Form 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 |
For the quarterly period ended December 31, 2008
or
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o |
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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, Suite 1000
Nashville, Tennessee
(Address of principal executive offices)
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37203
(Zip Code) |
(615) 844-2800
(Registrants telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year, if changed since last report)
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 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):
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Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filer o
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
As of February 9, 2009, there were 48,102,736 shares outstanding of the registrants common stock,
par value $0.01 per share.
FIRST ACCEPTANCE CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 31, 2008
INDEX
i
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
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December 31, |
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June 30, |
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2008 |
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2008 |
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(Unaudited) |
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ASSETS |
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Fixed maturities, available-for-sale at fair value (amortized
cost of $192,103 and $190,040, respectively) |
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$ |
189,960 |
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$ |
189,570 |
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Cash and cash equivalents |
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23,556 |
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38,646 |
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Premiums and fees receivable, net of allowance of $396 and $651 |
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48,677 |
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63,377 |
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Reinsurance receivables |
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140 |
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283 |
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Deferred tax asset, net |
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16,247 |
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17,593 |
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Other assets |
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9,878 |
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9,894 |
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Property and equipment, net |
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4,398 |
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4,876 |
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Deferred acquisition costs |
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4,113 |
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4,549 |
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Goodwill |
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138,082 |
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138,082 |
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Identifiable intangible assets |
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6,360 |
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6,360 |
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TOTAL ASSETS |
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$ |
441,411 |
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$ |
473,230 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Loss and loss adjustment expense reserves |
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$ |
93,803 |
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$ |
101,407 |
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Unearned premiums and fees |
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60,367 |
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77,237 |
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Notes payable and capitalized lease obligations |
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98 |
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4,124 |
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Debentures payable |
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41,240 |
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41,240 |
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Payable for securities |
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1,045 |
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Other liabilities |
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20,233 |
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22,718 |
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Total liabilities |
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215,741 |
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247,771 |
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Stockholders equity: |
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Preferred stock, $.01 par value, 10,000 shares authorized |
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Common stock, $.01 par value, 75,000 shares authorized;
48,103 and 48,055 shares issued and outstanding,
respectively |
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481 |
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481 |
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Additional paid-in capital |
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463,647 |
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462,601 |
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Accumulated other comprehensive loss |
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(2,143 |
) |
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(470 |
) |
Accumulated deficit |
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(236,315 |
) |
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(237,153 |
) |
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Total stockholders equity |
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225,670 |
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225,459 |
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TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
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$ |
441,411 |
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$ |
473,230 |
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See notes to consolidated financial statements.
1
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(in thousands, except per share data)
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Three Months Ended |
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Six Months Ended |
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December 31, |
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December 31, |
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2008 |
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2007 |
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2008 |
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2007 |
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Revenues: |
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Premiums earned |
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$ |
54,823 |
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$ |
70,484 |
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$ |
116,661 |
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$ |
145,287 |
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Commission and fee income |
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7,675 |
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8,987 |
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15,918 |
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18,285 |
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Investment income |
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2,608 |
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2,859 |
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5,331 |
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5,886 |
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Other |
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(26 |
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11 |
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(1,241 |
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41 |
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65,080 |
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82,341 |
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136,669 |
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169,499 |
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Costs and expenses: |
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Losses and loss adjustment
expenses |
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37,553 |
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54,346 |
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81,285 |
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112,017 |
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Insurance operating expenses |
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21,510 |
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25,180 |
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42,956 |
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49,166 |
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Other operating expenses |
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314 |
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759 |
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706 |
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1,264 |
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Litigation settlement |
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5,089 |
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5,234 |
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Stock-based compensation |
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514 |
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354 |
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1,009 |
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678 |
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Depreciation and amortization |
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455 |
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380 |
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924 |
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748 |
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Interest expense |
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1,033 |
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1,289 |
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2,190 |
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2,630 |
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66,468 |
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82,308 |
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134,304 |
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166,503 |
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Income (loss) before income
taxes |
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(1,388 |
) |
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33 |
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2,365 |
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2,996 |
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Provision (benefit) for income
taxes |
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(385 |
) |
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11,764 |
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1,527 |
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12,835 |
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Net income (loss) |
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$ |
(1,003 |
) |
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$ |
(11,731 |
) |
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$ |
838 |
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$ |
(9,839 |
) |
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Net income (loss) per share: |
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Basic and diluted |
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$ |
(0.02 |
) |
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$ |
(0.25 |
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$ |
0.02 |
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$ |
(0.21 |
) |
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Number of shares used to
calculate net income (loss)
per share: |
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Basic |
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47,658 |
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47,618 |
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47,656 |
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47,617 |
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Diluted |
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47,658 |
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47,618 |
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49,088 |
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47,617 |
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Reconciliation of net income
(loss) to comprehensive loss: |
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Net income (loss) |
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$ |
(1,003 |
) |
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$ |
(11,731 |
) |
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$ |
838 |
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$ |
(9,839 |
) |
Net unrealized change in
investments |
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1,790 |
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2,371 |
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(1,673 |
) |
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4,390 |
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Other |
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(83 |
) |
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(250 |
) |
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787 |
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(9,443 |
) |
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(835 |
) |
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(5,699 |
) |
Applicable provision for
income taxes |
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520 |
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520 |
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Comprehensive income (loss) |
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$ |
787 |
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$ |
(9,963 |
) |
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$ |
(835 |
) |
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$ |
(6,219 |
) |
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See
notes to consolidated financial statements.
2
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in thousands)
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Six Months Ended |
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December 31, |
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2008 |
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2007 |
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Cash flows from operating activities: |
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Net income (loss) |
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$ |
838 |
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$ |
(9,839 |
) |
Adjustments to reconcile net income (loss) to cash provided by
(used in) operating activities: |
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Depreciation and amortization |
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924 |
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|
748 |
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Stock-based compensation |
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1,009 |
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|
678 |
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Deferred income taxes |
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1,346 |
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12,659 |
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Other-than-temporary impairment on investment securities |
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1,265 |
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Other |
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58 |
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(1 |
) |
Change in: |
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Premiums and fees receivable |
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14,655 |
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10,059 |
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Deferred acquisition costs |
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436 |
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369 |
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Loss and loss adjustment expense reserves |
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(7,604 |
) |
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3,911 |
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Unearned premiums and fees |
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(16,870 |
) |
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(13,192 |
) |
Litigation settlement |
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880 |
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Other |
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(3,107 |
) |
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1,098 |
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Net cash provided by (used in) operating activities |
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(6,170 |
) |
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6,490 |
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Cash flows from investing activities: |
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Purchases of fixed maturities, available-for-sale |
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(14,225 |
) |
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(19,957 |
) |
Maturities and paydowns of fixed maturities, available-for-sale |
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6,476 |
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3,636 |
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Sales of fixed maturities, available-for-sale |
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4,425 |
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12,210 |
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Net change in receivable/payable for securities |
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(1,045 |
) |
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18,974 |
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Capital expenditures |
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(463 |
) |
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(984 |
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Other |
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(99 |
) |
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(119 |
) |
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Net cash provided by (used in) investing activities |
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(4,931 |
) |
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13,760 |
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Cash flows from financing activities: |
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Payments on borrowings |
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(4,026 |
) |
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(13,386 |
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Net proceeds from issuance of common stock |
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37 |
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81 |
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Net cash used in financing activities |
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(3,989 |
) |
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(13,305 |
) |
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Net increase (decrease) in cash and cash equivalents |
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(15,090 |
) |
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6,945 |
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Cash and cash equivalents, beginning of period |
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38,646 |
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34,161 |
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Cash and cash equivalents, end of period |
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$ |
23,556 |
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$ |
41,106 |
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|
See notes to consolidated financial statements.
3
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. General
The consolidated financial statements of First Acceptance Corporation (the Company) included
herein have been prepared without audit pursuant to the rules and regulations of the Securities and
Exchange Commission (SEC). Accordingly, certain information and disclosures normally included in
financial statements prepared in accordance with accounting principles generally accepted in the
United States of America have been omitted. In the opinion of management, the consolidated
financial statements reflect all adjustments (consisting of normal recurring adjustments) necessary
for a fair statement of the interim periods. Certain reclassifications have been made to the prior
years consolidated financial statements to conform with the current year presentation.
The results of operations for the interim periods are not necessarily indicative of the
results of operations to be expected for the full year. These consolidated financial statements
should be read in conjunction with the Companys audited consolidated financial statements included
in its Annual Report on Form 10-K for the fiscal year ended June 30, 2008.
2. Investments
Fair Value
Fair value is the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the measurement date. The
Company holds available-for-sale fixed maturities investments, which are carried at fair value.
Fair value measurements are generally based upon observable and unobservable inputs.
Observable inputs are based on market data from independent sources, while unobservable inputs
reflect the Companys view of market assumptions in the absence of observable market information.
