Form 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2008
or
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 001-12117
First Acceptance Corporation
(Exact name of registrant as specified in its charter)
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Delaware
(State or other jurisdiction
of incorporation or organization)
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75-1328153
(I.R.S. Employer
Identification No.) |
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3322 West End Ave, Suite 1000
Nashville, Tennessee
(Address of principal executive offices)
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37203
(Zip Code) |
(615) 844-2800
(Registrants telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions
of large accelerated filer, accelerated filer and smaller reporting
company in Rule 12b-2 of the
Exchange Act. (Check one):
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Large accelerated filer o |
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Accelerated filer þ |
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Non-accelerated filer o
(Do not check if a smaller reporting company) |
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Smaller reporting company o |
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 November 10, 2008, there were 48,089,667 shares outstanding of the registrants common stock,
par value $0.01 per share.
FIRST ACCEPTANCE CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2008
INDEX
i
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
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September 30, |
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June 30, |
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2008 |
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2008 |
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(Unaudited) |
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ASSETS |
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Fixed maturities, available-for-sale at fair value (amortized
cost of $192,972 and $190,040, respectively) |
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$ |
189,040 |
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$ |
189,570 |
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Cash and cash equivalents |
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29,101 |
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38,646 |
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Premiums and fees receivable, net of allowance of $852 and $651 |
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57,662 |
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63,377 |
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Reinsurance receivables |
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293 |
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283 |
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Deferred tax asset, net |
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15,892 |
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17,593 |
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Other assets |
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10,578 |
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9,894 |
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Property and equipment, net |
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4,659 |
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4,876 |
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Deferred acquisition costs |
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4,690 |
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4,549 |
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Goodwill |
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138,082 |
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138,082 |
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Identifiable intangible assets |
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6,360 |
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6,360 |
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TOTAL ASSETS |
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$ |
456,357 |
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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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$ |
98,631 |
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$ |
101,407 |
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Unearned premiums and fees |
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70,274 |
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77,237 |
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Notes payable and capitalized lease obligations |
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2,633 |
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4,124 |
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Debentures payable |
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41,240 |
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41,240 |
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Payable for securities |
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1,045 |
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Other liabilities |
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19,246 |
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22,718 |
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Total liabilities |
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232,024 |
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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, $.01 par value, 75,000 shares authorized;
48,055 shares issued and outstanding |
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481 |
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481 |
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Additional paid-in capital |
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463,096 |
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462,601 |
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Accumulated other comprehensive loss |
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(3,932 |
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(470 |
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Accumulated deficit |
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(235,312 |
) |
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(237,153 |
) |
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Total stockholders equity |
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224,333 |
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225,459 |
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TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
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$ |
456,357 |
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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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September 30, |
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2008 |
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2007 |
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Revenues: |
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Premiums earned |
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$ |
61,838 |
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$ |
74,803 |
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Commission and fee income |
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8,243 |
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9,298 |
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Investment income |
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2,723 |
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3,027 |
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Other |
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(1,215 |
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30 |
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71,589 |
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87,158 |
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Costs and expenses: |
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Losses and loss adjustment expenses |
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43,732 |
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57,671 |
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Insurance operating expenses |
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21,446 |
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23,986 |
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Other operating expenses |
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392 |
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505 |
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Litigation settlement |
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145 |
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Stock-based compensation |
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495 |
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324 |
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Depreciation and amortization |
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469 |
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368 |
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Interest expense |
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1,157 |
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1,341 |
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67,836 |
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84,195 |
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Income before income taxes |
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3,753 |
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2,963 |
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Provision for income taxes |
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1,912 |
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1,071 |
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Net income |
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$ |
1,841 |
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$ |
1,892 |
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Net income per share: |
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Basic and diluted |
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$ |
0.04 |
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$ |
0.04 |
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Number of shares used to calculate net income per share: |
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Basic |
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47,655 |
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47,615 |
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Diluted |
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49,244 |
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49,536 |
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Reconciliation of net income to comprehensive income (loss): |
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Net income |
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$ |
1,841 |
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$ |
1,892 |
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Net unrealized change in investments |
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(3,462 |
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2,019 |
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Other |
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(167 |
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Comprehensive income (loss) |
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$ |
(1,621 |
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$ |
3,744 |
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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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Three Months Ended |
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September 30, |
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2008 |
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2007 |
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Cash flows from operating activities: |
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Net income |
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$ |
1,841 |
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$ |
1,892 |
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Adjustments to reconcile net income to cash provided by (used
in) operating activities: |
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Depreciation and amortization |
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469 |
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368 |
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Stock-based compensation |
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495 |
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324 |
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Deferred income taxes |
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1,701 |
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924 |
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Other-than-temporary impairment on investment securities |
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1,265 |
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Other |
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(11 |
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(9 |
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Change in: |
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Premiums and fees receivable |
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5,670 |
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1,233 |
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Deferred acquisition costs |
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(141 |
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(235 |
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Loss and loss adjustment expense reserves |
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(2,776 |
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2,476 |
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Unearned premiums and fees |
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(6,963 |
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(3,255 |
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Litigation settlement |
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145 |
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Other |
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(4,226 |
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(733 |
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Net cash provided by (used in) operating activities |
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(2,531 |
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2,985 |
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Cash flows from investing activities: |
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Purchases of fixed maturities, available-for-sale |
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(10,036 |
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(7,512 |
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Maturities and paydowns of fixed maturities, available-for-sale |
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3,409 |
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3,072 |
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Sales of fixed maturities, available-for-sale |
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2,488 |
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802 |
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Net change in receivable/payable for securities |
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(1,045 |
) |
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18,974 |
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Capital expenditures |
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(254 |
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(176 |
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Other |
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(85 |
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(22 |
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Net cash provided by (used in) investing activities |
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(5,523 |
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15,138 |
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Cash flows from financing activities: |
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Payments on borrowings |
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(1,491 |
) |
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(6,442 |
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Net cash used in financing activities |
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(1,491 |
) |
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(6,442 |
) |
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Net increase (decrease) in cash and cash equivalents |
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(9,545 |
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11,681 |
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Cash and cash equivalents, beginning of period |
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38,646 |
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34,161 |
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Cash and cash equivalents, end of period |
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$ |
29,101 |
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$ |
45,842 |
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See notes to consolidated financial statements.
3
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. General
The consolidated financial statements of First Acceptance Corporation (the Company) included
herein have been prepared without audit pursuant to the rules and regulations of the Securities and
Exchange Commission (SEC). Accordingly, certain information and disclosures normally included in
financial statements prepared in accordance with accounting principles generally accepted in the
United States of America have been omitted. In the opinion of management, the consolidated
financial statements reflect all adjustments (consisting of normal recurring adjustments) necessary
for a fair statement of the interim periods. Certain reclassifications have been made to the prior
years consolidated financial statements to conform with the current year presentation.
The results of operations for the interim periods are not necessarily indicative of the
results of operations to be expected for the full year. These consolidated financial statements
should be read in conjunction with the Companys audited consolidated financial statements included
in its Annual Report on Form 10-K for the fiscal year ended June 30, 2008.
2. Investments
Fair Value
Fair value is the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the measurement date. The
Company holds fixed maturities investments, which are carried at fair value.
Fair value measurements are generally based upon observable and unobservable inputs.
Observable inputs are based on market data from independent sources, while unobservable inputs
reflect the Companys view of market assumptions in the absence of observable market information.
All assets and liabilities that are carried at fair value are classified and disclosed in one of
the following categories:
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Level 1 |
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Quoted prices in active markets for identical assets or liabilities. |
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Level 2 |
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Quoted market prices for similar assets or liabilities in active
markets; quoted prices for identical or similar assets or liabilities in markets
that are not active; and model driven valuations that use observable market data. |
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Level 3 |
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Instruments that use model driven valuations that do not have observable market data. |
Level 1 assets and liabilities primarily consist of financial instruments whose value is based
on quoted market prices.
Level 2 assets and liabilities include those financial instruments that are valued by quoted
market prices in markets that are not active or by independent pricing services or valued using
models or other valuation techniques. 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.
Level 3 assets and liabilities include financial instruments whose fair value is estimated
based on non-binding broker quotes or by model driven valuations that utilize significant inputs
not based on, or corroborated by, readily available market information.
