e10vk
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|
|
|
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the Fiscal Year Ended June 30, 2009
Commission file number 001-12117
FIRST ACCEPTANCE CORPORATION
(Exact name of registrant as specified in its charter)
|
|
|
Delaware
|
|
75-1328153 |
(State or other jurisdiction of
|
|
(I.R.S. Employer Identification No.) |
incorporation or organization) |
|
|
|
|
|
3322 West End Ave. Ste. 1000, Nashville, Tennessee
|
|
37203 |
(Address of principal executive offices)
|
|
(Zip Code) |
(615) 844-2800
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
|
|
|
Title of Each Class
|
|
Name of exchange on which registered |
|
|
|
Common Stock, $.01 par value per share
|
|
New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act.
Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section
13 or 15(d) of the Act.
Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate website, if any, every Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
Yes o No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer o |
Accelerated filer þ |
Non-accelerated filer o (Do not check if a smaller reporting company) |
Smaller Reporting Company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).
Yes o No þ
The aggregate market value of the voting and non-voting stock held
by non-affiliates of the registrant, based on the closing price of these shares on the New York
Stock Exchange on December 31, 2008, was $48,616,888. For the purposes of this disclosure only,
the registrant has assumed that its directors, executive officers and beneficial owners of 5% or
more of the registrants common stock are affiliates of the registrant.
As of September 10, 2009, there were 48,311,873 shares of the registrants common stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
All of the information called for by Part III of this report is incorporated by reference to
the Definitive Proxy Statement for our 2009 Annual Meeting of Shareholders, which will be held on
November 17, 2009.
FIRST ACCEPTANCE CORPORATION 10-K
Index to Annual Report on Form 10-K
i
FIRST ACCEPTANCE CORPORATION 10-K
PART I
Item 1. Business
General
First Acceptance Corporation (the Company, we or us) is a retailer, servicer and
underwriter of non-standard personal automobile insurance based in Nashville, Tennessee. We
currently write non-standard personal automobile insurance in 12 states and are licensed as an
insurer in 13 additional states. Non-standard personal automobile insurance is made available to
individuals who are categorized as non-standard because of their inability or unwillingness to
obtain standard insurance coverage due to various factors, including payment history, payment
preference, failure in the past to maintain continuous insurance coverage, driving record and/or
vehicle type, and in most instances who are required by law to buy a minimum amount of automobile
insurance. As of September 1, 2009, we leased and operated 418 retail locations, staffed with
employee-agents. Our employee-agents exclusively sell non-standard automobile insurance products
underwritten by us.
Our Business Strategy
As a provider of non-standard personal automobile insurance, we have adhered to a focused
business model and disciplined execution of our operating strategy. Our business model includes the
following core strategies:
|
|
|
Integrated Operations. To meet the preference of our customers for convenient, personal
service, we have integrated the retail distribution, underwriting and service functions of
personal automobile insurance into one system. By doing so, we are able to provide prompt
and personal service to meet effectively the insurance needs of our customers, while
capturing revenue that would otherwise be shared with several participants under a
traditional, non-integrated insurance business model. Our integrated model is supported by
both point of sale agency and back office systems. |
|
|
|
|
Extensive Office Network. We emphasize the use of employee-agents as the cornerstone of
our customer relationship. We believe our customers value face-to-face contact, speed of
service and convenient locations. Consequently, we train our employee-agents to cultivate
client relationships and utilize real-time service and information enabled by our
information systems. As of September 1, 2009, we leased and operated 418 retail locations
staffed with our employee-agents and located strategically in geographic markets to reach
and service our customers. |
|
|
|
|
Favorable Customer Payment Plans. Our customers can initiate insurance coverage with a
modest down payment. Any remaining premium is paid in monthly installments over the term
of the policy. We believe this modest initial payment and favorable payment plan is a
major factor in meeting the market demand for low monthly insurance payments. |
|
|
|
|
Effective Sales and Marketing. We build brand recognition and generate valuable sales
leads through the use of local print advertising (including the Yellow Pages®), television
and radio advertising, direct mailings and a broad network of retail locations. |
|
|
|
|
Efficient Systems. We have developed systems that enable timely and efficient
communication and data sharing among the various segments of our integrated operations. All
of our retail locations transmit information directly to our central data center where
policy information, customer profiles, risk assessment and underwriting criteria are
maintained in our database. |
Our Business Model
We believe our operations benefit from our ability to identify and satisfy the needs of our
target customers and eliminate many of the inefficiencies associated with a traditional automobile
insurance model. We have developed our business model by drawing on significant experience in the
automobile insurance industry. We are a
vertically integrated business that acts as the agency, servicer and underwriter of non-standard
personal automobile insurance. We own three insurance company subsidiaries: First Acceptance
Insurance Company, Inc. (FAIC),
1
FIRST ACCEPTANCE CORPORATION 10-K
First Acceptance Insurance Company of Georgia, Inc. (FAIC-GA) and First Acceptance Insurance
Company of Tennessee, Inc. (FAIC-TN). Our retail locations are staffed with employee-agents who
exclusively sell automobile insurance policies underwritten by us. Our vertical integration,
combined with our conveniently located retail locations, enables us to control the point of sale
and to retain significant revenue that would otherwise be lost in a traditional, non-integrated
insurance business model. We generate additional revenue by fully servicing our book of business,
which often allows us to collect policy, billing and other fees.
Our strategy is to offer customers automobile insurance with low down payments, competitive
equal monthly payments, convenient locations and a high level of personal service. This strategy
makes it easier for our customers to obtain automobile insurance, which is legally mandated in the
states in which we currently operate. We accept customers for our insurance who have previously
terminated coverage provided by us without imposing any additional requirements on such customers.
Currently, our policy renewal rate (the percentage of policies that are renewed after completion of
the full uninterrupted policy term) is approximately 37%, which, due to the payment patterns of our
customers, is lower than the average renewal rate of standard personal automobile insurance
providers. We are able to accept a low down payment because we process all business through our
centralized information systems. Our business model and systems allow us to issue policies
efficiently and, when necessary, cancel them to minimize the potential for credit loss while
adhering to regulatory cancellation notice requirements.
In addition to a low down payment and competitive monthly rates, we offer customers valuable
face-to-face contact and speed of service as many of our customers prefer not to purchase a new
automobile insurance policy via the internet or over the telephone. Substantially all of our
customers make their payments at our retail locations. For these consumers, our employee-agents are
not only the face of the Company, but also the preferred interface for buying insurance.
Our ability to process business quickly and accurately gives us an advantage over more
traditional insurance companies that produce business using independent agents. Our policies are
issued at the point of sale, and applications are processed in two business days, as opposed to the
two or more weeks that is often typical in the automobile insurance industry. The traditional
non-standard personal automobile insurance model typically involves interaction and paperwork
exchange between the insurance company, independent agent and premium finance provider. This
complicated interaction presents numerous opportunities for miscommunication, delays or lost
information. Accordingly, we believe that some of our competitors who rely on the traditional
independent agency model cannot match our efficiency in serving our customer base.
We believe that another distinct advantage of our model over the traditional independent
agency approach is that our employee-agents offer a single non-standard insurance product compared
with many products from multiple insurance companies. The typical independent agent selling
non-standard personal automobile insurance generally has multiple non-standard insurance companies
and premium finance sources from which to quote based on agent commission, price and other factors.
This means that insurance companies using the independent agent model must compete to provide the
most attractive agent commissions and absolute lowest prices to encourage the independent agent to
sell their product. Our employee-agents sell our non-standard automobile insurance products
exclusively. Therefore, we do not have to compete for the attention of those distributing our
product on the basis of agent commissions, price or other factors.
Personal Automobile Insurance Market
Personal automobile insurance is the largest line of property and casualty insurance in the
United States with, according to A.M. Best, an estimated market size of $164 billion in premiums
earned for the year ended December 31, 2008. Personal automobile insurance provides drivers with
coverage for liability to others for bodily injury and property damage and for physical damage to
the drivers vehicle from collision and other perils.
The market for personal automobile insurance is generally divided into three product segments:
non-standard, standard and preferred insurance. We believe that the premiums earned in the
non-standard automobile insurance market segment in the United States represent between 15% and 25%
of the total personal automobile insurance market. Non-standard personal automobile insurance is
designed to be attractive to drivers who prefer to
purchase only the minimum amount of coverage required by law or to minimize the required payment
during each payment period.
2
FIRST ACCEPTANCE CORPORATION 10-K
Our Products
Our core business involves issuing automobile insurance policies to individuals who are
categorized as non-standard, based primarily on their inability or unwillingness to obtain
insurance coverage from standard carriers due to various factors, including their need for monthly
payment plans, failure to maintain continuous insurance coverage or driving record. We believe that
a majority of our customers seek non-standard insurance due to their failure to maintain continuous
coverage or their need for affordable monthly payments, rather than as a result of poor driving
records. The majority of our customers purchase the minimum amount of coverage required by law.
At June 30, 2009, the average six-month premium on our policies in force was $634. We allow
most customers to pay for their insurance with an initial down payment and five equal monthly
installments, which includes a billing fee. We believe that our target customers prefer lower down
payments and level monthly payments over the payment options traditionally offered by other
non-standard providers. Because our centralized information systems enable us to control all
aspects of servicing our insurance policies, we can generally cancel the policy of a customer who
fails to make a payment without incurring a credit loss, while remaining within applicable
regulatory cancellation guidelines.
We use a single product template as the basis for our rates, rules and forms. Product
uniformity simplifies our business and allows speed to market when entering a new state, modifying
an existing program or introducing a new program. In addition, our retail agents, underwriters and
claims adjusters only need to be trained in one basic set of underwriting guidelines and one basic
automobile policy. Programming and systems maintenance are also simplified because we have one
basic product.
In addition to non-standard personal automobile insurance, we also offer our customers
optional products that provide ancillary reimbursements and benefits in the event of an automobile
accident. Those products generally provide reimbursements for medical expenses and hospital stays
as a result of injuries sustained in an automobile accident, automobile towing and rental, bail
bond premiums and ambulance services.
Our Strategy
During the 2008 and 2009 fiscal years, our business and the non-standard personal automobile
insurance industry were negatively impacted by the difficult economic conditions that adversely
impacted our customers. We believe that many of our customers made the financial decision to either
(i) reduce their insurance coverage to include only the mandatory coverage required by law or (ii)
not purchase any insurance coverage despite the legal requirement to do so. As a result, we did not
enter into any new markets during fiscal year 2008 or 2009 and focused our strategy on maintaining
business in our existing markets. We sought to maintain or increase the number of customers in our
existing markets through advertising campaigns and retention marketing efforts. In the future, we
may explore growth opportunities by expanding into new geographic markets through opening new
retail locations, pursuing selective acquisitions, including acquisitions of local agencies who
write non-standard automobile insurance for other insurance companies, and introducing additional
insurance products. We anticipate that the current difficult economic conditions will continue to
impact our customers and our business during fiscal year 2010.
Competition
The non-standard personal automobile insurance business is highly competitive. We believe that
our primary competition comes not only from national companies or their subsidiaries, but also from
non-standard insurers and independent agents that operate in specific regions or states. We
compete against other vertically integrated insurance companies and independent agencies that
market insurance on behalf of a number of insurers. We compete with these other insurers on
factors such as initial down payment, availability of monthly payment plans, price, customer
service and claims service. We believe that our significant competitors are the Berkshire Hathaway
insurance group (which includes GEICO), the Bristol West insurance group, the Direct General
insurance group, the Infinity insurance group, the Affirmative insurance group, the Progressive
insurance group, the Safe Auto insurance group, the Permanent General insurance group, and the AIG
insurance group.
3
FIRST ACCEPTANCE CORPORATION 10-K
Marketing and Distribution
Our marketing strategy is based on promoting brand recognition of our product and encouraging
prospective customers to visit one of our retail locations. Our primary advertising strategy
combines local print media advertising, such as the Yellow Pages®, with low-cost television and
radio advertising. We market our business under the name Acceptance Insurance in all areas
except in the Chicago-area, where we use the names Yale Insurance and Insurance Plus.
We primarily distribute our products through our retail locations. We believe the local office
concept is attractive to most of our customers, as they desire the face-to-face assistance they
cannot receive via the internet or over the telephone. Our advertisements promote local phone
numbers that are answered at either the local retail office or one of our regional customer service
centers, which are located in Nashville, Tennessee and Chicago, Illinois. We provide quotes over
the telephone highlighting our low down payment and monthly payments, and direct prospective
customers to the nearest local retail office to complete an application. The entire sales process
can be completed at the local retail office where the down payment is collected and a policy
issued. Future payments can be made either at the local office, by telephone, or mailed to our
Nashville customer service center.
Underwriting and Pricing
Our underwriting and rating systems are fully automated, including on-line driving records,
where available. We believe that our underwriting and pricing systems provide a competitive
advantage to us because they give us the ability to capture relevant pricing information, improve
efficiencies, increase the accuracy and consistency of underwriting decisions and reduce training
costs.
We set premium rates based on the specific type of vehicle and the drivers age, gender,
marital status, driving experience and location. We review loss trends in each of the states in
which we operate to identify changes in the frequency and severity of accidents and to assess the
adequacy of our rates and underwriting standards. We adjust rates periodically, as necessary, and
as permitted by applicable regulatory authorities, to maintain or improve underwriting results in
each market.
Claims Handling
Non-standard personal automobile insurance customers generally have a higher frequency of
claims than preferred and standard personal automobile insurance customers. We focus on controlling
the claims process and costs, thereby limiting losses, by internally managing the entire claims
process. We strive to promptly assess claims, manage against fraud, and identify loss trends and
capture information that is useful in establishing loss reserves and determining premium rates. Our
claims process is designed to promote expedient, fair and consistent claims handling, while
controlling loss adjustment expenses.
As of June 30, 2009, our claims operation included adjusters, appraisers, re-inspectors,
special investigators and claims administrative personnel. We conduct our claims operations out of
our Nashville office and through regional claims offices in Tampa, Florida and Chicago, Illinois.
Our employees handle all claims from the initial report of the claim until the final settlement. We
believe that directly employing claims personnel, rather than using independent contractors,
results in improved customer service, lower loss payments and lower loss adjustment expenses. In
territories where we do not believe a staff appraiser would be cost-effective, we utilize the
services of independent appraisers to inspect physical damage to automobiles. The work of
independent appraisers is supervised by regional staff appraisal managers.
While we are strongly committed to settling promptly and fairly the meritorious claims of our
customers and claimants, we are equally committed to defending against non-meritorious claims.
Litigated claims and lawsuits are primarily managed by one of our specially trained litigation
adjusters. Suspicious claims are referred to a special investigation unit. When a dispute arises,
we seek to minimize our claims litigation defense costs by attempting to negotiate flat-fee
representation with outside counsel specializing in automobile insurance claim defense. We believe
that our efforts to obtain high quality claims defense litigation services at a fixed or carefully
controlled cost have helped us control claims losses and expenses.
4
FIRST ACCEPTANCE CORPORATION 10-K
Loss and Loss Adjustment Expense Reserves
Automobile accidents generally result in insurance companies making payments (referred to as
losses) to individuals or companies to compensate for physical damage to an automobile or other
property and/or an injury to a person. Months and sometimes years may elapse between the occurrence
of an accident, report of the accident to the insurer and payment of the claim. Insurers record a
liability for estimates of losses that will be paid for accidents reported to them, which are
referred to as case reserves. As accidents are not always reported promptly, insurers estimate
incurred but not reported, or IBNR, reserves to cover expected losses for accidents that have
occurred, but have not been reported to the insurer. Insurers also incur expenses in connection
with the handling and settling of claims that are referred to as loss adjustment expenses and
record a liability for the estimated costs to settle their expected unpaid losses.
We are directly liable for loss and loss adjustment expenses under the terms of the insurance
policies underwritten by our insurance company subsidiaries. Each of our insurance company
subsidiaries establishes a reserve for all unpaid losses, both case reserves and IBNR reserves, and
estimates for the cost to settle the claims. We estimate our IBNR reserves by estimating our
ultimate liability for loss and loss adjustment expense reserves first, and then reducing that
amount by the amount of the cumulative paid claims and by the amount of our case reserves. We rely
primarily on historical loss experience in determining reserve levels on the assumption that
historical loss experience provides a good indication of future loss experience. We also consider
other factors, such as inflation, claims settlement patterns, legislative activity and litigation
trends. We review our loss and loss adjustment expense reserve estimates on a quarterly basis and
adjust those reserves each quarter to reflect any favorable or unfavorable development as
historical loss experience develops or new information becomes known.