All assets and liabilities that are carried at fair value are classified and disclosed in one of
the following categories:
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Level 1 -
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Quoted prices in active markets for identical assets or liabilities. |
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Level 2 -
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Quoted market prices for similar assets or liabilities in active
markets; quoted prices by independent pricing services for identical or similar
assets or liabilities in markets that are not active; and valuations, using models
or other valuation techniques, that use observable market data. All significant
inputs are observable, or derived from observable information in the marketplace, or
are supported by observable levels at which transactions are executed in the market
place. |
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Level 3 -
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Instruments that use non-binding broker quotes or model driven
valuations that do not have observable market data. |
4
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
The following table presents the fair-value measurements for each major category of assets
that are measured on a recurring basis as of December 31, 2008 (in thousands).
|
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Fair Value Measurements Using |
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Quoted Prices |
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in Active |
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Significant |
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Markets for |
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Other |
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Significant |
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Identical |
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Observable |
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Unobservable |
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Assets |
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Inputs |
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Inputs |
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Description |
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Total |
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(Level 1) |
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(Level 2) |
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(Level 3) |
|
Fixed maturities, available-for-sale: |
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U.S. government and agencies |
|
$ |
32,299 |
|
|
$ |
32,299 |
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|
$ |
|
|
|
$ |
|
|
State |
|
|
8,515 |
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|
|
|
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|
8,515 |
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|
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Political subdivisions |
|
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3,357 |
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3,357 |
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Revenue and assessment |
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29,373 |
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29,373 |
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Corporate bonds |
|
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52,114 |
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|
52,114 |
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|
|
|
Collateralized mortgage obligations |
|
|
64,302 |
|
|
|
|
|
|
|
62,630 |
|
|
|
1,672 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities, available-for-sale |
|
|
189,960 |
|
|
|
32,299 |
|
|
|
155,989 |
|
|
|
1,672 |
|
Cash and cash equivalents |
|
|
23,556 |
|
|
|
23,556 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
213,516 |
|
|
$ |
55,855 |
|
|
$ |
155,989 |
|
|
$ |
1,672 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Based on the above categorization, the following table represents the quantitative disclosure
for those assets included in category Level 3 as of December 31, 2008 (in thousands).
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using |
|
|
|
Significant Unobservable Inputs (Level 3) |
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
December 31, 2008 |
|
|
December 31, 2008 |
|
Beginning balance |
|
$ |
1,079 |
|
|
$ |
167 |
|
Total gains or losses (realized or unrealized): |
|
|
|
|
|
|
|
|
Included in net income (loss) |
|
|
11 |
|
|
|
(88 |
) |
Included in comprehensive income (loss) |
|
|
(160 |
) |
|
|
(160 |
) |
Purchases, sales, issuances and settlements |
|
|
(8 |
) |
|
|
(25 |
) |
Transfers in and/or out of Level 3 |
|
|
750 |
|
|
|
1,778 |
|
|
|
|
|
|
|
|
Balance at December 31, 2008 |
|
$ |
1,672 |
|
|
$ |
1,672 |
|
|
|
|
|
|
|
|
Gains or losses included in net income (loss) are included in other revenues within the
consolidated statements of operations. The $1.7 million fair value of securities in Level 3 at
December 31, 2008 consists of four securities, each priced based on non-binding broker quotes.
Investment Income and Net Realized Gains and Losses
The major categories of investment income follow (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Fixed maturities, available-for-sale |
|
$ |
2,582 |
|
|
$ |
2,535 |
|
|
$ |
5,213 |
|
|
$ |
5,201 |
|
Cash and cash equivalents |
|
|
107 |
|
|
|
402 |
|
|
|
286 |
|
|
|
846 |
|
Other |
|
|
29 |
|
|
|
29 |
|
|
|
58 |
|
|
|
59 |
|
Investment expenses |
|
|
(110 |
) |
|
|
(107 |
) |
|
|
(226 |
) |
|
|
(220 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,608 |
|
|
$ |
2,859 |
|
|
$ |
5,331 |
|
|
$ |
5,886 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Net realized capital gains (losses) on investments from fixed maturities, available-for-sale
are included in other revenues within the accompanying consolidated statements of operations. The
major categories of other revenues follow (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Gains |
|
$ |
3 |
|
|
$ |
247 |
|
|
$ |
62 |
|
|
$ |
283 |
|
Losses |
|
|
(29 |
) |
|
|
(236 |
) |
|
|
(38 |
) |
|
|
(242 |
) |
Other-than-temporary impairment |
|
|
|
|
|
|
|
|
|
|
(1,265 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(26 |
) |
|
$ |
11 |
|
|
$ |
(1,241 |
) |
|
$ |
41 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Maturities, Available-for-Sale
The following table summarizes the Companys fixed maturity securities at December 31, 2008
(in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
U.S. government and agencies |
|
$ |
30,110 |
|
|
$ |
2,189 |
|
|
$ |
|
|
|
$ |
32,299 |
|
State |
|
|
8,262 |
|
|
|
260 |
|
|
|
(7 |
) |
|
|
8,515 |
|
Political subdivisions |
|
|
3,357 |
|
|
|
37 |
|
|
|
(37 |
) |
|
|
3,357 |
|
Revenue and assessment |
|
|
29,006 |
|
|
|
618 |
|
|
|
(251 |
) |
|
|
29,373 |
|
Corporate bonds |
|
|
53,712 |
|
|
|
745 |
|
|
|
(2,343 |
) |
|
|
52,114 |
|
Collateralized mortgage obligations |
|
|
67,656 |
|
|
|
1,892 |
|
|
|
(5,246 |
) |
|
|
64,302 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
192,103 |
|
|
$ |
5,741 |
|
|
$ |
(7,884 |
) |
|
$ |
189,960 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
|
|
|
Less than |
|
|
Greater |
|
|
Gross |
|
|
|
or equal to |
|
|
than 12 |
|
|
Unrealized |
|
As of: |
|
12 months |
|
|
months |
|
|
Gains |
|
December 31, 2008 |
|
|
63 |
|
|
|
16 |
|
|
|
128 |
|
June 30, 2008 |
|
|
79 |
|
|
|
16 |
|
|
|
108 |
|
The fair value and gross unrealized losses of those securities in a continuous unrealized loss
position for greater than 12 months at December 31, 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% |
|
|
5 |
|
|
$ |
3,088 |
|
|
$ |
(252 |
) |
Greater than 10% |
|
|
11 |
|
|
|
5,900 |
|
|
|
(3,398 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
16 |
|
|
$ |
8,988 |
|
|
$ |
(3,650 |
) |
|
|
|
|
|
|
|
|
|
|
6
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
The following table sets forth the amount of gross unrealized loss by current severity (as
compared to amortized cost) and length of time that individual securities have been in a continuous
unrealized loss position at December 31, 2008 (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities with |
|
|
|
|
|
Severity of Gross Unrealized Losses |
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
|
|
|
|
Greater |
|
Length of |
|
Unrealized |
|
|
Unrealized |
|
|
Less |
|
|
5% to |
|
|
than |
|
Gross Unrealized Losses: |
|
Losses |
|
|
Losses |
|
|
than 5% |
|
|
10% |
|
|
10% |
|
Less than or equal to: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months |
|
$ |
4,722 |
|
|
$ |
(263 |
) |
|
$ |
(27 |
) |
|
$ |
|
|
|
$ |
(236 |
) |
Six months |
|
|
9,792 |
|
|
|
(529 |
) |
|
|
(148 |
) |
|
|
(81 |
) |
|
|
(300 |
) |
Nine months |
|
|
21,437 |
|
|
|
(1,816 |
) |
|
|
(278 |
) |
|
|
(639 |
) |
|
|
(899 |
) |
Twelve months |
|
|
7,760 |
|
|
|
(1,626 |
) |
|
|
(7 |
) |
|
|
(285 |
) |
|
|
(1,334 |
) |
Greater than twelve months |
|
|
8,988 |
|
|
|
(3,650 |
) |
|
|
(1 |
) |
|
|
(251 |
) |
|
|
(3,398 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
52,699 |
|
|
$ |
(7,884 |
) |
|
$ |
(461 |
) |
|
$ |
(1,256 |
) |
|
$ |
(6,167 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other-Than-Temporary Impairment
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 (CMOs). Securities with declines
attributable solely 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.
The issuer-specific factors considered in reaching the conclusion that securities with
declines are not other-than-temporary include (i) the extent and duration of the decline in fair
value, including the duration of any significant decline in value, (ii) whether the security is
current as to payments of principal and interest, (iii) a valuation of any underlying collateral,
(iv) current and future conditions and trends for both the business and its industry, (v) changes
in cash flow assumptions for CMOs and (vi) rating agency actions. Based on these factors, the
Company will make a determination as to the probability of recovering principal and interest on the
security.
Other-than-temporary impairment (OTTI) charges of $1.3 million for the six months ended
December 31, 2008 include $0.6 million for certain non-agency backed CMOs and $0.7 million for two
corporate bonds. For the three months ended September 30, 2008, as a result of the deterioration in
liquidity in the credit markets, yields on certain non-agency backed CMOs declined below projected
book yields requiring an impairment to those CMOs totaling $0.6 million. Effective for interim and
annual reporting periods ending after December 15, 2008, the Financial Accounting Standards Board
(FASB) issued Staff Position EITF 99-20-1, Amendments to the Impairment Guidance of EITF Issue
No. 99-20 (the FSP), which eliminated the previous requirement that a holders best estimate of
cash flows be based upon those that a market participant would use. Instead, the FSP requires that
an other-than-temporary impairment be recognized as a realized loss through earnings when it is
probable there has been an adverse change in the holders estimated cash flows from the cash flows
previously projected, which is consistent with the impairment model in FASB Statement No. 115,
Accounting for Certain Investments in Debt and Equity Securities. Retroactive application to a
prior interim or annual reporting period is not permitted. Based upon the Companys best estimate
of cash flows on its eligible securities, there has been no adverse change in such cash flows, and
therefore, no further impairment was recorded at December 31, 2008.
7
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
At December 31, 2008, the Companys portfolio included non-agency backed CMOs with an original
cost of $18.3 million and a current fair value of $11.0 million. Such fair value was obtained from
either an independent third-party valuation service provider or non-binding broker quotes. For the
year ended June 30, 2008 and the three months ended September 30, 2008, the Company recognized $1.4
million and $0.5 million, respectively, of OTTI in accordance with the guidance of EITF Issue No.
99-20, Recognition of Interest Income and Impairment of Purchased Beneficial Interests and
Beneficial Interests that Continue to Be Held by a Transferor in Securitized Financial Assets
(EITF 99-20). The Companys review of these securities included the analysis of available
information such as collateral quality, anticipated cash flows, credit enhancements, default rates,
loss severities, the securities relative position within their respective capital structures, and
credit ratings from statistical rating agencies. Based on its review, the Company believes that the
unrealized losses on these securities are not necessarily predictive of the ultimate performance of
the underlying collateral. In the absence of further deterioration in the collateral relative to
its positions in these securities respective capital
structures, which could be other-than-temporary, the Company believes the unrealized losses should reverse over the remaining lives of
the securities. The Company has both the ability and intention to hold these securities to
maturity.