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 September 30, 2008 (in thousands).
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Fair Value Measurements Using |
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Quoted Prices |
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in Active |
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Significant |
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Markets for |
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Other |
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Significant |
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Identical |
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Observable |
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Unobservable |
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Assets |
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Inputs |
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Inputs |
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Description |
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Total |
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(Level 1) |
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(Level 2) |
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(Level 3) |
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Fixed maturities: |
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U.S. government and agencies |
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$ |
31,378 |
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$ |
31,378 |
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$ |
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$ |
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State |
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7,561 |
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7,561 |
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Political subdivisions |
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3,362 |
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3,362 |
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Revenue and assessment |
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29,881 |
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29,881 |
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Corporate bonds |
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52,111 |
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52,111 |
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Collateralized mortgage obligations |
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64,747 |
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63,668 |
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|
1,079 |
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Total fixed maturities |
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189,040 |
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31,378 |
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156,583 |
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|
1,079 |
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Cash and cash equivalents |
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29,101 |
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29,101 |
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Total |
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$ |
218,141 |
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$ |
60,479 |
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$ |
156,583 |
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$ |
1,079 |
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Based on the above categorization, the following table represents the quantitative disclosure
for those major assets included in category Level 3 as of September 30, 2008 (in thousands).
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Fair Value |
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Measurements |
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Using Significant |
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Unobservable |
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Inputs |
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(Level 3) |
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Balance at July 1, 2008 |
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$ |
167 |
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Total gains or losses (realized or unrealized): |
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Included in net income |
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(99 |
) |
Included in comprehensive income (loss) |
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Purchases, sales, issuances and settlements |
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(17 |
) |
Transfers in and/or out of Level 3 |
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1,028 |
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Balance at September 30, 2008 |
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$ |
1,079 |
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Gains or losses included in net income are included in other revenues within the consolidated
statements of operations. Of the $1.1 million fair value of securities in Level 3, which consists
of 3 securities, each are priced based on non-binding broker quotes.
5
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Investment Income and Net Realized Gains and Losses
The major categories of investment income follow (in thousands).
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Three Months Ended |
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September 30, |
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2008 |
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2007 |
|
Fixed maturities, available-for-sale |
|
$ |
2,630 |
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$ |
2,667 |
|
Cash and cash equivalents |
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179 |
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|
445 |
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Other |
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|
29 |
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29 |
|
Investment expenses |
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(115 |
) |
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(114 |
) |
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$ |
2,723 |
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$ |
3,027 |
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Net realized capital gains (losses) on investments, which are included in other revenues
within the consolidated statements of operations, from fixed maturities available-for-sale follow
(in thousands).
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Three Months Ended |
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September 30, |
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2008 |
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2007 |
|
Gains |
|
$ |
59 |
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$ |
37 |
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Losses |
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(9 |
) |
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(7 |
) |
Other-than-temporary impairment |
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|
(1,265 |
) |
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|
|
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$ |
(1,215 |
) |
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$ |
30 |
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Fixed Maturities, Available-for-sale
The following table summarizes our fixed maturity securities at September 30, 2008 (in
thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
U.S. government and agencies |
|
$ |
30,310 |
|
|
$ |
1,154 |
|
|
$ |
(86 |
) |
|
$ |
31,378 |
|
State |
|
|
7,418 |
|
|
|
163 |
|
|
|
(20 |
) |
|
|
7,561 |
|
Political subdivisions |
|
|
3,365 |
|
|
|
19 |
|
|
|
(22 |
) |
|
|
3,362 |
|
Revenue and assessment |
|
|
29,928 |
|
|
|
276 |
|
|
|
(323 |
) |
|
|
29,881 |
|
Corporate bonds |
|
|
55,427 |
|
|
|
105 |
|
|
|
(3,421 |
) |
|
|
52,111 |
|
Collateralized mortgage obligations |
|
|
66,524 |
|
|
|
419 |
|
|
|
(2,196 |
) |
|
|
64,747 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
192,972 |
|
|
$ |
2,136 |
|
|
$ |
(6,068 |
) |
|
$ |
189,040 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The number of securities with gross unrealized gains and losses follows. Gross unrealized
losses are further segregated by the length of time that individual securities have been in a
continuous unrealized loss position.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Unrealized Losses |
|
Gross |
|
|
Less than |
|
12 months |
|
Unrealized |
As of: |
|
12 months |
|
or longer |
|
Gains |
September 30, 2008 |
|
|
95 |
|
|
|
14 |
|
|
|
107 |
|
June 30, 2008 |
|
|
79 |
|
|
|
16 |
|
|
|
108 |
|
6
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
The fair value and gross unrealized losses of those securities in a continuous unrealized loss
position for longer than 12 months at September 30, 2008 follows. Gross unrealized losses are
further segregated by the percentage of amortized cost.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number |
|
|
|
|
|
Gross |
|
|
of |
|
Fair |
|
Unrealized |
Gross Unrealized Losses |
|
Securities |
|
Value |
|
Losses |
Less than 10%
|
|
|
4 |
|
|
$ |
1,247 |
|
|
$ |
(76 |
) |
Greater than 10%
|
|
|
10 |
|
|
|
6,970 |
|
|
|
(1,875 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14 |
|
|
$ |
8,217 |
|
|
$ |
(1,951 |
) |
|
|
|
|
|
|
|
|
|
|
|
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 September 30, 2008 (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value of |
|
|
|
|
|
|
|
|
|
|
Securities with |
|
|
|
|
|
|
Severity of Gross Unrealized Losses |
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
|
|
|
|
Greater |
|
Length of |
|
Unrealized |
|
|
Unrealized |
|
|
Less |
|
|
5% to |
|
|
than |
|
Gross Unrealized Losses: |
|
Losses |
|
|
Losses |
|
|
than 5% |
|
|
10% |
|
|
10% |
|
Less than or equal to: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months |
|
$ |
21,729 |
|
|
$ |
(446 |
) |
|
$ |
(347 |
) |
|
$ |
(99 |
) |
|
$ |
|
|
Six months |
|
|
41,865 |
|
|
|
(2,242 |
) |
|
|
(458 |
) |
|
|
(937 |
) |
|
|
(847 |
) |
Nine months |
|
|
12,551 |
|
|
|
(1,222 |
) |
|
|
(208 |
) |
|
|
(70 |
) |
|
|
(944 |
) |
Twelve months |
|
|
2,294 |
|
|
|
(207 |
) |
|
|
(54 |
) |
|
|
|
|
|
|
(153 |
) |
Greater than twelve months |
|
|
8,217 |
|
|
|
(1,951 |
) |
|
|
(20 |
) |
|
|
(56 |
) |
|
|
(1,875 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
86,656 |
|
|
$ |
(6,068 |
) |
|
$ |
(1,087 |
) |
|
$ |
(1,162 |
) |
|
$ |
(3,819 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 to market or sector declines where the Company has the intent and ability to hold
these securities for a period of time sufficient to allow for any anticipated recovery in fair
value are not deemed to be other-than-temporary.
The issuer-specific factors considered in reaching the conclusion that securities with
declines are not other-than-temporary include (i) the extent and duration of the decline in fair
value, including the duration of any significant decline in value, (ii) whether the security is
current as to payments of principal and interest, (iii) a valuation of any underlying collateral,
(iv) current and future conditions and trends for both the business and its industry, (v) changes
in cash flow assumptions for CMOs and (vi) rating agency actions. Based on these factors, the
Company will make a determination as to the probability of recovering principal and interest on the
security.
7
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Other-than-temporary impairment (OTTI) charges of $1.3 million for the three months ended
September 30, 2008 include $0.6 million for certain non-agency CMOs and $0.7 million for two
corporate bonds. Due to the deterioration in liquidity in the credit markets, yields on certain
non-agency CMOs declined below projected book yields requiring the impairment of those CMOs
totaling $0.6 million under the guidance set forth in Emerging Issues Task Force Issue No. 99-20,
Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial
Interests That Continue to Be Held by a Transferor in Securitized Financial Assets. Other than the
decline in the yields of these securities resulting from changes in prepayment assumptions, the
underlying assets of these securities continue to perform within expectations. The Company also
recognized OTTI charges of $0.7 million related to two corporate bonds. These bonds were considered
to be impaired based on the extent and duration of the declines in their fair values
and issuer-specific fundamentals relating to (i) poor operating results and weakened financial
conditions, (ii) negative industry trends further impacted by the recent economic turmoil, and
(iii) a series of downgrades to their credit ratings. Based on these factors, the Company does not
believe that these bonds will recover their unrealized losses in the near future. The Company
believes that the remaining securities having unrealized losses at September 30, 2008 were not
other-than-temporarily impaired and that it has the ability and intent to hold these securities for
a period of time sufficient to allow for recovery of their impairment.
