The resulting net deferred tax asset related to federal NOL
carryforwards at June 30, 2008 was $4.2 million. If future taxable income is less than current
projections, an additional valuation allowance may become necessary that could have a materially
adverse impact on the Companys results of operations and financial position.
The gross federal NOL carryforwards will expire in 2009 through 2023, as shown in the
following table (in thousands).
|
|
|
|
|
Expiration Year Ended June 30, |
|
Amount |
|
2009 |
|
$ |
84,791 |
|
2010 |
|
|
7,095 |
|
2011 |
|
|
2,099 |
|
2012 |
|
|
|
|
Thereafter |
|
|
2,825 |
|
|
|
|
|
Total NOL carryforwards |
|
$ |
96,810 |
|
|
|
|
|
66
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
14. Net Income (Loss) Per Share
SFAS No. 128, Earnings Per Share, specifies the computation, presentation and disclosure
requirements for earnings per share (EPS). Basic EPS are computed using the weighted average
number of shares outstanding. Diluted EPS are computed using the weighted average number of shares
outstanding adjusted for the incremental shares attributed to outstanding securities with a right
to purchase or convert into common stock.
The following table sets forth the computation of basic and diluted net income (loss) per
share (in thousands, except per share data).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
Net income (loss) |
|
$ |
(17,845 |
) |
|
$ |
(16,670 |
) |
|
$ |
28,068 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average common basic shares |
|
|
47,628 |
|
|
|
47,584 |
|
|
|
47,487 |
|
Effect of dilutive securities |
|
|
|
|
|
|
|
|
|
|
2,089 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average common dilutive shares |
|
|
47,628 |
|
|
|
47,584 |
|
|
|
49,576 |
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share |
|
$ |
(0.37 |
) |
|
$ |
(0.35 |
) |
|
$ |
0.59 |
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share |
|
$ |
(0.37 |
) |
|
$ |
(0.35 |
) |
|
$ |
0.57 |
|
|
|
|
|
|
|
|
|
|
|
For the year ended June 30, 2008, options to purchase approximately 5.5 million shares of
common stock, a dilutive effect of approximately 1.5 million shares, and 0.4 million shares of
restricted common stock were not included in the computation of diluted loss per share as their
inclusion would have been anti-dilutive.
For the year ended June 30, 2007, options to purchase approximately 4.7 million shares of
common stock, a dilutive effect of approximately 2.1 million shares were not included in the
computation of diluted loss per share as their inclusion would have been anti-dilutive.
15. Concentrations of Credit Risk
At June 30, 2008, the Company had certain concentrations of credit risk with several financial
institutions in the form of cash and cash equivalents, which amounted to $38.6 million. For
purposes of evaluating credit risk, the stability of financial institutions conducting business
with the Company is periodically reviewed. If the financial institutions failed to completely
perform under the terms of the financial instruments, the exposure for credit loss would be the
amount of the financial instruments less amounts covered by regulatory insurance.
The Company primarily transacts business either directly with its policyholders or through
four independently-owned insurance agencies in Tennessee who exclusively write insurance policies
on behalf of the Company. Direct policyholders make payments directly to the Company. Balances
due from policyholders are generally secured by the related unearned premium. The Company requires
a down payment at the time the policy is originated and subsequent scheduled payments are monitored
in order to prevent the Company from providing coverage beyond the date for which payment has been
received. If subsequent payments are not made timely, the policy is generally canceled at no loss
to the Company. Policyholders whose premiums are written through the independent agencies make
their payments to these agencies that in turn remit these payments to the Company. Balances due to
the Company resulting from premium payments made to these agencies are unsecured.
16. Related Party Transactions
Certain of the Companys executives are covered by employment agreements covering, among other
things, base compensation, incentive-bonus determinations and payments in the event of termination,
or a change in control of the Company.
Effective May 2004, the Company entered into an advisory services agreement with an entity
controlled by a current director of the Company to render advisory services in connection with
financings, mergers and acquisitions and other related matters involving the Company. In
consideration for the advisory services to be provided, the Company paid the advisor a quarterly
fee of $62,500 for a four-year period through April 2008. There
67
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
are no further amounts due related to the advisory services agreement. See Note 9 to the
consolidated financial statements regarding the terms of a related severance agreement and future
lease obligations.
In September 2006, the Company sold 50,000 shares of common stock to an executive officer for
an aggregate purchase price of $0.6 million, or $11.81 per share, which was the closing price of
the common stock on the New York Stock Exchange on the date of sale.
17. Severance
During the year ended June 30, 2008, the Company entered into separation agreements with
certain officers and retail management personnel. Accordingly, the Company incurred a charge of
approximately $1.1 million, comprised of $1.0 million in accrued severance and benefits and a $0.1
million non-cash charge related to the vesting of remaining unvested stock options. The remaining
severance and benefit accrual of $0.8 million as of June 30, 2008 is classified within other
liabilities on the Companys consolidated balance sheet. The severance and benefits charge is
included in insurance operating expenses and the non-cash charge related to the vesting of
remaining unvested stock options is included within stock-based compensation expense in the
consolidated statements of operations. The insurance operations segment includes the accrued
severance and benefits charge, and the real estate and corporate segment includes the accelerated
vesting charge.
18. Litigation
The Company is named as a defendant in various lawsuits, arising in the ordinary course of
business, generally relating to its insurance operations. All legal actions relating to claims made
under insurance policies are considered by the Company in establishing its loss and loss adjustment
expense reserves. The Company also faces lawsuits that seek damages beyond policy limits, commonly
known as bad faith claims, as well as class action and individual lawsuits that involve issues
arising in the course of the Companys business. The Company continually evaluates potential
liabilities and reserves for litigation of these types using the criteria established by FASB
Statement No. 5, Accounting for Contingencies (SFAS 5). Pursuant to SFAS 5, reserves for a loss
may only be recorded if the likelihood of occurrence is probable and the amount can be reasonably
estimated. If a loss, while not probable, is judged to be reasonably possible, management will
disclose, if it can be estimated, a possible range of loss or state that an estimate cannot be
made. Management considers each legal action using SFAS 5 and records reserves for losses as
warranted by establishing a reserve within its consolidated balance sheet in loss and loss
adjustment expense reserves for bad faith claims and in other liabilities for other lawsuits.