The Company also recognized OTTI charges of $0.7 million for the six months ended December 31,
2008 related to two corporate bonds. These bonds were considered to be impaired based on the extent
and duration of the declines in their fair values and issuer-specific fundamentals relating to (i)
poor operating results and weakened financial conditions, (ii) negative industry trends further
impacted by the recent economic turmoil, and (iii) a series of downgrades to their credit ratings.
Based on the factors that existed at the time of impairment, the Company did not believe that these
bonds would recover their unrealized losses in the near future.
The Company believes that the remaining securities having unrealized losses at December 31,
2008 were not other-than-temporarily impaired and that it has the ability and intent to hold these
securities for a period of time sufficient to allow for recovery of their impairment.
3. Stock-Based Compensation
In October 2008, the Company issued 30,000 shares of restricted common stock (Restricted
Stock Awards), 15,000 shares to each of two executive officers, pursuant to the Companys 2002
Long Term Incentive Plan, as amended, and a Restricted Stock Award Agreement. Pursuant to the
Restricted Stock Award Agreement, the Restricted Stock Awards will vest 100% on July 1, 2009.
Expected compensation expense related to the issuance of these Restricted Stock Awards is $0.1
million, which will be amortized through June 2009.
4. Notes Payable
The Company entered into an amendment to its credit agreement effective September 10, 2008.
The amended terms (i) accelerated the maturity date of the term loan facility to October 31, 2008,
(ii) eliminated the revolving credit facility and (iii) removed all financial covenants for the
remaining term. The unpaid balance under the Companys credit agreement was paid in full on October
31, 2008. The Company entered into an interest rate swap agreement in January 2006 that fixed the
interest rate on the term loan facility at 6.63%. Effective September 30, 2008, the Company
cancelled the interest rate swap agreement for $0.1 million.
8
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
5. Net Income (Loss) Per Share
The following table sets forth the computation of basic and diluted net income (loss) per
share (in thousands, except per share data).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Net income (loss) |
|
$ |
(1,003 |
) |
|
$ |
(11,731 |
) |
|
$ |
838 |
|
|
$ |
(9,839 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common basic shares |
|
|
47,658 |
|
|
|
47,618 |
|
|
|
47,656 |
|
|
|
47,617 |
|
Effect of dilutive securities |
|
|
|
|
|
|
|
|
|
|
1,432 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common dilutive shares |
|
|
47,658 |
|
|
|
47,618 |
|
|
|
49,088 |
|
|
|
47,617 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net income (loss) per share |
|
$ |
(0.02 |
) |
|
$ |
(0.25 |
) |
|
$ |
0.02 |
|
|
$ |
(0.21 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended December 31, 2008, options to purchase 5.3 million shares of common
stock, a dilutive effect of 0.8 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 three months ended December 31, 2007, options to purchase 4.7 million shares
of common stock, a dilutive effect of 1.3 million shares, were not included in the computation of
diluted loss per share as their inclusion would have been anti-dilutive.
For the six months ended December 31, 2008, options to purchase 5.3 million shares of common
stock, a dilutive effect of 1.0 million shares, and 0.4 million shares of restricted common stock
were included in the computation of diluted income per share. For the six months ended December 31,
2007, options to purchase 4.7 million shares of common stock, a dilutive effect of 1.7 million
shares, were not included in the computation of diluted loss per share as their inclusion would
have been anti-dilutive.
6. Income Taxes
Included in net deferred tax assets within the accompanying consolidated balance sheets as of
December 31, 2008 and June 30, 2008 are valuation allowances of $30.9 million and $30.1 million,
respectively. The Company continues to assess the realization of its deferred tax assets, including
net operating loss (NOL) carryforwards, which comprise the majority of its gross deferred tax
assets. As of June 30, 2008, the deferred tax asset related to the federal NOL carryforwards that
expire in fiscal year 2009 were fully allowed for through the valuation allowance. The Companys
assessment of the realization of its remaining deferred tax assets at December 31, 2008 resulted in
an increase from June 30, 2008 of $0.8 million to the valuation allowance related to the changes in
unrealized losses and other-than-temporary impairment on investment securities.
A valuation allowance is recognized if, based on the weight of available evidence, it is more
likely than not that some portion, or all, of the deferred tax assets will not be realized. The
Company considers positive and negative evidence to determine the sufficiency of its valuation
allowance, including its historical and forecasted future taxable income. Management expects the
Company to generate taxable income sufficient to realize its remaining net deferred tax assets.
However, the Companys evaluation includes multiple assumptions and estimates that may change
over time. Current market conditions could create greater volatility in operating results.
Management is closely monitoring trends in premiums written, premiums earned, policies in force,
underwriting profits and their impact on forecasted operating results. As of December 31, 2008, the
Company was in a cumulative book taxable income position over a twelve-quarter period. However,
forecasted operating results for fiscal 2009 project cumulative book taxable losses over a
twelve-quarter period ending June 30, 2009. For purposes of assessing the realization of its
remaining deferred tax assets at December 31, 2008, this projected cumulative book taxable loss is
considered negative evidence. However, excluding the litigation settlement charges of $12.7
million, the Company generated book income in each of its past two fiscal years and projects book
income for fiscal 2009. The Company also considered positive evidence such as its expectation that
it will generate sufficient taxable income in the near term to
realize its deferred tax assets primarily through its continued efforts to improve
underwriting profitability.
9
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
If the Companys actual results deviate from its current projections, the Company may be
required to record an additional valuation allowance that could have a materially adverse impact on
its results of operations and financial position. Based on managements review and weighing of both
positive and negative evidence, no additional valuation allowance was recorded on the remaining
deferred tax assets at December 31, 2008.
7. Goodwill and Identifiable Intangible Assets
After considering recent trends in the Companys results, including premiums written, premiums
earned and policies in force, the estimated future discounted cash flows associated with its
goodwill and identifiable intangible 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 December 31, 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.
8. 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 evaluates each legal action in accordance with 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 has been involved in litigation in Alabama and
Georgia in which allegations have been 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. 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 alleged
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 sought unspecified damages
and attorneys fees. The Company denied all allegations of wrongdoing and vigorously defended
itself against these actions.
To avoid the uncertainty, risks and costs of further litigation, the Company entered into a
Stipulation and Agreement of Settlement effective September 10, 2008, which was approved by the
court in November 2008, with the plaintiffs in the Georgia litigation. Pursuant to the terms of the
settlement, each class member who was insured by the Company on both September 1, 2008 and December
31, 2008 is entitled to a premium credit upon renewal of his or her current automobile insurance
policy with the Company equal to 100% of the amounts he or she paid for
automobile club memberships and deferred billing fees with such credit to be prorated over a
twelve month renewal term and applied first to uninsured motorist coverage, if purchased, then to
liability coverage, unless he or she
10
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
elected, 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 on September 1, 2008 but not on December 31, 2008 is entitled to a premium credit
upon purchase of his or her next new automobile insurance policy from the Company no later than
December 31, 2009 equal to 100% of the amounts he or she paid for automobile club memberships and
deferred billing fees with such credit to be prorated over a twelve month renewal term and applied
first to uninsured motorist coverage, if purchased, then to liability coverage unless he or she
elected, 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 has been issued 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 elected, 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 his
or her next new automobile insurance policy purchased from the Company for up to twelve months
applied first to uninsured motorist coverage, if purchased, then to liability 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, 2011, 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. Benefits to class members commenced January 1, 2009.
The Company also agreed to strengthen its disclosures to customers of all relevant fees, charges
and coverages and to pay $3.8 million in fees and expenses for the attorneys for the Georgia
plaintiffs and all costs associated with the administration of the settlement.
On
December 5, 2008, the Company entered into a Stipulation and
Agreement of Settlement, which was approved by the court in February
2009, with
the plaintiffs in the Alabama litigation. Pursuant to the terms of the settlement, the plaintiffs
in the Alabama litigation will be divided into three classes: (i) persons insured in Alabama by the
Company who purchased an automobile club membership from the Company, and who own a liability
insurance policy issued by the Company that is in force on both December 15, 2008 and March 6, 2009
(Active Current Policyholders), (ii) persons insured in Alabama by the Company who purchased an
automobile club membership from the Company, and who owned a liability insurance policy issued by
the Company that was in force on December 15, 2008, but is not in force on March 6, 2009 (Inactive
Current Policyholders), and (iii) persons insured in Alabama by the Company who purchased an
automobile club membership from the Company, and who did not own a liability insurance policy
issued by the Company that was in force on December 15, 2008 (Former Policyholders).
Pursuant to the terms of the Alabama settlement, each Active Current Policyholder will, upon
renewal of his or her current automobile insurance policy with the Company, receive a premium
credit equal to 100% of the amounts he or she paid for automobile club memberships against the
premium for a renewal automobile insurance policy, unless he or she elects, prior to March 6, 2009,
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
such Active Current Policyholder on or before February 28, 2010 as a result of the disablement of
his or her vehicle because of an accident. Each Inactive Current Policyholder will receive a
premium credit equal to 100% of the amounts he or she paid for automobile club memberships against
the premium for his or her next automobile insurance policy purchased from the Company on or before
August 30, 2010, unless he or she elects, prior to March 6, 2009, 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 such Inactive Current Policyholder on
or before February 28, 2010 as a result of the disablement of his or her vehicle because of an
accident. Each Former Policyholder 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
such Former Policyholder on or before February 28, 2010 as a result of the disablement of his or
her vehicle because of an accident, unless he or she elects, prior to March 6, 2009, to receive
instead of the reimbursement certificate a premium credit equal to 100% of the amounts he or she
paid for automobile club memberships against the premium
for his or her next automobile insurance policy purchased from the Company on or before August
30, 2010. Any premium credits issued to class members as described above will be prorated over a
twelve-month term not to
11
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
extend beyond August 30, 2011, 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. Any such credits will be applied first to uninsured motorist coverage, if purchased, then to
liability coverage. Benefits to class members will
commence on March 7, 2009. The Company has also agreed to strengthen its disclosures to customers
of all relevant fees, charges and coverages and to pay $2.3 million in fees and expenses for the
attorneys for the Alabama plaintiffs and all costs associated with the administration of the
settlement.