3. 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 as of September 30, 2008
was $2.5 million, which 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.
4. Net Income Per Share
The following table sets forth the computation of basic and diluted net income per share (in
thousands, except per share data).
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
Net income |
|
$ |
1,841 |
|
|
$ |
1,892 |
|
|
|
|
|
|
|
|
Weighted average common basic shares |
|
|
47,655 |
|
|
|
47,615 |
|
Effect of dilutive securities |
|
|
1,589 |
|
|
|
1,921 |
|
|
|
|
|
|
|
|
Weighted average common dilutive shares |
|
|
49,244 |
|
|
|
49,536 |
|
|
|
|
|
|
|
|
Basic and diluted net income per share |
|
$ |
0.04 |
|
|
$ |
0.04 |
|
|
|
|
|
|
|
|
For the three months ended September 30, 2008, options to purchase approximately 5.4 million
shares of common stock, a dilutive effect of approximately 1.2 million shares, and 0.4 million
shares of restricted common stock were included in the computation of diluted income per share. For
the three months ended September 30, 2007, options to purchase approximately 4.7 million shares of
common stock, a dilutive effect of approximately 1.9 million shares, were included in the
computation of diluted income per share.
8
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
5. Income Taxes
Net
deferred tax assets in the accompanying balance sheets as of
September 30, 2008 and June 30, 2008 include deferred tax assets of
$47.5 million and $47.7 million, respectively, and a related
valuation allowance of $31.6 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 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 September 30,
2008 resulted in an increase of $1.5 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 remains optimistic about the
Companys future outlook and expects 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. If the Company were to incur actual cumulative losses over a
three-year period or forecast near term losses, which would indicate
uncertainty regarding its ability to generate taxable
income and realize tax benefits in future years, 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.
6. Goodwill and Identifiable Intangible Assets
After considering recent trends in the Companys results, including premiums written, premiums
earned and policies in force, the estimated future discounted cash flows associated with its
goodwill and identifiable intangible assets were compared with their carrying amounts to determine
if a write down to market value or discounted cash flow value was necessary. Based on this
evaluation, the Company concluded that goodwill and other identifiable intangible assets were fully
realizable as of September 30, 2008. However, the Companys evaluation includes multiple
assumptions, including estimated discounted cash flows and estimates that may change over time. If
future discounted cash flows become less than those projected by the Company, an impairment charge
may become necessary that could have a materially adverse impact on the Companys results of
operations and financial position.
7. Litigation
The Company is named as a defendant in various lawsuits, arising in the ordinary course of
business, generally relating to its insurance operations. All legal actions relating to claims made
under insurance policies are considered by the Company in establishing its loss and loss adjustment
expense reserves. The Company also faces lawsuits that seek damages beyond policy limits, commonly
known as bad faith claims, as well as class action and individual lawsuits that involve issues
arising in the course of the Companys business. The Company continually evaluates potential
liabilities and reserves for litigation of these types using the criteria established by Financial
Accounting Standards Board (FASB) Statement No. 5, Accounting for Contingencies (SFAS 5).
Pursuant to SFAS 5, reserves for a loss may only be recorded if the likelihood of occurrence is
probable and the amount can be reasonably estimated. If a loss, while not probable, is judged to be
reasonably possible, management will disclose, if it can be estimated, a possible range of loss or
state that an estimate cannot be made. Management considers each legal action using SFAS 5 and
records reserves for losses as warranted by establishing a reserve within its consolidated balance
sheet in loss and loss adjustment expense reserves for bad faith claims and in other liabilities
for other lawsuits. Amounts incurred are recorded within the Companys consolidated statement of
operations in losses and loss adjustment expenses for bad faith claims and in insurance operating
expenses for other lawsuits unless otherwise disclosed.
Certain claims and legal actions have been brought against the Company for which an accrual of
a loss has been made under SFAS 5. The Company is a party to litigation in Alabama and Georgia in
which allegations are made with respect to its sales practices, primarily the sale of motor club
memberships currently or formerly sold in those states. Annette Rush v. Village Auto Insurance
Company, Inc. (now known as First Acceptance Insurance Company of Georgia, Inc.) was filed on
October 26, 2005, as a putative class action in the Superior Court of Fulton County, Georgia.
Margaret Franklin v. Vesta Insurance Corp., et al. was filed on July 14, 2006, as a putative class
9
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
action in the Circuit Court of Bullock County, Alabama. Keisha Milbry Monday, et al. v. First
Acceptance Corp., et al. was filed on February 13, 2007, in the Circuit Court of Bullock County,
Alabama. Solomon and Catherine Warren, et al. v. First Acceptance Corp., et al. was filed on
November 9, 2007, in the Circuit Court of Barbour County, Alabama. The suits generally allege that
the Company implemented a program to convince its consumers who purchased automobile insurance
policies to also purchase motor club memberships or that the Company charged its consumers billing
fees associated with its products that were not properly disclosed, and seek unspecified damages
and attorneys fees. The Company has denied all allegations of wrongdoing, has vigorously defended
itself against these actions, and believes the Company has meritorious defenses to these claims.
Notwithstanding the foregoing, to avoid the uncertainty, risks and costs of further
litigation, the Company entered into a settlement agreement effective September 10, 2008 with the
plaintiffs in the Georgia litigation. Pursuant to the terms of the settlement agreement, the
plaintiffs in the Georgia litigation were divided into two classes: (i) persons who were insured by
the Company on September 1, 2008 who purchased an automobile club membership with their automobile
insurance and (ii) persons who were insured by the Company prior to September 1, 2008 who purchased
an automobile club membership with their automobile insurance. Pursuant to the terms of the
settlement, each class member who was insured by the Company on September 1, 2008 will receive a
premium credit equal to 100% of the amounts he or she paid for automobile club memberships and
deferred billing fees against the premium for a new or renewal automobile insurance policy (as
applicable) for up to twelve months of liability or uninsured motorist coverage issued by the
Company prior to December 31, 2009, unless he or she elects, prior to December 31, 2008, to receive
instead of the premium credit a reimbursement certificate that provides for cash reimbursement of
up to a maximum total payment of $50 for any rental or towing expenses incurred by the class member
on or before December 31, 2009 as a result of the disablement of his or her vehicle because of an
accident. Each class member who was insured by the Company prior to September 1, 2008 will receive
a reimbursement certificate that provides for cash reimbursement of up to a maximum total payment
of $50 for any rental or towing expenses incurred by the class member on or before December 31,
2009 as a result of the disablement of his or her vehicle because of an accident, unless he or she
elects, prior to December 31, 2008, to receive instead of the reimbursement certificate, a premium
credit equal to 100% of the amounts he or she paid for automobile club memberships and deferred
billing fees against the premium for a new automobile insurance policy for up to twelve months of
liability or uninsured motorist coverage issued by the Company prior to June 30, 2010. Any premium
credits issued to class members as described above will be prorated over a twelve-month term not to
extend beyond June 30, 2011, and the class member will be entitled to the prorated premium credit
only so long as he or she keeps their insurance premiums current during the twelve-month term. No
benefits will be available to class members until January 1, 2009. The Company has also agreed to
strengthen its disclosures to customers of all relevant fees, charges and coverages. In addition,
the Company has agreed to pay $3.8 million in fees and expenses for the attorneys for the Georgia
plaintiffs and pay all costs associated with the administration of the settlement. The settlement
agreement is subject to approval by the court, and the Company expects the court to hold a hearing
to consider the settlement in November 2008.
The Company has also agreed upon preliminary settlement terms with the plaintiffs in the
Alabama litigation. The preliminary settlement terms provide for benefits to the Alabama plaintiffs
substantially similar to the benefits to be paid to the Georgia plaintiffs, and a payment of $2.5
million in fees and expenses for the attorneys for the Alabama plaintiffs. The settlement of the
Alabama litigation is subject to the negotiation of a definitive settlement agreement and approval
of the settlement agreement by the applicable courts.