We experienced rapid and significant growth in prior years, primarily as a result of expansion
into new markets. Estimating our reserves for new markets was more difficult relative to estimating
our reserves in our larger, more mature markets. In new markets, we initially established our
reserves using our loss experience from other states that we perceived as being similar. As our
historical loss experience in new markets developed, we revised our estimates accordingly. As a
result, we experienced volatility in our incurred loss and loss adjustment expense for certain of
these markets, the effect of which impacted our results of operations and financial condition in
prior years.
We periodically review our methods of establishing case and IBNR reserves and update them if
necessary. Our actuarial staff, which includes a fully-credentialed actuary, reviews our reserves
and loss trends on a quarterly basis. We believe that the liabilities that we have recorded for
unpaid losses and loss adjustment expenses at June 30, 2009 are adequate to cover the final net
cost of losses and loss adjustment expenses incurred through that date.
The following table sets forth the year-end reserves since we began operations as an insurance
company following the 2004 acquisition of USAuto Holdings, Inc. (USAuto) and the subsequent
development of these reserves through June 30, 2009. The purpose of the table is to show a
cumulative deficiency or redundancy for each year which represents the aggregate amount by which
original estimates of reserves as of that year-end have changed in subsequent years. The top line
of the table presents the net reserves at the balance sheet date for each of the years indicated.
This represents the estimated amounts of losses and loss adjustment expenses for claims arising in
all years that were unpaid at the balance sheet date, including the IBNR reserve as of the end of
each successive year. The next portion of the table presents the re-estimated amount of the
previously recorded reserves based on experience as of the end of each succeeding year, including
cumulative payments since the end of the respective year. As more information becomes known about
the payments and the frequency and severity of claims for individual years, the estimate changes
accordingly. Favorable loss development, shown as a cumulative redundancy in the table, exists
when the original reserve estimate is greater than the re-estimated reserves. Adverse loss
development, which would be shown as a cumulative deficiency in the table, exists when the original
reserve estimate is less than the re-estimated reserves. Information with respect to the cumulative
development of gross reserves, without adjustment for the effect of reinsurance, also appears at
the bottom portion of the table.
5
FIRST ACCEPTANCE CORPORATION 10-K
In evaluating the information in the table below, you should note that each amount entered
incorporates the cumulative effect of all changes in amounts entered for prior periods. Conditions
and trends that have affected the development of liability in the past may not necessarily recur in
the future.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30 (in thousands) |
|
2004 |
|
|
2005 |
|
|
2006 |
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net liability for loss and loss
adjustment expense reserves, originally
estimated |
|
$ |
18,137 |
|
|
$ |
39,289 |
|
|
$ |
61,521 |
|
|
$ |
91,137 |
|
|
$ |
101,148 |
|
|
$ |
83,895 |
|
Cumulative amounts paid as of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One year later |
|
|
13,103 |
|
|
|
28,024 |
|
|
|
51,420 |
|
|
|
68,196 |
|
|
|
62,964 |
|
|
|
|
|
Two years later |
|
|
16,579 |
|
|
|
34,754 |
|
|
|
61,627 |
|
|
|
84,095 |
|
|
|
|
|
|
|
|
|
Three years later |
|
|
17,795 |
|
|
|
37,025 |
|
|
|
64,986 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Four years later |
|
|
18,472 |
|
|
|
37,802 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Five years later |
|
|
18,743 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability re-estimated as of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One year later |
|
|
17,781 |
|
|
|
37,741 |
|
|
|
65,386 |
|
|
|
89,738 |
|
|
|
89,766 |
|
|
|
|
|
Two years later |
|
|
17,244 |
|
|
|
38,226 |
|
|
|
68,491 |
|
|
|
92,860 |
|
|
|
|
|
|
|
|
|
Three years later |
|
|
16,973 |
|
|
|
37,484 |
|
|
|
67,100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Four years later |
|
|
17,978 |
|
|
|
38,289 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Five years later |
|
|
18,900 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cumulative redundancy (deficiency) |
|
|
(763 |
) |
|
|
1,000 |
|
|
|
(5,579 |
) |
|
|
(1,723 |
) |
|
|
11,382 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross liability end of year |
|
$ |
30,434 |
|
|
$ |
42,897 |
|
|
$ |
62,822 |
|
|
$ |
91,446 |
|
|
$ |
101,407 |
|
|
$ |
83,973 |
|
Reinsurance receivables |
|
|
12,297 |
|
|
|
3,608 |
|
|
|
1,301 |
|
|
|
309 |
|
|
|
259 |
|
|
|
78 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net liability end of year |
|
$ |
18,137 |
|
|
$ |
39,289 |
|
|
$ |
61,521 |
|
|
$ |
91,137 |
|
|
$ |
101,148 |
|
|
$ |
83,895 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross re-estimated liability latest |
|
$ |
31,170 |
|
|
$ |
41,600 |
|
|
$ |
68,186 |
|
|
$ |
93,182 |
|
|
$ |
89,894 |
|
|
|
|
|
Re-estimated reinsurance receivables latest |
|
|
12,270 |
|
|
|
3,311 |
|
|
|
1,086 |
|
|
|
322 |
|
|
|
128 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net re-estimated latest |
|
$ |
18,900 |
|
|
$ |
38,289 |
|
|
$ |
67,100 |
|
|
$ |
92,860 |
|
|
$ |
89,766 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross cumulative redundancy (deficiency) |
|
$ |
(736 |
) |
|
$ |
1,297 |
|
|
$ |
(5,364 |
) |
|
$ |
(1,736 |
) |
|
$ |
11,513 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2009, we had $84.0 million of loss and loss adjustment expense reserves, which
included $50.6 million in IBNR reserves and $33.4 million in case reserves. Through September 1,
2004, we maintained quota-share reinsurance, the run-off of which resulted in a reinsurance
receivable of $0.1 million that is offset against the gross reserves of $84.0 million at June 30,
2009 in the above table. For a reconciliation of net loss and loss adjustment expense reserves from
the beginning to the end of the year for the last three fiscal years, see Note 9 to our
consolidated financial statements.
As reflected in the table above, on reserves as of June 30, 2008, we have experienced a
favorable net reserve development of $11.4 million, which decreased our loss and loss adjustment
expense reserves for prior accident years and increased our income before income taxes for the 2009
fiscal year. We believe that the favorable development for the year ended June 30, 2009 was due to
lower than anticipated severity and frequency of accidents in the states in which we operate. In
particular, we experienced better than anticipated results in our property damage coverage in
Florida and Texas, bodily injury coverage in Alabama, physical damage coverage in Illinois and in
all coverages in Georgia. We also believe that our improved claim handling practices and a higher
than anticipated percentage of renewal policies to total policies had a favorable impact on the
development of our loss and loss adjustment expense reserves as of June 30, 2008. We believe that
customers who renew their policies generally tend to be a better class of drivers and thus
contribute to an overall better loss and loss adjustment expense ratio.
Loss and loss adjustment expense reserve estimates were reviewed on a quarterly basis and
adjusted each quarter to reflect any favorable or adverse development. Development assumptions were
based upon historical accident quarters. We analyzed our reserves for each type of coverage, by
state and for loss and loss adjustment expense separately to determine our loss and loss adjustment
expense reserves. To determine the best estimate, we reviewed the results of five estimation
methods, including the incurred development method, the paid development method, the incurred
Bornhuetter-Ferguson method, the paid Bornhuetter-Ferguson method, and the counts/averages
method for each set of data. In each quarterly review, we develop a point estimate for a subset of
our business. We did not prepare separate point estimates for our entire business using each of the
estimation methods. In determining our loss and loss adjustment expense reserves, we selected
different estimation methods as appropriate for the
6
FIRST ACCEPTANCE CORPORATION 10-K
various subsets of our business. The methods selected varied by coverage and by state, and
considerations included the number and value of the case reserves for open claims, incurred and
paid loss relativities, and suspected strengths and weaknesses for each of the procedures. Other
factors considered in establishing reserves include assumptions regarding loss frequency and loss
severity. We believe assumptions regarding loss frequency are reliable because injured parties
generally report their claims in a reasonably short period of time after an accident. Loss
severity is more difficult to estimate because severity is affected by changes in underlying costs,
including medical costs, settlements or judgments, and regulatory changes.
Based upon the foregoing, we calculated a single point estimate of our net loss and loss
adjustment expense reserves as of June 30, 2009. We believe that estimate is our best estimate of
our loss and loss adjustment expense reserves at June 30, 2009. The loss and loss adjustment
expense reserves in our consolidated financial statements for the fiscal year ended June 30, 2009
are equal to the estimate determined by our actuarial staff.
We believe that our estimate regarding changes in loss severity is the most significant factor
that can potentially impact our IBNR reserve estimate. We believe that there is a reasonable
possibility of increases or decreases in our estimated claim severities, with the largest potential
changes occurring in the most recent accident years. An increase in loss severity of unpaid losses,
ranging from 0.5% to 3% dependant upon the accident year, would result in adverse development of
net loss and loss adjustment expense reserve levels at June 30, 2009 and a decrease in income
before income taxes of approximately $8.1 million. Conversely, a comparable decrease in loss
severity would result in favorable development of net loss and loss adjustment expense reserve
levels at June 30, 2009 and an increase in income before income taxes of approximately $8.1
million.
Reinsurance
Reinsurance is an arrangement in which a company called a reinsurer agrees in a contract,
often referred to as a treaty, to assume specified risks written by an insurance company, known as
a ceding company, by paying the insurance company all or a portion of the insurance companys
losses arising under specified classes of insurance policies. Insurance companies like us can use
reinsurance to reduce their exposures, to increase their underwriting capacity and to manage their
capital more efficiently. Through August 31, 2004, our insurance companies relied on quota-share
reinsurance to maintain our exposure to loss at or below a level that was within the capacity of
our capital resources. In quota-share reinsurance, the reinsurer agrees to assume a specified
percentage of the ceding companys losses arising out of a defined class of business (for example,
50% of all losses arising from non-standard personal automobile insurance written in a particular
state in a particular year) in exchange for a corresponding percentage of premiums, less a ceding
commission as compensation for underwriting costs incurred by the ceding company.
Historically, our insurance companies ceded a portion of their non-standard personal
automobile insurance premiums and losses to unaffiliated reinsurers in accordance with these
contracts. Through August 2004, we had in place a quota-share treaty whereby we ceded approximately
50% of the premiums written by our insurance company subsidiaries. Effective September 2004, as a
result of available liquidity to increase the statutory capital and surplus of our insurance
company subsidiaries, we non-renewed our quota-share reinsurance treaty. Reinsurance receivables
under these contracts are no longer a significant component of our business.
Although FAIC is licensed in Texas, some of our business there is currently written by a
managing general agency subsidiary through a program with a county mutual insurance company and is
assumed by us through 100% quota-share reinsurance.
Technology
The effectiveness of our business model depends in part on the effectiveness of our
internally-developed information technology systems. Our information systems enable timely and
efficient communication and data-sharing among the various segments of our integrated operations,
including our retail locations, insurance underwriters and claims processors. We believe that this
sharing capability provides us with a competitive advantage over many of our competitors, who must
communicate with unaffiliated premium finance companies and with a
large number of independent agents, many of whom use different recordkeeping and information
systems that may not be fully compatible with the insurance companys systems.
7
FIRST ACCEPTANCE CORPORATION 10-K
Sales Office Automation. We have emphasized standardization and integration of our systems
among our subsidiaries to facilitate the automated capture of information at the earliest point in
the sales cycle. All of our retail locations transmit information directly to our central office
where policy information is added to our systems. Our retail locations also have immediate access
to current information on policies through a common network interface or through a distributed
database downloaded from our central office. Our systems enable our retail locations to process new
business, renewals and endorsements and issue policies, declaration pages and identification cards.
Payment Processing. Most of our customers visit our retail locations at least once a month to
make a payment on their policies. System-generated receipts are required for all payments
collected in our retail locations. Our retail locations generate balancing reports at the end of
each day and bank deposits are made electronically through the use of check-imaging technology.
Typically, payments are automatically applied to the applicable policies during the night following
their collection in our retail locations. This results in fewer notices of intent to cancel being
generated and fewer policies being canceled that would be reinstated if a customers late payment
is processed after cancellation. We believe that our payment processing methods reduce mailing
costs and limit unwarranted policy cancellations.
Ratings
In January 2009, A.M. Best, which rates insurance companies based on factors of concern to
policyholders, reaffirmed the ratings of our insurance company subsidiaries at B (Fair). The B
(Fair) rating is the seventh highest rating amongst a scale of 15 ratings, which currently range
from A++ (Superior) to F (In Liquidation). Publications of A.M. Best indicate that the B
(Fair) rating is assigned to those companies that in A.M. Bests opinion have a fair ability to
meet their ongoing obligations to policyholders, but are financially vulnerable to adverse changes
in underwriting and economic conditions. In evaluating a companys financial and operating
performance, A.M. Best reviews the companys profitability, leverage and liquidity, as well as its
book of business, the adequacy and soundness of its reinsurance (if any), the quality and estimated
market value of its assets, the adequacy of its loss reserves, the adequacy of its surplus, its
capital structure, the experience and competence of its management and its market presence. A.M.
Bests ratings reflect its opinion of an insurance companys financial strength, operating
performance and ability to meet its obligations to policyholders, and are not recommendations to
potential or current investors to buy, sell or hold our common stock.
Financial institutions and reinsurance companies sometimes use the A.M. Best ratings to help
assess the financial strength and quality of insurance companies. The current ratings of our
insurance company subsidiaries or their failure to maintain such ratings may dissuade a financial
institution or reinsurance company from conducting business with us or increase our potential
interest or reinsurance costs, respectively. We do not believe that the majority of our customers
are motivated to purchase our products and services based on our A.M. Best rating.
Regulatory Environment
Insurance Company Regulation. We and our insurance company subsidiaries are regulated by
governmental agencies in the states in which we conduct business and by various federal statutes
and regulations. These state regulations vary by jurisdiction but, among other matters, usually
involve:
|
|
|
regulating premium rates and forms; |
|
|
|
|
setting minimum solvency standards; |
|
|
|
|
setting capital and surplus requirements; |
|
|
|
|
licensing companies, agents and, in some states, adjusters; |
|
|
|
|
setting requirements for and limiting the types and amounts of investments; |
|
|
|
|
establishing requirements for the filing of annual statements and other financial
reports; |
|
|
|
|
conducting periodic statutory examinations of the affairs of insurance companies; |
|
|
|
|
requiring prior approval of changes in control and of certain transactions with
affiliates; |
|
|
|
|
limiting the amount of dividends that may be paid without prior regulatory approval; and |
|
|
|
|
setting standards for advertising and other market conduct activities. |
8
FIRST ACCEPTANCE CORPORATION 10-K
Required Licensing. We operate under licenses issued by various state insurance authorities.
Such licenses may be of perpetual duration or periodically renewable, provided we continue to meet
applicable regulatory requirements. The licenses govern, among other things, the types of insurance
coverages and products that may be offered in the licensing state. Such licenses are typically
issued only after an appropriate application is filed and prescribed criteria are met. All of our
licenses are in good standing. Currently, we hold property and casualty insurance licenses in the
following 25 states:
|
Alabama
Arizona
Arkansas
Colorado
Florida
Georgia
Illinois
Indiana
Iowa
|
|
Kansas
Kentucky
Louisiana
Mississippi
Missouri
Nevada
New Mexico
Ohio
Oklahoma
|
|
Pennsylvania
South Carolina
Tennessee
Texas
Utah
Virginia
West Virginia |
|
As required by our current operations, we hold managing general agency licenses in Texas and
Florida and motor club licenses in Mississippi and Tennessee. To expand into a new state or offer
a new line of insurance or other new product, we must apply for and obtain the appropriate
licenses.