At this time, the Company is unable to estimate the costs associated with the Georgia and
Alabama litigation settlements related to utilization of reimbursement certificates. However,
sufficient information related to the premium credits now exists to allow the Company to reasonably
estimate and accrue the total costs associated with the utilization of available premium credits
associated with the Georgia litigation through June 2011 and the Alabama litigation through August
2011. The final costs of the settlements depend on, among other factors, the rate of redemption and
forfeiture of the premium credits and reimbursement certificates and, with regards to the Alabama
litigation, whether class members elect to receive premium credits or reimbursement certificates
pursuant to the terms of the settlement.
Regarding the Georgia litigation, as of December 31, 2008, the plaintiff class included
approximately 176,500 members who were insured by the Company on or prior to September 1, 2008 that
received a reimbursement certificate, approximately 10,000 members who were insured by the Company
that received the premium credits and approximately 3,900 members who were not actively insured by
the Company that received the premium credits. Based upon its analysis of the premium credits
available to these members, the Company has accrued approximately $4.7 million as of December 31,
2008 associated with the estimated utilization of available premium credits for Georgia plaintiffs
who were insured by the Company on December 31, 2008 and received the premium credits. The Company
is not able to reasonably estimate and, therefore, did not accrue any estimated costs for Georgia
plaintiffs that were not actively insured by the Company on December 31, 2008 that received the
premium credits as a result of the uncertainties associated with those members purchasing a new
automobile insurance policy from the Company and utilizing the approximately $1.2 million of
premium credits available to them.
Regarding the Alabama litigation, as of December 31, 2008, the Company estimates that the
plaintiff class will include approximately 2,300 members who will be insured by the Company on
March 6, 2009 that will be eligible to receive the premium credits. Based upon its analysis of the
premium credits available to these members, the Company has accrued approximately $0.5 million as
of December 31, 2008 associated with the estimated utilization of available premium credits it
believes will be issued to those plaintiffs in the Alabama litigation who will receive the premium
credits. The Company is not able to reasonably estimate and, therefore, did not accrue any
estimated costs for those remaining plaintiffs in the Alabama litigation, approximately 58,300
members, who are not expected to be insured by the Company on March 6, 2009.
The litigation settlement costs are set forth separately in the consolidated statements of
operations. During the three and six months ended December 31, 2008, the Company paid $3.8 million
in fees and expenses to the attorneys for the Georgia plaintiffs and $0.1 million and $0.2 million,
respectively, in costs associated with the administration of the settlements, both of which were
previously accrued at June 30, 2008. The Company also reduced its estimated accrual for plaintiffs
attorneys fees and expenses in Alabama from $2.5 million to $2.3 million as stipulated in the
litigation settlement agreement. The Company anticipates that its payment of $2.3 million in fees
and expenses to the attorneys for the Alabama plaintiffs and $0.2 million in remaining estimated
costs associated with the administration of both of the settlements, which were previously accrued
at June 30, 2008, will occur during the three months ended March 31, 2009. As previously noted, the
Company has accrued, as of December 31, 2008, those currently estimable costs associated with the
utilization of available premium credits through August 2011 of $5.2 million. Management intends to
adjust the liability as necessary during future periods to account for the impact of actual
redemption and forfeiture of the premium credits and reimbursement certificates.
12
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
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 that it may receive from its insurance carriers. As a result, the Company has
not accrued any amount at December 31, 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 determined to be
probable.
The litigation costs are classified within the litigation settlement line item in the
Companys consolidated statements of operations for the three and six months ended December 31,
2008. The remaining litigation settlement accrual of $7.9 million as of December 31, 2008 is
classified within other liabilities on the Companys consolidated balance sheet.
9. Segment Information
The Company operates in two business segments: (i) insurance operations and (ii) real estate
and corporate. The Companys primary focus is the selling, servicing and underwriting of
non-standard personal automobile insurance. The real estate and corporate segment consists of
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).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance |
|
$ |
65,046 |
|
|
$ |
82,299 |
|
|
$ |
136,603 |
|
|
$ |
169,389 |
|
Real estate and corporate |
|
|
34 |
|
|
|
42 |
|
|
|
66 |
|
|
|
110 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated total |
|
$ |
65,080 |
|
|
$ |
82,341 |
|
|
$ |
136,669 |
|
|
$ |
169,499 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance |
|
$ |
438 |
|
|
$ |
2,390 |
|
|
$ |
6,200 |
|
|
$ |
7,451 |
|
Real estate and corporate |
|
|
(1,826 |
) |
|
|
(2,357 |
) |
|
|
(3,835 |
) |
|
|
(4,455 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated total |
|
$ |
(1,388 |
) |
|
$ |
33 |
|
|
$ |
2,365 |
|
|
$ |
2,996 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
June 30, |
|
|
|
2008 |
|
|
2008 |
|
Total assets: |
|
|
|
|
|
|
|
|
Insurance |
|
$ |
426,832 |
|
|
$ |
458,121 |
|
Real estate and corporate |
|
|
14,579 |
|
|
|
15,109 |
|
|
|
|
|
|
|
|
Consolidated total |
|
$ |
441,411 |
|
|
$ |
473,230 |
|
|
|
|
|
|
|
|
10. Recent Accounting Pronouncements
Effective July 1, 2008, the Company adopted the provisions of FASB Statement No. 157, Fair
Value Measurements (SFAS 157), which defines fair value, establishes a framework for measuring
fair value 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. The
adoption of SFAS 157 did not have a material impact on the results of operations or financial
position of the Company. In October 2008, the FASB issued FASB Staff Position No. FAS 157-3,
Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active (FSP
157-3). FSP 157-3 clarifies the application of SFAS 157 in cases where a market is not active. The
Company has considered the guidance provided by FSP 157-3 in its determination of estimated fair values as of
December 31, 2008, and the impact was not material.
13
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Effective July 1, 2008, the Company adopted the provisions of FASB 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 objective is to improve financial reporting by providing
entities with the opportunity to mitigate volatility in reported earnings caused by measuring
related assets and liabilities differently without having to apply complex hedge accounting
provisions. This statement is expected to expand the use of fair value measurement, which is
consistent with the FASBs long-term measurement objectives for accounting for financial
instruments. 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. The Company did not elect the fair
value option and, as a result, the adoption of SFAS 159 did not have a material impact on the
Companys results of operations or financial position.
14
FIRST ACCEPTANCE CORPORATION 10-Q
Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
Managements Discussion and Analysis of Financial Condition and Results of Operations contains
forward-looking statements which involve risks and uncertainties. Our actual results may differ
significantly from the results discussed in the forward-looking statements. Factors that might
cause such a difference include those discussed in Item 1A. Risk Factors in our Annual Report on
Form 10-K for the fiscal year ended June 30, 2008. The following discussion should be read in
conjunction with our consolidated financial statements included with this report and our
consolidated financial statements and related Managements Discussion and Analysis of Financial
Condition and Results of Operations for the fiscal year ended June 30, 2008 included in our Annual
Report on Form 10-K.
General
As of December 31, 2008, we leased and operated 424 retail locations (or stores), staffed by
employee-agents. Our employee-agents primarily sell insurance products either underwritten or
serviced by us. As of December 31, 2008, we wrote non-standard personal automobile insurance in 12
states and were licensed in 13 additional states. See the discussion in Item 1. Business -
General in our Annual Report on Form 10-K for the fiscal year ended June 30, 2008 for additional
information with respect to our business.