Amounts incurred are recorded within the Companys consolidated statement of operations in losses
and loss adjustment expenses for bad faith claims and in insurance operating expenses for other
lawsuits unless otherwise disclosed.
Certain claims and legal actions have been brought against the Company for which an accrual of
a loss has been made under SFAS 5. The Company is a party to litigation in Alabama and Georgia in
which allegations are made with respect to its sales practices, primarily the sale of motor club
memberships currently or formerly sold in those states. Annette Rush v. Village Auto Insurance
Company, Inc. (now known as First Acceptance Insurance Company of Georgia, Inc.) was filed on
October 26, 2005, as a putative class action in the Superior Court of Fulton County, Georgia.
Margaret Franklin v. Vesta Insurance Corp., et al. was filed on July 14, 2006, as a putative class
action in the Circuit Court of Bullock County, Alabama. Keisha Milbry Monday, et al. v. First
Acceptance Corp., et al. was filed on February 13, 2007, in the Circuit Court of Bullock County,
Alabama. Carrie Jackson v. Alabama Acceptance Insurance Agency, Inc. was filed on July 24, 2007, as
a putative class action in the Circuit Court of Bullock County, Alabama. Solomon and Catherine
Warren, et al. v. First Acceptance Corp., et al. was filed on November 9, 2007, in the Circuit
Court of Barbour County, Alabama. The suits generally allege that the Company implemented a program
to convince its consumers who purchased automobile insurance policies to also purchase motor club
memberships or that the Company charged its consumers billing fees associated with its products
that were not properly disclosed, and seek unspecified damages and attorneys fees. The Georgia
Superior Court certified the class in the Georgia lawsuit in December 2006. The Georgia Court of Appeals affirmed the
class certification decision and the Georgia Supreme Court denied the Companys Petition for
Certiorari in January 2008. The court has not certified classes of plaintiffs in the two Alabama
putative class actions. The Company has denied all allegations of wrongdoing, has vigorously
defended itself against these actions, and believes the Company has meritorious defenses to these
claims.
68
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Notwithstanding the foregoing, to avoid the uncertainty, risks and costs of further
litigation, the Company has determined to settle this litigation. Pursuant to the terms of the settlement agreement, the plaintiffs
in the Georgia litigation will be divided into two classes: (i) persons who were insured by the
Company on September 1, 2008 who purchased an automobile club membership with their automobile
insurance and (ii) persons who were insured by the Company prior to September 1, 2008 who purchased
an automobile club membership with their automobile insurance. Pursuant to the terms of the
settlement, each class member who was insured by the Company on September 1, 2008 will receive a premium credit equal to 100% of the amounts he or
she paid for automobile club memberships and deferred billing fees against the premium for new or
renewal automobile insurance policies for up to twelve months of liability or uninsured motorist
coverage issued by the Company prior to December 31, 2009, unless he or she elects, prior to
December 31, 2008, to receive instead of the premium credit a reimbursement certificate that
provides for cash reimbursement of up to a maximum total payment of $50 for any rental or towing
expenses incurred by the class member on or before December 31, 2009 as a result of the disablement
of his or her vehicle because of an accident. Each class member who was insured by the Company
prior to September 1, 2008 will receive a reimbursement certificate that provides
for cash reimbursement of up to a maximum total payment of $50 for any rental or towing expenses
incurred by the class member on or before December 31, 2009 as a result of the disablement of his
or her vehicle because of an accident, unless he or she elects, prior to December 31, 2008, to
receive instead of the reimbursement certificate, a premium credit equal to 100% of the amounts he
or she paid for automobile club memberships and deferred billing fees against the premium for new
automobile insurance policies for up to twelve months of liability or uninsured motorist coverage
issued by the Company prior to June 30, 2010. Any premium credits issued to class members as
described above will be prorated over a twelve-month term not to extend beyond June 30, 2010, and
the class member will be entitled to the prorated premium credit only so long as he or she keeps
their insurance premiums current during the twelve-month term. No benefits will be available to
class members until January 1, 2009. The Company has also agreed to strengthen its disclosures to
customers of all relevant fees, charges and coverages. In addition, the Company has agreed to pay
$3.8 million in fees and expenses for the attorneys for the Georgia plaintiffs and pay all costs
associated with the administration of the settlement. The settlement agreement is subject to
approval by the court, and the Company expects the court to hold a hearing to consider the
settlement in November 2008.
The Company has also agreed upon preliminary settlement terms with the plaintiffs in the
Alabama litigation. The preliminary settlement terms provide for benefits to the Alabama plaintiffs
substantially similar to the benefits to be paid to the Georgia plaintiffs, and a payment of $2.5
million in fees and expenses for the attorneys for the Alabama plaintiffs. The settlement of the
Alabama litigation is subject to the negotiation of a definitive settlement agreement and approval
of the settlement agreement by the applicable courts.
At this time, the Company is unable to estimate the total costs associated with the Georgia
and Alabama litigation settlements. The costs of the settlements will depend, among other factors,
upon whether class members receive premium credits or reimbursement certificates pursuant to the
terms of the settlements and the rate of redemption of the premium credits and reimbursement
certificates. The Company estimates that there are approximately 11,000 persons who were insured by
the Company on September 1, 2008 and approximately 155,000 persons who were insured by the Company
prior to September 1, 2008 that, pursuant to the terms of the settlement agreement, are members of
the plaintiff class in the Georgia litigation. The Company estimates that there are approximately
55,000 persons who were insured by the Company prior to September 1, 2008 that, pursuant to the
proposed settlement terms, would be eligible to be members of the plaintiff class in the Alabama
litigation. The total amount received by the Company relating to motor club memberships and
deferred billing fees is $24.7 million for the State of Georgia and $5.8 million for the State of
Alabama.
69
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The litigation settlement costs are set forth separately in the consolidated statements of
operations. The Company anticipates that its payment of $6.3 million in plaintiffs attorneys fees
and expenses and the $0.4 million in estimated costs associated with the administration of the
settlement, both of which were accrued at June 30, 2008, will occur in calendar year 2009, after
the final approval from the courts. The Company will accrue additional amounts relating to the
costs of the litigation settlements when those amounts become
reasonably estimable.