Insurance Holding Company Regulation. We operate as an insurance holding company system and
are subject to regulation in the jurisdictions in which our insurance company subsidiaries conduct
business. These regulations require that each insurance company in the holding company system
register with the insurance department of its state of domicile and furnish information concerning
the operations of companies in the holding company system which may materially affect the
operations, management or financial condition of the insurers in the holding company domiciled in
that state. We have insurance company subsidiaries that are organized and domiciled under the
insurance statutes of Texas, Georgia and Tennessee. The insurance laws in each of these states
similarly provide that all transactions among members of a holding company system be done at arms
length and be shown to be fair and reasonable to the regulated insurer. Transactions between
insurance company subsidiaries and their parents and affiliates typically must be disclosed to the
state regulators, and any material or extraordinary transaction requires prior approval of the
applicable state insurance regulator. A change of control of a domestic insurer or of any
controlling person requires the prior approval of the state insurance regulator. In general, any
person who acquires 10% or more of the outstanding voting securities of the insurer or its parent
company is presumed to have acquired control of the domestic insurer. To the best of our knowledge,
we are in compliance with the regulations discussed above.
Restrictions on Paying Dividends. We may at times rely on dividends from our insurance
company subsidiaries to meet corporate cash requirements. State insurance regulatory authorities
require insurance companies to maintain specified levels of statutory capital and surplus. The
amount of an insurers capital and surplus following payment of any dividends must be reasonable in
relation to the insurers outstanding liabilities and adequate to meet its financial needs. Prior
approval from state insurance regulatory authorities is generally required in order for an
insurance company to declare and pay extraordinary dividends. The payment of ordinary dividends is
limited by the amount of capital and surplus available to the insurer, as determined in accordance
with state statutory accounting practices and other applicable limitations. State insurance
regulatory authorities that have jurisdiction over the payment of dividends by our insurance
company subsidiaries may in the future adopt statutory provisions more restrictive than those
currently in effect. See Note 20 to our consolidated financial statements for a discussion of the
ability of our insurance company subsidiaries to pay dividends.
Regulation of Rates and Policy Forms. Most states in which our insurance company subsidiaries
operate have insurance laws that require insurance companies to file premium rate schedules and
policy or coverage forms for review and approval. In many cases, such rates and policy forms must
be approved prior to use. State insurance regulators have broad discretion in judging whether an
insurers rates are adequate, not excessive and not unfairly discriminatory. Generally, property
and casualty insurers are unable to implement rate increases until they show that the costs
associated with providing such coverage have increased. The speed at which an insurer can change
rates in response to competition or increasing costs depends, in part, on the method by which the
applicable states rating
laws are administered. There are three basic rate administration systems: (i) the insurer must file
and obtain regulatory approval of the new rate before using it; (ii) the insurer may begin using
the new rate and immediately
9
FIRST ACCEPTANCE CORPORATION 10-K
file it for regulatory review; or (iii) the insurer may begin using the new rate and file it in a
specified period of time for regulatory review. Under all three rating systems, the state insurance
regulators have the authority to disapprove the rate subsequent to its filing. Thus, insurers who
begin using new rates before the rates are approved may be required to issue premium refunds or
credits to policyholders if the new rates are ultimately deemed excessive and disapproved by the
applicable state insurance authorities. In some states there has historically been pressure to
reduce premium rates for automobile and other personal insurance or to limit how often an insurer
may request increases for such rates. To the best of our knowledge, we are in compliance with all
such applicable rate regulations.
Guaranty Funds. Under state insurance guaranty fund laws, insurers doing business in a state
can be assessed for certain obligations of insolvent insurance companies to policyholders and
claimants. Maximum contributions required by law in any one year vary between 1% and 2% of annual
premiums written in that state. In most states, guaranty fund assessments are recoverable either
through future policy surcharges or offsets to state premium tax liabilities. To date, we have not
received any material unrecoverable assessments.
Investment Regulation. Our insurance company subsidiaries are subject to state laws and
regulations that require diversification of their investment portfolios and limitations on the
amount of investments in certain categories. Failure to comply with these laws and regulations
would cause non-conforming investments to be treated as non-admitted assets for purposes of
measuring statutory surplus and, in some instances, would require divestiture. If a non-conforming
asset is treated as a non-admitted asset, it would lower the affected subsidiarys surplus and
thus, its ability to write additional premiums and pay dividends. To the best of our knowledge, our
insurance company subsidiaries are in compliance with all such investment regulations.
Restrictions on Cancellation, Non-Renewal or Withdrawal. Many states have laws and
regulations that limit an insurers ability to exit a market. For example, certain states limit an
automobile insurers ability to cancel or not renew policies. Some states prohibit an insurer from
withdrawing one or more lines of business from the state, except pursuant to a plan approved by the
state insurance department. The state insurance department may disapprove a plan that may lead to
market disruption. Laws and regulations that limit cancellations and non-renewals and that subject
business withdrawals to prior approval requirements may restrict an insurers ability to exit
unprofitable markets. To the best of our knowledge, we are in compliance with all such laws and
regulations.
Privacy Regulations. In 1999, the United States Congress enacted the Gramm-Leach-Bliley Act,
which protects consumers from the unauthorized dissemination of certain personal information.
Subsequently, the majority of states have implemented additional regulations to address privacy
issues. These laws and regulations apply to all financial institutions, including insurance
companies, and require us to maintain appropriate procedures for managing and protecting certain
personal information of our customers and to fully disclose our privacy practices to our customers.
We may also be exposed to future privacy laws and regulations, which could impose additional costs
and impact our results of operations or financial condition. To the best of our knowledge, we are
in compliance with all current privacy laws and regulations.
Licensing of Our Employee-Agents and Adjusters. All of our employees who sell, solicit or
negotiate insurance are licensed, as required, by the state in which they work, for the applicable
line or lines of insurance they offer. Our employee-agents generally must renew their licenses
annually and adhere to minimum annual continuing education requirements. In certain states in which
we operate, our insurance claims adjusters are also required to be licensed and are subject to
annual continuing education requirements.
10
FIRST ACCEPTANCE CORPORATION 10-K
Unfair Claims Practices. Generally, insurance companies, adjusting companies and individual
claims adjusters are prohibited by state statutes from engaging in unfair claims practices which
could indicate a general business practice. Unfair claims practices include, but are not limited
to:
|
|
|
misrepresenting pertinent facts or insurance policy provisions relating to coverages at
issue; |
|
|
|
|
failing to acknowledge and act reasonably promptly upon communications regarding claims
arising under insurance policies; |
|
|
|
|
failing to affirm or deny coverage of claims in a reasonable time after proof of loss
statements have been completed; |
|
|
|
|
attempting to settle claims for less than the amount to which a reasonable person would
have believed such person was entitled; |
|
|
|
|
attempting to settle claims on the basis of an application that was altered without
notice to, knowledge or consent of the insured; |
|
|
|
|
making known to insureds or claimants a policy of appealing from arbitration awards in
favor of insureds or claimants for the purpose of compelling them to accept settlements or
compromises less than the amount awarded in arbitration; |
|
|
|
|
delaying the investigation or payment of claims by requiring an insured, claimant or the
physician of either to submit a preliminary claim report and then requiring the subsequent
submission of formal proof of loss forms, both of which submissions contain substantially
the same information; |
|
|
|
|
failing to settle claims promptly, where liability has become reasonably clear, under
one portion of the insurance policy coverage in order to influence settlements under other
portions of the insurance policy coverage; and |
|
|
|
|
not attempting in good faith to effectuate prompt, fair and equitable settlements of
claims in which liability has become reasonably clear. |
We set business conduct policies and conduct regular training to ensure that our
employee-adjusters and other claims personnel are aware of these prohibitions, and we require them
to conduct their activities in compliance with these statutes. To the best of our knowledge, we
have not engaged in any unfair claims practices.
Quarterly and Annual Financial Reporting. We are required to file quarterly and annual
financial reports with states utilizing statutory accounting practices that are different from U.S.
generally accepted accounting principles, which reflect our insurance company subsidiaries on a
going concern basis. The statutory accounting practices used by state regulators, in keeping with
the intent to assure policyholder protection, are generally based on a liquidation concept. For
statutory financial information on our insurance company subsidiaries, see Note 20 to our
consolidated financial statements included in this report.
Periodic Financial and Market Conduct Examinations. The state insurance departments that have
jurisdiction over our insurance company subsidiaries conduct on-site visits and examinations of the
insurers affairs, especially as to their financial condition, ability to fulfill their obligations
to policyholders, market conduct, claims practices and compliance with other laws and applicable
regulations. Generally, these examinations are conducted every three to five years. If
circumstances dictate, regulators are authorized to conduct special or target examinations of
insurers, insurance agencies and insurance adjusting companies to address particular concerns or
issues. The results of these examinations can give rise to regulatory orders requiring remedial,
injunctive or other corrective action on the part of the company that is the subject of the
examination. FAIC has been examined by the Tennessee Department of Commerce and Insurance for
financial condition through December 31, 2001. (FAIC redomesticated from Tennessee to Texas in
November 2006.) FAIC-GA has been examined by the Georgia Department of Insurance for financial
condition through December 31, 2007. FAIC-TN received an organizational examination by the
Tennessee Department of Commerce and Insurance as of December 4, 2006. An examination of FAIC for
financial condition through December 31, 2007 is currently in process by the Texas Department of
Insurance. During the fiscal year ended June 30, 2009, FAIC was examined for market conduct by the
states of Missouri and Illinois. None of our insurance company subsidiaries have ever been the
subject of a target examination.
11
FIRST ACCEPTANCE CORPORATION 10-K
Risk-Based Capital. In order to enhance the regulation of insurer solvency, the National
Association of Insurance Commissioners, or NAIC, has adopted a formula and model law to implement
risk-based capital, or RBC, requirements designed to assess the minimum amount of statutory
capital that an insurance company needs to support its overall business operations and to ensure
that it has an acceptably low expectation of becoming financially impaired. RBC is used to set
capital requirements based on the size and degree of risk taken by the insurer and taking into
account various risk factors such as asset risk, credit risk, underwriting risk, interest rate risk
and other relevant business risks. The NAIC model law provides for increasing levels of regulatory
intervention as the ratio of an insurers total adjusted capital decreases relative to its
risk-based capital, culminating with mandatory control of the operations of the insurer by the
domiciliary insurance department at the so-called mandatory control level. This calculation is
performed on a calendar year basis, and at December 31, 2008, FAIC, FAIC-GA and FAIC-TN all
maintained an RBC level that was in excess of an amount that would require any corrective actions
on their part.
RBC is a comprehensive financial analysis system affecting nearly all types of licensed
insurers, including our insurance company subsidiaries. It is designed to evaluate the relative
financial condition of the insurer by application of a weighting formula to the companys assets
and its policyholder obligations. The key RBC calculation is to recast total surplus, after
application of the RBC formula, in terms of an authorized control level RBC. The authorized control
level RBC is a number determined under the risk-based capital formula in accordance with certain
RBC instructions. Once the authorized control level RBC is determined, it is contrasted against the
companys total adjusted capital. A high multiple generally indicates stronger capitalization and
financial strength, while a lower multiple reflects lesser capitalization and strength. Each
states statutes also create certain RBC multiples at which either the company or the regulator
must take action. For example, there are four defined RBC levels that trigger different regulatory
events. The minimum RBC level is called the company action level RBC and is generally defined as
the product of 2.0 and the companys authorized control level RBC. Next is a regulatory action
level RBC, which is defined as the product of 1.5 and the companys authorized control level RBC.
Below the regulatory action level RBC is the authorized control level RBC. Finally, there is a
mandatory control level RBC, which means the product of 0.70 and the companys authorized control
level RBC.
As long as the companys total adjusted capital stays above the company action level RBC
(i.e., at greater than 2.0 times the authorized control level RBC), regulators generally will not
take any corrective action. However, if an insurance companys total adjusted capital falls below
the company action level RBC, but remains above the regulatory action level RBC, the company is
required to submit an RBC plan to the applicable state regulator(s) that identifies the conditions
that contributed to the substandard RBC level and identifies a remediation plan to increase the
companys total adjusted capital above 2.0 times its authorized control level RBC. If a companys
total adjusted capital falls below its regulatory action level RBC but remains above its authorized
control level RBC, then the regulator may require the insurer to submit an RBC plan, perform a
financial examination or analysis on the companys assets and liabilities, and may issue an order
specifying corrective action for the company to take to improve its RBC number. In the event an
insurance companys total adjusted capital falls below its authorized control level RBC, the state
regulator may require the insurer to submit an RBC plan or may place the insurer under regulatory
supervision. If an insurance companys total adjusted capital were to fall below its mandatory
control level RBC, the regulator is obligated to place the insurer under regulatory control, which
could ultimately include, among other actions, administrative supervision, rehabilitation or
liquidation.
At December 31, 2008, FAICs total adjusted capital was 5.2 times its authorized control level
RBC, requiring no corrective action on FAICs part. Likewise, at December 31, 2008, FAIC-GA and
FAIC-TN had total adjusted capital of 2.8 and 3.3, respectively, times their authorized control
level RBC. As a part of its 2008 RBC calculation, FAIC-GA failed the Trend Test component as the
litigation settlement expense it incurred in 2008 resulted in a combined ratio of 122% which
exceeded the 120% threshold for this test. Excluding the litigation settlement expense, the 2008
combined ratio for FAIC-GA would have been 109%, and therefore would not have exceeded the
threshold. On April 28, 2009, an explanation of this matter was provided to the Georgia Insurance
Department. Since that date, no regulatory action has been taken, nor is any such action
anticipated.
IRIS Ratios. The NAIC Insurance Regulatory Information System, or IRIS, is part of a
collection of analytical tools designed to provide state insurance regulators with an integrated
approach to screening and analyzing the financial condition of insurance companies operating in
their respective states. IRIS is intended to assist state insurance regulators in targeting
resources to those insurers in greatest need of regulatory attention. IRIS
consists of two phases: statistical and analytical. In the statistical phase, the NAIC
database generates key financial ratio results based on financial information obtained from
insurers annual statutory statements. The analytical phase
12
FIRST ACCEPTANCE CORPORATION 10-K
is a review of the annual statements, financial ratios and other automated solvency tools. The
primary goal of the analytical phase is to identify companies that appear to require immediate
regulatory attention. A ratio result falling outside the defined range of IRIS ratios is not
considered a failing result; rather, unusual values are viewed as part of the regulatory early
monitoring system. Furthermore, in some years, it may not be unusual for financially sound
insurance companies to have several ratios with results outside the defined ranges.
As of December 31, 2008, FAIC had two IRIS ratios outside the defined range, FAIC-GA had five
outside the defined range, and FAIC-TN had two outside the defined range as follows:
|
|
|
Both FAIC and FAIC-GA had ratios above the defined threshold for the two-year
overall operating ratio as their calculated ratios were above 100%. FAICs ratio was
101% and was primarily attributable to an increase in its expense ratio for 2008 as a
result of a decrease in net premiums written. FAIC-GAs ratio was 102% and was
primarily the result of the $9.2 million litigation settlement expense recognized in
2008. Without this expense, FAIC-GAs ratio would have been 95.1%. |
|
|
|
|
Both FAIC-GA and FAIC-TN had ratios outside of the defined range for the gross
change in policyholders surplus, which is between plus 50% and minus 10%. During the
twelve months ended December 31, 2008, FAIC-GA and FAIC-TN reduced their policyholders
surplus by 26% and 11%, respectively. FAIC-GAs surplus was reduced by approximately
$6.4 million as a result of the after-tax litigation settlement expense. Without this
charge, FAIC-GAs change would have only been minus 4%. FAIC-TNs surplus was reduced
by $1.4 million as the result of paying a dividend during the year to its parent
company. Without this payment, FAIC-TNs change would have been plus 3%. For these same
reasons, both FAIC-GA and FAIC-TN had ratios (also minus 26% and minus 11%,
respectively) outside of the defined range for the change in adjusted policyholders
surplus, which is between plus 25% and minus 10%. The change in adjusted policyholders
surplus excludes amounts related to paid in surplus. |
|
|
|
|
FAIC had a ratio outside the high end of the defined investment yield range as the
calculated yield was above 6.5%. The calculated yield was 6.6% and was inflated as a
result of the inclusion of dividends received during the year from FAIC-GA and FAIC-TN.
Excluding these dividends, the calculated yield would have been 4.2%, which is above
the low end of the defined investment yield range of 3%. |
|
|
|
|
FAIC-GA had a ratio outside of the defined threshold for net premiums written to
policyholders surplus, which is 300%. FAIC-GAs ratio was 327% which included
approximately $7.0 million in net premiums written related to the transfer of the
beginning policy liabilities under an intercompany pooling agreement that was effected
during 2008. Excluding the effect of this one-time transfer, FAIC-GA would have had a
net premiums written to policyholders surplus ratio of 294%. |
|
|
|
|
FAIC-GA had a ratio of 20% which equaled the defined threshold for the two-year
reserve development. This ratio was primarily the result of continued adverse
development on FAIC-GAs 2006 accident year loss and loss adjustment expense reserves.