At this time, the Company is unable to estimate the total costs associated with the Georgia
and Alabama litigation settlements. The costs of the settlements will depend, among other factors,
upon whether class members receive premium credits or reimbursement certificates pursuant to the
terms of the settlements and the rate of redemption and forfeiture of the premium credits and
reimbursement certificates. The Company estimates that there are approximately 11,000 persons who
were insured by the Company on September 1, 2008 and approximately 155,000 persons who were insured
by the Company prior to September 1, 2008 that, pursuant to the terms of the settlement agreement,
are members of the plaintiff class in the Georgia litigation. The Company estimates that there are
approximately 55,000 persons who were insured by the Company prior to September 1, 2008 that,
pursuant to the proposed settlement terms, would be eligible to be members of the plaintiff class
in the Alabama litigation. Through September 30, 2008, the total amount received by the Company
relating to motor club memberships and deferred billing fees is $25.3 million for the State of
Georgia and $5.8 million for the State of Alabama.
10
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
The litigation settlement costs are set forth separately in the consolidated statements of
operations. The Company anticipates that its payment of $6.3 million in plaintiffs attorneys fees
and expenses and the $0.4 million in estimated costs associated with the administration of the
settlement, both of which were previously accrued at June 30, 2008, will occur in calendar year
2009, after the final approval from the courts. The Company will accrue additional amounts relating
to the costs of the litigation settlements when those amounts become reasonably estimable.
The Company is currently in discussions with its insurance carriers regarding coverage for the
costs and expenses incurred relating to the litigation settlements and is not able currently to
estimate the amount, if any, that it may receive from its insurance carriers. As a result, the
Company has not accrued any amount at September 30, 2008 for insurance recoveries that may offset
the costs and expenses relating to the litigation settlements. Any such insurance recoveries will
be recorded in the Companys operating results during the periods in which the recoveries are
determined to be probable.
The litigation settlement accrual of $6.3 million as well as the remaining estimated costs
associated with the administration of the settlement accrual of $0.4 million as of September 30,
2008 are classified within other liabilities on the Companys consolidated balance sheet. The
associated litigation costs for the three months ended September 30, 2008 of $0.1 million relate to
costs incurred in connection with the Companys defense of the litigation and are classified within
litigation settlement in the consolidated statements of operations.
8. 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 |
|
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
Revenues: |
|
|
|
|
|
|
|
|
Insurance |
|
$ |
71,556 |
|
|
$ |
87,089 |
|
Real estate and corporate |
|
|
33 |
|
|
|
69 |
|
|
|
|
|
|
|
|
Consolidated total |
|
$ |
71,589 |
|
|
$ |
87,158 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes: |
|
|
|
|
|
|
|
|
Insurance |
|
$ |
5,763 |
|
|
$ |
5,061 |
|
Real estate and corporate |
|
|
(2,010 |
) |
|
|
(2,098 |
) |
|
|
|
|
|
|
|
Consolidated total |
|
$ |
3,753 |
|
|
$ |
2,963 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
June 30, |
|
|
|
2008 |
|
|
2008 |
|
Total assets: |
|
|
|
|
|
|
|
|
Insurance |
|
$ |
443,475 |
|
|
$ |
458,121 |
|
Real estate and corporate |
|
|
12,882 |
|
|
|
15,109 |
|
|
|
|
|
|
|
|
Consolidated total |
|
$ |
456,357 |
|
|
$ |
473,230 |
|
|
|
|
|
|
|
|
11
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
9. Recent Accounting Pronouncements
Effective July 1, 2008, the Company adopted the provisions of the 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 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
September 30, 2008, and the impact was not material.
Effective July 1, 2008, the Company adopted the provisions of the FASB Statement No. 159,
Establishing the Fair Value Option for Financial Assets and Liabilities (SFAS 159), which
includes an amendment to FASB Statement No. 115, Accounting for Certain Investments in Debt and
Equity Securities (SFAS 115). SFAS 159 permits entities to choose to measure many financial
instruments and certain other items at fair value. The objective is to improve financial reporting
by providing entities with the opportunity to mitigate volatility in reported earnings caused by
measuring related assets and liabilities differently without having to apply complex hedge
accounting provisions. This statement is expected to expand the use of fair value measurement,
which is consistent with the FASBs long-term measurement objectives for accounting for financial
instruments. This statement applies to all entities and most of the provisions of this statement
apply only to entities that elect the fair value option. However, the amendment to SFAS 115 applies
to all entities with available-for-sale and trading securities. The Company did not elect the fair
value option and, as a result, the adoption of SFAS 159 did not have a material impact on the
Companys results of operations or financial position.
12
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 September 30, 2008, we leased and operated 429 retail locations (or stores), staffed
by employee-agents. Our employee-agents exclusively sell insurance products either underwritten or
serviced by us. As of September 30, 2008, we wrote non-standard personal automobile insurance in
12 states and were licensed in 13 additional states. See the discussion in Item 1. Business -
General in our Annual Report on Form 10-K for the fiscal year ended June 30, 2008 for additional
information with respect to our business.
The following table shows the change in the number of our retail locations for the periods
presented. Retail location counts are based upon the date that a location commenced or ceased
writing business.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
September 30, |
|
|
2008 |
|
2007 |
Retail locations beginning of period |
|
|
431 |
|
|
|
462 |
|
Opened |
|
|
1 |
|
|
|
1 |
|
Closed |
|
|
(3 |
) |
|
|
(5 |
) |
|
|
|
|
|
|
|
|
|
Retail locations end of period |
|
|
429 |
|
|
|
458 |
|
|
|
|
|
|
|
|
|
|
The following tables show the number of our retail locations by state.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
June 30, |
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
Alabama |
|
|
25 |
|
|
|
25 |
|
|
|
25 |
|
|
|
25 |
|
Florida |
|
|
39 |
|
|
|
41 |
|
|
|
40 |
|
|
|
41 |
|
Georgia |
|
|
61 |
|
|
|
62 |
|
|
|
61 |
|
|
|
62 |
|
Illinois |
|
|
81 |
|
|
|
81 |
|
|
|
80 |
|
|
|
81 |
|
Indiana |
|
|
19 |
|
|
|
23 |
|
|
|
19 |
|
|
|
24 |
|
Mississippi |
|
|
8 |
|
|
|
8 |
|
|
|
8 |
|
|
|
8 |
|
Missouri |
|
|
13 |
|
|
|
16 |
|
|
|
14 |
|
|
|
15 |
|
Ohio |
|
|
29 |
|
|
|
30 |
|
|
|
29 |
|
|
|
30 |
|
Pennsylvania |
|
|
18 |
|
|
|
24 |
|
|
|
19 |
|
|
|
25 |
|
South Carolina |
|
|
28 |
|
|
|
28 |
|
|
|
28 |
|
|
|
28 |
|
Tennessee |
|
|
20 |
|
|
|
20 |
|
|
|
20 |
|
|
|
20 |
|
Texas |
|
|
88 |
|
|
|
100 |
|
|
|
88 |
|
|
|
103 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
429 |
|
|
|
458 |
|
|
|
431 |
|
|
|
462 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13
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 |
|
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
Premiums earned: |
|
|
|
|
|
|
|
|
Georgia |
|
$ |
13,427 |
|
|
$ |
16,103 |
|
Florida |
|
|
7,616 |
|
|
|
12,361 |
|
Illinois |
|
|
7,361 |
|
|
|
8,169 |
|
Texas |
|
|
7,002 |
|
|
|
8,526 |
|
Alabama |
|
|
6,572 |
|
|
|
7,504 |
|
South Carolina |
|
|
5,450 |
|
|
|
5,640 |
|
Tennessee |
|
|
4,415 |
|
|
|
5,522 |
|
Ohio |
|
|
3,451 |
|
|
|
4,000 |
|
Pennsylvania |
|
|
2,787 |
|
|
|
2,301 |
|
Indiana |
|
|
1,563 |
|
|
|
1,968 |
|
Missouri |
|
|
1,128 |
|
|
|
1,470 |
|
Mississippi |
|
|
1,066 |
|
|
|
1,239 |
|
|
|
|
|
|
|
|
Total premiums earned |
|
$ |
61,838 |
|
|
$ |
74,803 |
|
|
|
|
|
|
|
|
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 |
|
|
September 30, |
|
|
2008 |
|
2007 |
Policies in force beginning of period |
|
|
194,079 |
|
|
|
226,974 |
|
Net decrease during period |
|
|
(23,524 |
) |
|
|
(14,463 |
) |
|
|
|
|
|
|
|
|
|
Policies in force end of period |
|
|
170,555 |
|
|
|
212,511 |
|
|
|
|
|
|
|
|
|
|
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.