The Company is currently in discussions with its insurance carriers regarding coverage for the
costs and expenses incurred relating to the litigation settlements and is not able currently to
estimate the amount, if any, that it may receive from its insurance carriers. As a result, the
Company has not accrued any amount at June 30, 2008 for insurance recoveries that may offset the
costs and expenses relating to the litigation settlements. Any such insurance recoveries will be
recorded in the Companys operating results during the periods in which the recoveries are
probable.
The litigation settlement accrual of $6.3 million as well as the estimated costs associated
with the administration of the settlement accrual of $0.4 million as of June 30, 2008 are
classified within other liabilities on the Companys consolidated balance sheet. The associated
litigation costs for the year ended June 30, 2008 of $7.5 million relate to the provision of $6.3
million associated with estimated payments of the fees and costs of plaintiffs counsel, the
provision of $0.4 million for estimated costs associated with the administration of the settlement
as well as $0.8 million incurred in connection with the Companys defense of the litigation and are
classified within litigation settlement in the consolidated statements of operations.
19. Fair Value of Financial Instruments
The carrying values and fair values of certain of the Companys financial instruments as of
June 30, 2008 and 2007 were as follows (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
|
Carrying |
|
|
Fair |
|
|
Carrying |
|
|
Fair |
|
|
|
Value |
|
|
Value |
|
|
Value |
|
|
Value |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities, available-for-sale |
|
$ |
189,570 |
|
|
$ |
189,570 |
|
|
$ |
176,555 |
|
|
$ |
176,555 |
|
Cash and cash equivalents |
|
|
38,646 |
|
|
|
38,646 |
|
|
|
34,161 |
|
|
|
34,161 |
|
Premiums and fees receivable, net |
|
|
63,377 |
|
|
|
63,377 |
|
|
|
71,771 |
|
|
|
71,771 |
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable |
|
|
3,913 |
|
|
|
3,913 |
|
|
|
23,060 |
|
|
|
23,060 |
|
Capitalized lease obligations |
|
|
211 |
|
|
|
211 |
|
|
|
430 |
|
|
|
430 |
|
Debentures payable |
|
|
41,240 |
|
|
|
30,668 |
|
|
|
41,240 |
|
|
|
41,240 |
|
The fair values as presented represent the Companys best estimates and may not be
substantiated by comparisons to independent markets and, in many cases, could not be realized in
immediate settlement of the instruments. Certain financial instruments and all non-financial
instruments are not required to be disclosed. Therefore, the aggregate fair values presented in the
table do not purport to represent the Companys underlying value.
70
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The Company operates in two business segments with its primary focus being the selling,
servicing and underwriting of non-standard personal automobile insurance. The real estate and
corporate segment consists of the activities related to the disposition of foreclosed real estate
held for sale, interest expense associated with all debt and other general corporate overhead
expenses.
The following table presents selected financial data by business segment (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Insurance |
|
$ |
332,219 |
|
|
$ |
347,431 |
|
|
$ |
244,557 |
|
Real estate and corporate |
|
|
180 |
|
|
|
206 |
|
|
|
4,445 |
|
|
|
|
|
|
|
|
|
|
|
Consolidated total |
|
$ |
332,399 |
|
|
$ |
347,637 |
|
|
$ |
249,002 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes: |
|
|
|
|
|
|
|
|
|
|
|
|
Insurance |
|
$ |
4,685 |
|
|
$ |
6,252 |
|
|
$ |
26,476 |
|
Real estate and corporate |
|
|
(8,708 |
) |
|
|
(5,336 |
) |
|
|
553 |
|
|
|
|
|
|
|
|
|
|
|
Consolidated total |
|
$ |
(4,023 |
) |
|
$ |
916 |
|
|
$ |
27,029 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
2008 |
|
|
2007 |
|
Total assets: |
|
|
|
|
|
|
|
|
Insurance |
|
$ |
458,121 |
|
|
$ |
460,356 |
|
Real estate and corporate |
|
|
15,109 |
|
|
|
38,536 |
|
|
|
|
|
|
|
|
Consolidated total |
|
$ |
473,230 |
|
|
$ |
498,892 |
|
|
|
|
|
|
|
|
21. |
|
Statutory Financial Information and Accounting Policies |
The statutory-basis financial statements of the Insurance Companies are prepared in accordance
with accounting practices prescribed or permitted by the Department of Insurance in each respective
state of domicile. Each state of domicile requires that insurance companies domiciled in those
states prepare their statutory-basis financial statements in accordance with the National
Association of Insurance Commissioners Accounting Practices and Procedures Manual subject to any
deviations prescribed or permitted by the insurance commissioner in each state of domicile. In
addition, the Insurance Companies are required to report their risk-based capital (RBC) each
December 31. Failure to maintain an adequate RBC could subject the Insurance Companies to
regulatory action and could restrict the payment of dividends. As of December 31, 2007, the RBC
levels of the Insurance Companies did not subject them to any regulatory action.
At June 30, 2008 and 2007, on an unaudited consolidated statutory basis, capital and surplus
as calculated was $113.1 million and $120.2 million, respectively. For the twelve months ended June
30, 2008, 2007 and 2006, unaudited consolidated statutory net income (loss) as filed was $3.8
million, $(1.9) million and $10.6 million, respectively.
The maximum amount of dividends which can be paid by FAIC to the Company, without the prior
approval of the Texas insurance commissioner, is limited to the greater of 10% of statutory capital
and surplus as of December 31 of the next preceding year or net income for the year. Accordingly,
as of December 31, 2007, the maximum amount of dividends available to be paid to the Company from
FAIC without prior approval within any preceding twelve-month period is approximately $11 million.
The amount of the dividend is further limited by the amount of FAICs earned surplus which at
June 30, 2008 was $2.8 million.