In 2007, FAIC-GA recorded $3.8 million in adverse development as a result of an
unanticipated increase in severity related to Bodily Injury and Property Damage losses.
In 2008, additional development of $1.0 million was recorded on this accident year. |
These IRIS results were provided to regulators on February 27, 2009. Since that date, no
regulatory action has been taken, nor is any such action anticipated.
Employees
As of June 30, 2009, we had approximately 1,175 employees. Our employees are not covered by
any collective bargaining agreements.
13
FIRST ACCEPTANCE CORPORATION 10-K
Available Information
We file reports with the United States Securities and Exchange Commission (SEC), including
Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, and other reports from time to time.
The public may read and copy any materials filed with the SEC at the SECs Public Reference Room at
100 F Street, N.E., Washington D.C. 20549. The public may obtain information about the operation of
the Public Reference Room by calling the SEC at 1-800-SEC-0330. We are an electronic filer, and the
SEC maintains an Internet site at www.sec.gov that contains our reports, proxy and information
statements, and other information filed electronically. These website addresses are provided as
inactive textual references only, and the information provided on those websites is not part of
this report and is therefore not incorporated by reference unless such information is otherwise
specifically referenced elsewhere in this report.
Internet Website
We maintain an internet website at the following address: www.firstacceptancecorp.com. The
information on the Companys website is not incorporated by reference in this Annual Report on Form
10-K. We make available on or through our website certain reports and amendments to those reports
that we file with, or furnish to, the SEC in accordance with the Securities Exchange Act of 1934,
as amended. These include our Annual Reports on Form 10-K, our Quarterly Reports on Form 10-Q, our
current reports on Form 8-K, and any amendments to these reports. We make this information
available on our website free of charge as soon as reasonably practicable after we electronically
file the information with, or furnish it to, the SEC.
14
FIRST ACCEPTANCE CORPORATION 10-K
Item 1A. Risk Factors
Our loss and loss adjustment expenses may exceed our reserves, which would adversely impact our
results of operations and financial condition.
We establish reserves for the estimated amount of claims under terms of the insurance policies
underwritten by our insurance company subsidiaries. The amount of the reserves is determined based
on historical claims information, industry statistics and other factors. The establishment of
appropriate reserves is an inherently uncertain process due to a number of factors, including the
difficulty in predicting the frequency and severity of claims, the rate of inflation, the rate and
direction of changes in trends, ongoing interpretation of insurance policy provisions by courts,
inconsistent decisions in lawsuits regarding coverage and broader theories of liability. Any
changes in claims settlement practices can also lead to changes in loss payment patterns, which are
used to estimate reserve levels. Our ability to accurately estimate our loss and loss adjustment
expense reserves may be made more difficult by rapid growth or entry into new markets. If our
reserves prove to be inadequate, we will be required to increase our loss reserves and the amount
of any such increase would reduce our income in the period that the deficiency is recognized. The
historic development of reserves for loss and loss adjustment expenses may not necessarily reflect
future trends in the development of these amounts. Consequently, our actual losses could materially
exceed our loss reserves, which would have a material adverse effect on our results of operations
and financial condition.
Our results may fluctuate as a result of cyclical changes in the non-standard personal automobile
insurance industry.
The non-standard personal automobile insurance industry is cyclical in nature. Likewise,
adverse economic conditions impact our customers and many will choose to reduce their coverage or
go uninsured during a weak economy. In the past, the industry has been characterized by periods of
price competition and excess capacity followed by periods of high premium rates and shortages of
underwriting capacity. If new competitors enter the market, existing competitors may attempt to
increase market share by lowering rates. Such conditions could lead to reduced prices, which would
negatively impact our revenues and profitability. Recently, competitive pricing and the weak
economic conditions have resulted in declines in premiums in most states. Given the cyclical nature
of the industry and the economy, these conditions may negatively impact our revenues and
profitability.
Due to our largely fixed cost structure, our profitability may decline if our sales volume were to
decline significantly.
Our reliance on leased retail locations staffed by employee-agents results in a cost structure
that has a high proportion of fixed costs. In times of increasing sales volume, our acquisition
cost per policy decreases, improving our expense ratio, which we believe is one of the significant
advantages of our business model. However, in times of declining sales volume, the opposite occurs.
Our business may be adversely affected by negative developments in the non-standard personal
automobile insurance industry.
Substantially all of our gross premiums written are generated from sales of non-standard
personal automobile insurance policies. As a result of our concentration in this line of business,
negative developments in the economic, competitive or regulatory conditions affecting the
non-standard personal automobile insurance industry could reduce our revenues, increase our
expenses or otherwise have a material adverse effect on our results of operations and financial
condition. For example, the current weak economic conditions in the United States have resulted in
fewer customers purchasing and maintaining non-standard personal automobile insurance policies and
certain customers reducing their insurance coverage. Developments affecting the non-standard
personal automobile insurance industry could have a greater effect on us compared with more
diversified insurers that also sell other types of automobile insurance products or write other
additional lines of insurance.
Our investment portfolio may suffer reduced returns or other-than-temporary losses, which could
reduce our profitability.
Our results of operations depend, in part, on the performance of our investment portfolio. As
of June 30, 2009, substantially all of our investment portfolio was invested either directly or
indirectly in debt securities, primarily in marketable, investment-grade, U.S. government
securities, municipal bonds, corporate bonds and
15
FIRST ACCEPTANCE CORPORATION 10-K
collateralized mortgage obligations. Fluctuations
in interest rates and economic decline affect our returns on, and the fair value of, debt
securities. Unrealized gains and losses on debt securities are recognized in other comprehensive
income (loss) and increase or decrease our stockholders equity. As of June 30, 2009, the amortized
cost of our investment portfolio exceeded the fair value by $0.5 million. We believe the unrealized
loss is temporary; however, an increase in interest rates could further reduce the fair value of
our investments in debt securities. As of June 30, 2009, the impact of an immediate 100 basis point
increase in market interest rates on our fixed maturities and cash equivalents portfolio would have
resulted in an estimated decrease in fair value of 3%, or approximately $4.9 million. Defaults by
third parties who fail to pay or perform obligations could reduce our investment income and could
also result in investment losses to our portfolio. See Critical Accounting Estimates
Investments in Item 7 and Note 3 to our consolidated financial statements regarding determination
of other-than-temporary impairment losses on investment securities.
Our business is highly competitive, which may make it difficult for us to market our core products
effectively and profitably.
The non-standard personal automobile insurance business is highly competitive. We believe that
our primary insurance company competition comes not only from national insurance companies or their
subsidiaries, but also from non-standard insurers and independent agents that operate in a specific
region or single state in which we also operate. We believe that our significant competitors are
the Berkshire Hathaway insurance group (which includes GEICO), the Bristol West insurance group,
the Direct General insurance group, the Infinity insurance group, the Affirmative insurance group,
the Progressive insurance group, the Safe Auto insurance group, the Permanent General insurance
group, and the AIG insurance group. Some of our competitors have substantially greater financial
and other resources than us, and they may offer a broader range of products or competing products
at lower prices. Our revenues, profitability and financial condition could be materially adversely
affected if we are required to decrease or are unable to increase prices to stay competitive or if
we do not successfully retain our current customers and attract new customers.
Our business may be adversely affected by negative developments in the states in which we operate.
We currently operate in 12 states located primarily in the Southeastern and Midwestern United
States. For the year ended June 30, 2009, approximately 68% of our premiums earned were generated
from insurance policies written in five states. Our revenues and profitability are affected by
prevailing regulatory, economic, demographic, competitive and other conditions in the states in
which we operate. Changes in any of these conditions could make it more costly or difficult for us
to conduct business. Adverse regulatory developments, which could include reductions in the maximum
rates permitted to be charged, restrictions on rate increases, fundamental changes to the design or
implementation of the automobile insurance regulatory framework, or economic conditions that result
in fewer customers purchasing or maintaining insurance, could reduce our revenues, increase our
expenses or otherwise have a material adverse effect on our results of operations and financial
condition. These developments could have a greater effect on us, as compared with more diversified
insurers that also sell other types of automobile insurance products, write other additional lines
of insurance coverages or whose premiums are not concentrated in a single line of insurance.
We may have difficulties in managing any expansion into new markets.
Any future growth plans may include expanding into new states by opening new retail locations,
acquiring the business and assets of other companies, and possibly introducing additional insurance
products. In order to grow our business successfully, we must apply for and maintain necessary
licenses, properly design and price our products and identify, hire and train new claims,
underwriting and sales employees. Our expansion will also place significant demands on our
management, operations, systems, accounting, internal controls and financial resources. If we fail
to do any one of these well, we may not be able to expand our business successfully. Even if we
successfully complete an acquisition, we face the risk that we may acquire business in states in
which market and
other conditions may not be favorable to us. Any failure by us to manage growth and to respond to
changes in our business could have a material adverse effect on our business, financial condition
and results of operations.
16
FIRST ACCEPTANCE CORPORATION 10-K
We may not be successful in identifying acquisition candidates or integrating their operations,
which could harm our financial results.
In order to grow our business by acquisition, we must identify acquisition candidates and
integrate the acquired operations. If we do acquire additional companies or businesses, we could
face increased costs, or, if we are unable to successfully integrate the operations of the acquired
business into our operations, we could experience disruption of our business and distraction of our
management, which may not be offset by corresponding increases in revenues. The integration of
operations after an acquisition is subject to risks, including, among others, loss of key personnel
of the acquired company, difficulty associated with assimilating the personnel and operations of
the acquired company, potential disruption of ongoing business, maintenance of uniform standards,
controls, procedures and policies and impairment of the acquired companys reputation and
relationships with its employees and clients. Any of these may result in the loss of customers. It
is also possible that we may not realize, either at all or in a timely manner, any or all benefits
from recent and future acquisitions and may incur significant costs in connection with these
acquisitions. Failure to successfully integrate future acquisitions could materially adversely
affect the results of our operations.
New pricing, claim and coverage issues and class action litigation are continually emerging in the
automobile insurance industry, and these new issues could adversely impact our revenues,
profitability, or our methods of doing business.
As automobile insurance industry practices and regulatory, judicial and consumer conditions
change, litigation and unexpected and unintended issues related to claims, coverages and business
practices may emerge. These issues can have an adverse effect on our business by subjecting us to
liability, changing the way we price and market our products, extending coverage beyond our
underwriting intent, requiring us to obtain additional licenses or increasing the size of claims.
Recent examples of some emerging issues include:
|
|
|
concerns over the use of an applicants credit score or zip code as a factor in making
risk selections and pricing decisions; |
|
|
|
|
a growing trend of plaintiffs targeting automobile insurers in purported class action
litigation relating to sales and marketing practices and claims-handling practices, such as
total loss evaluation methodology, the use of aftermarket (non-original equipment
manufacturer) parts and the alleged diminution in value to insureds vehicles involved in
accidents; and |
|
|
|
|
consumer groups lobbying state legislatures to regulate and require separate licenses
for individuals and companies engaged in the sale of ancillary products or services. |
The effects of these and other unforeseen emerging issues could subject us to liability or
negatively affect our revenues, profitability, or our methods of doing business.
We may write-off intangible assets, such as goodwill.
As a result of purchase accounting for our business combination transactions, our consolidated
balance sheet at June 30, 2009 contained intangible assets designated as goodwill and other
identifiable intangible assets totaling approximately $76.5 million. On an ongoing basis, we
evaluate whether facts and circumstances indicate any impairment of value of intangible assets. As
circumstances change, we cannot assure you that the value of these intangible assets will be
realized by us. If we determine that a material impairment has occurred, we will be required to
write-off the impaired portion of intangible assets, which could have a material adverse effect on
our results of operations in the period in which the write-off occurs.
Our ability to use net operating loss carryforwards to reduce future tax payments may be limited by
applicable law.
Based on our calculations and in accordance with the rules stated in the Internal Revenue Code
of 1986, as amended (the Code), we do not believe that any ownership change, as described in
the following paragraph and as defined in Section 382 of the Code, has occurred with respect to our
net operating losses (NOLs) and
accordingly we believe that there is no existing annual limitation under Section 382 of the Code on
our ability to use NOLs to reduce our past and future taxable income. We did not obtain, and
currently do not plan to obtain, an Internal Revenue Service (IRS) ruling or opinion of counsel
regarding either of these conclusions.
17
FIRST ACCEPTANCE CORPORATION 10-K
Generally, an ownership change occurs if certain persons or groups increase their aggregate
ownership of our total capital stock by more than 50 percentage points in any three-year period. If
an ownership change occurs, our ability to use our NOLs to reduce income taxes is limited to an
annual amount (the Section 382 limitation) equal to the fair market value of our stock
immediately prior to the ownership change multiplied by the long term tax-exempt interest rate,
which is published monthly by the IRS. In the event of an ownership change, NOLs that exceed the
Section 382 limitation in any year will continue to be allowed as carryforwards for the remainder
of the carryforward period and such excess NOLs can be used to offset taxable income for years in
the carryforward period subject to the Section 382 limitation in each year. Regardless of whether
an ownership change occurs, the carryforward period for NOLs is either 15 or 20 years from the year
in which the losses giving rise to the NOLs were incurred, depending on when those losses were
incurred. The earliest losses that gave rise to our remaining NOLs were incurred in 1995 and will
expire in 2010. The most recent losses that gave rise to our NOLs were incurred in 2003 and will
expire in 2023. If the carryforward period for any NOL were to expire before that NOL had been
fully utilized, the use of the unutilized portion of that NOL would be permanently prohibited. Our
use of new NOLs arising after the date of an ownership change would not be affected by the Section
382 limitation, unless there were another ownership change after those new NOLs arose.
It is impossible for us to state that an ownership change will not occur in the future.
Limitations imposed by Code Section 382 and the restrictions contained in our certificate of
incorporation may limit our ability to issue additional stock to raise capital or acquire
businesses. To the extent not prohibited by our certificate of incorporation, we may decide in the
future that it is necessary or in our interest to take certain actions that could result in an
ownership change.
Code Section 269 permits the IRS to disallow any deduction, credit or allowance, including the
utilization of NOLs, that otherwise would not be available but for the acquisition of control of a
corporation, including acquisition by merger, for the principal purpose of avoiding federal income
taxes, including avoidance through the use of NOLs. If the IRS were to assert that the principal
purpose of the April 2004 acquisition of USAuto was the avoidance of federal income tax, we would
have the burden of proving that this was not the principal purpose. The determination of the
principal purpose of a transaction is purely a question of fact and requires an analysis of all the
facts and circumstances surrounding the transaction. Courts generally have been reluctant to apply
Code Section 269 where a reasonable business purpose existed for the timing and form of the
transaction, even if the availability of tax benefits was also an acknowledged consideration in the
transaction. We think that Code Section 269 should not apply to the acquisition of USAuto because
we can show that genuine business purposes existed for the USAuto acquisition and that tax
avoidance was not the principal purpose for the merger. Our primary objective of the merger was to
seek long-term growth for our stockholders through an acquisition. To that end, we redeployed a
significant amount of our existing capital and offered our existing stockholders the right to make
a substantial additional investment in the Company to facilitate the acquisition of USAuto. If,
nevertheless, the IRS were to assert that Code Section 269 applied and if such assertion were
sustained, our ability to utilize our past and existing NOLs would be severely limited or
extinguished. Due to the fact that the application of Code Section 269 is ultimately a question of
fact, there can be no assurance that the IRS would not prevail if it were to assert the application
of Code Section 269.
Our insurance company subsidiaries are subject to regulatory restrictions on paying dividends to
us.
Our holding company may rely, in part, on receiving dividends from the insurance company
subsidiaries to pay its obligations. State insurance laws limit the ability of our insurance
company subsidiaries to pay dividends and require our insurance company subsidiaries to maintain
specified minimum levels of statutory capital and surplus. These restrictions affect the ability of
our insurance company subsidiaries to pay dividends to our holding company and may require our
subsidiaries to obtain the prior approval of regulatory authorities, which could slow the timing of
such payments to us or reduce the amount that can be paid. The limits on the amount of dividends
that can be paid by our insurance company subsidiaries may affect the ability of our holding
company to pay those obligations. The dividend-paying ability of the insurance company
subsidiaries is discussed in Note 20 to our consolidated financial statements.