The following table shows the change in 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
December 31, |
|
December 31, |
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
Retail locations
beginning of period |
|
|
429 |
|
|
|
458 |
|
|
|
431 |
|
|
|
462 |
|
Opened |
|
|
|
|
|
|
1 |
|
|
|
1 |
|
|
|
2 |
|
Closed |
|
|
(5 |
) |
|
|
(19 |
) |
|
|
(8 |
) |
|
|
(24 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail locations
end of period |
|
|
424 |
|
|
|
440 |
|
|
|
424 |
|
|
|
440 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following tables show the number of our retail locations by state.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
September 30, |
|
June 30, |
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
|
2008 |
|
2007 |
Alabama |
|
|
25 |
|
|
|
25 |
|
|
|
25 |
|
|
|
25 |
|
|
|
25 |
|
|
|
25 |
|
Florida |
|
|
39 |
|
|
|
40 |
|
|
|
39 |
|
|
|
41 |
|
|
|
40 |
|
|
|
41 |
|
Georgia |
|
|
61 |
|
|
|
61 |
|
|
|
61 |
|
|
|
62 |
|
|
|
61 |
|
|
|
62 |
|
Illinois |
|
|
81 |
|
|
|
80 |
|
|
|
81 |
|
|
|
81 |
|
|
|
80 |
|
|
|
81 |
|
Indiana |
|
|
18 |
|
|
|
22 |
|
|
|
19 |
|
|
|
23 |
|
|
|
19 |
|
|
|
24 |
|
Mississippi |
|
|
8 |
|
|
|
8 |
|
|
|
8 |
|
|
|
8 |
|
|
|
8 |
|
|
|
8 |
|
Missouri |
|
|
12 |
|
|
|
16 |
|
|
|
13 |
|
|
|
16 |
|
|
|
14 |
|
|
|
15 |
|
Ohio |
|
|
28 |
|
|
|
29 |
|
|
|
29 |
|
|
|
30 |
|
|
|
29 |
|
|
|
30 |
|
Pennsylvania |
|
|
18 |
|
|
|
19 |
|
|
|
18 |
|
|
|
24 |
|
|
|
19 |
|
|
|
25 |
|
South Carolina |
|
|
27 |
|
|
|
28 |
|
|
|
28 |
|
|
|
28 |
|
|
|
28 |
|
|
|
28 |
|
Tennessee |
|
|
20 |
|
|
|
20 |
|
|
|
20 |
|
|
|
20 |
|
|
|
20 |
|
|
|
20 |
|
Texas |
|
|
87 |
|
|
|
92 |
|
|
|
88 |
|
|
|
100 |
|
|
|
88 |
|
|
|
103 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
424 |
|
|
|
440 |
|
|
|
429 |
|
|
|
458 |
|
|
|
431 |
|
|
|
462 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
FIRST ACCEPTANCE CORPORATION 10-Q
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. 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; |
|
|
|
|
commission and fee income, including installment billing fees on policies
written, agency fees and commissions and fees for other ancillary products and
services; and |
|
|
|
|
investment income earned on the invested assets of the insurance company
subsidiaries. |
The following table presents premiums earned by state (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Premiums earned: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Georgia |
|
$ |
12,344 |
|
|
$ |
15,135 |
|
|
$ |
25,772 |
|
|
$ |
31,238 |
|
Illinois |
|
|
6,826 |
|
|
|
7,931 |
|
|
|
14,188 |
|
|
|
16,100 |
|
Florida |
|
|
6,196 |
|
|
|
10,820 |
|
|
|
13,812 |
|
|
|
23,181 |
|
Texas |
|
|
6,133 |
|
|
|
8,217 |
|
|
|
13,134 |
|
|
|
16,743 |
|
Alabama |
|
|
5,888 |
|
|
|
7,034 |
|
|
|
12,460 |
|
|
|
14,538 |
|
South Carolina |
|
|
4,491 |
|
|
|
5,650 |
|
|
|
9,941 |
|
|
|
11,290 |
|
Tennessee |
|
|
3,800 |
|
|
|
5,168 |
|
|
|
8,215 |
|
|
|
10,690 |
|
Ohio |
|
|
3,182 |
|
|
|
3,814 |
|
|
|
6,633 |
|
|
|
7,814 |
|
Pennsylvania |
|
|
2,786 |
|
|
|
2,360 |
|
|
|
5,572 |
|
|
|
4,661 |
|
Indiana |
|
|
1,298 |
|
|
|
1,806 |
|
|
|
2,861 |
|
|
|
3,774 |
|
Missouri |
|
|
956 |
|
|
|
1,382 |
|
|
|
2,085 |
|
|
|
2,852 |
|
Mississippi |
|
|
923 |
|
|
|
1,167 |
|
|
|
1,988 |
|
|
|
2,406 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total premiums earned |
|
$ |
54,823 |
|
|
$ |
70,484 |
|
|
$ |
116,661 |
|
|
$ |
145,287 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
December 31, |
|
December 31, |
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
Policies in force
beginning of period |
|
|
170,555 |
|
|
|
212,511 |
|
|
|
194,079 |
|
|
|
226,974 |
|
Net decrease
during period |
|
|
(10,998 |
) |
|
|
(9,503 |
) |
|
|
(34,522 |
) |
|
|
(23,966 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policies in force
end of period |
|
|
159,557 |
|
|
|
203,008 |
|
|
|
159,557 |
|
|
|
203,008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
16
FIRST ACCEPTANCE CORPORATION 10-Q
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.
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
December 31, |
|
December 31, |
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
Loss and loss adjustment expense |
|
|
68.5 |
% |
|
|
77.1 |
% |
|
|
69.7 |
% |
|
|
77.1 |
% |
Expense |
|
|
25.2 |
% |
|
|
23.0 |
% |
|
|
23.2 |
% |
|
|
21.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined |
|
|
93.7 |
% |
|
|
100.1 |
% |
|
|
92.9 |
% |
|
|
98.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
We use the services of an independent investment manager to manage our fixed maturities
investment portfolio. The investment manager conducts, in accordance with our 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,
restrictions on sales by the investment manager and guidelines as to asset allocation, duration and
credit quality. The portfolio is compared with a customized 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 our investment guidelines.
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 (CMOs). 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 $190.0 million at December 31, 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. At December 31, 2008, we had
gross unrealized gains of $5.7 million and gross unrealized losses of $7.9 million.
At December 31, 2008, 99.9% of our investment portfolio was rated investment grade (a
credit rating of AAA to BBB) by Standard & Poors Corporation, a nationally recognized rating
agency. The average credit rating of our fixed maturity portfolio was AA+ at December 31, 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 CMOs were $64.3 million at December 31, 2008 and represented 34% of our fixed
maturity portfolio. CMOs are subject to significant extension risk in periods of rising interest
rates and economic decline as mortgages may be repaid slower than expected. As of December 31,
2008, 99.7% of our CMOs were considered investment grade by all of the nationally recognized rating
agencies. In addition, 96% of the CMOs were rated AAA and 83% of our CMOs were backed by agencies
of the United States government. Of the non-agency backed CMOs, 76% were rated AAA.
17
FIRST ACCEPTANCE CORPORATION 10-Q
The following table summarizes our fixed maturity securities at December 31, 2008 (in
thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
U.S. government and agencies |
|
$ |
30,110 |
|
|
$ |
2,189 |
|
|
$ |
|
|
|
$ |
32,299 |
|
State |
|
|
8,262 |
|
|
|
260 |
|
|
|
(7 |
) |
|
|
8,515 |
|
Political subdivisions |
|
|
3,357 |
|
|
|
37 |
|
|
|
(37 |
) |
|
|
3,357 |
|
Revenue and assessment |
|
|
29,006 |
|
|
|
618 |
|
|
|
(251 |
) |
|
|
29,373 |
|
Corporate bonds |
|
|
53,712 |
|
|
|
745 |
|
|
|
(2,343 |
) |
|
|
52,114 |
|
Collateralized mortgage obligations |
|
|
67,656 |
|
|
|
1,892 |
|
|
|
(5,246 |
) |
|
|
64,302 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
192,103 |
|
|
$ |
5,741 |
|
|
$ |
(7,884 |
) |
|
$ |
189,960 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth the scheduled maturities of our fixed maturity securities at
December 31, 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 |
|
|
|
|
|
|
Securities |
|
|
Securities |
|
|
with No |
|
|
All |
|
|
|
with |
|
|
with |
|
|
Unrealized |
|
|
Fixed |
|
|
|
Unrealized |
|
|
Unrealized |
|
|
Gains or |
|
|
Maturity |
|
|
|
Gains |
|
|
Losses |
|
|
Losses |
|
|
Securities |
|
One year or less |
|
$ |
5,367 |
|
|
$ |
1,432 |
|
|
$ |
2,360 |
|
|
$ |
9,159 |
|
After one through five years |
|
|
44,533 |
|
|
|
17,708 |
|
|
|
|
|
|
|
62,241 |
|
After five through ten years |
|
|
27,191 |
|
|
|
15,059 |
|
|
|
1,525 |
|
|
|
43,775 |
|
After ten years |
|
|
2,902 |
|
|
|
7,581 |
|
|
|
|
|
|
|
10,483 |
|
No single maturity date |
|
|
53,383 |
|
|
|
10,919 |
|
|
|
|
|
|
|
64,302 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
133,376 |
|
|
$ |
52,699 |
|
|
$ |
3,885 |
|
|
$ |
189,960 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three and Six Months Ended December 31, 2008
Compared with the Three and Six Months Ended
December 31, 2007
Consolidated Results
Revenues for the three months ended December 31, 2008 decreased 21% to $65.1 million from
$82.3 million in the same period last year. Net loss for the three months ended December 31, 2008
was $1.0 million, compared with a net loss of $11.7 million for the three months ended December 31,
2007. Basic and diluted net loss per share was $0.02 for the three months ended December 31, 2008
compared with $0.25 for the three months ended December 31, 2007.
Revenues for the six months ended December 31, 2008 decreased 19% to $136.7 million from
$169.5 million in the same period last year. Net income for the six months ended December 31, 2008
was $0.8 million, compared with a net loss of $9.8 million for the six months ended December 31,
2007. Basic and diluted net income per share was $0.02 for the six months ended December 31, 2008
compared with net loss per share of $0.21 for the six months ended December 31, 2007.
Insurance Operations
Revenues from insurance operations were $65.0 million for the three months ended December 31,
2008, compared with $82.3 million for the three months ended December 31, 2007. For the six months
ended December 31, 2008, revenues from insurance operations were $136.6 million, compared with
$169.4 million for the six months ended December 31, 2007.
Income before income taxes from insurance operations for the three months ended December 31,
2008 was $0.4 million, compared with $2.4 million for the three months ended December 31, 2007.
Income before income taxes from insurance operations for the six months ended December 31, 2008 was
$6.2 million, compared with $7.5 million for the six months ended December 31, 2007.
18
FIRST ACCEPTANCE CORPORATION 10-Q
Premiums Earned
Premiums earned decreased by $15.7 million, or 22%, to $54.8 million for the three months
ended December 31, 2008 from $70.5 million for the three months ended December 31, 2007. For the
six months ended December 31, 2008, premiums earned decreased by $28.6 million, or 20%, to $116.7
million from $145.3 million for the six months ended December 31, 2007. The decreases in premiums
earned were primarily due to declines in policies written resulting from the weak economic
conditions, rate increases taken in a number of states to improve underwriting profitability, and
the closure of 53 poor performing stores since January 2007.