FAIC-GA and FAIC-TN are wholly-owned subsidiaries of FAIC and the maximum amount of dividends
which they can pay to FAIC, without the prior approval of the respective insurance commissioner, is
limited to the greater of 10% of their statutory capital and surplus as of December 31 of the next
preceding year or net income (not including realized capital gains) for the year. Available
ordinary dividends from these wholly-owned insurance company subsidiaries would increase the earned
surplus of FAIC to $7.0 million.
71
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
22. |
|
Selected Quarterly Financial Data (unaudited) |
Interim results are not necessarily indicative of fiscal year performance because of the
impact of seasonal and short-term variations. Selected quarterly financial data for the years
ended June 30, 2008 and 2007 is summarized as follows (in
thousands, except per share data).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended |
|
|
September 30, |
|
December 31, |
|
March 31, |
|
June 30, |
Year Ended June 30, 2008: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
87,158 |
|
|
$ |
82,341 |
|
|
$ |
83,985 |
|
|
$ |
78,915 |
|
Net income (loss) before income
taxes |
|
$ |
2,963 |
|
|
$ |
33 |
|
|
$ |
1,287 |
|
|
$ |
(8,306 |
) |
Net income (loss) |
|
$ |
1,892 |
|
|
$ |
(11,731 |
) |
|
$ |
758 |
|
|
$ |
(8,764 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share |
|
$ |
0.04 |
|
|
$ |
(0.25 |
) |
|
$ |
0.02 |
|
|
$ |
(0.18 |
) |
Diluted net income (loss) per share |
|
$ |
0.04 |
|
|
$ |
(0.25 |
) |
|
$ |
0.02 |
|
|
$ |
(0.18 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, 2007: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
79,102 |
|
|
$ |
84,321 |
|
|
$ |
91,983 |
|
|
$ |
92,231 |
|
Net income (loss) before income
taxes |
|
$ |
2,336 |
|
|
$ |
4,241 |
|
|
$ |
4,833 |
|
|
$ |
(10,494 |
) |
Net income (loss) |
|
$ |
1,493 |
|
|
$ |
2,701 |
|
|
$ |
3,066 |
|
|
$ |
(23,930 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share |
|
$ |
0.03 |
|
|
$ |
0.06 |
|
|
$ |
0.06 |
|
|
$ |
(0.50 |
) |
Diluted net income (loss) per share |
|
$ |
0.03 |
|
|
$ |
0.05 |
|
|
$ |
0.06 |
|
|
$ |
(0.50 |
) |
Net loss before income taxes for the quarter ended June 30, 2008 included $7.0 million in
settlement, defense and administration costs associated with the litigation settlements (see Note
18). Net loss for the quarter ended June 30, 2008 included an increase in the provision for income
taxes of $3.3 million due to the increase in the valuation allowance for the deferred tax asset
relating to NOL carryforwards expiring during fiscal 2009 as a result of the litigation
settlements. Previously, during the quarter ended December 31, 2007, the Company increased its
valuation allowance for the deferred tax asset related to the NOL carryforwards that expire in
fiscal 2008 and 2009 by $11.6 million.
Net loss before income taxes for the quarter ended June 30, 2007 included an unfavorable
change in the estimate of unpaid loss and loss adjustment expenses which resulted in a charge of
$15.6 million. Of this amount, $12.6 million related to prior accident quarters and $3.0 million
related to an unanticipated increase in the loss and loss adjustment expense ratio for the current
quarter. Net loss for the quarter ended June 30, 2007 included an increase in the provision for
income taxes of $16.9 million due to (i) an increase in the valuation allowance for the deferred
tax asset of $6.9 million resulting from revisions in managements estimates for the Companys
future taxable income based on the results for fiscal 2007 and (ii) a $10.0 million charge due to
the expiration of certain NOL carryforwards due to taxable income for fiscal 2007 being less than
managements most recent estimates.
72
|
|
|
Item 9. |
|
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure |
None.
|
|
|
Item 9A. |
|
Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management team, including our Chief
Executive Officer and Chief Financial Officer, we conducted an evaluation of our disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act
of 1934, as amended, or the Exchange Act) as of June 30, 2008. Based on that evaluation, our Chief
Executive Officer (principal executive officer) and Chief Financial Officer (principal financial
officer) concluded that our disclosure controls and procedures were effective as of June 30, 2008
to ensure that information required to be disclosed by us in the reports that we file or submit
under the Exchange Act is recorded, processed, summarized and reported within the time periods
specified in the SECs rules and forms.
Managements Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining effective internal control over
financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our
internal control over financial reporting is designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles.
Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, we conducted an assessment of the effectiveness of
our internal control over financial reporting based on the framework in Internal Control
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(the COSO criteria). Based on our assessment under the Internal Control Integrated Framework,
our management concluded that our internal control over financial reporting was effective as of
June 30, 2008.
Our independent registered public accounting firm, Ernst & Young LLP has issued an
attestation report on our internal control over financial reporting, which report appears herein.
Changes in Internal Control over Financial Reporting
During the fourth fiscal quarter of the period covered by this report, there has been no
change in our internal control over financial reporting that has materially affected, or is
reasonably likely to materially affect, our internal control over financial reporting.
|
|
|
Item 9B. |
|
Other Information |
On
September 10, 2008, we entered into a waiver and amendment (the
Amendment) to our Revolving Credit and Term Loan
Agreement, dated as of January 12, 2006 (as amended from time to
time, the Credit Agreement), by and among the Company,
SunTrust Bank, as administrative agent and a lender, and First Bank,
as a lender. The Amendment (i) waived our non-compliance with certain
financial covenants as of June 30, 2008, (ii) required the Company to
make a principal prepayment of $1.0 million in August 2008, (iii)
accelerated the maturity date of the term loan facility to October
31, 2008, (iv) eliminated the revolving credit facility, and (v)
removed all financial covenants for the remaining term of the term
loan facility. The foregoing description of the Amendment is
qualified in its entirety by reference to the Amendment, which is
attached as Exhibit 10.38 to this report and incorporated herein by
this reference.
On
September 11, 2008, we entered into a settlement agreement with
respect to certain litigation pending in the State of Georgia. For
additional information with respect to the settlement agreement and
certain other litigation pending against the Company, see Item
3. Legal Proceedings.
73
PART III
|
|
|
Item 10. |
|
Directors, Executive Officers and Corporate Governance |
Information with respect to our directors, set forth in our Definitive Proxy Statement for the
Annual Meeting of Stockholders to be held November 5, 2008, is incorporated herein by reference.