18
FIRST ACCEPTANCE CORPORATION 10-K
Our insurance company subsidiaries are subject to statutory capital and surplus requirements and
other standards, and their failure to meet these requirements or standards could subject them to
regulatory actions.
Our insurance company subsidiaries are subject to RBC standards and other minimum statutory
capital and surplus requirements imposed under the laws of their respective states of domicile. The
RBC standards, which are based upon the RBC Model Act adopted by the NAIC, require our insurance
company subsidiaries to annually report their results of RBC calculations to the state departments
of insurance and the NAIC.
Failure to meet applicable RBC requirements or minimum statutory capital and surplus
requirements could subject our insurance company subsidiaries to further examination or corrective
action imposed by state regulators, including limitations on their writing of additional business,
state supervision or even liquidation. Any changes in existing RBC standards or minimum statutory
capital and surplus requirements may require our insurance company subsidiaries to increase their
statutory capital and surplus levels, which they may be unable to do. This calculation is performed
on a calendar year basis, and at December 31, 2008, our insurance company subsidiaries maintained
RBC levels in excess of an amount that would require any corrective actions on their part.
State regulators also screen and analyze the financial condition of insurance companies using
the NAIC IRIS system. As part of IRIS, the NAIC database generates key financial ratio results
obtained from an insurers annual statutory statements. A ratio result falling outside the defined
range of IRIS ratios may result in further examination by a state regulator to determine if
corrective action is necessary. As of December 31, 2008, our insurance company subsidiaries had
IRIS ratios outside the defined ranges that were reported to the appropriate regulatory
authorities, but no regulatory authority has informed our insurance company subsidiaries that it
intends to conduct a further examination of their financial condition. We cannot assure you that
regulatory authorities will not conduct any such examination of the financial condition of our
insurance company subsidiaries, or of the outcome of any such investigation. See Item 1. Business
Regulatory Environment.
We rely on our information technology and communication systems, and the failure of these systems
could materially adversely affect our business.
Our business is highly dependent on the proprietary integrated technology systems that enable
timely and efficient communication and data sharing among the various segments of our integrated
operations. These systems are used in all our operations, including quotation, policy issuance,
customer service, underwriting, claims, accounting, and communications. We have a technical staff
that develops, maintains and supports all elements of our technology infrastructure. However,
disruption of power systems or communication systems or any failure of our systems could result in
deterioration in our ability to respond to customers requests, write and service new business, and
process claims in a timely manner. We believe we have appropriate types and levels of insurance to
protect our real property, systems, and other assets. However, insurance does not provide full
reimbursement for all losses, both direct and indirect, that may result from an event affecting our
information technology and communication systems.
Severe weather conditions and other catastrophes may result in an increase in the number and amount
of claims filed against us.
Our business is exposed to the risk of severe weather conditions and other catastrophes.
Catastrophes can be caused by various events, including natural events, such as severe winter
weather, hurricanes, tornados, windstorms, earthquakes, hailstorms, thunderstorms and fires, and
other events, such as explosions, terrorist attacks and riots. The incidence and severity of
catastrophes and severe weather conditions are inherently unpredictable. Severe weather conditions
generally result in more automobile accidents, leading to an increase in the number of claims filed
and/or the amount of compensation sought by claimants.
In the event that a severe weather condition or other major catastrophe were to occur
resulting in property losses to us, we would have to cover such losses using additional resources,
which could increase our losses incurred, cause our statutory capital and surplus to fall below
required levels or otherwise have a material adverse effect on our results of operations and
financial condition.
19
FIRST ACCEPTANCE CORPORATION 10-K
A few of our stockholders have significant control over us, and their interests may differ from
yours.
Three of our stockholders, Gerald J. Ford, our Chairman of the Board; Stephen J. Harrison, our
Chief Executive Officer and a current director; and Thomas M. Harrison, Jr., a current director, in
the aggregate, control approximately 62% of our outstanding common stock. If these stockholders
acted or voted together, they would have the power to control the election and removal of our
directors. They would also have significant control over other matters requiring stockholder
approval, including the approval of major corporate transactions and proposed amendments to our
certificate of incorporation. This concentration of ownership may delay or prevent a change in
control of the Company, as well as frustrate attempts to replace or remove current management, even
when a change may be in the best interests of our other stockholders. Furthermore, the interests of
these stockholders may not always coincide with the interests of the Company or other stockholders.
We and our subsidiaries are subject to comprehensive regulation and supervision that may restrict
our ability to earn profits.
We and our subsidiaries are subject to comprehensive regulation and supervision by the
insurance departments in the states where our subsidiaries are domiciled and where our subsidiaries
sell insurance and ancillary products, issue policies and handle claims. Certain regulatory
restrictions and prior approval requirements may affect our subsidiaries ability to operate,
change their operations or obtain necessary rate adjustments in a timely manner or may increase our
costs and reduce profitability.
Among other things, regulation and supervision of us and our subsidiaries extends to:
Required Licensing. We and our subsidiaries operate under licenses issued by various state
insurance authorities. These licenses govern, among other things, the types of insurance coverages,
agency and claims services and motor club products that we and our subsidiaries may offer consumers
in the particular state. If a regulatory authority denies or delays granting any such license, our
ability to enter new markets or offer new products could be substantially impaired.
Transactions Between Insurance Companies and Their Affiliates. Our insurance company
subsidiaries are organized and domiciled under the insurance statutes of Texas, Georgia and
Tennessee. The insurance laws in these states provide that all transactions among members of an
insurance holding company system must be done at arms length and shown to be fair and reasonable
to the regulated insurer. Transactions between our insurance company subsidiaries and other
subsidiaries generally must be disclosed to the state regulators, and prior approval of the
applicable regulator generally is required before any material or extraordinary transaction may be
consummated. State regulators may refuse to approve or delay approval of such a transaction, which
may impact our ability to innovate or operate efficiently.
Regulation of Rates and Policy Forms. The insurance laws of most states in which our
insurance company subsidiaries operate require insurance companies to file premium rate schedules
and policy forms for review and approval. State insurance regulators have broad discretion in
judging whether our rates are adequate, not excessive and not unfairly discriminatory. The speed at
which we can change our rates in response to market conditions or increasing costs depends, in
part, on the method by which the applicable states rating laws are administered. Generally, state
insurance regulators have the authority to disapprove our requested rates. If as permitted in some
states, we begin using new rates before they are approved, we may be required to issue premium
refunds or credits to our policyholders if the new rates are ultimately disapproved by the
applicable state regulator. In some states, there has been pressure in past years to reduce premium
rates for automobile and other personal insurance or to limit how often an insurer may request
increases for such rates. In states where such pressure is applied, our ability to respond to
market developments or increased costs in that state may be adversely affected.
Investment Restrictions. Our insurance company subsidiaries are subject to state laws and
regulations that require diversification of their investment portfolios and that limit the amount
of investments in certain categories. Failure to comply with these laws and regulations would cause
non-conforming investments to be treated as non-admitted assets for purposes of measuring statutory
capital and surplus and, in some instances, would require divestiture. If a non-conforming asset is
treated as a non-admitted asset, it would lower the affected subsidiarys capital and surplus and
thus, its ability to write additional premiums and pay dividends.
20
FIRST ACCEPTANCE CORPORATION 10-K
Restrictions on Cancellation, Non-Renewal or Withdrawal. Many states have laws and
regulations that limit an insurers ability to exit a market. For example, certain states limit an
automobile insurers ability to cancel or not renew policies. Some states prohibit an insurer from
withdrawing from one or more lines of business in the state, except pursuant to a plan approved by
the state insurance department. The state insurance department may disapprove a plan that may lead
to market disruption. These laws and regulations that limit cancellations and non-renewals and that
subject business withdrawals to prior approval restrictions could limit our ability to exit
unprofitable markets or discontinue unprofitable products in the future.
Provisions in our certificate of incorporation and bylaws may prevent a takeover or a change in
management that you may deem favorable.
Our certificate of incorporation contains prohibitions on the transfer of our common stock to
avoid limitations on the use of the NOL carryforwards and other federal income tax attributes that
we inherited from our predecessor. These restrictions could prevent or inhibit a third party from
acquiring us. Our certificate of incorporation generally prohibits, without the prior approval of
our board of directors, any transfer of common stock, any subsequent issue of voting stock or stock
that participates in our earnings or growth, and certain options with respect to such stock, if the
transfer of such stock or options would (i) cause any group or person to own 4.9% or more, by
aggregate value, of the outstanding shares of our common stock, (ii) increase the ownership
position of any person or group that already owns 4.9% or more, by aggregate value, of the
outstanding shares of our common stock, or (iii) cause any person or group to be treated like the
owner of 4.9% or more, by aggregate value, of our outstanding shares of common stock for tax
purposes.
Our certificate of incorporation and bylaws also contain the following provisions that could
prevent or inhibit a third party from acquiring us:
|
|
|
the requirement that only stockholders owning at least one-third of the outstanding
shares of our common stock may call a special stockholders meeting; and |
|
|
|
|
the requirement that stockholders owning at least two-thirds of the outstanding shares
of our common stock must approve any amendment to our certificate of incorporation
provisions concerning the transfer restrictions and the ability to call special
stockholders meetings. |
Under our certificate of incorporation, we may issue shares of preferred stock on terms that
are unfavorable to the holders of our common stock. The issuance of shares of preferred stock could
also prevent or inhibit a third party from acquiring us. The existence of these provisions could
depress the price of our common stock, could delay or prevent a takeover attempt or could prevent
attempts to replace or remove incumbent management.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
We lease office space in Nashville, Tennessee for our corporate offices (approximately 21,000
square feet) and our claims, customer service and data center (approximately 53,000 square feet).
We also lease office space for our regional claims offices in Chicago, Illinois and Tampa, Florida
and for our regional customer service center in Chicago, Illinois. Our retail locations are all
leased and typically are located in storefronts in retail shopping centers, and each location
typically contains less than 1,000 square feet of space. See Note 8 to our consolidated financial
statements for further information about our leases.
21
FIRST ACCEPTANCE CORPORATION 10-K
Item 3. Legal Proceedings
We and our subsidiaries are named from time to time as defendants in various legal actions
that are incidental to our business, including those which arise out of or are related to the
handling of claims made in connection with our insurance policies and claims handling. The
plaintiffs in some of these lawsuits have alleged bad faith or extracontractual damages, and some
have sought punitive damages or class action status. We believe that the resolution of these legal
actions will not have a material adverse effect on our financial condition or results of
operations. However, the ultimate outcome of these matters is uncertain.
During the year ended June 30, 2009, we were involved in litigation in Alabama and Georgia in
which allegations were made with respect to our sales practices, primarily the sale of motor club
memberships currently or formerly sold in those states. The suits generally alleged that we
implemented a program to convince our consumers who purchased automobile insurance policies to also
purchase motor club memberships or that we charged our consumers billing fees associated with our
products that were not properly disclosed. We denied all allegations of wrongdoing.
On November 21, 2008, the Superior Court for Fulton County, Georgia approved the settlement of
the case styled Annette Rush v. Village Auto Insurance Company, Inc. (now known as First Acceptance
Insurance Company of Georgia, Inc.) that was pending in the Superior Court of Fulton County,
Georgia. The court approved the terms of the settlement as described in Part II, Item 1. Legal
Proceedings, in our Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2008.
On December 5, 2008, we entered into a Stipulation and Agreement of Settlement with the plaintiffs
in the class action litigation that was pending against the Company in Alabama. The Circuit Court
of Bullock County, Alabama approved the terms of the Alabama settlement as set forth in Item 1.01
Entry into a Material Definitive Agreement in our Current Report on Form 8-K, dated December 11,
2008.
The litigation settlement costs are set forth separately in the consolidated statements of
operations.
In July 2009, we received $2.95 million from our insurance carrier regarding coverage for the
costs and expenses incurred by the Company relating to the settlement of the Georgia and Alabama
litigation. This insurance recovery was accrued in fiscal year 2009 and included in other assets in
our consolidated balance sheet and as a reduction of litigation settlement expenses in our
consolidated statement of operations. See Note 17 to our consolidated financial statements for
further information about the litigation settlements.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of stockholders during the fourth quarter of the fiscal
year ended June 30, 2009.
22
FIRST ACCEPTANCE CORPORATION 10-K
PART II
Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Market Information
Our common stock is currently quoted on the New York Stock Exchange under the symbol FAC.
The following table sets forth quarterly high and low bid prices for our common stock for the
periods indicated. All price quotations represent prices between dealers, without accounting for
retail mark-ups, mark-downs or commissions, and may not represent actual transactions.
|
|
|
|
|
|
|
|
|
|
|
Price Range |
|
|
High |
|
Low |
Year Ended June 30, 2008 |
|
|
|
|
|
|
|
|
First Quarter |
|
$ |
10.37 |
|
|
$ |
4.60 |
|
Second Quarter |
|
|
5.46 |
|
|
|
3.12 |
|
Third Quarter |
|
|
4.52 |
|
|
|
2.85 |
|
Fourth Quarter |
|
|
4.33 |
|
|
|
2.90 |
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, 2009 |
|
|
|
|
|
|
|
|
First Quarter |
|
$ |
4.70 |
|
|
$ |
2.76 |
|
Second Quarter |
|
|
3.80 |
|
|
|
2.18 |
|
Third Quarter |
|
|
3.45 |
|
|
|
1.66 |
|
Fourth Quarter |
|
|
3.20 |
|
|
|
1.81 |
|
Holders
According to the records of our transfer agent, there were 493 holders of record of our common
stock on September 10, 2009, including record holders such as banks and brokerage firms who hold
shares for beneficial holders, and 48,311,873 shares of our common stock were outstanding.
Dividends
We paid no dividends during the two most recent fiscal years. We do not anticipate paying cash
dividends in the future. Any future determination to pay dividends will be at the discretion of our
Board of Directors and will depend upon, among other factors, our results of operations, financial
condition, capital requirements and contractual restrictions.
Stock Transfer Restrictions
Our certificate of incorporation (the Charter) contains prohibitions on the transfer of our
common stock to avoid limitations on the use of our NOL carryforwards and other federal income tax
attributes that we inherited from our predecessor. The Charter generally prohibits, without the
prior approval of our Board of Directors, any transfer of common stock, any subsequent issue of
voting stock or stock that participates in our earnings or growth, and certain options with respect
to such stock, if the transfer of such stock would cause any group or person to own 4.9% or more
(by aggregate value) of our outstanding shares or cause any person to be treated like the owner of
4.9% or more (by aggregate value) of our outstanding shares for tax purposes. Transfers in
violation of this prohibition will be void, unless our Board of Directors consents to the transfer.
If void, upon our demand, the purported transferee must return the shares to our agent to be sold,
or if already sold, the purported transferee must forfeit some, or possibly all, of the sale
proceeds. In connection with certain changes in the ownership of the holders of our shares, we may
require the holder to dispose of some or all of such shares. For this purpose, person is defined
broadly to mean any individual, corporation, estate, debtor, association, company, partnership,
joint venture, or similar organization.
23
FIRST ACCEPTANCE CORPORATION 10-K
Performance Graph
The following graph compares the total cumulative shareholder return for $100 invested in our
common shares against the cumulative total return of the Russell 3000 Index and the S&P Property &
Casualty Insurance Index on June 30, 2004 to the end of the most recently completed fiscal year.
CUMULATIVE VALUE OF $100 INVESTMENT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
2004 |
|
2005 |
|
2006 |
|
2007 |
|
2008 |
|
2009 |
First Acceptance Corporation |
|
|
100.00 |
|
|
|
135.14 |
|
|
|
168.29 |
|
|
|
145.14 |
|
|
|
45.71 |
|
|
|
30.43 |
|
Russell 3000 |
|
|
100.00 |
|
|
|
108.05 |
|
|
|
118.38 |
|
|
|
142.14 |
|
|
|
124.11 |
|
|
|
91.14 |
|
S&P Property & Casualty
Insurance |
|
|
100.00 |
|
|
|
113.67 |
|
|
|
120.31 |
|
|
|
137.62 |
|
|
|
96.35 |
|
|
|
74.97 |
|
Item 6. Selected Financial Data
The following tables provide selected historical consolidated financial and operating data of
the Company as of the dates and for the periods indicated. In conjunction with the data provided
in the following tables and in order to more fully understand our historical consolidated financial
and operating data, you should also read Managements Discussion and Analysis of Financial
Condition and Results of Operations and our consolidated financial statements and the accompanying
notes included in this report. We derived our selected historical consolidated financial data as
of June 30, 2009 and 2008 and for the years ended June 30, 2009, 2008 and 2007 from our
consolidated financial statements included in this report. We derived our selected historical
consolidated financial data as of June 30, 2007, 2006 and 2005 and for the years ended June 30,
2006 and 2005 from our consolidated financial statements, which are not included in this report.