14
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 |
|
|
September 30, |
|
|
2008 |
|
2007 |
Loss and loss adjustment expense |
|
|
70.7 |
% |
|
|
77.1 |
% |
Expense |
|
|
21.4 |
% |
|
|
19.6 |
% |
|
|
|
|
|
|
|
|
|
Combined |
|
|
92.1 |
% |
|
|
96.7 |
% |
|
|
|
|
|
|
|
|
|
Investments
We use the services of an independent investment manager to manage our fixed maturities
investment portfolio. The investment manager conducts, in accordance with our investment policy,
all of the investment purchases and sales for our insurance company subsidiaries. Our investment
policy has been established by the Investment Committee of our Board of Directors and specifically
addresses overall investment goals and objectives, authorized investments, prohibited securities,
restrictions on sales by the investment manager and guidelines as to asset allocation, duration and credit quality. The portfolio is compared with
a customized index. We do not invest in equity securities. Management and the Investment Committee
meet regularly to review the performance of the portfolio and compliance with our investment
guidelines.
The invested assets of the insurance company subsidiaries consist substantially of marketable,
investment grade, U.S. government securities, municipal bonds, corporate bonds and collateralized
mortgage obligations (CMOs). We also invest a portion of the portfolio in certain securities
issued by political subdivisions which enable our insurance company subsidiaries to obtain premium
tax credits. Investment income is comprised primarily of interest earned on these securities, net
of related investment expenses. Realized gains and losses, which are included in other revenues in
our consolidated statements of operations, may occur from time to time as changes are made to our
holdings to obtain premium tax credits or based upon changes in interest rates.
Our consolidated investment portfolio was $189.0 million at September 30, 2008 and consisted
of fixed maturity securities, all carried at fair value with unrealized gains and losses reported
as a separate component of stockholders equity on an after-tax basis. At September 30, 2008, we
had gross unrealized gains of $2.1 million and gross unrealized losses of $6.1 million, which
resulted in a net unrealized loss of $3.9 million on our fixed maturity securities.
At September 30, 2008, 99.8% of our investment portfolio was rated investment grade (a
credit rating of AAA to BBB) by nationally recognized rating agencies. The average credit rating of
our fixed maturity portfolio was AA+ at September 30, 2008. Investment grade securities generally
bear lower yields and lower degrees of risk than those that are unrated or non-investment grade.
Management believes that a high quality investment portfolio is more likely to generate a stable
and predictable investment return.
Investments in CMOs were $64.7 million at September 30, 2008 and represented 34% of our fixed
maturity portfolio. CMOs are subject to significant extension risk in periods of rising interest
rates and economic decline as mortgages may be repaid slower than expected. As of September 30,
2008, all of our CMOs were considered investment grade. In addition, 96% of the CMOs were rated AAA
and 79% of our CMOs were backed by agencies of the United States government. Of the non-agency
CMOs, 81% were rated AAA.
15
FIRST ACCEPTANCE CORPORATION 10-Q
The following table summarizes our fixed maturity securities at September 30, 2008 (in
thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
U.S. government and agencies |
|
$ |
30,310 |
|
|
$ |
1,154 |
|
|
$ |
(86 |
) |
|
$ |
31,378 |
|
State |
|
|
7,418 |
|
|
|
163 |
|
|
|
(20 |
) |
|
|
7,561 |
|
Political subdivisions |
|
|
3,365 |
|
|
|
19 |
|
|
|
(22 |
) |
|
|
3,362 |
|
Revenue and assessment |
|
|
29,928 |
|
|
|
276 |
|
|
|
(323 |
) |
|
|
29,881 |
|
Corporate bonds |
|
|
55,427 |
|
|
|
105 |
|
|
|
(3,421 |
) |
|
|
52,111 |
|
Collateralized mortgage obligations |
|
|
66,524 |
|
|
|
419 |
|
|
|
(2,196 |
) |
|
|
64,747 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
192,972 |
|
|
$ |
2,136 |
|
|
$ |
(6,068 |
) |
|
$ |
189,040 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth the scheduled maturities of our fixed maturity securities at
September 30, 2008 based on their fair values (in thousands). Actual maturities may differ from
contractual maturities because certain securities may be called or prepaid by the issuers.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities |
|
|
|
|
|
|
Securities |
|
|
Securities |
|
|
with No |
|
|
All |
|
|
|
with |
|
|
with |
|
|
Unrealized |
|
|
Fixed |
|
|
|
Unrealized |
|
|
Unrealized |
|
|
Gains or |
|
|
Maturity |
|
|
|
Gains |
|
|
Losses |
|
|
Losses |
|
|
Securities |
|
One year or less |
|
$ |
6,257 |
|
|
$ |
1,383 |
|
|
$ |
580 |
|
|
$ |
8,220 |
|
After one through five years |
|
|
43,479 |
|
|
|
19,318 |
|
|
|
544 |
|
|
|
63,341 |
|
After five through ten years |
|
|
13,194 |
|
|
|
27,812 |
|
|
|
|
|
|
|
41,006 |
|
After ten years |
|
|
2,186 |
|
|
|
9,083 |
|
|
|
457 |
|
|
|
11,726 |
|
No single maturity date |
|
|
34,646 |
|
|
|
29,060 |
|
|
|
1,041 |
|
|
|
64,747 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
99,762 |
|
|
$ |
86,656 |
|
|
$ |
2,622 |
|
|
$ |
189,040 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2008 Compared with the Three Months Ended September 30, 2007
Consolidated Results
Revenues for the three months ended September 30, 2008 decreased 18% to $71.6 million from
$87.2 million in the same period last year. Net income for the three months ended September 30,
2008 was $1.8 million, compared with net income of $1.9 million for the three months ended
September 30, 2007. Basic and diluted net income per share was
$0.04 for both the three
months ended September 30, 2008 and 2007.
Insurance Operations
Revenues from insurance operations were $71.6 million for the three months ended September 30,
2008, compared with $87.1 million for the three months ended September 30, 2007. Income before
income taxes from insurance operations for the three months ended
September 30, 2008 was $5.8
million, compared with $5.1 million for the three months ended September 30, 2007.
Premiums Earned
Premiums earned decreased by $13.0 million, or 17%, to $61.8 million for the three months
ended September 30, 2008 from $74.8 million for the three months ended September 30, 2007. The
decrease in premiums earned was due to declines in policies written resulting from the current
recessionary conditions, rate increases taken in a number of states to improve underwriting
profitability and the closure of 48 poor performing stores since January 2007.
Approximately
78% of the $13.0 million decline in premiums earned for the three months ended
September 30, 2008 was in our Florida, Georgia, Texas and Tennessee markets. These states collectively
accounted for 52% of premiums earned during the three months ended September 30, 2008, down from
57% for the same period in the prior year.
16
FIRST ACCEPTANCE CORPORATION 10-Q
Our premiums earned in these states were adversely affected by the current recessionary
conditions, as well as a decline in used car sales, which have historically
been a significant contributor to new policy growth in these markets. Additionally, the decline in
our Florida market was due to a January 1, 2008 rate increase to improve our underwriting
profitability.
The total number of insured policies in force at September 30, 2008 decreased 20% over the
same date in 2007 from 212,511 to 170,555, primarily due to the factors noted above. At September
30, 2008, we operated 429 stores, compared with 458 stores at September 30, 2007.
Commission and Fee Income
Commission and fee income decreased 11% to $8.2 million for the three months ended September
30, 2008 from $9.3 million for the three months ended September 30, 2007. The decrease in fee
income was a result of the decrease in policies in force, partially offset by higher fee income in
Florida.