Information with respect to our executive officers, set forth in our Definitive Proxy Statement for
the Annual Meeting of Stockholders to be held November 5, 2008, is incorporated herein by
reference.
Information with respect to compliance with Section 16(a) of the Securities Exchange Act of
1934, as amended, set forth in our Definitive Proxy Statement for the Annual Meeting of
Stockholders to be held November 5, 2008, is incorporated herein by reference.
Information with respect to our code of business conduct and ethics, set forth in our
Definitive Proxy Statement for the Annual Meeting of Stockholders to be held November 5, 2008, is
incorporated herein by reference.
Information with respect to our corporate governance disclosures, set forth in our Definitive
Proxy Statement for the Annual Meeting of Stockholders to be held November 5, 2008, is incorporated
herein by reference.
On December 5, 2007, the Company filed with the New York Stock Exchange (NYSE) the Annual
CEO Certification regarding the Companys compliance with the NYSEs Corporate Governance listing
standards as required by Section 303A.12(a) of the NYSE Listed Company Manual. The Company has
filed as exhibits to this Annual Report on Form 10-K and to the Annual Report on Form 10-K for the
year ended June 30, 2007, the applicable certifications of its Chief Executive Officer and Chief
Financial Officer required under Section 302 of the Sarbanes-Oxley Act of 2002 regarding the
quality of the Companys public disclosures.
|
|
|
Item 11. |
|
Executive Compensation |
Information with respect to our executive officers, set forth in our Definitive Proxy
Statement for the Annual Meeting of Stockholders to be held November 5, 2008, is incorporated
herein by reference.
|
|
|
Item 12. |
|
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters |
Information with respect to security ownership of certain beneficial owners and management and
related stockholder matters, set forth in our Definitive Proxy Statement for the Annual Meeting of
Stockholders to be held November 5, 2008, is incorporated herein by reference.
|
|
|
Item 13. |
|
Certain Relationships and Related Transactions, and Director Independence |
Information with respect to certain relationships and related transactions, and director
independence, set forth in our Definitive Proxy Statement for the Annual Meeting of Stockholders to
be held November 5, 2008, is incorporated herein by reference.
|
|
|
Item 14. |
|
Principal Accountant Fees and Services |
Information with respect to the fees paid to and services provided by our principal
accountants, set forth in our Definitive Proxy Statement for the Annual Meeting of Stockholders to
be held November 5, 2008, is incorporated herein by reference.
74
PART IV
|
|
|
Item 15. |
|
Exhibits, Financial Statement Schedules |
(a) Financial Statements, Financial Statement Schedules and Exhibits
|
(1) |
|
Consolidated Financial Statements: See Index to Consolidated
Financial Statements in Part II, Item 8 of this Form 10-K. |
|
|
(2) |
|
Financial Statement Schedules: |
|
|
|
|
Schedule I Financial Information of Registrant (Parent Company) |
|
|
(3) |
|
Exhibits: See the exhibit listing set forth below. |
|
|
|
Exhibit |
|
|
Number |
|
|
|
|
|
2.1
|
|
Plan of Reorganization, dated as of April 1, 1996, between the Trust and the Company
(incorporated by reference to Exhibit 2.1 of Registration Statement No. 333-07439 on Form S-4,
filed July 2, 1996 (the Registration Statement)). |
|
|
|
2.2
|
|
Stock Purchase Agreement, dated as of January 16, 1996, between Liberté Investors Trust and
Hunters Glen/Ford, Ltd. (the Purchaser) (incorporated by reference to Exhibit 4.1 of
Liberté Investors Trusts Current Report on Form 8-K filed with the Commission on January 24,
1996), as amended by the Amendment to the Stock Purchase Agreement, dated as of February 27,
1996, and the Second Amendment to the Stock Purchase Agreement, dated as of March 28, 1996
(incorporated by reference to Exhibit 2.1 of Liberté Investors Trusts Quarterly Report on
Form 10-Q for the quarter ended March 31, 1996). |
|
|
|
2.3
|
|
Agreement and Plan of Merger by and among the Company, USAH Merger Sub, Inc., USAuto
Holdings, Inc. and the Stockholders of USAuto Holdings, Inc., dated as of December 15, 2003
(incorporated by reference to Exhibit 2.1 of Registration Statement No. 333-111161 on Form
S-1, filed December 15, 2003). |
|
|
|
3.1
|
|
Restated Certificate of Incorporation of First Acceptance Corporation (incorporated by
reference to Exhibit 3.1 of the Companys Current Report on Form 8-K dated May 3, 2004). |
|
|
|
3.2
|
|
Second Amended and Restated Bylaws of First Acceptance Corporation (incorporated by reference
to Exhibit 3 of the Companys Current Report on Form 8-K dated November 9, 2007). |
|
|
|
4.1
|
|
Form of Registration Rights Agreement, dated August 16, 1996, between the Company and the
Purchaser (incorporated by reference to Exhibit 4.1 of the Registration Statement). |
|
|
|
4.2
|
|
Form of Agreement Clarifying Registration Rights, dated August 16, 1996, between the Company,
the Purchaser, the Enloe Descendants Trust, and Robert Ted Enloe, III (incorporated by
reference to Exhibit 4.3 of the Registration Statement). |
|
|
|
4.3
|
|
Registration Rights Agreement, dated as of July 1, 2002, by and between the Company and
Donald J. Edwards (incorporated by reference to Exhibit 4.1 of the Companys Current Report on
Form 8-K dated July 11, 2002). |
|
|
|
4.4
|
|
Form of certificate representing shares of common stock, par value $0.01 per share
(incorporated by reference to Exhibit 4.1 of the Companys Registration Statement on Form S-8
filed December 26, 2002). |
75
|
|
|
Exhibit |
|
|
Number |
|
|
|
|
|
10.1
|
|
Employment Agreement, dated as of July 1, 2002, by and between the Company and Donald J.