The results for past periods are not necessarily indicative of the results to be expected for any
future period.
24
FIRST ACCEPTANCE CORPORATION 10-K
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
(in thousands, except per share data) |
|
Statement of Operations Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned |
|
$ |
224,113 |
|
|
$ |
285,914 |
|
|
$ |
300,661 |
|
|
$ |
208,771 |
|
|
$ |
132,677 |
|
Commission and fee income |
|
|
31,759 |
|
|
|
36,479 |
|
|
|
37,324 |
|
|
|
26,757 |
|
|
|
26,821 |
|
Investment income |
|
|
9,504 |
|
|
|
11,250 |
|
|
|
8,863 |
|
|
|
5,762 |
|
|
|
3,353 |
|
Net realized gains (losses) on fixed
maturities, available-for-sale |
|
|
89 |
|
|
|
(1,244 |
) |
|
|
(61 |
) |
|
|
3,562 |
|
|
|
3,944 |
|
Other |
|
|
|
|
|
|
|
|
|
|
850 |
|
|
|
4,150 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
265,465 |
|
|
|
332,399 |
|
|
|
347,637 |
|
|
|
249,002 |
|
|
|
166,795 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and loss adjustment expenses |
|
|
149,277 |
|
|
|
219,943 |
|
|
|
241,908 |
|
|
|
140,845 |
|
|
|
87,493 |
|
Insurance operating expenses |
|
|
87,124 |
|
|
|
98,433 |
|
|
|
97,629 |
|
|
|
75,773 |
|
|
|
49,921 |
|
Other operating expenses |
|
|
1,307 |
|
|
|
2,415 |
|
|
|
2,623 |
|
|
|
2,494 |
|
|
|
2,775 |
|
Litigation settlement |
|
|
1,570 |
|
|
|
7,468 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation |
|
|
2,053 |
|
|
|
1,507 |
|
|
|
1,063 |
|
|
|
500 |
|
|
|
332 |
|
Depreciation and amortization |
|
|
1,910 |
|
|
|
1,679 |
|
|
|
1,624 |
|
|
|
1,463 |
|
|
|
1,920 |
|
Interest expense |
|
|
4,138 |
|
|
|
4,977 |
|
|
|
1,874 |
|
|
|
898 |
|
|
|
351 |
|
Goodwill impairment(1) |
|
|
67,990 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
315,369 |
|
|
|
336,422 |
|
|
|
346,721 |
|
|
|
221,973 |
|
|
|
142,792 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
(49,904 |
) |
|
|
(4,023 |
) |
|
|
916 |
|
|
|
27,029 |
|
|
|
24,003 |
|
Provision (benefit) for income taxes(1) |
|
|
18,396 |
|
|
|
13,822 |
|
|
|
17,586 |
|
|
|
(1,039 |
) |
|
|
(2,153 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(68,300 |
) |
|
$ |
(17,845 |
) |
|
$ |
(16,670 |
) |
|
$ |
28,068 |
|
|
$ |
26,156 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Share Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
(1.43 |
) |
|
$ |
(0.37 |
) |
|
$ |
(0.35 |
) |
|
$ |
0.59 |
|
|
$ |
0.56 |
|
Diluted |
|
$ |
(1.43 |
) |
|
$ |
(0.37 |
) |
|
$ |
(0.35 |
) |
|
$ |
0.57 |
|
|
$ |
0.53 |
|
Number of shares used to calculate net income
(loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
47,664 |
|
|
|
47,628 |
|
|
|
47,584 |
|
|
|
47,487 |
|
|
|
47,055 |
|
Diluted |
|
|
47,664 |
|
|
|
47,628 |
|
|
|
47,584 |
|
|
|
49,576 |
|
|
|
48,989 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
2009 |
|
2008 |
|
2007 |
|
2006 |
|
2005 |
|
|
(in thousands, except per share data) |
Balance Sheet Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and total
investments |
|
$ |
217,512 |
|
|
$ |
228,216 |
|
|
$ |
210,716 |
|
|
$ |
159,362 |
|
|
$ |
110,522 |
|
Total assets |
|
|
358,956 |
|
|
|
473,230 |
|
|
|
498,892 |
|
|
|
435,327 |
|
|
|
331,645 |
|
Loss and loss adjustment expense reserves |
|
|
83,973 |
|
|
|
101,407 |
|
|
|
91,446 |
|
|
|
62,822 |
|
|
|
42,897 |
|
Notes and debentures payable |
|
|
41,240 |
|
|
|
45,153 |
|
|
|
23,060 |
|
|
|
23,612 |
|
|
|
|
|
Total liabilities |
|
|
199,100 |
|
|
|
247,771 |
|
|
|
259,408 |
|
|
|
181,904 |
|
|
|
103,316 |
|
Total stockholders equity |
|
|
159,856 |
|
|
|
225,459 |
|
|
|
239,484 |
|
|
|
253,423 |
|
|
|
228,329 |
|
|
|
Book value per common share |
|
$ |
3.31 |
|
|
$ |
4.69 |
|
|
$ |
5.03 |
|
|
$ |
5.33 |
|
|
$ |
4.81 |
|
|
|
|
(1) |
|
The year ended June 30, 2009 includes a goodwill impairment charge of $68.0 million,
a related increase in the tax provision of $15.3 million, and a tax benefit of $5.1 million
related to the utilization of federal net operating loss (NOL) carryforwards that were
previously reserved for through a valuation allowance. The provision for income taxes for the
year ended June 30, 2008 includes a charge of $11.4 million related to the expiration of
certain federal NOL carryforwards as well as an increase in the valuation allowance of $3.6
million for the deferred tax asset for certain federal NOL carryforwards resulting in a charge
totaling $15.0 million. The provision for income taxes for the year ended June 30, 2007
includes an increase in the valuation allowance for the deferred tax asset of $6.9 million as
well as $10.0 million related to the expiration of certain federal NOL carryforwards resulting
in a charge totaling $16.9 million. The benefit from income taxes for the years ended June 30,
2006 and 2005 include decreases in the valuation allowance for the deferred tax asset of $10.5
million and $10.6 million, respectively. |
25
FIRST ACCEPTANCE CORPORATION 10-K
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with our consolidated financial
statements and accompanying notes included in this report. This discussion contains forward-looking
statements that involve risks and uncertainties. Our actual results could differ materially from
those anticipated in these forward-looking statements as a result of various factors, including
those discussed below and elsewhere in this report, particularly under the caption Item 1A. Risk
Factors.
General
We are principally a retailer, servicer and underwriter of non-standard personal automobile
insurance. We also own two tracts of land in San Antonio, Texas that are held for sale.
Non-standard personal automobile insurance is made available to individuals who are categorized as
non-standard because of their inability or unwillingness to obtain standard insurance coverage
due to various factors, including payment history, payment preference, failure in the past to
maintain continuous insurance coverage, driving record and/or vehicle type. Generally, our
customers are required by law to buy a minimum amount of automobile insurance.
As of September 1, 2009, we leased and operated 418 retail locations (or stores), staffed by
employee-agents. Our employee-agents exclusively sell non-standard automobile insurance products
underwritten by us. As of September 1, 2009, we wrote non-standard personal automobile insurance
in 12 states and were licensed in 13 additional states.
The following table shows the number of our retail locations. Retail location counts are based
upon the date that a location commenced or ceased writing business.
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
2009 |
|
2008 |
Retail locations beginning of period |
|
|
431 |
|
|
|
462 |
|
Opened |
|
|
1 |
|
|
|
4 |
|
Closed |
|
|
(14 |
) |
|
|
(35 |
) |
|
|
|
|
|
|
|
|
|
Retail locations end of period |
|
|
418 |
|
|
|
431 |
|
|
|
|
|
|
|
|
|
|
The following table shows the number of our retail locations by state.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
2009 |
|
2008 |
|
2007 |
|
|
Alabama |
|
|
25 |
|
|
|
25 |
|
|
|
25 |
|
Florida |
|
|
39 |
|
|
|
40 |
|
|
|
41 |
|
Georgia |
|
|
61 |
|
|
|
61 |
|
|
|
62 |
|
Illinois |
|
|
78 |
|
|
|
80 |
|
|
|
81 |
|
Indiana |
|
|
18 |
|
|
|
19 |
|
|
|
24 |
|
Mississippi |
|
|
8 |
|
|
|
8 |
|
|
|
8 |
|
Missouri |
|
|
12 |
|
|
|
14 |
|
|
|
15 |
|
Ohio |
|
|
27 |
|
|
|
29 |
|
|
|
30 |
|
Pennsylvania |
|
|
17 |
|
|
|
19 |
|
|
|
25 |
|
South Carolina |
|
|
27 |
|
|
|
28 |
|
|
|
28 |
|
Tennessee |
|
|
20 |
|
|
|
20 |
|
|
|
20 |
|
Texas |
|
|
86 |
|
|
|
88 |
|
|
|
103 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
418 |
|
|
|
431 |
|
|
|
462 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26
FIRST ACCEPTANCE CORPORATION 10-K
Consolidated Results of Operations
Overview
Our primary focus is the selling, servicing and underwriting of non-standard personal
automobile insurance. Our real estate and corporate segment consists of activities related to the
disposition of real estate held for sale, interest expense associated with debt, and other general
corporate overhead expenses.
The following table presents selected financial data for our insurance operations and real
estate and corporate segments (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Insurance |
|
$ |
265,341 |
|
|
$ |
332,219 |
|
|
$ |
347,431 |
|
Real estate and corporate |
|
|
124 |
|
|
|
180 |
|
|
|
206 |
|
|
|
|
|
|
|
|
|
|
|
Consolidated total |
|
$ |
265,465 |
|
|
$ |
332,399 |
|
|
$ |
347,637 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes: |
|
|
|
|
|
|
|
|
|
|
|
|
Insurance |
|
$ |
(42,536 |
) |
|
$ |
4,685 |
|
|
$ |
6,252 |
|
Real estate and corporate |
|
|
(7,368 |
) |
|
|
(8,708 |
) |
|
|
(5,336 |
) |
|
|
|
|
|
|
|
|
|
|
Consolidated total |
|
$ |
(49,904 |
) |
|
$ |
(4,023 |
) |
|
$ |
916 |
|
|
|
|
|
|
|
|
|
|
|
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).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Premiums earned: |
|
|
|
|
|
|
|
|
|
|
|
|
Georgia |
|
$ |
49,762 |
|
|
$ |
60,928 |
|
|
$ |
70,312 |
|
Illinois |
|
|
27,583 |
|
|
|
32,009 |
|
|
|
31,201 |
|
Florida |
|
|
26,113 |
|
|
|
43,017 |
|
|
|
55,117 |
|
Texas |
|
|
25,971 |
|
|
|
33,769 |
|
|
|
32,480 |
|
Alabama |
|
|
23,948 |
|
|
|
28,780 |
|
|
|
30,316 |
|
South Carolina |
|
|
17,887 |
|
|
|
23,634 |
|
|
|
14,797 |
|
Tennessee |
|
|
15,269 |
|
|
|
20,772 |
|
|
|
23,800 |
|
Ohio |
|
|
12,914 |
|
|
|
15,416 |
|
|
|
16,455 |
|
Pennsylvania |
|
|
11,437 |
|
|
|
10,041 |
|
|
|
6,937 |
|
Indiana |
|
|
5,537 |
|
|
|
7,131 |
|
|
|
8,186 |
|
Missouri |
|
|
3,907 |
|
|
|
5,630 |
|
|
|
6,087 |
|
Mississippi |
|
|
3,785 |
|
|
|
4,787 |
|
|
|
4,973 |
|
|
|
|
|
|
|
|
|
|
|
Total premiums earned |
|
$ |
224,113 |
|
|
$ |
285,914 |
|
|
$ |
300,661 |
|
|
|
|
|
|
|
|
|
|
|
27
FIRST ACCEPTANCE CORPORATION 10-K
The following table presents the change in the total number of policies in force for the
insurance operations. Policies in force increase as a result of new policies issued and decrease as
a result of policies that are canceled or expire and are not renewed.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
2009 |
|
2008 |
|
2007 |
Policies in force beginning of period |
|
|
194,079 |
|
|
|
226,974 |
|
|
|
200,401 |
|
Net increase (decrease) during period |
|
|
(35,857 |
) |
|
|
(32,895 |
) |
|
|
26,573 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policies in force end of period |
|
|
158,222 |
|
|
|
194,079 |
|
|
|
226,974 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance companies present a combined ratio as a measure of their overall underwriting
profitability. The components of the combined ratio are as follows.
Loss Ratio Loss ratio is the ratio (expressed as a percentage) of losses and loss
adjustment expenses incurred to premiums earned and is a basic element of underwriting
profitability. We calculate this ratio based on all direct and assumed premiums earned.
Expense Ratio Expense ratio is the ratio (expressed as a percentage) of operating expenses
to premiums earned. This is a measurement that illustrates relative management efficiency in
administering our operations.
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
2009 |
|
2008 |
|
2007 |
Loss and loss adjustment expense |
|
|
66.6 |
% |
|
|
76.9 |
% |
|
|
80.4 |
% |
Expense |
|
|
24.7 |
% |
|
|
21.7 |
% |
|
|
19.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined |
|
|
91.3 |
% |
|
|
98.6 |
% |
|
|
100.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
The non-standard personal automobile insurance industry is cyclical in nature. Likewise,
adverse economic conditions impact our customers and many will choose to reduce their coverage or
go uninsured during a weak economy. In the past, the industry has been characterized by periods of
price competition and excess capacity followed by periods of high premium rates and shortages of
underwriting capacity. If new competitors enter this market, existing competitors may attempt to
increase market share by lowering rates. Such conditions could lead to reduced prices, which would
negatively impact our revenues and profitability.
28
FIRST ACCEPTANCE CORPORATION 10-K
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. This policy currently does not allow investments in equity securities. Management
and the Investment Committee meet regularly with our investment manager to review the performance
of the portfolio and compliance with our investment guidelines.
The invested assets of the insurance company subsidiaries consist substantially of marketable,
investment grade, U.S. government securities, municipal bonds, corporate bonds and collateralized
mortgage obligations (CMOs). We also invest a portion of the portfolio in certain securities
issued by political subdivisions which enable our insurance company subsidiaries to obtain premium
tax credits. Investment income is comprised primarily of interest earned on these securities, net
of related investment expenses. Realized gains and losses may occur from time to time as changes
are made to our holdings to obtain premium tax credits or based upon changes in interest rates or
the credit quality of specific securities. During the 2009 fiscal year, we sold securities with
unrealized gains to generate taxable income in order to utilize expiring tax NOL carryforwards.
The value of our consolidated investment portfolio was $140.3 million at June 30, 2009 and
consisted of fixed maturity securities, all carried at fair value with unrealized gains and losses
reported as a separate component of stockholders equity on an after-tax basis. At June 30, 2009,
we had gross unrealized gains of $4.6 million and gross unrealized losses of $5.2 million.
At June 30, 2009, 98.0% of the fair value of our investment portfolio was rated investment
grade (a credit rating of AAA to BBB) by Standard & Poors Corporation, a nationally recognized
rating agency. The average credit rating of our fixed maturity portfolio was AA+ at June 30, 2009.
Investment grade securities generally bear lower yields and have 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 $43.5 million at June 30, 2009 and represented 31% of our fixed
maturity portfolio. As of June 30, 2009, 98.5% of our CMOs were considered investment grade by each
of the nationally recognized rating agencies. In addition, 89% of our CMOs were rated AAA and 74%
of our CMOs were backed by agencies of the United States government. Of the non-agency backed CMOs,
58% were rated AAA.