Approximately 69% of the $15.7 million decline in premiums earned for the three months ended
December 31, 2008 and approximately 73% of the $28.6 million decline in premiums earned for the six
months ended December 31, 2008 was in our Florida, Georgia, Texas and Tennessee markets. These
states collectively accounted for 52% of premiums earned during both the three and six months ended
December 31, 2008, down from 56% for the same periods in the prior year. Our premiums earned in
these states were adversely affected by the weak economic conditions, as well as 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.
The total number of insured policies in force at December 31, 2008 decreased 21% over the same
date in 2007 from 203,008 to 159,557, primarily due to the factors noted above. At December 31,
2008, we operated 424 stores, compared with 440 stores at December 31, 2007.
Commission and Fee Income
Commission and fee income decreased 15% to $7.7 million for the three months ended December
31, 2008 from $9.0 million for the three months ended December 31, 2007. The decrease in fee income
was a result of the decrease in policies in force, partially offset by higher fee income in
Florida.
For the six months ended December 31, 2008, commission and fee income decreased by $2.4
million, or 13%, to $15.9 million from $18.3 million for the six months ended December 31, 2007.
The decrease in fee income was the result of factors discussed above for the three months ended
December 31, 2008.
Investment Income
Investment income decreased during the three and six months ended December 31, 2008 primarily
as a result of the decrease in the total amount of invested assets and the significant decline in
yields on cash equivalents. At December 31, 2008 and 2007, the tax-equivalent book yields for our
fixed maturities portfolio were 5.0% and 5.2%, respectively, with effective durations of 3.56 and
3.46 years, respectively.
Other
Included in other revenues during the six months ended December 31, 2008 is $1.3 million of
charges related to other-than-temporary impairment (OTTI) on investments comprised of $0.6
million for certain non-agency backed CMOs and $0.7 million for two corporate bonds. Managements
assessment of whether an impairment is other-than-temporary includes an evaluation of factors such
as the credit quality of the investment, the duration of the impairment, issuer-specific
fundamentals, our ability and intent to hold the investment until recovery or maturity and overall
economic conditions. If it is determined that the value of any investment is other-than-temporarily
impaired, the impairment would be charged against earnings and a new cost basis for the security
would be established. For the three months ended September 30, 2008, as a result of the
deterioration in liquidity in the credit markets, yields on certain non-agency mortgage-backed
securities declined below projected book yield requiring an impairment to those CMOs totaling $0.6
million. Effective for interim and annual reporting periods ending after December 15, 2008, the
Financial Accounting Standards Board (FASB) issued Staff Position EITF 99-20-1, Amendments to the
Impairment Guidance of EITF Issue No. 99-20 (the FSP), which eliminated the previous requirement
that a holders best estimate of cash flows be based upon those that a market participant would
use. Instead, the FSP requires that an other-than-temporary impairment be recognized as a realized
loss through earnings when it is probable there has been an adverse change in the holders
estimated cash flows from the cash flows previously projected, which is consistent with the
impairment model in FASB Statement No. 115, Accounting for Certain Investments in Debt and Equity
Securities. Retroactive application to a prior interim or annual reporting
period is not permitted. Based upon our best estimate of cash flows on eligible securities,
there has been no adverse change in such cash flows, and therefore, no further impairment was
recorded at December 31, 2008.
19
FIRST ACCEPTANCE CORPORATION 10-Q
At December 31, 2008, our portfolio included non-agency backed CMOs with an original cost of
$18.3 million and a current fair value of $11.0 million. Such fair value was obtained from either
an independent third-party valuation service provider or non-binding broker quotes. For the year
ended June 30, 2008 and the three months ended September 30, 2008, we recognized $1.4 million and
$0.5 million, respectively, of OTTI in accordance with the guidance of EITF Issue No. 99-20,
Recognition of Interest Income and Impairment of Purchased Beneficial Interests and Beneficial
Interests that Continue to Be Held by a Transferor in Securitized Financial Assets. Our review of
these securities included the analysis of available information such as collateral quality,
anticipated cash flows, credit enhancements, default rates, loss severities, the securities
relative position within their respective capital structures, and credit ratings from statistical
rating agencies. Based on our review, we believe that the unrealized losses on these securities are
not necessarily predictive of the ultimate performance of the underlying collateral. In the absence
of further deterioration in the collateral relative to its positions in these securities
respective capital structures, which could be other-than-temporary, we believe the unrealized
losses should reverse over the remaining lives of the securities. We have both the ability and
intention to hold these securities to maturity.
We also recognized OTTI charges of $0.7 million related to two corporate bonds due to the
extent and duration of the declines in their fair values and issuer-specific fundamentals. We
believe that the remaining securities having unrealized losses at December 31, 2008 were not
other-than-temporarily impaired and that we have the ability and intent to hold these securities
for a period of time sufficient to allow for recovery of their impairment.
Losses and Loss Adjustment Expenses
The loss and loss adjustment expense ratio was 68.5% for the three months ended December 31,
2008, compared with 77.1% for the three months ended December 31, 2007. The loss and loss
adjustment expense ratio was 69.7% for the six months ended December 31, 2008, compared with 77.1%
for the six months ended December 31, 2007. For the three and six months ended December 31, 2008,
we experienced unfavorable development of approximately $0.3 million and favorable development of
approximately $1.1 million for losses occurring prior to calendar year 2008. For the three and six
months ended December 31, 2007, we did not experience any significant development for prior
accident periods. In addition, we did not experience any significant weather-related losses during
the three and six months ended December 31, 2008.
Excluding the development noted above, the loss and loss adjustment expense ratio for the
three and six months ended December 31, 2008 was 68.0% and 70.6%, respectively. These improvements
over the same periods last year were primarily the result of a revision in our estimate of the loss
and loss adjustment expense ratio for calendar 2008 which improved from 76.5% at June 30, 2008 to
73.8% at December 31, 2008. We attribute this improvement to the impact of the rate increases taken
in early calendar 2008 in our Florida, Illinois, Indiana, Texas and South Carolina markets and the
continued improvement in our underwriting and claim handling practices.
Operating Expenses
Insurance
operating expenses decreased 15% to $21.5 million for the three months ended
December 31, 2008 from $25.2 million for the three months ended December 31, 2007. For the six
months ended December 31, 2008, insurance operating expenses
decreased 13% to $43.0 million from
$49.2 million for the six months ended December 31, 2007. These decreases were primarily a result
of a reduction in costs (such as agent commissions and premium taxes) that varied along with the
decrease in premiums earned as well as savings realized from the closure of underperforming stores.
The expense ratio increased from 23.0% for the three months ended December 31, 2007 to 25.2%
for the same period in the current fiscal year. The expense ratio increased from 21.3% for the six
months ended December 31, 2007 to 23.2% for the same period in the current fiscal year. These
increases were primarily due to the declines in premiums earned discussed above.
Overall, the combined ratio decreased to 93.7% for the three months ended December 31, 2008
from 100.1% for the three months ended December 31, 2007. For the six months ended December 31,
2008, the combined ratio decreased to 92.9% from 98.4% for the six months ended December 31, 2007.
20
FIRST ACCEPTANCE CORPORATION 10-Q
Litigation Settlement
Litigation settlement costs for the three and six months ended December 31, 2008 of $5.1
million and $5.2 million, respectively, relate to the costs incurred in connection with our
settlement and defense of the litigation in Alabama and Georgia. We have entered into settlement
agreements relating to the Georgia litigation and the Alabama litigation. Pursuant to the
litigation settlements, we will (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 $6.1 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 costs associated with the Georgia and Alabama
litigation settlements related to utilization of reimbursement certificates. However, sufficient
information related to the premium credits now exists to allow us to reasonably estimate and accrue
the total costs associated with the utilization of available premium credits associated with the
Georgia litigation through June 2011 and the Alabama litigation through August 2011. The final
costs of the settlements depend on, among other factors, the rate of redemption and forfeiture of
the premium credits and reimbursement certificates and, with regards to the Alabama litigation,
whether class members elect to receive premium credits or reimbursement certificates pursuant to
the terms of the settlement.
Regarding the Georgia litigation, as of December 31, 2008, the plaintiff class included
approximately 176,500 members who were insured by the Company on or prior to September 1, 2008 that
received a reimbursement certificate, approximately 10,000 members who were insured by the Company
that received the premium credits and approximately 3,900 members who were not actively insured by
the Company that received the premium credits. Based upon our analysis of the premium credits
available to these members, we have accrued approximately $4.7 million as of December 31, 2008
associated with the estimated utilization of available premium credits for Georgia plaintiffs who
were insured by the Company on December 31, 2008 and received the premium credits. We are not able
to reasonably estimate and, therefore, did not accrue any estimated costs for Georgia plaintiffs
that were not actively insured by the Company on December 31, 2008 that received the premium
credits as a result of the uncertainties associated with those members purchasing a new automobile
insurance policy from the Company and utilizing the approximately $1.2 million of premium credits
available to them.
Regarding the Alabama litigation, as of December 31, 2008, we estimate that the plaintiff
class will include approximately 2,300 members who will be insured by the Company on March 6, 2009
that will be eligible to receive the premium credits. Based upon our analysis of the premium
credits available to these members, we have accrued approximately $0.5 million as of December 31,
2008 associated with the estimated utilization of available premium credits we believe will be
issued to those plaintiffs in the Alabama litigation who will receive the premium credits. We are
not able to reasonably estimate and, therefore, did not accrue any estimated costs for those
remaining plaintiffs in the Alabama litigation, approximately 58,300 members, who are not expected
to be insured by the Company on March 6, 2009.