Edwards (incorporated by reference to Exhibit 10.1 of the Companys Current Report on Form 8-K
dated July 11, 2002).* |
|
|
|
10.2
|
|
First Acceptance Corporation 2002 Long Term Incentive Plan, as amended (incorporated by
reference to Exhibit 4.4 of the Companys Registration Statement on Form S-8 filed May 18,
2004).* |
|
|
|
10.3
|
|
Nonqualified Stock Option Agreement, dated as of July 9, 2002, by and between the Company and
Donald J. Edwards (incorporated by reference to Exhibit 10.3 of the Companys Current Report
on Form 8-K dated July 11, 2002).* |
|
|
|
10.4
|
|
Indemnification Agreement, dated as of July 1, 2002, by and between the Company and Donald J.
Edwards (incorporated by reference to Exhibit 10.4 of the Companys Current Report on Form 8-K
dated July 11, 2002). |
|
|
|
10.5
|
|
Stock Purchase Agreement, dated as of July 9, 2002, by and between the Company and Donald J.
Edwards (incorporated by reference to Exhibit 10.3 of the Companys Registration Statement on
Form S-8 dated December 26, 2002).* |
|
|
|
10.6
|
|
Stock Purchase Agreement, dated as of June 30, 2003, by and between the Company and Donald J.
Edwards (incorporated by reference to Exhibit 10.8 of the Companys Annual Report on Form 10-K
dated September 26, 2003).* |
|
|
|
10.7
|
|
Advisory Services Agreement, dated as of April 30, 2004, by and between First Acceptance
Corporation and Edwards Capital LLC (incorporated by reference to Exhibit 10.1 of the
Companys Current Report on Form 8-K dated May 3, 2004).* |
|
|
|
10.8
|
|
Separation Agreement, dated as of April 30, 2004, by and between First Acceptance Corporation
and Donald J. Edwards (incorporated by reference to Exhibit 10.2 of the Companys Current
Report on Form 8-K dated May 3, 2004).* |
|
|
|
10.9
|
|
Employment Agreement, dated as of April 30, 2004, by and between First Acceptance Corporation
and Thomas M. Harrison, Jr. (incorporated by reference to Exhibit 10.4 of the Companys
Current Report on Form 8-K dated May 3, 2004).* |
|
|
|
10.10
|
|
Nonqualified Stock Option Agreement, dated as of April 30, 2004, by and between First
Acceptance Corporation and Stephen J. Harrison (incorporated by reference to Exhibit 10.5 of
the Companys Current Report on Form 8-K dated May 3, 2004).* |
|
|
|
10.11
|
|
Nonqualified Stock Option Agreement, dated as of April 30, 2004, by and between First
Acceptance Corporation and Thomas M. Harrison, Jr. (incorporated by reference to Exhibit 10.6
of the Companys Current Report on Form 8-K dated May 3, 2004).* |
|
|
|
10.12
|
|
Registration Rights Agreement, dated as of April 30, 2004, by and among First Acceptance
Corporation, Stephen J. Harrison and Thomas M. Harrison, Jr. (incorporated by reference to
Exhibit 10.7 of the Companys Current Report on Form 8-K dated May 3, 2004). |
|
|
|
10.13
|
|
Form of Restricted Stock Award Agreement under the Companys 2002 Long Term Incentive Plan
(incorporated by reference to Exhibit 10.1 of the Companys Current Report on Form 8-K dated
November 3, 2004).* |
|
|
|
10.14
|
|
Form of Nonqualified Stock Option Agreement under the Companys 2002 Long Term Incentive
Plan (incorporated by reference to Exhibit 10.2 of the Companys Current Report on Form 8-K
dated November 3, 2004).* |
|
|
|
10.15
|
|
First Acceptance Corporation Employee Stock Purchase Plan (incorporated by reference to
Exhibit 10.1 of the Registration Statement No. 333-121551 on Form S-8, filed December 22,
2004). |
76
|
|
|
Exhibit |
|
|
Number |
|
|
|
|
|
10.16
|
|
Summary of Compensation for Non-Employee Directors and Named Executive Officers. |
|
|
|
10.17
|
|
Asset Purchase Agreement, dated as of January 12, 2006, by and among First Acceptance
Corporation, Acceptance Insurance Agency of Illinois, Inc., Insurance Plus Agency II, Inc.,
Yale International Insurance Agency, Inc. and Constantine Danos (incorporated by reference to
Exhibit 10.1 of the Companys Current Report on Form 8-K dated January 18, 2006). |
|
|
|
10.18
|
|
Credit Agreement, dated as of January 12, 2006, by and among First Acceptance Corporation,
SunTrust Bank, in its capacity as a lender and as administrative agent for the lenders, and
First Bank (incorporated by reference to Exhibit 10.2 of the Companys Current Report on Form
8-K dated January 18, 2006). |
|
|
|
10.19
|
|
Stock Purchase Agreement, dated as of September 13, 2006, by and between First Acceptance
Corporation and Edward Pierce (incorporated by reference to Exhibit 99.2 of the Companys
Current Report on Form 8-K dated September 19, 2006).* |
|
|
|
10.20
|
|
Nonqualified Stock Option Agreement, dated as of September 13, 2006, by and between First
Acceptance Corporation and Edward Pierce (incorporated by reference to Exhibit 99.3 of the
Companys Current Report on Form 8-K dated September 19, 2006).* |
|
|
|
10.21
|
|
Amendment to Employment Agreement, dated as of September 13, 2006, by and between First
Acceptance Corporation and Thomas M. Harrison, Jr. (incorporated by reference to Exhibit 99.5
of the Companys Current Report on Form 8-K dated September 19, 2006).* |
|
|
|
10.22
|
|
Nonqualified Stock Option Agreement, dated as of October 9, 2006, by and between First
Acceptance Corporation and Kevin P. Cohn (incorporated by reference to Exhibit 99.2 of the
Companys Current Report on Form 8-K dated October 12, 2006).* |
|
|
|
10.23
|
|
Second Amendment to the First Acceptance Corporation 2002 Long Term Incentive Plan
(incorporated by reference to Exhibit 10.1 of the Companys Current Report on Form 10-Q dated
May 10, 2007).* |
|
|
|
10.24
|
|
Form of Restricted Stock Award Agreement of Outside Directors under the Companys 2002 Long
