e10vq
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 March 31, 2009
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
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75-1328153 |
(State or other jurisdiction
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(I.R.S. Employer |
of incorporation or organization)
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Identification No.) |
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3322 West End Ave, Suite 1000
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37203 |
Nashville, Tennessee
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(Zip Code) |
(Address of principal executive offices) |
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(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 has submitted electronically and posted on its
corporate web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
Yes o 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 May 11, 2009, there were 48,297,310 shares outstanding of the registrants common stock, par
value $0.01 per share.
FIRST ACCEPTANCE CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2009
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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March 31, |
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June 30, |
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2009 |
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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 $144,659 and $190,040, respectively) |
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$ |
140,590 |
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$ |
189,570 |
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Cash and cash equivalents |
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74,512 |
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38,646 |
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Premiums and fees receivable, net of allowance of $396 and $651 |
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55,053 |
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63,377 |
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Deferred tax asset, net |
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15,206 |
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17,593 |
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Other assets |
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9,300 |
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10,177 |
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Property and equipment, net |
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4,098 |
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4,876 |
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Deferred acquisition costs |
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4,461 |
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4,549 |
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Goodwill |
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138,082 |
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138,082 |
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Identifiable intangible assets |
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6,360 |
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6,360 |
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TOTAL ASSETS |
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$ |
447,662 |
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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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$ |
92,747 |
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$ |
101,407 |
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Unearned premiums and fees |
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68,766 |
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77,237 |
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Notes payable |
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3,913 |
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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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18,248 |
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22,929 |
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Total liabilities |
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221,001 |
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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, $.01 par value, 75,000 shares authorized;
48,250 and 48,055 shares issued and outstanding,
respectively |
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482 |
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481 |
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Additional paid-in capital |
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464,169 |
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462,601 |
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Accumulated other comprehensive loss |
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(4,069 |
) |
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(470 |
) |
Accumulated deficit |
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(233,921 |
) |
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(237,153 |
) |
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Total stockholders equity |
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226,661 |
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225,459 |
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TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
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$ |
447,662 |
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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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Nine Months Ended |
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March 31, |
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March 31, |
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2009 |
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2008 |
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2009 |
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2008 |
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Revenues: |
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Premiums earned |
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$ |
54,845 |
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$ |
72,209 |
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$ |
171,506 |
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$ |
217,496 |
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Commission and fee income |
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8,115 |
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9,311 |
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24,033 |
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27,596 |
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Investment income |
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2,410 |
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2,687 |
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7,741 |
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8,573 |
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Net realized gains (losses) on fixed
maturities, available-for-sale |
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1,727 |
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(222 |
) |
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486 |
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(181 |
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67,097 |
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83,985 |
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203,766 |
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253,484 |
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Costs and expenses: |
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Losses and loss adjustment expenses |
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38,929 |
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55,319 |
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120,214 |
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167,336 |
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Insurance operating expenses |
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22,021 |
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24,496 |
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64,977 |
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73,662 |
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Other operating expenses |
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276 |
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487 |
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982 |
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1,751 |
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Litigation settlement |
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(67 |
) |
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440 |
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5,167 |
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440 |
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Stock-based compensation |
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523 |
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310 |
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1,532 |
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988 |
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Depreciation and amortization |
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455 |
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454 |
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1,379 |
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1,202 |
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Interest expense |
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969 |
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1,192 |
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3,159 |
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3,822 |
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63,106 |
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82,698 |
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197,410 |
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249,201 |
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Income before income taxes |
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3,991 |
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1,287 |
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6,356 |
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4,283 |
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Provision for income taxes |
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1,597 |
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529 |
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3,124 |
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13,364 |
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Net income (loss) |
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$ |
2,394 |
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$ |
758 |
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$ |
3,232 |
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$ |
(9,081 |
) |
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Net income (loss) per share: |
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Basic and diluted |
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$ |