Investment Income
Investment income decreased during the three months ended September 30, 2008 primarily as a
result of the decrease in the total amount of invested assets and the decline in yields on cash
equivalents. At September 30, 2008 and 2007, the tax-equivalent book yields for our fixed
maturities portfolio were 5.2%, with effective durations of 3.50 and 3.26 years, respectively. The
yields for the comparable customized indices were 5.5% and 5.1% at September 30, 2008 and 2007,
respectively.
Other
Included in other revenues during the three months ended September 30, 2008 is $1.3 million of
charges related to other-than-temporary impairment (OTTI) on investments comprised of $0.6
million for certain non-agency CMOs and $0.7 million for two corporate bonds. Managements
assessment of whether an impairment is other-than-temporary includes an evaluation of factors such
as the credit quality of the investment, the duration of the impairment, issuer-specific
fundamentals, our ability and intent to hold the investment until recovery or maturity and overall
economic conditions. If it is determined that the value of any investment is other-than-temporarily
impaired, the impairment would be charged against earnings and a new cost basis for the security
would be established. Due to the deterioration in liquidity in the credit markets during calendar
2008, yields on certain non-agency mortgage-backed securities declined below projected book yield
requiring a $0.6 million impairment of these securities under the guidance set forth in Emerging
Issues Task Force Issue No. 99-20 Recognition of Interest Income and Impairment on Purchased
Beneficial Interests and Beneficial Interests That Continue to Be Held by a Transferor in
Securitized Financial Assets. We also recognized OTTI charges of $0.7 million related to two
corporate bonds due to the extent and duration of the declines in their fair values
and issuer-specific fundamentals. We believe that the remaining securities having unrealized losses
at September 30, 2008 were not other-than-temporarily impaired and that we have the ability and
intent to hold these securities for a period of time sufficient to allow for recovery of their
impairment.
Losses and Loss Adjustment Expenses
The
loss and loss adjustment expense ratio was 70.7% for the three months ended September 30,
2008, compared with 77.1% for the three months ended September 30, 2007. For the three months ended September
30, 2008, we experienced favorable development of approximately $1.4
million for losses occurring prior to calendar year 2008. For the
three months ended September 30, 2007, we did not experience any significant development for prior accident
periods. In addition, we did not experience any significant weather-related losses during the three
months ended September 30, 2008.
Excluding
the favorable development noted above, the loss and loss adjustment expense ratio for the three months ended
September 30, 2008 was 73.0%. The improvement over the same
period last year was the result of rate increases taken in early 2008
in our Florida, Illinois, Indiana, Texas and South Carolina markets
and the continued improvement in our underwriting and claim handling
practices.
17
FIRST ACCEPTANCE CORPORATION 10-Q
Operating Expenses
Insurance operating expenses decreased 11% to $21.4 million for the three months ended
September 30, 2008 from $24.0 million for the three months ended September 30, 2007. This decrease
was primarily a result of a reduction in costs (such as variable employee-agent compensation and
premium taxes) that vary along with the decrease in premiums earned as well as savings realized
from the closure of underperforming stores.
The expense ratio increased from 19.6% for the three months ended September 30, 2007 to 21.4%
for the same period in the current fiscal year. This increase was primarily due to the decline in
premiums earned discussed above.
Overall,
the combined ratio decreased to 92.1% for the three months ended September 30, 2008
from 96.7% for the three months ended September 30, 2007.
Litigation Settlement
Litigation settlement costs for the three months ended September 30, 2008 of $0.1 million
relate to the costs incurred in connection with our defense of the litigation in Alabama and
Georgia. We have entered into a settlement agreement relating to the Georgia litigation effective
September 10, 2008, which is subject to approval by the court, and have agreed upon preliminary
settlement terms with the plaintiffs in the Alabama actions. The settlement of the Alabama
litigation is subject to negotiation of a definitive settlement agreement and approval by the
applicable courts. Pursuant to the litigation settlements, we would (i) provide the plaintiffs with
either a premium credit towards a future insurance policy or a reimbursement certificate for
certain future towing and rental expenses, (ii) strengthen our disclosures to customers of all
relevant fees, charges and coverages, (iii) pay an aggregate of $6.3 million in fees and expenses
for the attorneys for the plaintiffs and (iv) pay the costs associated with the administration of
the settlements.
At this time, we are unable to estimate the total costs associated with the Georgia and
Alabama litigation settlements. The costs of the settlements will depend, among other factors, upon
whether class members receive premium credits or reimbursement certificates pursuant to the terms
of the settlements and the rate of redemption and forfeiture of the premium credits and
reimbursement certificates. The litigation settlement costs are set forth separately in the
consolidated statements of operations. We anticipate that our payment of the $6.3 million in
plaintiffs attorneys fees and expenses and the $0.4 million in estimated costs associated with
the administration of the settlement, both of which were accrued at June 30, 2008, will occur in
calendar year 2009, after the final approvals from the courts.
We are currently in discussions with our insurance carriers regarding coverage for the costs
and expenses incurred relating to the litigation settlements and are not able currently to estimate
the amount, if any, that we may receive from our insurance carriers. As a result, we have not
accrued any amount at September 30, 2008 for insurance recoveries that may offset the costs and
expenses relating to the litigation settlements. Any such insurance recoveries will be recorded in
our operating results during the periods in which the recoveries are probable. For additional
information with respect to the litigation settlements, see Part II Item 1. Legal Proceedings.
Real Estate and Corporate
Loss before income taxes for the three months ended September 30, 2008 was $2.0 million,
compared with a loss of $2.1 million for the three months ended September 30, 2007. During the
three months ended September 30, 2008, we incurred $0.2 million of interest expense in connection
with credit facility borrowings compared with $0.3 million for the three months ended September 30,
2007. In addition, we incurred $1.0 million of interest expense during both the three months ended
September 30, 2008 and September 30, 2007 related to the debentures issued in June 2007.
18
FIRST ACCEPTANCE CORPORATION 10-Q
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. Operating activities for the three months ended September 30, 2008 used
$2.5 million of cash, compared with $3.0 million provided in the same period in fiscal 2008. The
decrease in cash provided by operating activities was the result of a decrease in cash collected on
premiums written. Net cash used in investing activities for the three months ended September 30,
2008 was $5.5 million, compared with net cash provided by investing activities of $15.1 million for
the same period in fiscal 2008. Both periods reflect net additions to our investment portfolio,
while the three months ended September 30, 2007 includes the settlement of a $20.0 million
receivable for securities in July 2007. Financing activities for the three months ended September
30, 2008 included a principal prepayment of $1.0 million on our term loan facility in August 2008,
while the three months ended September 30, 2007 included the repayment of $5.0 million related to
our revolving credit facility. The three months ended September 30, 2008 and 2007 included
scheduled quarterly principal payments on our term loan facility of $0.4 million and $1.4 million,
respectively. We paid the final $2.5 million principal payment and terminated our term loan
facility in October 2008.
Our holding company requires cash for general corporate overhead expenses and debt service.
However, we are part of an insurance holding company system with substantially all of our
operations conducted by our insurance company subsidiaries. Accordingly, the holding companys
primary sources of unrestricted cash to meet its obligations are dividends from our insurance
company subsidiaries and from our non-insurance company subsidiaries that sell ancillary products
to our insureds. The holding company will also receive cash from operating activities as a result
of investment income and the ultimate liquidation of our foreclosed real estate held for sale. In
addition, as a result of our net operating loss (NOL) carryforwards, taxable income generated by
the insurance company subsidiaries through June 30, 2009 will provide cash to the holding company
through an intercompany tax allocation agreement through which the insurance company subsidiaries
reimburse the holding company for current tax benefits utilized through recognition of the NOL
carryforwards. Future taxable losses by the holding company will also provide cash through this
agreement should the insurance company subsidiaries generate taxable income.
We anticipate that our insurance company subsidiaries will pay the amounts due under our
Georgia litigation settlement, which includes $3.8 million in plaintiffs attorneys fees and
expenses, $0.4 million in estimated costs associated with the administration of the settlement and
amounts to be paid with regards to premium credits and reimbursement certificates. The Alabama
litigation settlement, which includes $2.5 million in plaintiffs attorneys fees and expenses,
will be paid by the holding company as the insurance company subsidiaries are not part of the
settlement.