Term Incentive Plan (incorporated by reference to Exhibit 10.2 of the Companys Current Report
on Form 10-Q dated May 10, 2007).* |
|
|
|
10.25
|
|
Form of Indemnification Agreement between the Company and each of the Companys directors
and executive officers (incorporated by reference to Exhibit 10.3 of the Companys Current
Report on Form 10-Q dated May 10, 2007).* |
|
|
|
10.26
|
|
Junior Subordinated Indenture, dated June 15, 2007, between First Acceptance Corporation and
Wilmington Trust Company (incorporated by reference to Exhibit 99.2 of the Companys Current
Report on Form 8-K dated June 18, 2007). |
|
|
|
10.27
|
|
Guarantee Agreement, dated June 15, 2007, between First Acceptance Corporation and
Wilmington Trust Company (incorporated by reference to Exhibit 99.3 of the Companys Current
Report on Form 8-K dated June 18, 2007). |
|
|
|
10.28
|
|
Amended and Restated Trust Agreement, dated June 15, 2007, among First Acceptance
Corporation, Wilmington Trust Company and the Administrative Trustees Named Therein
(incorporated by reference to Exhibit 99.4 of the Companys Current Report on Form 8-K dated
June 18, 2007). |
|
|
|
10.29
|
|
Waiver and Fourth Amendment to Revolving Credit and Term Loan Agreement, dated September 13,
2007, by and among First Acceptance Corporation, Suntrust Bank, as administrative agent and as
a lender, and First Bank, as a lender (incorporated by reference to Exhibit 10.1 of the
Companys Current Report on Form 8-K dated September 18, 2007). |
77
|
|
|
Exhibit |
|
|
Number |
|
|
|
|
|
10.30
|
|
Release Agreement, dated December 31, 2007, between First Acceptance Corporation and Thomas
M. Harrison, Jr. (incorporated by reference to Exhibit 99.1 of the Companys Current Report on
Form 8-K dated January 4, 2008).* |
|
|
|
10.31
|
|
Waiver and Fifth Amendment to Revolving Credit and Term Loan Agreement, dated February 6,
2008, by and among First Acceptance Corporation, Suntrust Bank, as administrative agent and as
a lender, and First Bank, as a lender (incorporated by reference to Exhibit 99.1 of the
Companys Current Report on Form 8-K dated February 11, 2008). |
|
|
|
10.32
|
|
Amended and Restated Employment Agreement, made as of February 8, 2008, to be effective
January 1, 2008, by and between First Acceptance Corporation and Stephen J. Harrison
(incorporated by reference to Exhibit 99.3 of the Companys Current Report on Form 8-K dated
February 11, 2008).* |
|
|
|
10.33
|
|
Amended and Restated Employment Agreement, made as of February 8, 2008, to be effective
January 1, 2008, by and between First Acceptance Corporation and Edward Pierce (incorporated
by reference to Exhibit 99.4 of the Companys Current Report on Form 8-K dated February 11,
2008).* |
|
|
|
10.34
|
|
Amended and Restated Employment Agreement, made as of February 8, 2008, to be effective
January 1, 2008, by and between First Acceptance Corporation and Kevin P. Cohn (incorporated
by reference to Exhibit 99.5 of the Companys Current Report on Form 8-K dated February 11,
2008).* |
|
|
|
10.35
|
|
Employment Agreement, made as of February 8, 2008, to be effective January 1, 2008, by and
between First Acceptance Corporation and William R. Pentecost (incorporated by reference to
Exhibit 99.6 of the Companys Current Report on Form 8-K dated February 11, 2008).* |
|
|
|
10.36
|
|
First Amendment to First Acceptance Corporation Employee Stock Purchase Plan (incorporated
by reference to Exhibit 10.1 of the Companys Quarterly Report on Form 10-Q dated February 11,
2008). |
|
|
|
10.37
|
|
Restricted Stock Award Agreement, dated as of March 18, 2008, between First Acceptance
Corporation and Edward Pierce (incorporated by reference to Exhibit 99.1 of the Companys
Current Report on Form 8-K dated March 21, 2008).* |
|
|
|
10.38
|
|
Waiver and Sixth Amendment to
Revolving Credit and Term Loan Agreement, dated September 10, 2008,
by and among First Acceptance Corporation, Suntrust Bank, as
administrative agent and as a lender, and First Bank, as a lender. |
|
|
|
14
|
|
First Acceptance Corporation Code of Business Conduct and Ethics (incorporated by reference
to Exhibit 14 of the Companys Annual Report on Form 10-K dated September 28, 2004). |
|
|
|
21
|
|
Subsidiaries of First Acceptance Corporation. |
|
|
|
23.1
|
|
Consent of Ernst & Young LLP. |
|
|
|
31.1
|
|
Certification of Chief Executive Officer pursuant to Rule 13a-14(a). |
|
|
|
31.2
|
|
Certification of Chief Financial Officer pursuant to Rule 13a-14(a). |
|
|
|
32.1
|
|
Chief Executive Officers Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.2
|
|
Chief Financial Officers Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
* |
|
Management contract or compensatory plan or arrangement. |
78
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
|
|
|
|
|
FIRST ACCEPTANCE CORPORATION
|
|
Date: September 11, 2008 |
By |
/s/ Stephen J. Harrison
|
|
|
|
Stephen J. Harrison |
|
|
|
Chief Executive Officer |
|
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the capacities and on the
dates indicated.
|
|
|
|
|
Signature |
|
Title |
|
Date |
|
|
|
|
|
/s/ Stephen J. Harrison
|
|
Chief Executive Officer and
Director (Principal Executive
Officer)
|
|
September 11, 2008 |
|
|
|
|
|
Stephen J. Harrison |
|
|
|
|
|
|
|
|
|
/s/ Kevin P. Cohn
|
|
Senior Vice President and Chief
Financial Officer (Principal
Financial Officer and Principal
Accounting Officer)
|
|
September 11, 2008 |
|
|
|
|
|
Kevin P. Cohn |
|
|
|
|
|
|
|
|
|
/s/ Gerald J. Ford
|
|
Chairman of the Board of Directors
|
|
September 11, 2008 |
|
|
|
|
|
Gerald J. Ford |
|
|
|
|
|
|
|
|
|
/s/ Thomas M. Harrison, Jr.