0.05 |
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$ |
0.02 |
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$ |
0.07 |
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$ |
(0.19 |
) |
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Number of shares used to calculate net
income (loss) per share: |
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Basic |
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47,673 |
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47,640 |
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47,662 |
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47,624 |
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Diluted |
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48,865 |
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48,831 |
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49,030 |
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47,624 |
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Reconciliation of net income (loss) to
comprehensive income (loss): |
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Net income (loss) |
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$ |
2,394 |
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$ |
758 |
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$ |
3,232 |
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$ |
(9,081 |
) |
Net unrealized change in investments |
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(1,926 |
) |
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1,251 |
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(3,599 |
) |
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5,641 |
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Other |
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5 |
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(245 |
) |
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468 |
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2,014 |
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(367 |
) |
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(3,685 |
) |
Applicable provision for income taxes |
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434 |
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955 |
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Comprehensive income (loss) |
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$ |
468 |
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$ |
1,580 |
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$ |
(367 |
) |
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$ |
(4,640 |
) |
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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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Nine Months Ended |
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March 31, |
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2009 |
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2008 |
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Cash flows from operating activities: |
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Net income (loss) |
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$ |
3,232 |
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$ |
(9,081 |
) |
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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1,379 |
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|
1,202 |
|
Stock-based compensation |
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1,532 |
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|
988 |
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Deferred income taxes |
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2,387 |
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12,982 |
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Other-than-temporary impairment on investment securities |
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1,987 |
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265 |
|
Net realized gains on sales of investments |
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(2,473 |
) |
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(84 |
) |
Other |
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103 |
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64 |
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Change in: |
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Premiums and fees receivable |
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8,279 |
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(2,497 |
) |
Loss and loss adjustment expense reserves |
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(8,660 |
) |
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6,897 |
|
Unearned premiums and fees |
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(8,471 |
) |
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|
106 |
|
Litigation settlement |
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(2,443 |
) |
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101 |
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Other |
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(1,087 |
) |
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2,957 |
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Net cash provided by (used in) operating activities |
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(4,235 |
) |
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13,900 |
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Cash flows from investing activities: |
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Purchases of fixed maturities, available-for-sale |
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(16,228 |
) |
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(33,126 |
) |
Maturities and paydowns of fixed maturities, available-for-sale |
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19,285 |
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11,330 |
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Sales of fixed maturities, available-for-sale |
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42,786 |
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13,458 |
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Net change in receivable/payable for securities |
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(1,045 |
) |
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20,464 |
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Capital expenditures |
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(635 |
) |
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(1,693 |
) |
Other |
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(103 |
) |
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(226 |
) |
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Net cash provided by investing activities |
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44,060 |
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10,207 |
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Cash flows from financing activities: |
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Payments on borrowings |
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(3,913 |
) |
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(18,712 |
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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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Other |
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(83 |
) |
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(164 |
) |
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Net cash used in financing activities |
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(3,959 |
) |
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(18,795 |
) |
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Net increase in cash and cash equivalents |
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35,866 |
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|
5,312 |
|
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 |
|
$ |
74,512 |
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$ |
39,473 |
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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 upon the sale of 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 maturity 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 March 31, 2009 (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 |
|
$ |
12,375 |
|
|
$ |
12,375 |
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|
$ |
|
|
|
$ |
|
|
State |
|
|
7,476 |
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|
|
|
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7,476 |
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|
|
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Political subdivisions |
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1,842 |
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|
|
|
1,842 |
|
|
|
|
|
Revenue and assessment |
|
|
30,135 |
|
|
|
|
|
|
|
30,135 |
|
|
|
|
|
Corporate bonds |
|
|
45,824 |
|
|
|
|
|
|
|
45,824 |
|
|
|
|
|
Collateralized mortgage obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency backed |
|
|
32,460 |
|
|
|
|
|
|
|
32,460 |
|
|
|
|
|
Non-agency backed residential |
|
|
5,257 |
|
|
|
|
|
|
|
2,644 |
|
|
|
2,613 |
|
Non-agency backed commercial |
|
|
5,221 |
|
|
|
|
|
|
|
4,637 |
|
|
|
584 |
|
|
|
|
|
|
|
Total fixed maturities, available-for-sale |
|
|
140,590 |
|
|
|
12,375 |
|
|
|
125,018 |
|
|
|
3,197 |
|
Cash and cash equivalents |
|
|
74,512 |
|
|
|
74,512 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
215,102 |
|
|
$ |
86,887 |
|
|
$ |
125,018 |
|
|
$ |
3,197 |
|
|
|
|
|
|
|
The fair values of the Companys fixed maturities are determined by management after taking
into consideration available sources of data. All of the portfolio valuations classified as Level 1
or Level 2 in the above table are priced exclusively by utilizing the services of independent
pricing sources using observable market data. The Level 2 classified
security valuations are obtained from a single independent pricing
service. The Level 3 classified securities in the table above
consist of seven collateralized mortgage obligations that are priced from non-binding broker quotes
obtained from a single dealer familiar with each particular security or model driven valuations
that do not have observable market data. Based on the nature of these securities and the lack of
similar securities trading to obtain observable market data, the Company believes that these Level
3 valuations are more subjective in nature. The Company has not made any adjustments to the prices
obtained from the independent pricing sources and dealers.
The Company has reviewed the pricing techniques and methodologies of the independent pricing
sources and dealers and believes that their policies adequately consider market activity, either
based on specific transactions for the issue valued or based on modeling of securities with similar
credit quality, duration, yield and structure that were recently traded. The Company monitors
security-specific valuation trends and discussed material changes or the absence of expected
changes with the pricing sources to understand the underlying factors and inputs and to validate
the reasonableness of the pricing.
5
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Based on the above categorization, the following table represents the quantitative disclosure
for those assets included in category Level 3 as of March 31, 2009 (in thousands).