After the October 2008 termination of our credit facilities, the debt service requirements of
the holding company will be limited to the debentures payable. Such debentures are interest-only
and mature in full in July 2037. Annual interest is fixed through July 2012 at $3.8 million. The
Company is currently in discussions with other financial institutions regarding a new revolving
credit facility. However, no assurances can be made that financing
will be available or, if available, will be available on satisfactory
terms.
During October 2008, the insurance company subsidiaries paid ordinary dividends to the holding
company of $2.5 million. These dividends were used to repay the $2.5 million in debt noted above.
At September 30, 2008, we had $1.3 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 future expenses outside of the insurance company
subsidiaries.
State insurance laws limit the amount of dividends that may be paid from our insurance company
subsidiaries. These limitations relate to statutory capital and surplus and net income. In
addition, the National Association of Insurance Commissioners Model Act for risk-based capital
(RBC) provides formulas to determine the amount of statutory capital and surplus that an
insurance company needs to ensure that it has an acceptable expectation of not becoming financially
impaired. A low RBC ratio would prevent an insurance company from paying dividends. Statutory
guidelines suggest that the insurance company subsidiaries should not exceed a ratio of net
premiums written to statutory capital and surplus of 3-to-1. We believe that our insurance company
subsidiaries have sufficient financial resources available to support their net premium writings in
both the short-term and the reasonably foreseeable future.
19
FIRST ACCEPTANCE CORPORATION 10-Q
Based on our December 31, 2007 statutory capital and surplus, our ordinary dividend capacity
for calendar 2008 is approximately $11 million. Such amount is limited however to the amount of
earned surplus of First Acceptance Insurance Company, Inc., which at September 30, 2008 was
approximately $7 million.
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. Our 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.
Credit Facility
We entered into an amendment to the credit agreement effective September 10, 2008. The amended
terms (i) accelerated the maturity date of the term loan facility to October 31, 2008, (ii)
eliminated the revolving credit facility and (iii) removed all financial covenants for the
remaining term. The unpaid balance under our credit agreement as of September 30, 2008 was $2.5
million, which was repaid on October 31, 2008. We terminated this credit facility effective October
31, 2008. We entered into an interest rate swap agreement in January 2006 that fixed the interest
rate on the term loan facility at 6.63%. In addition, effective September 30, 2008, we cancelled
the interest rate swap agreement for $0.1 million.
Critical Accounting Policies
There have been no significant changes to our critical accounting policies and estimates
during the three months ended September 30, 2008 compared with those disclosed in Item 7.
Managements Discussion and Analysis of Financial Condition and Results of Operations Critical
Accounting Policies included in our Annual Report on Form 10-K for the fiscal year ended June 30,
2008.
Off-Balance Sheet Arrangements
There have been no new off-balance sheet arrangements since June 30, 2008. Refer to Item 7.
Managements Discussion and Analysis of Financial Condition and Results of Operations
Off-Balance Sheet Arrangements included in our Annual Report on Form 10-K for the fiscal year
ended June 30, 2008.
Forward-Looking Statements
This report contains forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. All statements made in the report, other than statements of historical fact, are
forward-looking statements. You can identify these statements from our use of the words may,
should, could, potential, continue, plan, forecast, estimate, project, believe,
intent, anticipate, expect, target, is likely, will, or the negative of these terms,
and similar expressions. These statements are made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. These forward-looking statements may include,
among other things:
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statements and assumptions relating to future growth, income, income per share and
other financial performance measures, as well as managements short-term and long-term
performance goals; |
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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. |
20
FIRST ACCEPTANCE CORPORATION 10-Q
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sensitivity to Instantaneous Interest Rate Changes (basis points) |
|
|
|
(100) |
|
|
(50) |
|
|
0 |
|
|
50 |
|
|
100 |
|
|
200 |
|
Fair value of fixed
maturity portfolio |
|
$ |
196,288 |
|
|
$ |
192,669 |
|
|
$ |
189,040 |
|
|
$ |
185,372 |
|
|
$ |
181,701 |
|
|
$ |
174,416 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21
FIRST ACCEPTANCE CORPORATION 10-Q
The following table provides information about our fixed maturity investments at September 30,
2008 which are sensitive to interest rate risk. The table shows expected principal cash flows (at
par value, which differs from amortized cost as a result of discounts at the time of purchase and
other-than-temporary impairment) by expected maturity date for each of the five 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.
|
|
|
|
|
Year Ended June 30, |
|
Amount |
|
2009 |
|
$ |
17,649 |
|
2010 |
|
|
14,862 |
|
2011 |
|
|
20,558 |
|
2012 |
|
|
26,105 |
|
2013 |
|
|
21,116 |
|
Thereafter |
|
|
95,884 |
|
|
|
|
|
Total |
|
$ |
196,174 |
|
|
|
|
|
|
|
|
|
|
Fair value |
|
$ |
189,040 |
|
|
|
|
|
With regards to interest rate risk on our outstanding debt, at September 30, 2008, the unpaid
balance due under the credit facility was $2.5 million. The interest rate on this borrowing was
fixed through an interest rate swap agreement. This debt was repaid in full in October 2008. On
June 15, 2007, our newly formed wholly-owned unconsolidated trust entity, First Acceptance
Statutory Trust I, used the proceeds from its sale of trust preferred securities to purchase $41.2
million of junior subordinated debentures. The debentures pay a fixed rate of 9.277% until July 30,
2012, after which the rate becomes variable (LIBOR plus 375 basis points).
Credit Risk
Credit risk is managed by diversifying the portfolio to avoid concentrations in any single
industry group or issuer and by limiting investments in securities with lower credit ratings. The
largest investment in any one fixed maturity security, excluding U.S. government and agency
securities, is $2.7 million, or 1% of the fixed maturity portfolio. The top five investments make
up 5% of the fixed maturity portfolio. The average credit quality rating for our fixed maturity
portfolio was AA+ at September 30, 2008. There are no fixed maturities in the portfolio that have
not produced investment income during the previous twelve months.
The following table shows our fixed maturity portfolio by Standard & Poors Corporation rating
as of September 30, 2008 (in thousands).
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
Amortized |
|
|
Amortized |
|
|
Fair |
|
|
Fair |
|
Comparable Rating |
|
Cost |
|
|
Cost |
|
|
Value |
|
|
Value |
|
AAA |
|
$ |
102,017 |
|
|
|
52.9 |
% |
|
$ |
101,812 |
|
|
|
53.9 |
% |
AA+, AA, AA- |
|
|
34,620 |
|
|
|
17.9 |
% |
|
|
33,852 |
|
|
|
17.9 |
% |
A+, A, A- |
|
|
47,801 |
|
|
|
24.8 |
% |
|
|
45,368 |
|
|
|
24.0 |
% |
BBB+, BBB, BBB- |
|
|
8,194 |
|
|
|
4.2 |
% |
|
|
7,668 |
|
|
|
4.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment grade |
|
|
192,632 |
|
|
|
99.8 |
% |
|
|
188,700 |
|
|
|
99.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BB+, BB, BB- |
|
|
340 |
|
|
|
0.2 |
% |
|
|
340 |
|
|
|
0.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-investment grade |
|
|
340 |
|
|
|
0.2 |
% |
|
|
340 |
|
|
|
0.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
192,972 |
|
|
|
100.0 |
% |
|
$ |
189,040 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
22
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 drops in fair value. We have only modest exposure to
sub-prime investments and no exposure to Alt-A investments. At September 30, 2008, our fixed
maturity portfolio included three CMOs having sub-prime exposure with a fair value of $1.3 million,
all of which were rated investment grade. These securities are paying their principal and periodic
interest timely and the underlying assets of these securities continue to perform within
expectations.
In early 2008, several municipal bond insurers had their credit ratings downgraded or placed
under review by the major nationally recognized credit rating agencies. Fitch, one of the
nationally recognized credit rating agencies, downgraded AMBAC to a rating of AA from AAA. Our
investment portfolio consists of $40.8 million of municipal bonds, of which $29.3 million are
insured. Of the insured bonds, 47% are insured with MBIA, 18% with FGIC, 21% with AMBAC and 14%
with XL Capital. These securities are paying their principal and periodic interest timely.