|
|
Director
|
|
September 11, 2008 |
|
|
|
|
|
Thomas M. Harrison, Jr. |
|
|
|
|
|
|
|
|
|
/s/ Rhodes R. Bobbitt
|
|
Director
|
|
September 11, 2008 |
|
|
|
|
|
Rhodes R. Bobbitt |
|
|
|
|
|
|
|
|
|
|
|
Director
|
|
|
|
|
|
|
|
Harvey B. Cash |
|
|
|
|
|
|
|
|
|
|
|
Director
|
|
|
|
|
|
|
|
Donald J. Edwards |
|
|
|
|
|
|
|
|
|
/s/ Tom C. Nichols
|
|
Director
|
|
September 11, 2008 |
|
|
|
|
|
Tom C. Nichols |
|
|
|
|
|
|
|
|
|
|
|
Director
|
|
|
|
|
|
|
|
Lyndon L. Olson |
|
|
|
|
|
|
|
|
|
/s/ William A. Shipp, Jr.
|
|
Director
|
|
September 11, 2008 |
|
|
|
|
|
William A. Shipp, Jr. |
|
|
|
|
79
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
SCHEDULE I. FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY)
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
2008 |
|
|
2007 |
|
Balance Sheets |
|
|
|
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
Investment in subsidiaries, at equity in net assets |
|
$ |
257,305 |
|
|
$ |
269,806 |
|
Cash and cash equivalents |
|
|
2,465 |
|
|
|
10,350 |
|
Deferred tax asset |
|
|
8,927 |
|
|
|
24,674 |
|
Other assets |
|
|
2,741 |
|
|
|
3,161 |
|
Foreclosed real estate held for sale |
|
|
594 |
|
|
|
341 |
|
Amounts due from (to) subsidiaries |
|
|
383 |
|
|
|
(3,136 |
) |
|
|
|
|
|
|
|
|
|
$ |
272,415 |
|
|
$ |
305,196 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
Notes payable |
|
$ |
3,913 |
|
|
$ |
23,060 |
|
Debentures payable |
|
|
41,240 |
|
|
|
41,240 |
|
Other liabilities |
|
|
1,803 |
|
|
|
1,412 |
|
Stockholders equity |
|
|
225,459 |
|
|
|
239,484 |
|
|
|
|
|
|
|
|
|
|
$ |
272,415 |
|
|
$ |
305,196 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
Statements of Operations |
|
|
|
|
|
|
|
|
|
|
|
|
Gains on sales of foreclosed real estate |
|
$ |
|
|
|
$ |
|
|
|
$ |
3,637 |
|
Investment income |
|
|
180 |
|
|
|
206 |
|
|
|
807 |
|
Equity in income of subsidiaries, net of tax |
|
|
2,805 |
|
|
|
3,677 |
|
|
|
17,282 |
|
Expenses |
|
|
(8,888 |
) |
|
|
(5,542 |
) |
|
|
(3,891 |
) |
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
(5,903 |
) |
|
|
(1,659 |
) |
|
|
17,835 |
|
Provision (benefit) for income taxes |
|
|
11,942 |
|
|
|
15,011 |
|
|
|
(10,233 |
) |
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(17,845 |
) |
|
$ |
(16,670 |
) |
|
$ |
28,068 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
Statements of Cash Flows |
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(17,845 |
) |
|
$ |
(16,670 |
) |
|
$ |
28,068 |
|
Equity in income of subsidiaries, net of tax |
|
|
(2,805 |
) |
|
|
(3,677 |
) |
|
|
(17,282 |
) |
Stock-based compensation |
|
|
1,507 |
|
|
|
1,063 |
|
|
|
500 |
|
Deferred income taxes |
|
|
15,747 |
|
|
|
18,037 |
|
|
|
514 |
|
Gains on sales of foreclosed real estate |
|
|
|
|
|
|
|
|
|
|
(3,637 |
) |
Change in assets and liabilities |
|
|
(2,829 |
) |
|
|
3,322 |
|
|
|
5,726 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities |
|
|
(6,225 |
) |
|
|
2,075 |
|
|
|
13,889 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Sale of investment in mutual fund |
|
|
|
|
|
|
|
|
|
|
10,920 |
|
Investment in subsidiary |
|
|
|
|
|
|
(45,765 |
) |
|
|
(47,026 |
) |
Dividend from subsidiary |
|
|
17,609 |
|
|
|
6,435 |
|
|
|
750 |
|
Improvements to foreclosed real estate |
|
|
(253 |
) |
|
|
(254 |
) |
|
|
|
|
Purchase of common stock in trust |
|
|
|
|
|
|
(1,240 |
) |
|
|
|
|
Proceeds from sales of foreclosed real estate |
|
|
|
|
|
|
|
|
|
|
4,512 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
17,356 |
|
|
|
(40,824 |
) |
|
|
(30,844 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from borrowings |
|
|
|
|
|
|
5,000 |
|
|
|
30,000 |
|
Payments on borrowings |
|
|
(19,147 |
) |
|
|
(5,552 |
) |
|
|
(6,388 |
) |
Proceeds from issuance of debentures |
|
|
|
|
|
|
41,240 |
|
|
|
|
|
Net proceeds from issuance of common stock |
|
|
131 |
|
|
|
857 |
|
|
|
223 |
|
Exercise of stock options |
|
|
|
|
|
|
|
|
|
|
421 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
(19,016 |
) |
|
|
41,545 |
|
|
|
24,256 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
(7,885 |
) |
|
|
2,796 |
|
|
|
7,301 |
|
Cash and cash equivalents, beginning of year |
|
|
10,350 |
|
|
|
7,554 |
|
|
|
253 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year |
|
$ |
2,465 |
|
|
$ |
10,350 |
|
|
$ |
7,554 |
|
|
|
|
|
|
|
|
|
|
|
80