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using |
|
|
|
Significant Unobservable Inputs (Level 3) |
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
March 31, 2009 |
|
|
March 31, 2009 |
|
Beginning balance |
|
$ |
1,672 |
|
|
$ |
167 |
|
Total gains or losses (realized or unrealized): |
|
|
|
|
|
|
|
|
Included in net income (loss) |
|
|
10 |
|
|
|
(78 |
) |
Included in comprehensive income (loss) |
|
|
(113 |
) |
|
|
(273 |
) |
Purchases, sales, issuances and settlements |
|
|
(4 |
) |
|
|
(29 |
) |
Transfers in and/or out of Level 3 |
|
|
1,632 |
|
|
|
3,410 |
|
|
|
|
|
|
|
|
Balance at March 31, 2009 |
|
$ |
3,197 |
|
|
$ |
3,197 |
|
|
|
|
|
|
|
|
Investment Income and Net Realized Gains and Losses
The major categories of investment income follow (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
March 31, |
|
|
March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Fixed maturities, available-for-sale |
|
$ |
2,451 |
|
|
$ |
2,434 |
|
|
$ |
7,664 |
|
|
$ |
7,635 |
|
Cash and cash equivalents |
|
|
38 |
|
|
|
334 |
|
|
|
324 |
|
|
|
1,180 |
|
Other |
|
|
29 |
|
|
|
29 |
|
|
|
87 |
|
|
|
88 |
|
Investment expenses |
|
|
(108 |
) |
|
|
(110 |
) |
|
|
(334 |
) |
|
|
(330 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,410 |
|
|
$ |
2,687 |
|
|
$ |
7,741 |
|
|
$ |
8,573 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The components of net realized gains (losses) on fixed maturities, available-for-sale are as
follows (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
March 31, |
|
|
March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Realized gains on sales |
|
$ |
2,531 |
|
|
$ |
43 |
|
|
$ |
2,592 |
|
|
$ |
327 |
|
Realized losses on sales |
|
|
(82 |
) |
|
|
|
|
|
|
(119 |
) |
|
|
(243 |
) |
Other-than-temporary impairment losses |
|
|
(722 |
) |
|
|
(265 |
) |
|
|
(1,987 |
) |
|
|
(265 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,727 |
|
|
$ |
(222 |
) |
|
$ |
486 |
|
|
$ |
(181 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Maturities, Available-for-Sale
The following table summarizes the Companys fixed maturity securities at March 31, 2009 (in
thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
U.S. government and agencies |
|
$ |
11,746 |
|
|
$ |
653 |
|
|
$ |
(24 |
) |
|
$ |
12,375 |
|
State |
|
|
7,187 |
|
|
|
305 |
|
|
|
(16 |
) |
|
|
7,476 |
|
Political subdivisions |
|
|
1,833 |
|
|
|
51 |
|
|
|
(42 |
) |
|
|
1,842 |
|
Revenue and assessment |
|
|
29,575 |
|
|
|
814 |
|
|
|
(254 |
) |
|
|
30,135 |
|
Corporate bonds |
|
|
47,475 |
|
|
|
788 |
|
|
|
(2,439 |
) |
|
|
45,824 |
|
Collateralized mortgage obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency backed |
|
|
31,212 |
|
|
|
1,248 |
|
|
|
|
|
|
|
32,460 |
|
Non-agency backed residential |
|
|
7,975 |
|
|
|
18 |
|
|
|
(2,736 |
) |
|
|
5,257 |
|
Non-agency backed commercial |
|
|
7,656 |
|
|
|
|
|
|
|
(2,435 |
) |
|
|
5,221 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
144,659 |
|
|
$ |
3,877 |
|
|
$ |
(7,946 |
) |
|
$ |
140,590 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
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 |
March 31, 2009 |
|
|
35 |
|
|
|
25 |
|
|
|
117 |
|
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 March 31, 2009 follows. Gross unrealized losses are further
segregated by the percentage of amortized cost (in thousands, except number of securities).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number |
|
|
|
|
|
|
Gross |
|
|
|
of |
|
|
Fair |
|
|
Unrealized |
|
Gross Unrealized Losses |
|
Securities |
|
|
Value |
|
|
Losses |
|
Less than 10% |
|
|
8 |
|
|
$ |
4,921 |
|
|
$ |
(222 |
) |
Greater than 10% |
|
|
17 |
|
|
|
10,032 |
|
|
|
(5,283 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
25 |
|
|
$ |
14,953 |
|
|
$ |
(5,505 |
) |
|
|
|
|
|
|
|
|
|
|
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 March 31, 2009 (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 |
|
$ |
5,097 |
|
|
$ |
(202 |
) |
|
$ |
(47 |
) |
|
$ |
(64 |
) |
|
$ |
(91 |
) |
Six months |
|
|
3,044 |
|
|
|
(156 |
) |
|
|
(30 |
) |
|
|
|
|
|
|
(126 |
) |
Nine months |
|
|
1,806 |
|
|
|
(232 |
) |
|
|
(46 |
) |
|
|
|
|
|
|
(186 |
) |
Twelve months |
|
|
15,549 |
|
|
|
(1,851 |
) |
|
|
(254 |
) |
|
|
(180 |
) |
|
|
(1,417 |
) |
Greater than twelve months |
|
|
14,953 |
|
|
|
(5,505 |
) |
|
|
(130 |
) |
|
|
(92 |
) |
|
|
(5,283 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
40,449 |
|
|
$ |
(7,946 |
) |
|
$ |
(507 |
) |
|
$ |
(336 |
) |
|
$ |
(7,103 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
7
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
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 $2.0 million for the nine months ended
March 31, 2009 include $1.1 million for certain non-agency backed CMOs and $0.9 million for three
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 $0.5 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. In accordance with this new requirement,
for the three months ended March 31, 2009, based on an adverse change in the Companys best
estimate of cash flows on its eligible securities, a further impairment of $0.2 million was
recognized. In addition, during the three months ended March 31, 2009, the Company recognized an
impairment of $0.4 million on a non-agency backed CMO not subject to the FSP based on the Companys
quarterly projected cash flow analysis, which indicated that a principal loss was probable for this
security.
At March 31, 2009, the Companys portfolio included non-agency backed CMOs with an adjusted
cost of $15.6 million and a current fair value of $10.5 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 nine months ended March 31, 2009, the Company recognized $1.4
million and $0.7 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) and, effective with the quarter ended December 31, 2008, the FSP. The OTTI charges
recognized to date on these securities resulted from an adverse change in expected cash flows. The
timing of projected cash flows on these securities has changed as economic conditions have
prevented the underlying borrowers from refinancing the mortgages underlying these securities,
thereby reducing the amount of projected prepayments. Likewise, economic conditions have caused an
increase in the actual and projected delinquencies in the underlying mortgages.
The
Companys review of these non-agency backed CMOs included an 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. The Company reviews quarterly
projected cash flow analyses for each security utilizing current assumptions regarding (i)
unemployment, (ii) delinquency transition-to-default rates, and (iii) loss severities. Based on
its current quarter review, the Company determined that there had not been an adverse change
from the previous quarter in projected cash flows, except in the case of those securities
previously discussed, which incurred OTTI charges. 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 $0.9 million for the nine months ended March
31, 2009 related to three corporate bonds. OTTI charges of $0.7 million were recognized on two
of these bonds that 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
8
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
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. An OTTI charge of $0.2 million
was recognized on a bond that was sold in April 2009 at a loss as the Company considered the
bonds issuer to be underperforming. At March 31, 2009, gross unrealized losses on corporate
bonds were $2.4 million; however, of this amount, only 10 issues with a combined unrealized
loss of $1.9 million had a loss severity greater than 10%. Of these 10 issues, only five issues
with an unrealized loss of $1.2 million were in a loss position for a period greater than 12
months. Based on its review of the current and future conditions and trends for these
businesses and their industries, the Company believes that these corporate bonds will recover
their unrealized losses in the near future.
The Company believes that the remaining securities having unrealized losses at March 31, 2009
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
During the nine months ended March 31, 2009, the Company issued 176,841 shares of restricted
common stock (Restricted Stock Awards), to certain employees pursuant to the Companys 2002 Long
Term Incentive Plan, as amended, and a Restricted Stock Award Agreement. Pursuant to the Restricted
Stock Award Agreements, 30,000 Restricted Stock Awards will vest 100% on July 1, 2009, 17,537
Restricted Stock Awards will vest equally in annual installments over four years, while 129,304
Restricted Stock Awards will vest equally in annual installments over five years. Expected
compensation expense related to the issuance of these Restricted Stock Awards is $0.5 million,
which will be amortized through March 2014.
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.
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 |
|
|
Nine Months Ended |
|
|
|
March 31, |
|
|
March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Net income (loss) |
|
$ |
2,394 |
|
|
$ |
758 |
|
|
$ |
3,232 |
|
|
$ |
(9,081 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common basic shares |
|
|
47,673 |
|
|
|
47,640 |
|
|
|
47,662 |
|
|
|
47,624 |
|
Effect of dilutive securities |
|
|
1,192 |
|
|
|
1,191 |
|
|
|
1,368 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common dilutive
shares |
|
|
48,865 |
|
|
|
48,831 |
|
|
|
49,030 |
|
|
|
47,624 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net income (loss)
per share |
|
$ |
0.05 |
|
|
$ |
0.02 |
|
|
$ |
0.07 |
|
|
$ |
(0.19 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended March 31, 2009, options to purchase 5.3 million shares of common
stock, a dilutive effect of 0.7 million shares, and 0.6 million shares of unvested restricted stock
were included in the
computation of diluted net income per share. For the three months ended March 31, 2008,
options to purchase 5.6 million shares of common stock, a dilutive effect of 0.8 million shares,
and 0.4 million shares of unvested restricted stock were included in the computation of diluted net
income per share.
9
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
For the nine months ended March 31, 2009, options to purchase 5.3 million shares of common
stock, a dilutive effect of 0.9 million shares, and 0.6 million shares of unvested restricted stock
were included in the computation of diluted net income per share. For the nine months ended March
31, 2008, options to purchase 5.6 million shares of common stock, a dilutive effect of 1.6 million
shares, and 0.4 million shares of unvested restricted stock were not included in the computation of
diluted net 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
March 31, 2009 and June 30, 2008 are valuation allowances of $31.8 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 March 31, 2009 resulted in an
increase from June 30, 2008 of $1.7 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 March 31, 2009, the
Company was in a cumulative book taxable income position over a twelve-quarter period. Forecasted
operating results for fiscal 2009 project cumulative book taxable income over a twelve-quarter
period ending June 30, 2009. For purposes of assessing the realization of its remaining deferred
tax assets at March 31, 2009, a projected cumulative book taxable loss would be considered negative
evidence. In addition, excluding the litigation settlement charges of $12.6 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. 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 recognized on the remaining deferred tax assets at March 31,
2009.