The following table summarizes our fixed maturity securities at June 30, 2009 (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
U.S. government and agencies |
|
$ |
10,744 |
|
|
$ |
473 |
|
|
$ |
(37 |
) |
|
$ |
11,180 |
|
State |
|
|
8,238 |
|
|
|
344 |
|
|
|
(19 |
) |
|
|
8,563 |
|
Political subdivisions |
|
|
1,834 |
|
|
|
52 |
|
|
|
(32 |
) |
|
|
1,854 |
|
Revenue and assessment |
|
|
27,816 |
|
|
|
831 |
|
|
|
(166 |
) |
|
|
28,481 |
|
Corporate bonds |
|
|
45,737 |
|
|
|
1,654 |
|
|
|
(665 |
) |
|
|
46,726 |
|
Collateralized mortgage obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency backed |
|
|
30,656 |
|
|
|
1,270 |
|
|
|
|
|
|
|
31,926 |
|
Non-agency backed residential |
|
|
8,178 |
|
|
|
1 |
|
|
|
(2,561 |
) |
|
|
5,618 |
|
Non-agency backed commercial |
|
|
7,646 |
|
|
|
|
|
|
|
(1,683 |
) |
|
|
5,963 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
140,849 |
|
|
$ |
4,625 |
|
|
$ |
(5,163 |
) |
|
$ |
140,311 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29
FIRST ACCEPTANCE CORPORATION 10-K
The following table sets forth the scheduled maturities of our fixed maturity securities at
June 30, 2009 based on their fair values (in thousands). Actual maturities may differ from
contractual maturities because certain securities may be called or prepaid by the issuers.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities |
|
|
|
|
|
|
Securities |
|
|
Securities |
|
|
with No |
|
|
All |
|
|
|
with |
|
|
with |
|
|
Unrealized |
|
|
Fixed |
|
|
|
Unrealized |
|
|
Unrealized |
|
|
Gains or |
|
|
Maturity |
|
|
|
Gains |
|
|
Losses |
|
|
Losses |
|
|
Securities |
|
One year or less |
|
$ |
4,376 |
|
|
$ |
905 |
|
|
$ |
250 |
|
|
$ |
5,531 |
|
After one through five years |
|
|
50,827 |
|
|
|
1,951 |
|
|
|
|
|
|
|
52,778 |
|
After five through ten years |
|
|
21,554 |
|
|
|
5,490 |
|
|
|
|
|
|
|
27,044 |
|
After ten years |
|
|
4,777 |
|
|
|
6,674 |
|
|
|
|
|
|
|
11,451 |
|
No single maturity date |
|
|
32,531 |
|
|
|
10,862 |
|
|
|
114 |
|
|
|
43,507 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
114,065 |
|
|
$ |
25,882 |
|
|
$ |
364 |
|
|
$ |
140,311 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, 2009 Compared with the Year Ended June 30, 2008
Consolidated Results
Revenues for the year ended June 30, 2009 decreased 20% to $265.5 million from $332.4 million
in the prior year. Loss before income taxes for the year ended June 30, 2009 was $49.9 million,
compared with a loss before income taxes of $4.0 million for the year ended June 30, 2008. The loss
before income taxes for the year ended June 30, 2009 included a goodwill impairment charge of $68.0
million. Net loss for the year ended June 30, 2009 was $68.3 million, compared with a net loss of
$17.8 million for the year ended June 30, 2008. The net loss for the year ended June 30, 2009
included a net charge of $10.2 million resulting from the $15.3
million tax effect of the goodwill impairment charge and the
establishment of a full valuation allowance on the remaining deferred
tax assets
offset by a tax benefit of $5.1 million related to the utilization of
federal NOL carryforwards that were to expire on June 30, 2009
that had been previously reserved for through a valuation allowance. Basic and diluted net loss per share was $1.43 for the year ended June 30,
2009, compared with basic and diluted net loss per share of $0.37 for the year ended June 30, 2008.
Insurance Operations
Revenues from insurance operations were $265.3 million for the year ended June 30, 2009,
compared with $332.2 million for the year ended June 30, 2008. Loss before income taxes from
insurance operations for the year ended June 30, 2009 was $42.5 million, compared with income
before income taxes from insurance operations of $4.7 million for the year ended June 30, 2008.
Premiums Earned
Premiums earned decreased by $61.8 million, or 22%, to $224.1 million for the year ended June
30, 2009, from $285.9 million for the year ended June 30, 2008. The decrease in premiums earned was
primarily due to the weak economic conditions, which have caused both a decline in the number of
policies written, as well as an increase in the percentage of our customers purchasing liability
only coverage. Rate actions taken in a number of states to improve underwriting profitability and
the closure of underperforming stores also contributed toward the
decrease in policies written and premiums earned.
Approximately 67% of the $61.8 million decline in premiums earned for the year ended June 30, 2009
was in our Florida, Georgia, South Carolina and Texas markets.
The total number of insured policies in force at June 30, 2009 decreased 18% over the same
date in 2008 from 194,079 to 158,222, primarily due to the factors noted above. At June 30, 2009,
we operated 418 stores, compared with 431 stores at June 30, 2008.
Commission and Fee Income
Commission and fee income decreased 13% to $31.8 million for the year ended June 30, 2009,
from $36.5 million for the year ended June 30, 2008. The decrease was a result of the decrease in
the number of policies in force, partially offset by higher fee income related to commissionable
products sold through our network of retail locations.
30
FIRST ACCEPTANCE CORPORATION 10-K
Investment Income
Investment income decreased to $9.5 million during the year ended June 30, 2009 from $11.3
million during the year ended June 30, 2008 primarily as a result of an increase in cash and cash
equivalents, a decrease in the amount of assets invested in fixed maturities and the significant
decline in yields on cash equivalents. Cash and cash equivalents increased from $38.6 million at
June 30, 2008 to $77.2 million at June 30, 2009 primarily as a result of the sale of $35.3 million
of U.S. government and agency securities and agency backed CMOs in March 2009 to generate taxable
income in order to utilize expiring net operating losses. The proceeds from these sales had not
been reinvested as of June 30, 2009. At June 30, 2009 and 2008, the tax-equivalent book yields for
our fixed maturities and cash equivalents portfolio were 3.5% and 5.1%, respectively, with
effective durations of 2.26 and 3.69 years, respectively, which both declined as a result of the
increase in cash equivalents previously discussed.
Net realized gains (losses) on fixed maturities, available-for-sale
Net realized gains (losses) on fixed maturities, available-for-sale during the year ended June
30, 2009 included $2.5 million in net realized gains from the sale of $35.3 million of U.S.
government and agency securities and agency backed CMOs in March 2009 as previously noted. Net
realized gains (losses) on fixed maturities, available-for-sale included $2.4 million of charges
related to other-than-temporary impairment (OTTI) on investments, which was comprised of $1.5
million related to certain non-agency backed CMOs and $0.9 million related to three corporate
bonds.
Effective April 1, 2009, we adopted the provisions of Staff Position 115-2, Recognition and
Presentation of Other-Than-Temporary Impairments. Under this guidance, we separate OTTI into the
following two components: (i) the amount related to credit losses which is recognized in the
consolidated statement of operations and (ii) the amount related to all other factors which is
recorded in other comprehensive income (loss). The credit-related portion of an OTTI is measured by
comparing a securitys amortized cost to the present value of its current expected cash flows
discounted at its effective yield at the date of acquisition. As a result of the adoption of this
pronouncement, the cumulative effect resulted in an adjustment of $0.6 million to reclassify the
non-credit component of previously recognized impairments from accumulated deficit to accumulated
other comprehensive loss.
The determination of whether unrealized losses are other-than-temporary requires judgment
based on subjective as well as objective factors. We routinely monitor our fixed maturities
portfolio for changes in fair value that might indicate potential impairments and perform detailed
reviews on such securities. Changes in fair value are evaluated to determine the extent to which
such changes are attributable to (i) fundamental factors specific to the issuer or (ii)
market-related factors such as interest rates or sector declines.
Securities with declines attributable to issuer-specific fundamentals are reviewed to identify
all available evidence to estimate the potential for impairment. Resources used include historical
financial data included in SEC filings for corporate bonds and performance data regarding the
underlying loans for CMOs. Securities with declines attributable solely to market or sector
declines where we do not intend to sell the security and it is more likely than not that we will
not be required to sell the security before the full recovery of its amortized cost basis 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, we will
make a determination as to the probability of recovering principal and interest on the security.
On a quarterly basis, we review cash flow estimates for certain non-agency backed CMOs of
lesser credit quality following the guidance of FSP EITF 99-20-1, Amendments to the Impairment
Guidance of EITF Issue No. 99-20 (FSP EITF 99-20-1). Accordingly, when changes in estimated cash
flows from the cash flows previously estimated occur due to actual prepayment and credit loss
experience, and the present value of the revised cash flows is less than the present value
previously estimated, OTTI is deemed to have occurred. For non-agency backed CMOs not subject to
FSP EITF 99-20-1, we prepare quarterly projected cash flow analyses and when it is indicated that a
principal loss is probable, OTTI is deemed to have occurred. The timing of projected cash
flows on CMOs has changed as economic conditions have prevented the underlying borrowers from
refinancing the mortgages
31
FIRST ACCEPTANCE CORPORATION 10-K
underlying these securities, thereby reducing the amount of projected prepayments. Likewise,
economic conditions have caused an increase in the actual and projected delinquencies in the
underlying mortgages. These factors have resulted in the OTTI that we have recognized related to
non-agency backed CMOs.
Our review of non-agency backed CMOs included an analysis of available information such as
collateral quality, anticipated cash flows, credit enhancements, default rates, loss severities,
the securities relative position in their respective capital structures, and credit ratings from
statistical rating agencies. We review quarterly projected cash flow analyses for each security
utilizing current assumptions regarding (i) actual and anticipated delinquencies, (ii) delinquency
transition-to-default rates, and (iii) loss severities. Based on our quarterly reviews, we
determined that there had not been adverse changes in projected cash flows, except in the case of
those securities previously discussed which incurred OTTI charges. We believe that the unrealized
losses on these securities are not necessarily predictive of the ultimate performance of the
underlying collateral. We do not intend to sell these securities and it is more likely than not
that we will not be required to sell these securities before the recovery of their amortized cost
basis.
The OTTI charges on corporate bonds was recognized as 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 decline, and (iii) a series of
downgrades to their credit ratings. Based on the factors that existed at the time of impairment,
we did not believe that these bonds would recover their unrealized losses in the near future.
We believe that the remaining securities having unrealized losses at June 30, 2009 were not
other-than-temporarily impaired. We also do not intend to sell any of these securities and it is
more likely than not that we will not be required to sell any of these securities before the
recovery of their amortized cost basis.
Loss and Loss Adjustment Expenses
The loss and loss adjustment expense ratio was 66.6% for the year ended June 30, 2009,
compared with 76.9% for the year ended June 30, 2008. For the year ended June 30, 2009, we
experienced favorable development of approximately $11.4 million for losses occurring prior to June
30, 2008.
The favorable development for the year ended June 30, 2009 was due to lower than anticipated
severity and frequency of accidents in the states in which we operate. Excluding the development
noted above, the loss and loss adjustment expense ratio for the year ended June 30, 2009 was 71.7%.
The year-over-year improvement reflects among other things, favorable severity trends in property
and physical damage coverages, rate actions taken in a number of states to improve underwriting
profitability, improvement in our underwriting and claim handling practices, and the shift in
business mix toward renewal policies, which have lower loss ratios than new policies.
Operating Expenses
Insurance operating expenses decreased 12% to $87.1 million for the year ended June 30, 2009
from $98.4 million for the year ended June 30, 2008. The decrease was primarily a result of a
reduction in costs (such as employee-agent commissions and premium taxes) that varied along with
the decrease in premiums earned as well as savings realized from the closure of underperforming
stores.
The expense ratio increased from 21.7% for the year ended June 30, 2008 to 24.7% for fiscal
year 2009. The year-over-year increase in the expense ratio was due to the drop in revenues, which
resulted in a higher percentage of fixed expenses (such as rent and base salary).
Overall, the combined ratio decreased to 91.3% for the year ended June 30, 2009 from 98.6% for
the year ended June 30, 2008.
32
FIRST ACCEPTANCE CORPORATION 10-K
Litigation Settlement
Litigation settlement costs for the years ended June 30, 2009 and 2008 of $1.6 million and
$7.5 million, respectively, relate to the costs incurred in connection with our settlement and
defense of the litigation filed against us in Georgia and Alabama relating to certain sales
practices. Pursuant to these litigation settlements, we have (i) provided the plaintiffs with
either a premium credit towards a future automobile insurance policy or a reimbursement certificate
for future towing and rental expenses, (ii) paid an aggregate of $6.5 million in fees and expenses
for the attorneys for the plaintiffs and (iii) agreed to pay the costs associated with the
administration of the settlements.
At this time, we are unable to estimate the costs associated with the Georgia and Alabama
litigation settlements related to the utilization of reimbursement certificates. However,
sufficient information related to the premium credits has existed since December 31, 2008 to allow
us to reasonably estimate and accrue the total costs associated with the utilization of available
premium credits. The final costs of the settlements will depend on, among other factors, the rate
of redemption and forfeiture of the premium credits and reimbursement certificates.
Regarding the Georgia and Alabama settlements, based upon our analysis of the premium credits
available to class members at December 31, 2008, we accrued approximately $5.2 million associated
with the estimated utilization of available premium credits for Georgia and Alabama class members
who were insured by the Company on December 31, 2008 and received the premium credits. Since
January 1, 2009, $1.3 million of available premium credits have been utilized and $0.9 million have
been forfeited. We are not able to reasonably estimate and, therefore, did not accrue any estimated
costs for Georgia and Alabama class members that were not insured by the Company on June 30, 2009
that received the premium credits as a result of the uncertainties associated with those class
members purchasing a new automobile insurance policy from the Company and utilizing the
approximately $1.0 million of premium credits available to them.
The litigation settlement costs are set forth separately in the consolidated statements of
operations. During the year ended June 30, 2009, we paid $6.5 million in fees and expenses to the
attorneys for the Georgia and Alabama plaintiffs and $0.3 million in costs associated with the
administration of the settlements, all of which were accrued at June 30, 2008. During the year
ended June 30, 2009, we incurred an additional $0.2 million in legal costs in connection with the
defense of the litigation. We have a remaining accrual as of June 30, 2009 for those currently
estimable costs associated with the utilization of available premium credits of $3.0 million.
Management intends to adjust the estimated accrual as necessary during future periods to account
for the impact of actual rate of redemption and forfeiture of the premium credits and reimbursement
certificates.
In July 2009, we received $2.95 million from our insurance carrier regarding coverage for the
costs and expenses we incurred relating to the settlement of the Georgia and Alabama litigation.
This insurance recovery was accrued in fiscal year 2009 and included in other assets in our
consolidated balance sheet and as a reduction of litigation settlement expenses in our
consolidated statement of operations. For additional information with respect to the litigation
settlements, see Item 3. Legal Proceedings and Note 17 to our consolidated financial statements.
Goodwill Impairment
We recorded a non-cash, pre-tax goodwill impairment charge in fiscal year 2009 of $68.0
million. In accordance with Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets, we are required to perform periodic impairment tests of our goodwill and
intangible assets. The goodwill impairment test is a two-step process that requires us to make
judgments in determining what assumptions to use in the calculation. The first step of the process
consists of estimating the fair value of each reporting unit based on valuation techniques,
including a discounted cash flow model using revenue and profit forecasts, and comparing those
estimated fair values with the carrying values of those assets and liabilities, which includes the
allocated goodwill. If the estimated fair value is less than the carrying value, a second step is
performed to compute the amount of the impairment, if any, by determining an implied fair value
of goodwill. The determination of the implied fair value of goodwill of a reporting unit requires
us to allocate the estimated fair value of the reporting unit to the assets and liabilities of the
reporting unit. Any unallocated fair value represents the implied fair value of goodwill, which
is compared to its corresponding carrying value.