The litigation settlement costs are set forth separately in the consolidated statements of
operations. During the three and six months ended December 31, 2008, we paid $3.8 million in fees
and expenses to the attorneys for the Georgia plaintiffs and $0.1 million and $0.2 million,
respectively, in costs associated with the administration of the settlements, both of which were
previously accrued at June 30, 2008. We also reduced our estimated accrual for plaintiffs
attorneys fees and expenses in Alabama from $2.5 million to $2.3 million as stipulated in the
litigation settlement agreement. We anticipate that our payment of $2.3 million in fees and
expenses to the attorneys for the Alabama plaintiffs and $0.2 million in remaining estimated costs
associated with the administration of both of the settlements, which were previously accrued at
June 30, 2008, will occur during the three months ended March 31, 2009. As previously noted, we
have accrued, as of December 31, 2008, those currently estimable costs associated with the
utilization of available premium credits through August 2011 of $5.2 million. Management intends to
adjust the initial estimated accrual as necessary during future periods to account for the impact
of actual rate of redemption and forfeiture of the premium credits and reimbursement certificates.
21
FIRST ACCEPTANCE CORPORATION 10-Q
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 December 31, 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 determined to be probable. For additional information with
respect to the litigation settlements, see Part II Item 1. Legal Proceedings.
Real Estate and Corporate
Loss before income taxes for the three months ended December 31, 2008 was $1.8 million,
compared with a loss of $2.4 million for the three months ended December 31, 2007. Loss before
income taxes for the six months ended December 31, 2008 was $3.8 million, compared with a loss of
$4.5 million for the six months ended December 31, 2007.
During the six months ended December 31, 2008, we incurred $0.1 million of interest expense in
connection with credit facility borrowings compared with $0.2 million and $0.6 million,
respectively, for the three and six months ended December 31, 2007. Such borrowings were repaid in
full on October 31, 2008. In addition, we incurred $1.0 million and $2.0 million, respectively, of
interest expense during both the three and six months ended December 31, 2008 and December 31, 2007
related to the debentures issued in June 2007.
Liquidity and Capital Resources
Our primary sources of funds are premiums, fees and investment income from our insurance
company subsidiaries and commissions and fee income from our non-insurance company subsidiaries
that sell ancillary products to our insureds. Our primary uses of funds are the payment of claims
and operating expenses. Net cash used in operating activities for the six months ended December 31,
2008 was $6.2 million, compared with net cash provided by operating activities of $6.5 million in
the same period in the prior fiscal year. This decrease was primarily the result of a decrease in
cash collected from premiums written and payments made as a part of our litigation settlements. Net
cash used in investing activities for the six months ended December 31, 2008 was $4.9 million,
compared with net cash provided by investing activities of $13.8 million for the same period in the
prior fiscal year. Both periods reflect net additions to our investment portfolio, while the six
months ended December 31, 2007 includes the settlement of a $20.0 million receivable for securities
in July 2007. Financing activities for the six months ended December 31, 2008 and 2007 included
principal prepayments made on our former term loan and revolving credit facility.
Our holding company requires cash for general corporate overhead expenses and for debt service
related to our debentures payable. The holding companys primary sources of unrestricted cash to
meet its obligations are dividends from our insurance company subsidiaries and from the sale of
ancillary products to our insureds. The holding company will also receive cash from operating
activities as a result of investment income. In addition, as a result of our net operating loss
(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
arrangement. At December 31, 2008, we had $2.5 million available in unrestricted cash and
investments outside of the insurance company subsidiaries. These funds and the additional
unrestricted cash from the sources as noted above will be used to pay the future requirements
outside of the insurance company subsidiaries.
After the October 2008 termination of our credit facility, the debt service requirements of
the holding company were limited to the debentures payable. Such debentures are interest-only and
mature in full in July 2037. Interest is fixed annually through July 2012 at $3.8 million. The
debentures pay a fixed rate of 9.277% until July 30, 2012, after which time the rate becomes
variable (LIBOR plus 375 basis points). The Company has held recent discussions with other
financial institutions regarding a new revolving credit facility. However, no assurances can be
made that financing will be available or, if available, will be available on satisfactory terms. We
believe that the lack of a current facility does not impair our ability to meet our current
expected liquidity needs.
The remaining amounts due under our Georgia litigation settlement, which includes $0.1 million
in estimated costs associated with the administration of the settlement, $4.7 million in estimated
costs related to the utilization of available premium credits, and any amounts to be paid with
regards to reimbursement certificates, are the obligation of one of our insurance company
subsidiaries. The Alabama litigation settlement, which includes $2.3 million in plaintiffs
attorneys fees and expenses, $0.1 million in estimated costs associated with the administration of
the settlement, $0.5 million in estimated costs related to the utilization of available premium
credits, and any
amounts to be paid with regards to reimbursement certificates, are the obligation of the
holding company as the insurance company subsidiaries are not a party to the settlement.
22
FIRST ACCEPTANCE CORPORATION 10-Q
State insurance laws limit the amount of dividends that may be paid from our insurance company
subsidiaries. Based on our December 31, 2008 statutory capital and surplus and our anticipated
operating results in calendar 2009, we expect that our ordinary dividend capacity for calendar 2009
will be approximately $11.0 million. During October 2008, the insurance company subsidiaries paid
ordinary dividends to the holding company of $2.5 million, the proceeds of which were used to repay
our former debt facility.
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.
In addition, there are statutory guidelines that suggest that on an annual calendar year basis, 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.
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, for both the holding
company and its insurance company subsidiaries, in both the short-term and the reasonably
foreseeable future. Any future growth strategy may require external financing, and we may from time
to time seek to obtain external financing. We cannot assure 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.
Former Credit Facility
We entered into an amendment to our former credit agreement effective September 10, 2008. The
amended terms (i) accelerated the maturity date of the term loan facility to October 31, 2008, (ii)
eliminated the revolving credit facility and (iii) removed all financial covenants for the
remaining term. The unpaid balance under our credit agreement was paid in full on October 31, 2008.
We entered into an interest rate swap agreement in January 2006 that fixed the interest rate on the
term loan facility at 6.63%. Effective September 30, 2008, we cancelled the interest rate swap
agreement for $0.1 million.
Critical Accounting Policies
There have been no significant changes to our critical accounting policies and estimates
during the six months ended December 31, 2008 compared with those disclosed in Item 7.
Managements Discussion and Analysis of Financial Condition and Results of Operations Critical
Accounting Policies included in our Annual Report on Form 10-K for the fiscal year ended June 30,
2008.
Off-Balance Sheet Arrangements
There have been no new off-balance sheet arrangements since June 30, 2008. Refer to Item 7.
Managements Discussion and Analysis of Financial Condition and Results of Operations
Off-Balance Sheet Arrangements included in our Annual Report on Form 10-K for the fiscal year
ended June 30, 2008.
23
FIRST ACCEPTANCE CORPORATION 10-Q
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:
|
|
|
statements and assumptions relating to future growth, income, income per share, cash
flows 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 Item 1A.
Risk Factors of our Annual Report on Form 10-K for the fiscal year ended June 30, 2008.
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.
Item 3. 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.
24
FIRST ACCEPTANCE CORPORATION 10-Q
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 |
|
$ |
197,036 |
|
|
$ |
193,750 |
|
|
$ |
189,960 |
|
|
$ |
186,171 |
|
|
$ |
182,427 |
|
|
$ |
175,179 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table provides information about our fixed maturity investments at December 31,
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 fiscal years and
collectively for all fiscal 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.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities |
|
|
|
|
|
|
Securities |
|
|
Securities |
|
|
with No |
|
|
|
|
|
|
with |
|
|
with |
|
|
Unrealized |
|
|
|
|
|
|
Unrealized |
|
|
Unrealized |
|
|
Gains or |
|
|
|
|
Year Ended June 30, |
|
Gains |
|
|
Losses |
|
|
Losses |
|
|
Amount |
|
2009 |
|
$ |
7,448 |
|
|
$ |
685 |
|
|
$ |
3,855 |
|
|
$ |
11,988 |
|
2010 |
|
|
5,993 |
|
|
|
3,390 |
|
|
|
|
|
|
|
9,383 |
|
2011 |
|
|
15,786 |
|
|
|
3,584 |
|
|
|
|
|
|
|
19,370 |
|
2012 |
|
|
17,385 |
|
|
|
11,914 |
|
|
|
|
|
|
|
29,299 |
|
2013 |
|
|
14,927 |
|
|
|
5,630 |
|
|
|
|
|
|
|
20,557 |
|
Thereafter |
|
|
67,644 |
|
|
|
37,004 |
|
|
|
|
|
|
|
104,648 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
129,183 |
|
|
$ |
62,207 |
|
|
$ |
3,855 |
|
|
$ |
195,245 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value |
|
$ |
133,376 |
|
|
$ |
52,699 |
|
|
$ |
3,885 |
|
|
$ |
189,960 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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).
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 $2.8 million, or 1.5% of the fixed maturity portfolio. The top five investments make
up 5.9% of the fixed maturity portfolio. The average credit quality rating for our fixed maturity
portfolio was AA+ at December 31, 2008. There are no fixed maturities in the portfolio that have
not produced investment income during the previous twelve months.
25
FIRST ACCEPTANCE CORPORATION 10-Q
The following table shows our fixed maturity portfolio by Standard & Poors Corporation rating
as of December 31, 2008 (in thousands).
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
Amortized |
|
|
Amortized |
|
|
Fair |
|
|
Fair |
|
Comparable Rating |
|
Cost |
|
|
Cost |
|
|
Value |
|
|
Value |
|
AAA |
|
$ |
100,134 |
|
|
|
52.1 |
% |
|
$ |
101,038 |
|
|
|
53.2 |
% |
AA+, AA, AA- |
|
|
33,041 |
|
|
|
17.2 |
% |
|
|
32,064 |
|
|
|
16.9 |
% |
A+, A, A- |
|
|
49,936 |
|
|
|
26.0 |
% |
|
|
48,553 |
|
|
|
25.5 |
% |
BBB+, BBB, BBB- |
|
|
8,652 |
|
|
|
4.5 |
% |
|
|
8,093 |
|
|
|
4.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment grade |
|
|
191,763 |
|
|
|
99.8 |
% |
|
|
189,748 |
|
|
|
99.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BB+, BB, BB- |
|
|
340 |
|
|
|
0.2 |
% |
|
|
212 |
|
|
|
0.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-investment grade |
|
|
340 |
|
|
|
0.2 |
% |
|
|
212 |
|
|
|
0.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
192,103 |
|
|
|
100.0 |
% |
|
$ |
189,960 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
The mortgage industry has 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 declines in fair value. We have only modest exposure to
sub-prime investments and no exposure to Alt-A investments. At December 31, 2008, our fixed
maturity portfolio included three CMOs having sub-prime exposure with a fair value of $1.0 million,
two of which were rated investment grade. All of these securities are paying their principal and
periodic interest timely and the underlying assets of these securities continue to perform in
accordance with their contractual terms.