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 carrying amounts to determine if a
write down to estimated fair value was necessary. Based on this evaluation, the Company concluded
that goodwill and other identifiable intangible assets were fully realizable as of March 31, 2009.
However, the Companys evaluation includes multiple assumptions and estimates, including estimated
discounted cash flows, that may change over time. If future discounted cash flows become less than
those currently 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.
10
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
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 recognized 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.
The Company has established an accrual for a loss under SFAS 5 related to the settlement of
litigation brought against the Company in Alabama and Georgia with respect to its sales practices,
primarily the sale of motor club memberships currently or formerly sold in those states.
The Company entered into a Stipulation and Agreement of Settlement, which was approved by the
court in November 2008, with the plaintiffs in the Georgia litigation. 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 these
settlements, eligible class members are entitled to certain premium credits towards a future
automobile insurance policy with the Company or a reimbursement certificate for rental or towing
expenses incurred. Benefits to the Georgia class members commenced January 1, 2009. Benefits to the
Alabama class members commenced March 7, 2009. As a part of the settlements, the Company agreed to
pay $6.5 million in fees and expenses for the attorneys for the Georgia and Alabama plaintiffs and
to pay 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 has existed since December 31, 2008 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.
Regarding the Georgia and Alabama settlements, based upon its analysis of the premium credits
available to class members and actual redemption and forfeiture experience to date, the Company has
a remaining accrual of approximately $4.4 million as of March 31, 2009 associated with the
estimated utilization of available premium credits for Georgia and Alabama class members who were
insured by the Company on March 31, 2009 and received the premium credits. The Company is not able
to reasonably estimate and, therefore, did not accrue any estimated costs for Georgia and Alabama
class members that were not insured by the Company on March 31, 2009 that received the premium
credits as a result of the uncertainties associated with those class members purchasing a new
automobile insurance policy from the Company and utilizing the approximately $1.1 million of
premium credits available to them.
The litigation settlement costs are set forth separately in the consolidated statements of
operations. During the nine months ended March 31, 2009, the Company paid the $6.5 million in fees
and expenses to the attorneys for the Georgia and Alabama plaintiffs and $0.2 million in costs
associated with the administration of the settlements, all of which were accrued at June 30, 2008.
As previously noted, the Company has a remaining accrual as of March 31, 2009 for those currently
estimable costs associated with the utilization of available premium credits of $4.4 million. No
material change to previous estimates of the total costs of the utilization of premium credits was
recorded in the current quarter. Management intends to adjust the initial estimated accrual as
necessary during future
11
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
periods to account for the impact of actual rate of redemption and forfeiture of the premium
credits and reimbursement certificates.
The Company is currently in discussions with its insurance carriers regarding coverage for the
costs and expenses incurred relating to the litigation settlements and is not able currently to
estimate the amount, if any, that it may receive from its insurance carriers. As a result, the
Company has not accrued any amount at March 31, 2009 for insurance recoveries that may offset the
costs and expenses relating to the litigation settlements. Any such insurance recoveries will be
recognized 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 nine months ended March 31, 2009.
The remaining litigation settlement accrual 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 |
|
|
Nine Months Ended |
|
|
|
March 31, |
|
|
March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance |
|
$ |
67,068 |
|
|
$ |
83,953 |
|
|
$ |
203,671 |
|
|
$ |
253,341 |
|
Real estate and corporate |
|
|
29 |
|
|
|
32 |
|
|
|
95 |
|
|
|
143 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated total |
|
$ |
67,097 |
|
|
$ |
83,985 |
|
|
$ |
203,766 |
|
|
$ |
253,484 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance |
|
$ |
5,729 |
|
|
$ |
3,241 |
|
|
$ |
11,930 |
|
|
$ |
10,692 |
|
Real estate and corporate |
|
|
(1,738 |
) |
|
|
(1,954 |
) |
|
|
(5,574 |
) |
|
|
(6,409 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated total |
|
$ |
3,991 |
|
|
$ |
1,287 |
|
|
$ |
6,356 |
|
|
$ |
4,283 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
June 30, |
|
|
|
2009 |
|
|
2008 |
|
Total assets: |
|
|
|
|
|
|
|
|
Insurance |
|
$ |
434,475 |
|
|
$ |
458,121 |
|
Real estate and corporate |
|
|
13,187 |
|
|
|
15,109 |
|
|
|
|
|
|
|
|
Consolidated total |
|
$ |
447,662 |
|
|
$ |
473,230 |
|
|
|
|
|
|
|
|
12
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
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 March 31, 2009, and the impact was not material.
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 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.
On April 9, 2009, the FASB issued three final FASB Staff Positions intended to provide
additional application guidance and enhanced disclosures regarding fair value measurements and
impairments of securities. These FSPs will be effective for periods ending after June 15, 2009 with
early adoption permitted. The Company did not early adopt these FSPs for the three and nine months
ended March 31, 2009 and is currently evaluating the potential impact of these FSPs on the
Companys results of operations and financial position.