The following table presents the underlying ratings as of September 30, 2008, represented by
the lower of either Standard and Poors, Fitchs, or Moodys ratings, of the municipal bond
portfolio (in thousands).
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insured |
|
|
Uninsured |
|
|
Total |
|
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
Fair |
|
|
Fair |
|
|
Fair |
|
|
Fair |
|
|
Fair |
|
|
Fair |
|
|
|
Value |
|
|
Value |
|
|
Value |
|
|
Value |
|
|
Value |
|
|
Value |
|
AAA |
|
$ |
|
|
|
|
0 |
% |
|
$ |
3,833 |
|
|
|
33 |
% |
|
$ |
3,833 |
|
|
|
10 |
% |
AA+, AA, AA- |
|
|
16,715 |
|
|
|
57 |
% |
|
|
6,655 |
|
|
|
58 |
% |
|
|
23,370 |
|
|
|
57 |
% |
A+, A, A- |
|
|
9,653 |
|
|
|
33 |
% |
|
|
1,035 |
|
|
|
9 |
% |
|
|
10,688 |
|
|
|
26 |
% |
BBB+, BBB, BBB- |
|
|
1,355 |
|
|
|
5 |
% |
|
|
|
|
|
|
0 |
% |
|
|
1,355 |
|
|
|
3 |
% |
NR (not rated) |
|
|
1,558 |
|
|
|
5 |
% |
|
|
|
|
|
|
0 |
% |
|
|
1,558 |
|
|
|
4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
29,281 |
|
|
|
100 |
% |
|
$ |
11,523 |
|
|
|
100 |
% |
|
$ |
40,804 |
|
|
|
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 September 30,
2008. Based on that evaluation, our chief executive officer and chief financial officer have
concluded that our disclosure controls and procedures effectively ensure that information required
to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the Securities and Exchange
Commissions rules and forms.
Changes in Internal Control Over Financial Reporting
During the period covered by this report, there has been no change in our internal control
over financial reporting that has materially affected or is reasonably likely to materially affect
our internal control over financial reporting.
23
FIRST ACCEPTANCE CORPORATION 10-Q
PART II OTHER INFORMATION
Item 1. Legal Proceedings
We are a party to litigation in Alabama and Georgia in which allegations are made with respect
to our sales practices, primarily the sale of motor club memberships currently or formerly sold in
those states. Annette Rush v. Village Auto Insurance Company, Inc. (now known as First Acceptance
Insurance Company of Georgia, Inc.) was filed on October 26, 2005, as a putative class action in
the Superior Court of Fulton County, Georgia. Margaret Franklin v. Vesta Insurance Corp., et al.
was filed on July 14, 2006, as a putative class action in the Circuit Court of Bullock County,
Alabama. Keisha Milbry Monday, et al. v. First Acceptance Corp., et al. was filed on February 13,
2007, in the Circuit Court of Bullock County, Alabama. Solomon and Catherine Warren, et al. v.
First Acceptance Corp., et al. was filed on November 9, 2007, in the Circuit Court of Barbour
County, Alabama. The suits generally allege that we implemented a program to convince our consumers
who purchased automobile insurance policies to also purchase motor club memberships or that we
charged our consumers billing fees associated with our products that were not properly disclosed,
and seek unspecified damages and attorneys fees. We have denied all allegations of wrongdoing,
have vigorously defended the Company against these actions, and believe that we have meritorious
defenses to these claims.
Notwithstanding the foregoing, to avoid the uncertainty, risks and costs of further
litigation, we have entered into a settlement agreement effective September 10, 2008 with the
plaintiffs in the Georgia litigation. Pursuant to the terms of the settlement agreement, the
plaintiffs in the Georgia litigation were divided into two classes: (i) persons who were insured by
the Company on September 1, 2008 who purchased an automobile club membership with their automobile
insurance and (ii) persons who were insured by the Company prior to September 1, 2008 who purchased
an automobile club membership with their automobile insurance. Pursuant to the terms of the
settlement, each class member who was insured by the Company on September 1, 2008 will receive a
premium credit equal to 100% of the amounts he or she paid for automobile club memberships and
deferred billing fees against the premium for a new or renewal automobile insurance policy (as
applicable) for up to twelve months of liability or uninsured motorist coverage issued by the
Company prior to December 31, 2009, unless he or she elects, prior to December 31, 2008, to receive
instead of the premium credit a reimbursement certificate that provides for cash reimbursement of
up to a maximum total payment of $50 for any rental or towing expenses incurred by the class member
on or before December 31, 2009 as a result of the disablement of his or her vehicle because of an
accident. Each class member who was insured by the Company prior to September 1, 2008 will receive
a reimbursement certificate that provides for cash reimbursement of up to a maximum total payment
of $50 for any rental or towing expenses incurred by the class member on or before December 31,
2009 as a result of the disablement of his or her vehicle because of an accident, unless he or she
elects, prior to December 31, 2008, to receive instead of the reimbursement certificate, a premium
credit equal to 100% of the amounts he or she paid for automobile club memberships and deferred
billing fees against the premium for a new automobile insurance policy for up to twelve months of
liability or uninsured motorist coverage issued by the Company prior to June 30, 2010. Any premium
credits issued to class members as described above will be prorated over a twelve-month term not to
extend beyond June 30, 2011, and the class member will be entitled to the prorated premium credit
only so long as he or she keeps their insurance premiums current during the twelve-month term. No
benefits will be available to class members until January 1, 2009. We have also agreed to
strengthen our disclosures to customers of all relevant fees, charges and coverages. In addition,
we have agreed to pay $3.8 million in fees and expenses for the attorneys for the Georgia
plaintiffs and pay all costs associated with the administration of the settlement. The settlement
agreement is subject to approval by the court, and we expect the court to hold a hearing to
consider the settlement in November 2008.
We have also agreed upon preliminary settlement terms with the plaintiffs in the Alabama
litigation. The preliminary settlement terms provide for benefits to the Alabama plaintiffs
substantially similar to the benefits to be paid to the Georgia plaintiffs, and a payment of $2.5
million in fees and expenses for the attorneys for the Alabama plaintiffs. The settlement of the
Alabama litigation is subject to the negotiation of a definitive settlement agreement and approval
of the settlement agreement by the applicable courts.
At this time, we are unable to estimate the total costs associated with the Georgia and
Alabama litigation settlements. The costs of the settlements will depend, among other factors, upon
whether class members receive premium credits or reimbursement certificates pursuant to the terms
of the settlements and the rate of redemption and forfeiture of the premium credits and
reimbursement certificates. We estimate that there are approximately 11,000 persons who were
insured by the Company on September 1, 2008 and approximately 155,000 persons who
24
FIRST ACCEPTANCE CORPORATION 10-Q
were insured by the Company prior to September 1, 2008 that, pursuant to the terms of the
settlement agreement, are members of the plaintiff class in the Georgia litigation. We estimate
that there are approximately 55,000 persons who were insured by the Company prior to September 1,
2008 that, pursuant to the proposed settlement terms, would be eligible to be members of the
plaintiff class in the Alabama litigation. Through September 30, 2008, the total amount received by
the Company relating to motor club memberships and deferred billing fees is $25.3 million for the
State of Georgia and $5.8 million for the State of Alabama.
At June 30, 2008, we had accrued an aggregate of $6.7 million related to the expenses of the
litigation settlements, consisting of $6.3 million in plaintiffs attorneys fees and expenses and
$0.4 million in estimated costs associated with the administration of the settlement. We will
accrue additional amounts relating to the costs of the litigation settlements when those amounts
become reasonably estimable.
Item 6. Exhibits
The following exhibits are attached to this report:
10 |
|
Stipulation and Agreement of Settlement, made and entered into as of September 10, 2008, by
First Acceptance Insurance Company of Georgia, Inc., and its predecessors and affiliates,
Village Auto Insurance Company, U.S. Auto Insurance Company, and Transit Auto Club, Inc., and
Annette Rush and all other persons similarly situated by and through their undersigned
attorneys of record. |
|
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. |
25
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
|
|
November 10, 2008 |
By: |
/s/ Kevin P. Cohn
|
|
|
Kevin P. Cohn |
|
|
Senior Vice President and Chief Financial Officer
(Principal Financial Officer and Principal Accounting
Officer) |
|
26