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 $41.2 million of municipal bonds, of which $29.0 million are
insured. Of the insured bonds, 61.7% are insured with MBIA, 24.3% with AMBAC and 14.0% with XL
Capital. These securities are paying their principal and periodic interest timely.
The following table presents the underlying ratings as of December 31, 2008, represented by
the lower of either Standard and Poors, Fitchs, or Moodys ratings, of the municipal bond
portfolio (in thousands).
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insured |
|
|
Uninsured |
|
|
Total |
|
|
|
|
|
|
% of |
|
|
|
|
|
% of |
|
|
|
|
|
% of |
|
|
|
Fair |
|
|
Fair |
|
|
Fair |
|
|
Fair |
|
|
Fair |
|
|
Fair |
|
|
|
Value |
|
|
Value |
|
|
Value |
|
|
Value |
|
|
Value |
|
|
Value |
|
AAA |
|
$ |
|
|
|
|
0 |
% |
|
$ |
4,758 |
|
|
|
39 |
% |
|
$ |
4,758 |
|
|
|
12 |
% |
AA+, AA, AA- |
|
|
16,914 |
|
|
|
58 |
% |
|
|
6,390 |
|
|
|
52 |
% |
|
|
23,304 |
|
|
|
56 |
% |
A+, A, A- |
|
|
9,712 |
|
|
|
34 |
% |
|
|
1,050 |
|
|
|
9 |
% |
|
|
10,762 |
|
|
|
26 |
% |
BBB+, BBB, BBB- |
|
|
1,449 |
|
|
|
5 |
% |
|
|
|
|
|
|
0 |
% |
|
|
1,449 |
|
|
|
4 |
% |
NR (not rated) |
|
|
972 |
|
|
|
3 |
% |
|
|
|
|
|
|
0 |
% |
|
|
972 |
|
|
|
2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
29,047 |
|
|
|
100 |
% |
|
$ |
12,198 |
|
|
|
100 |
% |
|
$ |
41,245 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26
FIRST ACCEPTANCE CORPORATION 10-Q
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our chief executive officer and chief financial officer have reviewed and evaluated the
effectiveness 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 Exchange Act) as of December 31,
2008. Based on that evaluation, our chief executive officer and chief financial officer have
concluded that our disclosure controls and procedures effectively 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 Securities and Exchange
Commissions rules and forms.
Changes in Internal Control Over Financial Reporting
During 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.
27
FIRST ACCEPTANCE CORPORATION 10-Q
PART II OTHER INFORMATION
Item 1. Legal Proceedings
We have been involved in litigation in Alabama and Georgia in which allegations have been made
with respect to our sales practices, primarily the sale of motor club memberships currently or
formerly sold in those states. The suits generally alleged 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 sought unspecified damages and attorneys fees. We denied all
allegations of wrongdoing and vigorously defended the Company against these actions.
On November 21, 2008, the Superior Court for Fulton County, Georgia approved the settlement of
the case styled Annette Rush v. Village Auto Insurance Company, Inc. (now known as First Acceptance
Insurance Company of Georgia, Inc.) that was pending in the Superior Court of Fulton County,
Georgia. The court approved the terms of the settlement as described in Part II, Item 1. Legal
Proceedings, in our Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2008.
On December 5, 2008, we entered into a Stipulation and Agreement of Settlement with the plaintiffs
in the class action litigation pending against the Company in
Alabama. The Circuit Court of Bullock County, Alabama approved the terms of the Alabama
settlement as set forth in Item 1.01 Entry into a Material Definitive Agreement in our Current
Report on Form 8-K, dated December 11, 2008.
At this time, we are unable to estimate the costs associated with the Georgia and Alabama
litigation settlements related to utilization of reimbursement certificates. However, sufficient
information related to the premium credits now exists to allow us to reasonably estimate and accrue
the total costs associated with the utilization of available premium credits associated with the
Georgia litigation through June 2011 and the Alabama litigation through August 2011. The final
costs of the settlements depend on, among other factors, the rate of redemption and forfeiture of
the premium credits and reimbursement certificates and, with regards to the Alabama litigation,
whether class members elect to receive premium credits or reimbursement certificates pursuant to
the terms of the settlement.
Regarding the Georgia litigation, as of December 31, 2008, the plaintiff class included
approximately 176,500 members who were insured by the Company on or prior to September 1, 2008 that
received a reimbursement certificate, approximately 10,000 members who were insured by the Company
that received the premium credits and approximately 3,900 members who were not actively insured by
the Company that received the premium credits. Based upon our analysis of the premium credits
available to these members, we have accrued approximately $4.7 million as of December 31, 2008
associated with the estimated utilization of available premium credits for Georgia plaintiffs who
were insured by the Company on December 31, 2008 and received the premium credits. We are not able
to reasonably estimate and, therefore, did not accrue any estimated costs for Georgia plaintiffs
that were not actively insured by the Company on December 31, 2008 that received the premium
credits as a result of the uncertainties associated with those members purchasing a new automobile
insurance policy from the Company and utilizing the approximately $1.2 million of premium credits
available to them.
Regarding the Alabama litigation, as of December 31, 2008, we estimate that the plaintiff
class will include approximately 2,300 members who will be insured by the Company on March 6, 2009
that will be eligible to receive the premium credits. Based upon our analysis of the premium
credits available to these members, we have accrued approximately $0.5 million as of December 31,
2008 associated with the estimated utilization of available premium credits we believe will be
issued to those plaintiffs in the Alabama litigation who will receive the premium credits. We are
not able to reasonably estimate and, therefore, did not accrue any estimated costs for those
remaining plaintiffs in the Alabama litigation, approximately 58,300 members, who are not expected
to be insured by the Company on March 6, 2009.
The litigation settlement costs are set forth separately in the consolidated statements of
operations. During the three and six months ended December 31, 2008, we paid $3.8 million in fees
and expenses to the attorneys for the Georgia plaintiffs and $0.1 million and $0.2 million,
respectively, in costs associated with the administration of the settlements, both of which were
previously accrued at June 30, 2008. We also reduced our estimated accrual for plaintiffs
attorneys fees and expenses in Alabama from $2.5 million to $2.3 million as stipulated in the
litigation settlement agreement. We anticipate that our payment of
$2.3 million in fees and expenses to the attorneys for the Alabama plaintiffs and
$0.2 million in remaining estimated costs associated
28
FIRST ACCEPTANCE CORPORATION 10-Q
with the administration of both of the settlements, which were previously accrued at June 30, 2008, will
occur during the three months ended March 31, 2009. As previously noted, we have accrued, as of
December 31, 2008, those currently estimable costs associated with the utilization of available
premium credits through August 2011 of $5.2 million. Management intends to adjust the liability as
necessary during future periods to account for the impact of actual redemption and forfeiture of
the premium credits and reimbursement certificates.
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 that we may receive from our insurance carriers. As a result, we have not accrued any
amount at December 31, 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 determined to be probable.
The litigation costs are classified within the litigation settlement line item in the
Companys consolidated statements of operations for the three and six months ended December 31,
2008. The remaining litigation settlement accrual of $7.9 million as of December 31, 2008 is
classified within other liabilities on our consolidated balance sheet.
Item 4. Submission of Matters to a Vote of Security Holders
At the Companys Annual Meeting of Stockholders held on November 5, 2008 (the Annual
Meeting), the following persons were elected to the Companys Board of Directors for a one-year
term:
|
|
|
|
|
|
|
|
|
|
|
Votes For |
|
|
Votes Withheld |
|
Rhodes R. Bobbitt |
|
|
30,567,791 |
|
|
|
1,783,517 |
|
Harvey B. Cash |
|
|
31,782,768 |
|
|
|
568,540 |
|
Donald J. Edwards |
|
|
30,191,478 |
|
|
|
2,159,830 |
|
Gerald J. Ford |
|
|
32,028,892 |
|
|
|
322,416 |
|
Stephen J. Harrison |
|
|
32,012,792 |
|
|
|
338,516 |
|
Thomas M. Harrison, Jr. |
|
|
32,027,792 |
|
|
|
323,516 |
|
Tom C. Nichols |
|
|
32,030,084 |
|
|
|
321,224 |
|
Lyndon L. Olson, Jr. |
|
|
31,785,806 |
|
|
|
565,502 |
|
William A. Shipp, Jr. |
|
|
31,783,439 |
|
|
|
567,869 |
|
The following proposal was also considered and approved at the Annual Meeting by the vote set
forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Votes Withheld |
|
|
|
|
|
|
|
|
|
|
and Broker |
|
|
Votes For |
|
Votes Against |
|
Non-Votes |
Ratification of the
appointment of
Ernst & Young LLP
as our independent
auditors for the
fiscal year ending
June 30, 2009
|
|
|
32,328,987 |
|
|
|
13,239 |
|
|
|
9,082 |
|
Item 6. Exhibits
The following exhibits are attached to this report:
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. |
29
FIRST ACCEPTANCE CORPORATION 10-Q
SIGNATURES
Pursuant to the requirements 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
|
|
February 9, 2009 |
By: |
/s/ Kevin P. Cohn
|
|
|
Kevin P. Cohn |
|
|
Senior Vice President and Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer) |
|
30