13
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 March 31, 2009, we leased and operated 419 retail locations (or stores), staffed by
employee-agents. Our employee-agents primarily sell insurance products either underwritten or
serviced by us. As of March 31, 2009, 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 |
|
Nine Months Ended |
|
|
March 31, |
|
March 31, |
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
Retail locations beginning of period |
|
|
424 |
|
|
|
440 |
|
|
|
431 |
|
|
|
462 |
|
Opened |
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
2 |
|
Closed |
|
|
(5 |
) |
|
|
(8 |
) |
|
|
(13 |
) |
|
|
(32 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail locations end of period |
|
|
419 |
|
|
|
432 |
|
|
|
419 |
|
|
|
432 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following tables show the number of our retail locations by state.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
December 31, |
|
June 30, |
|
|
2009 |
|
2008 |
|
2008 |
|
2007 |
|
2008 |
|
2007 |
Alabama |
|
|
25 |
|
|
|
25 |
|
|
|
25 |
|
|
|
25 |
|
|
|
25 |
|
|
|
25 |
|
Florida |
|
|
39 |
|
|
|
40 |
|
|
|
39 |
|
|
|
40 |
|
|
|
40 |
|
|
|
41 |
|
Georgia |
|
|
61 |
|
|
|
61 |
|
|
|
61 |
|
|
|
61 |
|
|
|
61 |
|
|
|
62 |
|
Illinois |
|
|
80 |
|
|
|
80 |
|
|
|
81 |
|
|
|
80 |
|
|
|
80 |
|
|
|
81 |
|
Indiana |
|
|
18 |
|
|
|
19 |
|
|
|
18 |
|
|
|
22 |
|
|
|
19 |
|
|
|
24 |
|
Mississippi |
|
|
8 |
|
|
|
8 |
|
|
|
8 |
|
|
|
8 |
|
|
|
8 |
|
|
|
8 |
|
Missouri |
|
|
12 |
|
|
|
15 |
|
|
|
12 |
|
|
|
16 |
|
|
|
14 |
|
|
|
15 |
|
Ohio |
|
|
27 |
|
|
|
29 |
|
|
|
28 |
|
|
|
29 |
|
|
|
29 |
|
|
|
30 |
|
Pennsylvania |
|
|
17 |
|
|
|
19 |
|
|
|
18 |
|
|
|
19 |
|
|
|
19 |
|
|
|
25 |
|
South Carolina |
|
|
27 |
|
|
|
28 |
|
|
|
27 |
|
|
|
28 |
|
|
|
28 |
|
|
|
28 |
|
Tennessee |
|
|
20 |
|
|
|
20 |
|
|
|
20 |
|
|
|
20 |
|
|
|
20 |
|
|
|
20 |
|
Texas |
|
|
85 |
|
|
|
88 |
|
|
|
87 |
|
|
|
92 |
|
|
|
88 |
|
|
|
103 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
419 |
|
|
|
432 |
|
|
|
424 |
|
|
|
440 |
|
|
|
431 |
|
|
|
462 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
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 |
|
|
Nine Months Ended |
|
|
|
March 31, |
|
|
March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Premiums earned: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Georgia |
|
$ |
12,273 |
|
|
$ |
15,237 |
|
|
$ |
38,045 |
|
|
$ |
46,475 |
|
Illinois |
|
|
6,736 |
|
|
|
8,016 |
|
|
|
20,923 |
|
|
|
24,116 |
|
Florida |
|
|
6,382 |
|
|
|
10,762 |
|
|
|
20,194 |
|
|
|
33,943 |
|
Texas |
|
|
6,459 |
|
|
|
8,781 |
|
|
|
19,593 |
|
|
|
25,524 |
|
Alabama |
|
|
5,845 |
|
|
|
7,209 |
|
|
|
18,305 |
|
|
|
21,747 |
|
South Carolina |
|
|
4,219 |
|
|
|
6,195 |
|
|
|
14,160 |
|
|
|
17,485 |
|
Tennessee |
|
|
3,650 |
|
|
|
5,179 |
|
|
|
11,865 |
|
|
|
15,869 |
|
Ohio |
|
|
3,182 |
|
|
|
3,846 |
|
|
|
9,815 |
|
|
|
11,660 |
|
Pennsylvania |
|
|
2,883 |
|
|
|
2,606 |
|
|
|
8,455 |
|
|
|
7,267 |
|
Indiana |
|
|
1,359 |
|
|
|
1,736 |
|
|
|
4,221 |
|
|
|
5,510 |
|
Missouri |
|
|
939 |
|
|
|
1,435 |
|
|
|
3,023 |
|
|
|
4,287 |
|
Mississippi |
|
|
918 |
|
|
|
1,207 |
|
|
|
2,907 |
|
|
|
3,613 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total premiums earned |
|
$ |
54,845 |
|
|
$ |
72,209 |
|
|
$ |
171,506 |
|
|
$ |
217,496 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
Nine Months Ended |
|
|
March 31, |
|
March 31, |
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
Policies in force beginning of
period |
|
|
159,557 |
|
|
|
203,008 |
|
|
|
194,079 |
|
|
|
226,974 |
|
Net increase (decrease) during
period |
|
|
14,117 |
|
|
|
12,849 |
|
|
|
(20,405 |
) |
|
|
(11,117 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policies in force end of period |
|
|
173,674 |
|
|
|
215,857 |
|
|
|
173,674 |
|
|
|
215,857 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
15
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 |
|
Nine Months Ended |
|
|
March 31, |
|
March 31, |
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
Loss and loss adjustment expense |
|
|
71.0 |
% |
|
|
76.6 |
% |
|
|
70.1 |
% |
|
|
76.9 |
% |
Expense |
|
|
25.3 |
% |
|
|
21.0 |
% |
|
|
23.9 |
% |
|
|
21.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined |
|
|
96.3 |
% |
|
|
97.6 |
% |
|
|
94.0 |
% |
|
|
98.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 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.
Securities were also sold during the current quarter to generate taxable income in order to utilize
expiring tax net operating loss carryforwards.
Our consolidated investment portfolio was $140.6 million at March 31, 2009 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 March 31, 2009, we had gross
unrealized gains of $3.9 million and gross unrealized losses of $7.9 million.
At
March 31, 2009, 99.8% 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 March 31, 2009. 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 $42.9 million at March 31, 2009 and represented 31% 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 March 31, 2009,
99.9% of our CMOs were considered investment grade by each of the nationally recognized rating
agencies. In addition, 95% of the CMOs were rated AAA and 76% of our CMOs were backed by agencies
of the United States government. Of the non-agency backed CMOs, 78% were rated AAA.
16
FIRST ACCEPTANCE CORPORATION 10-Q
The following table summarizes our fixed maturity securities at March 31, 2009 (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
U.S. government and agencies |
|
$ |
11,746 |
|
|
$ |
653 |
|
|
$ |
(24 |
) |
|
$ |
12,375 |
|
State |
|
|
7,187 |
|
|
|
305 |
|
|
|
(16 |
) |
|
|
7,476 |
|
Political subdivisions |
|
|
1,833 |
|
|
|
51 |
|
|
|
(42 |
) |
|
|
1,842 |
|
Revenue and assessment |
|
|
29,575 |
|
|
|
814 |
|
|
|
(254 |
) |
|
|
30,135 |
|
Corporate bonds |
|
|
47,475 |
|
|
|
788 |
|
|
|
(2,439 |
) |
|
|
45,824 |
|
Collateralized mortgage obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency backed |
|
|
31,212 |
|
|
|
1,248 |
|
|
|
|
|
|
|
32,460 |
|
Non-agency backed residential |
|
|
7,975 |
|
|
|
18 |
|
|
|
(2,736 |
) |
|
|
5,257 |
|
Non-agency backed commercial |
|
|
7,656 |
|
|
|
|
|
|
|
(2,435 |
) |
|
|
5,221 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
144,659 |
|
|
$ |
3,877 |
|
|
$ |
(7,946 |
) |
|
$ |
140,590 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth the scheduled maturities of our fixed maturity securities at
March 31, 2009 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 |
|
$ |
7,077 |
|
|
$ |
1,431 |
|
|
$ |
585 |
|
|
$ |
9,093 |
|
After one through five years |
|
|
39,625 |
|
|
|
11,413 |
|
|
|
858 |
|
|
|
51,896 |
|
After five through ten years |
|
|
15,328 |
|
|
|
10,118 |
|
|
|
|
|
|
|
25,446 |
|
After ten years |
|
|
3,829 |
|
|
|
7,388 |
|
|
|
|
|
|
|
11,217 |
|
No single maturity date |
|
|
32,526 |
|
|
|
10,099 |
|
|
|
313 |
|
|
|
42,938 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
98,385 |
|
|
$ |
40,449 |
|
|
$ |
1,756 |
|
|
$ |
140,590 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three and Nine Months Ended March 31, 2009 Compared with the Three and Nine Months Ended March 31,
2008
Consolidated Results
Revenues for the three months ended March 31, 2009 decreased 20% to $67.1 million from $84.0
million in the same period last year. Net income for the three months ended March 31, 2009 was
$2.4 million, compared with $0.8 million for the three months ended March 31, 2008. Basic and
diluted net income per share was $0.05 for the three months ended March 31, 2009 compared with
basic and diluted net income per share of $0.02 for the three months ended March 31, 2008.
Revenues for the nine months ended March 31, 2009 decreased 20% to $203.8 million from $253.5
million in the same period last year. Net income for the nine months ended March 31, 2009 was $3.2
million, compared with a net loss of $9.1 million for the nine months ended March 31, 2008. Basic
and diluted net income per share was $0.07 for the nine months ended March 31, 2009 compared with
basic and diluted net loss per share of $0.19 for the nine months ended March 31, 2008.
Insurance Operations
Revenues from insurance operations were $67.1 million for the three months ended March 31,
2009, compared with $84.0 million for the three months ended March 31, 2008. For the nine months
ended March 31, 2009, revenues from insurance operations were
$203.7 million, compared with $253.3
million for the nine months ended March 31, 2008.
Income before income taxes from insurance operations for the three months ended March 31, 2009
was $5.7 million, compared with $3.2 million for the three months ended March 31, 2008. Income
before income taxes
17
FIRST ACCEPTANCE CORPORATION 10-Q
from insurance operations for the nine months ended March 31, 2009 was $11.9 million, compared
with $10.7 million for the nine months ended March 31, 2008.
Premiums Earned
Premiums earned decreased by $17.4 million, or 24%, to $54.8 million for the three months
ended March 31, 2009 from $72.2 million for the three months ended March 31, 2008. For the nine
months ended March 31, 2009, premiums earned decreased by $46.0 million, or 21%, to $171.5 million
from $217.5 million for the nine months ended March 31, 2008. The decreases in premiums earned
were primarily due to the weak economic conditions which have caused both a decline in the number
of policies written as well as an increase in the percentage of our customers purchasing liability
only coverage. Rate increases taken in a number of states to improve underwriting profitability and
the closure of stores also contributed toward the decreases in premiums earned.
Approximately 67% of the $17.4 million decline in premiums earned for the three months ended
March 31, 2009 and approximately 68% of the $46.0 million decline in premiums earned for the nine
months ended March 31, 2009 was in our Florida, Georgia, South Carolina and Texas markets. 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.
The total number of insured policies in force at March 31, 2009 decreased 20% over the same
date in 2008 from 215,857 to 173,674, primarily due to the factors noted above. At March 31, 2009,
we operated 419 stores, compared with 432 stores at March 31, 2008.
Commission and Fee Income
Commission and fee income decreased 13% to $8.1 million for the three months ended March 31,
2009 from $9.3 million for the three months ended March 31, 2008. 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 nine months ended March 31, 2009, commission and fee income decreased by $3.6 million,
or 13%, to $24.0 million from $27.6 million for the nine months ended March 31, 2008. The decrease
in fee income was the result of factors discussed above for the three months ended March 31, 2009.
Investment Income
Investment income decreased during the three and nine months ended March 31, 2009 primarily as
a result of the decrease in the total amount of invested assets and the significant decline in
yields on cash equivalents. At March 31, 2009 and 2008, the tax-equivalent book yields for our
fixed maturities portfolio were 3.8% and 5.1%, respectively, with effective durations of 2.45 and
3.44 years, respectively.
Net realized gains (losses) on fixed maturities, available-for-sale
Net realized gains (losses) on fixed maturities, available-for-sale during the nine months
ended March 31, 2009 included $2.5 million in net realized gains from the sales of $35.3 million of
U.S. government and agency backed CMOs which were sold in March 2009 in order to utilize expiring
tax net operating loss carryforwards. In addition, net realized gains (losses) on fixed maturities,
available-for-sale included $2.0 million of charges related to other-than-temporary impairment
(OTTI) on investments which was comprised of $1.1 million related to certain non-agency backed
CMOs and $0.9 million related to three 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 backed CMOs declined below projected book
yields requiring an impairment to those CMOs totaling $0.5 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
18
FIRST ACCEPTANCE CORPORATION 10-Q
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. In accordance with this new requirement, for the three months ended March 31, 2009,
based on an adverse change in our best estimate of cash flows on eligible securities, we recognized
further impairment of $0.2 million during the three months ended March 31, 2009. In addition,
during the three months ended March 31, 2009, we recognized an impairment of $0.4 million on a
non-agency backed CMO not subject to the FSP based on our quarterly projected cash flow analysis
which indicated that a principal loss was probable for this security.
At March 31, 2009, our portfolio included non-agency backed CMOs with an adjusted cost of
$15.6 million and a current fair value of $10.5 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 nine months ended March 31, 2009, we recognized $1.4
million and $0.7 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
and, effective with the quarter ended December 31, 2008, the FSP. The OTTI charges recognized
to date on these securities resulted from an adverse change in expected cash flows. The timing
of projected cash flows on these securities has changed as economic conditions have prevented
the underlying borrowers from refinancing the mortgages underlying these securities, thereby
reducing the amount of projected prepayments. Likewise, economic conditions have caused an
increase in the actual and projected delinquencies in the underlying mortgages. In addition, as
previously discussed, during the three months ended March 31, 2009, we also recognized $0.4
million of OTTI on a non-EITF 99-20 CMO.
Our review of these non-agency backed CMOs 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. We perform a quarterly projected cash flow analysis for each
security utilizing current assumptions regarding (i) unemployment, (ii) delinquency
transition-to-default rates, (iii) and loss severities. Based on our current quarter review, we
determined that there had not been an adverse change from the previous quarter in projected cash
flows, except in the case of the securities previously discussed, which incurred OTTI charges. 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. An OTTI
charge of $0.2 million was recognized on a bond that was sold in April 2009 at a loss as we
considered the bonds issuer to be underperforming. We believe that the remaining securities having
unrealized losses at March 31, 2009 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 71.0% for the three months ended March 31,
2009, compared with 76.6% for the three months ended March 31, 2008. The loss and loss adjustment
expense ratio was 70.1% for the nine months ended March 31, 2009, compared with 76.9% for the nine
months ended March 31, 2008. For the three and nine months ended March 31, 2009, we experienced
favorable development of approximately $2.7 million and $6.9 million, respectively, for losses
occurring prior to June 30, 2008. For the three and nine months ended March 31, 2008, we did not
experience any significant development for losses occurring prior to June 30, 2008. In addition, we
did not experience any significant weather-related losses during these periods.
Excluding the development noted above, the loss and loss adjustment expense ratio for the
three and nine months ended March 31, 2009 was 75.9% and 74.1%, 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 73.5% at March 31, 2009. We attribute
19
FIRST ACCEPTANCE CORPORATION 10-Q
this improvement to the impact of the rate increases taken in early calendar 2008 in
Florida, Illinois, Indiana, Texas and South Carolina and the continued improvement in our
underwriting and claim handling practices, as well as favorable severity trends most notably in
our property damage and physical damage coverages.
Operating Expenses
Insurance operating expenses decreased 10% to $22.0 million for the three months ended March
31, 2009 from $24.5 million for the three months ended March 31, 2008. For the nine months ended
March 31, 2009, insurance operating expenses decreased 12% to $65.0 million from $73.7 million for
the nine months ended March 31, 2008. 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 stores.
The expense ratio increased from 21.0% for the three months ended March 31, 2008 to 25.3% for
the same period in the current fiscal year. The expense ratio increased from 21.2% for the nine
months ended March 31, 2008 to 23.9% 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 96.3% for the three months ended March 31, 2009 from
97.6% for the three months ended March 31, 2008. For the nine months ended March 31, 2009, the
combined ratio decreased to 94.0% from 98.1% for the nine months ended March 31, 2008.
Litigation Settlement
Litigation settlement costs for the three and nine months ended March 31, 2009 of $(0.1)
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 entered into settlement
agreements relating to the Georgia litigation and the Alabama litigation. Pursuant to the
litigation settlements, we have (i) provided the plaintiffs with either a premium credit towards a
future automobile insurance policy or a reimbursement certificate for towing and rental expenses
incurred, (ii) strengthened our disclosures to customers of all relevant fees, charges and
coverages, (iii) paid an aggregate of $6.5 million in fees and expenses for the attorneys for the
plaintiffs and (iv) agreed to 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 has existed since December 31, 2008 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.
Regarding the Georgia and Alabama settlements, based upon our analysis of the premium credits
available to class members and actual redemption and forfeiture experience to date, we have a
remaining accrual of approximately $4.4 million as of March 31, 2009 associated with the estimated
utilization of available premium credits for Georgia and Alabama class members who were insured by
the Company on March 31, 2009 and received the premium credits. We are not able to reasonably
estimate and, therefore, did not accrue any estimated costs for Georgia and Alabama class members
that were not insured by the Company on March 31, 2009 that received the premium credits as a
result of the uncertainties associated with those class members purchasing a new automobile
insurance policy from the Company and utilizing the approximately $1.1 million of premium credits
available to them.
The litigation settlement costs are set forth separately in the consolidated statements of
operations. During the nine months ended March 31, 2009, we paid the $6.5 million in fees and
expenses to the attorneys for the Georgia and Alabama plaintiffs and $0.2 million in costs
associated with the administration of the settlements, all of which were accrued at June 30, 2008.
As previously noted, we have a remaining accrual as of March 31, 2009 for those currently estimable
costs associated with the utilization of available premium credits of $4.4 million. No
material change to previous estimates of the total costs of the utilization of premium credits
was recorded in the current quarter. Management intends to adjust the initial estimated accrual as
necessary during future periods to
20
FIRST ACCEPTANCE CORPORATION 10-Q
account for the impact of actual rate of 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, if any, that we may receive from our insurance carriers. As a result, we have not
accrued any amount at March 31, 2009 for insurance recoveries that may offset the costs and
expenses relating to the litigation settlements. Any such insurance recoveries will be recognized
in our operating results during the periods in which the recoveries are determined to be probable.
Real Estate and Corporate
Loss before income taxes for the three months ended March 31, 2009 was $1.7 million, compared
with a loss of $2.0 million for the three months ended March 31, 2008. Loss before income taxes for
the nine months ended March 31, 2009 was $5.6 million, compared with a loss of $6.4 million for the
nine months ended March 31, 2008.
During the nine months ended March 31, 2009, we incurred $0.1 million of interest expense in
connection with credit facility borrowings compared with $0.1 million and $0.7 million,
respectively, for the three and nine months ended March 31, 2008. Such borrowings were repaid in
full on October 31, 2008. In addition, we incurred $1.0 million and $2.9 million, respectively, of
interest expense during both the three and nine months ended March 31, 2009 and March 31, 2008
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 nine months ended March 31,
2009 was $4.2 million, compared with net cash provided by operating activities of $13.9 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 provided by investing activities for the nine months ended March 31, 2009 was $44.1 million,
compared with net cash provided by investing activities of $10.2 million for the same period in the
prior fiscal year. During March 2009, we sold $35.3 million of U.S. government and agency backed
CMOs in order to utilize expiring tax net operating loss carryforwards. The nine months ended March
31, 2009 includes a net reduction in our investment portfolio of $45.8 million, while the same
period in the prior fiscal year includes net additions to our investment portfolio of $8.3 million
and the settlement of a $20.0 million receivable for securities in July 2007. The net proceeds from
the reduction in our investment portfolio during the nine months ended March 31, 2009 are being
held in short-term cash equivalents at March 31, 2009. Financing activities for the nine months
ended March 31, 2009 and 2008 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 tax net operating loss
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
March 31, 2009, we had $0.8 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 financial
institutions regarding a new revolving credit facility. No assurances can be made that the Company
will enter into a new credit facility. We believe that the lack of a credit facility does not
impair our ability to meet our current expected liquidity needs.
21
FIRST ACCEPTANCE CORPORATION 10-Q
The remaining amounts due under our Georgia litigation settlement, which includes $3.9 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 remaining amounts due under our Alabama litigation settlement, which includes
$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.
State insurance laws limit the amount of dividends that may be paid from our insurance company
subsidiaries. Based on our statutory capital and surplus, our ordinary dividend capacity for the
next twelve months 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. During March 2009, the insurance company subsidiaries
paid ordinary dividends to the holding company of $1.5 million, the proceeds of which were used to
help pay the costs of our Alabama litigation settlement.
The National Association of Insurance Commissioners Model Act for risk-based capital 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.
Critical Accounting Policies
There have been no significant changes to our critical accounting policies and estimates
during the nine months ended March 31, 2009 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.
Forward-Looking Statements
This report contains forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. All statements made in the report, other than statements of historical fact, are
forward-looking statements. You can identify these statements from our use of the words may,
should, could, potential, continue, plan, forecast, estimate, project, believe,
intent, anticipate, expect, target, is likely, will, or the negative of these terms,
and similar expressions. These statements are made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. These forward-looking statements may include,
among other things:
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statements and assumptions relating to future growth, income, income per share, cash
flows and other financial performance measures, as well as managements short-term and
long-term performance goals; |
22
FIRST ACCEPTANCE CORPORATION 10-Q
|
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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.
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.
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sensitivity to Instantaneous Interest Rate Changes (basis points) |
|
|
(100) |
|
(50) |
|
0 |
|
50 |
|
100 |
|
200 |
Fair value of fixed
maturity
portfolio
|
|
$ |
145,983 |
|
|
$ |
143,269 |
|
|
$ |
140,590 |
|
|
$ |
137,977 |
|
|
$ |
135,423 |
|
|
$ |
130,528 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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23
FIRST ACCEPTANCE CORPORATION 10-Q
The following table provides information about our fixed maturity investments at March 31,
2009 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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|
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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 |
|
$ |
2,790 |
|
|
$ |
80 |
|
|
$ |
604 |
|
|
$ |
3,474 |
|
2010 |
|
|
6,875 |
|
|
|
3,313 |
|
|
|
86 |
|
|
|
10,274 |
|
2011 |
|
|
11,318 |
|
|
|
2,195 |
|
|
|
67 |
|
|
|
13,580 |
|
2012 |
|
|
15,374 |
|
|
|
9,530 |
|
|
|
33 |
|
|
|
24,937 |
|
2013 |
|
|
14,539 |
|
|
|
4,435 |
|
|
|
|
|
|
|
18,974 |
|
Thereafter |
|
|
44,436 |
|
|
|
29,905 |
|
|
|
2,428 |
|
|
|
76,769 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
95,332 |
|
|
$ |
49,458 |
|
|
$ |
3,218 |
|
|
$ |
148,008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value |
|
$ |
98,385 |
|
|
$ |
40,449 |
|
|
$ |
1,756 |
|
|
$ |
140,590 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 $1.9 million, or 1.3% of the fixed maturity portfolio. The top five investments make
up 6.4% of the fixed maturity portfolio. The average credit quality rating for our fixed maturity
portfolio was AA+ at March 31, 2009. There are no fixed maturities in the portfolio that have not
produced investment income during the previous twelve months.
The following table shows our fixed maturity portfolio by Standard & Poors Corporation rating
as of March 31, 2009 (in thousands).
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|
|
|
|
|
|
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
Amortized |
|
|
Amortized |
|
|
Fair |
|
|
Fair |
|
Comparable Rating |
|
Cost |
|
|
Cost |
|
|
Value |
|
|
Value |
|
AAA |
|
$ |
61,545 |
|
|
|
42.5 |
% |
|
$ |
60,325 |
|
|
|
42.9 |
% |
AA+, AA, AA- |
|
|
33,940 |
|
|
|
23.5 |
% |
|
|
32,990 |
|
|
|
23.5 |
% |
A+, A, A- |
|
|
38,498 |
|
|
|
26.6 |
% |
|
|
37,564 |
|
|
|
26.7 |
% |
BBB+, BBB, BBB- |
|
|
10,336 |
|
|
|
7.2 |
% |
|
|
9,426 |
|
|
|
6.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment grade |
|
|
144,319 |
|
|
|
99.8 |
% |
|
|
140,305 |
|
|
|
99.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BB+, BB, BB- |
|
|
340 |
|
|
|
0.2 |
% |
|
|
285 |
|
|
|
0.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-investment grade |
|
|
340 |
|
|
|
0.2 |
% |
|
|
285 |
|
|
|
0.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
144,659 |
|
|
|
100.0 |
% |
|
$ |
140,590 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
24
FIRST ACCEPTANCE CORPORATION 10-Q
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 March 31, 2009, our fixed maturity
portfolio included three CMOs having sub-prime exposure with a fair value of $0.7 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 $39.5 million of municipal bonds, of which $27.2 million are
insured. Of the insured bonds, 64.5% are insured with MBIA, 19.4% with AMBAC and 16.1% with XL
Capital. These securities are paying their principal and periodic interest timely.
The following table presents the underlying ratings as of March 31, 2009, 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 |
% |
|
$ |
4,801 |
|
|
|
39 |
% |
|
$ |
4,801 |
|
|
|
12 |
% |
AA+, AA, AA- |
|
|
13,540 |
|
|
|
50 |
% |
|
|
6,358 |
|
|
|
52 |
% |
|
|
19,898 |
|
|
|
50 |
% |
A+, A, A- |
|
|
11,636 |
|
|
|
43 |
% |
|
|
1,053 |
|
|
|
9 |
% |
|
|
12,689 |
|
|
|
32 |
% |
BBB+, BBB, BBB- |
|
|
1,465 |
|
|
|
5 |
% |
|
|
|
|
|
|
0 |
% |
|
|
1,465 |
|
|
|
4 |
% |
NR (not rated) |
|
|
600 |
|
|
|
2 |
% |
|
|
|
|
|
|
0 |
% |
|
|
600 |
|
|
|
2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
27,241 |
|
|
|
100 |
% |
|
$ |
12,212 |
|
|
|
100 |
% |
|
$ |
39,453 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 March 31,
2009. 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.
25
FIRST ACCEPTANCE CORPORATION 10-Q
PART II OTHER INFORMATION
Item 6. Exhibits
The following exhibits are attached to this report:
10.1 |
|
Employment Agreement, made as of February 8, 2008, to be effective January 1, 2008, between
First Acceptance Corporation and Daniel L. Walker |
10.2 |
|
Amended and Restated Employment Agreement, made as of February 8, 2008, to be effective
January 1, 2008, between First Acceptance Corporation and Keith E. Bornemann |
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. |
26
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.
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FIRST ACCEPTANCE CORPORATION
|
|
May 11, 2009 |
By: |
/s/ Kevin P. Cohn
|
|
|
Kevin P. Cohn |
|
|
Senior Vice President and Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer) |
|
|
27