As a result of the adverse impact of the difficult economic conditions on our customers and
our business and the resulting decline in our
share price during the most recent quarter, we have estimated that a goodwill impairment charge
would be required upon the completion of a
33
FIRST ACCEPTANCE CORPORATION 10-K
detailed allocation of the reporting unit fair values. Accordingly, we recognized a non-cash,
pre-tax goodwill impairment charge of $68.0 million in the fourth quarter of fiscal year 2009. Due
to the complexity of the fair value calculations involved, it is expected that the goodwill
impairment charge will be finalized by the end of the first quarter of fiscal year 2010 and it is
not expected to differ materially from this estimate. The key assumptions used to determine the
fair value of our reporting unit, from a market participants perspective, included (i) long-term
revenue growth rates ranging from 5% to 10%, (ii) a discount rate of 14.5%, which was based on an
estimated weighted average cost of capital adjusted for the risks associated with our operations,
and (iii) recent industry transaction trends in price to tangible book multiples and related
returns on tangible equity. We do not believe that the estimated goodwill impairment charge will have a
materially adverse impact on the continuing operations, liquidity, or statutory surplus of the Company.
A variance in the discount rate could have had a significant effect on the amount of the
estimated goodwill impairment charge recognized. A one percent (1%) increase or decrease in the discount rate
would have caused an increase or decrease in the estimated goodwill impairment charge of approximately $20.0
million.
Our evaluation includes multiple assumptions, including estimated discounted cash flows and
other estimates that may change over time. If future discounted cash flows become less than those
projected by us, further impairment charges may become necessary that could have a materially
adverse impact on our results of operations and financial condition. As quoted market prices in
active stock markets are relevant evidence of fair value, a significant decrease in our common
stock trading price could also indicate that an impairment of goodwill exists.
Provision for Income Taxes
The provision for income taxes for the year ended June 30, 2009 was $18.4 million, compared
with $13.8 million for the same period in fiscal year 2008. As a result of the goodwill impairment
charge, we are in a cumulative pre-tax loss over a three-year period. In assessing our ability to
support the realizability of our deferred tax assets, we have considered both positive and negative
evidence. We have placed greater weight on the uncertainty associated with the current economic
challenges and the related goodwill impairment charge. Therefore, we have established a full
valuation allowance against our net deferred tax assets which, in combination with the tax effect of
the goodwill impairment charge, resulted in a net increase in the tax provision of $15.3 million
during the three months ended June 30, 2009. This charge was
partially
offset by a $5.1 million tax benefit
related to the utilization of tax NOL carryforwards expiring in 2009 that had been
previously reserved for through a valuation allowance resulting in a net increase in the tax
provision for the year of $10.2 million.
The provision for income taxes for the year ended June 30, 2008 included a charge of $11.4
million related to the expiration of certain federal NOL carryforwards as well as an increase in
the valuation allowance of $3.6 million for the deferred tax asset for certain federal NOL
carryforwards resulting in a charge totaling $15.0 million. The changes during the year ended June
30, 2008 related to the valuation allowance were due to (i) revisions in estimates for our future
taxable income based on the most recent fiscal year results and (ii) taxable income for the most
recent fiscal year being less than our prior estimates.
Real Estate and Corporate
Loss before income taxes for the year ended June 30, 2009 was $7.4 million, compared with a
loss before income taxes of $8.7 million for the year ended June 30, 2008. Segment losses consist of other operating
expenses not directly related to the insurance operations, interest expense and stock-based
compensation offset by investment income on corporate invested assets. During the year ended June
30, 2009, we incurred $0.1 million of interest expense in connection with credit facility
borrowings compared with $0.7 million for the year ended June 30, 2008. The credit facility was
repaid in full and terminated on October 31, 2008. We incurred $3.9 million of interest expense
during both the year ended June 30, 2009 and 2008 related to the debentures issued in June 2007.
Year Ended June 30, 2008 Compared with the Year Ended June 30, 2007
Consolidated Results
Revenues for the year ended June 30, 2008 decreased 4% to $332.4 million from $347.6 million
in the prior year. Net loss for the year ended June 30, 2008 was $17.8 million, compared with a
net loss of $16.7 million for the
34
FIRST ACCEPTANCE CORPORATION 10-K
year ended June 30, 2007. Basic and diluted net loss per share was $0.37 for the year ended
June 30, 2008, compared with $0.35 for the year ended June 30, 2007.
Insurance Operations
Revenues from insurance operations were $332.2 million for the year ended June 30, 2008,
compared with $347.4 million for the year ended June 30, 2007. Income before income taxes from
insurance operations for the year ended June 30, 2008 was $4.7 million, compared with $6.3 million
for the year ended June 30, 2007.
Premiums Earned
Premiums earned decreased by $14.7 million, or 5%, to $285.9 million for the year ended June
30, 2008, from $300.7 million for the year ended June 30, 2007. This decline was due to the
decrease in the number of policies written, which was partially offset by higher average premiums
per policy as a result of rate increases taken in a number of states to improve underwriting
profitability. The decrease in the policies written was due to the weak economic conditions that
impacted our customers, rate increases taken in a number of states to improve underwriting
profitability and the closure of 45 poor performing stores between January 2007 and June 30, 2008.
Premiums earned in Florida, Georgia and Tennessee for the year ended June 30, 2008 declined by
$24.5 million over the same period in the prior fiscal year. These markets collectively accounted
for 44% of premiums earned during fiscal year 2008, down from 50% in the prior year. Our premiums
earned in these states were adversely affected by a decline in used car sales, which had
historically been a significant contributor to new policy growth in these markets. Additionally,
the decline in our Florida market was due to a January 1, 2008 rate increase to improve our
underwriting profitability and the decline in our Georgia market was due to state legislation
intended to curb illegal immigration. The decline in premiums earned was partially offset by
premium growth of $11.9 million in our South Carolina and Pennsylvania markets.
The total number of insured policies in force at June 30, 2008 decreased 15% over the same
date in 2007 from 226,974 to 194,079. At June 30, 2008, we operated 431 stores, compared with 462
stores at June 30, 2007.
Commission and Fee Income
Commission and fee income decreased 2% to $36.5 million for the year ended June 30, 2008, from
$37.3 million for the year ended June 30, 2007. The decrease was a result of the decrease in
policies in force during fiscal year 2008 partially offset by higher fee income in Illinois and
Florida.
Investment Income
Investment income increased during the year ended June 30, 2008 as invested assets increased
as a result of cash provided by operating activities and the proceeds received from the sale of
debentures in June 2007. The tax-equivalent book yields for our fixed maturities and cash
equivalents portfolio were 5.1% and 5.2% at June 30, 2008 and 2007, respectively, with effective
durations of 3.69 years and 3.43 years at June 30, 2008 and 2007, respectively.
Net realized gains (losses) on fixed maturities, available-for-sale
Included in net realized gains (losses) on fixed maturities, available-for-sale during the
year ended June 30, 2008 were $1.4 million of charges related to the OTTI of certain non-agency
CMOs in our investment portfolio. Due
to the deterioration in liquidity in the credit markets during
calendar year 2008, yields on certain
non-agency CMOs declined below projected book yields, which required the $1.4 million impairment of
these securities under the guidance set forth in Emerging Issues Task Force Issue No. 99-20
Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial
Interests That Continue to Be Held by a Transferor in Securitized Financial Assets.
Other
Other revenues for the year ended June 30, 2007 are comprised of $0.9 million in transaction
service fees earned for servicing the run-off business previously written by the Chicago
non-standard insurance agencies whose
35
FIRST ACCEPTANCE CORPORATION 10-K
assets we acquired in January 2006. We received the transaction service fee from the effective date
of the acquisition in January 2006 through December 31, 2006.
Loss and Loss Adjustment Expenses
The loss and loss adjustment expense ratio was 76.9% for the year ended June 30, 2008,
compared with 80.4% for the same period in fiscal year 2007. During fiscal year 2007, we
experienced a higher than anticipated loss and loss adjustment expense ratio primarily as a result
of significant unanticipated increases in (i) the frequency of Personal Injury Protection (PIP)
coverage losses in Florida, (ii) the severity of bodily injury losses in Florida and Georgia, and
(iii) the severity of property damage losses in Georgia and other states. This higher than
anticipated severity in Georgia bodily injury losses in fiscal year 2007 was driven by a higher
than anticipated occurrence of large losses (losses of $10,000 or above). Additionally, the loss
and loss adjustment expense ratio for fiscal year 2008 improved due to rate increases in Florida
taken in connection with the reinstatement of Floridas Motor Vehicle No-Fault Law (PIP coverage).
This law and the related coverage expired September 30, 2007 but was reinstated effective January
1, 2008. Our loss ratio (exclusive of loss adjustment expenses) for Floridas PIP coverage improved
to 97.2% for the year ended June 30, 2008 from 105.1% for the prior fiscal year. Premiums earned on
Floridas PIP coverage decreased to $13.6 million from $15.5 million over the same period.
For the year ended June 30, 2008, we experienced favorable development for prior accident
periods of approximately $1.4 million. For the year ended June 30, 2007, we experienced negative
development for losses occurring in prior accident periods of approximately $3.9 million. The
favorable development for the year ended June 30, 2008 was due to lower than anticipated severity
and frequency of accidents in certain states in which we operate. There was no individual factor
that had a material impact on our loss and loss adjustment expense reserves for the year ended June
30, 2008. The estimation process for the year ended June 30, 2007 was impacted by our limited
historical loss experience in our newer states which required more judgment in determining our loss
reserve estimates for those states.
Excluding development for prior accident periods, for those premiums earned during the years
ended June 30, 2008 and 2007, the loss and loss adjustment expense ratios were 77.4% and 79.2%,
respectively. We believe that this improvement was the result of (i) the absence of the negative
factors experienced during fiscal year 2007, (ii) the impact of rate increases taken during fiscal
year 2008 in Florida (January 2008), Indiana (February 2008), Texas (March 2008) and South Carolina
(May 2008) and (iii) improvements in our underwriting and claim handling practices.
Operating Expenses
Insurance operating expenses increased 1% to $98.4 million for the year ended June 30, 2008
from $97.6 million for the year ended June 30, 2007. This increase was primarily a result of (i)
severance and related benefits charges of $1.0 million incurred in connection with separation
agreements with certain officers and retail management personnel, (ii) expenses of $0.3 million
associated with the closure of poor performing stores and (iii) costs relating to the increased
investment in our product, actuarial and information technology functions to support our
rate-making capabilities. The increased costs were partially offset by cost savings related to the
decline in the number of active retail locations.
The expense ratio increased from 19.8% for the year ended June 30, 2007 to 21.7% for the year
ended June 30, 2008. This increase was primarily due to the year-over-year decline in premiums
earned and the net effect of the expenses discussed above which had a negative impact of 40 basis
points on the expense ratio during the year ended June 30, 2008 and the positive impact on the
expense ratio during the year ended June 30, 2007 from the transaction service fee of $0.9 million,
or 30 basis points, earned through December 31, 2006 in connection with the Chicago acquisition.
Overall, the combined ratio decreased to 98.6% for the year ended June 30, 2008 from 100.2%
for the year ended June 30, 2007.
Litigation Settlement
Litigation settlement costs for the year ended June 30, 2008 of $7.5 million relate to the
provision of $6.3 million associated with estimated payments of the fees and costs of plaintiffs
counsel, $0.4 million in estimated
36
FIRST ACCEPTANCE CORPORATION 10-K
costs associated with the administration of the settlement as well as $0.8 million incurred in
connection with our defense of the litigation in Alabama and Georgia.
Provision for Income Taxes
The provision for income taxes for the year ended June 30, 2008 includes a charge of $11.4
million related to the expiration of certain federal NOL carryforwards as well as an increase in
the valuation allowance of $3.6 million for the deferred tax asset for certain federal NOL
carryforwards resulting in a charge totaling $15.0 million.
The provision for income taxes for the year ended June 30, 2007 includes an increase in the
valuation allowance for the deferred tax asset of $6.9 million as well as $10.0 million related to
the expiration of certain NOL carryforwards resulting in a deferred tax asset charge totaling $16.9
million. The changes during the years ended June 30, 2008 and 2007 related to the valuation
allowance were due to revisions in estimates for our future taxable income.
The charges during the years ended June 30, 2008 and 2007 related to the expiration of NOL
carryforwards were due to taxable income for fiscal year 2008 being less than our prior estimates.
Real Estate and Corporate
Loss before income taxes for the year ended June 30, 2008 was $8.7 million, compared with $5.3
million for the year ended June 30, 2007. During the year ended June 30, 2008, interest expense in
connection with borrowings under our credit facility decreased to $0.7 million from $1.7 million
during the year ended June 30, 2007 as a result of lower outstanding indebtedness. We incurred $3.9
million and $0.2 million of interest expense during the years ended June 30, 2008 and 2007,
respectively, related to the debentures issued in June 2007. Other operating expenses for the year
ended June 30, 2008 also included a $0.5 million accrual for disputed Texas franchise taxes on
sales of foreclosed real estate held for sale and $0.2 million in costs associated with amendments
made to our credit agreement.
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.
Our primary uses of funds are the payment of claims and operating expenses. Net cash used in
operating activities for the year ended June 30, 2009 was $5.3 million, compared with net cash
provided by operating activities of $18.4 million in the same period in the prior fiscal year. This
decrease was primarily the result of a decrease in cash collected from premiums written and
payments made as a part of our litigation settlements. Net cash provided by investing activities
for the year ended June 30, 2009 was $47.7 million, compared with net cash provided by investing
activities of $5.4 million for the same period in the prior fiscal year. During March 2009, we sold
$35.3 million of U.S. government and agency securities and agency backed CMOs in order to utilize
expiring tax NOL carryforwards. The year ended June 30, 2009 includes a net reduction in our
investment portfolio of $49.9 million, while the same period in the prior fiscal year includes net
additions to our investment portfolio of $12.0 million and
the settlement of a $20.0 million receivable for securities in July 2007. The net proceeds
from the reduction in our investment portfolio during the year ended June 30, 2009 were being held
in short-term cash equivalents at June 30, 2009. Financing activities for the year ended June 30,
2009 and 2008 included principal prepayments made on our former term loan and revolving credit
facility.
Our holding company requires cash for general corporate overhead expenses and for debt service
related to our debentures payable. The holding companys primary sources of unrestricted cash to
meet its obligations are dividends from our insurance company subsidiaries and from the sale of
ancillary products to our insureds. The holding company will also receive cash from operating
activities as a result of investment income. Through an intercompany tax allocation arrangement,
taxable losses of the holding company will provide cash to the holding company to the extent that
taxable income is generated by the insurance company subsidiaries. At June 30, 2009, we had $3.2
million available in unrestricted cash and investments outside of the insurance company
subsidiaries. These funds and the additional unrestricted cash from the sources noted above will be
used to pay the future requirements outside of the insurance company subsidiaries.
After the October 2008 termination of our credit facility, the debt service requirements of
the holding company were limited to the debentures payable. Such debentures are interest-only and
mature in full in July 2037.
37
FIRST ACCEPTANCE CORPORATION 10-K
Interest is fixed annually through July 2012 at $3.9 million. The debentures pay a fixed rate of
9.277% until July 30, 2012, after which time the rate becomes variable (LIBOR plus 375 basis
points).
The remaining amounts due under our Georgia litigation settlement, which includes $2.6 million
in estimated costs related to the utilization of available premium credits and any amounts to be
paid with regards to reimbursement certificates, are the obligation of one of our insurance company
subsidiaries. The remaining amounts due under our Alabama litigation settlement, which includes
$0.4 million in estimated costs related to the utilization of available premium credits, and any
amounts to be paid with regards to reimbursement certificates, are the obligation of the holding
company as the insurance company subsidiaries are not a party to the Alabama settlement agreement.
State insurance laws limit the amount of dividends that may be paid from our insurance company
subsidiaries. Based on our statutory capital and surplus, our ordinary dividend capacity for the
next twelve months will be approximately $11.0 million. During October 2008, the insurance company
subsidiaries paid ordinary dividends to the holding company of $2.5 million, the proceeds of which
were used to repay our former debt facility. During March 2009, the insurance company subsidiaries
paid ordinary dividends to the holding company of $1.5 million, the proceeds of which were used to
pay a portion of the costs of the Alabama litigation settlement.
The National Association of Insurance Commissioners Model Act for risk-based capital provides
formulas to determine the amount of statutory capital and surplus that an insurance company needs
to ensure that it has an acceptable expectation of not becoming financially impaired. There are
statutory guidelines that suggest that on an annual calendar year basis, the insurance company
subsidiaries should not exceed a ratio of net premiums written to statutory capital and surplus of
3-to-1. We believe that our insurance company subsidiaries have sufficient financial resources
available to support their net premium writings in both the short-term and the reasonably
foreseeable future.
We believe that existing cash and investment balances, when combined with anticipated cash
flows as noted above, will be adequate to meet our expected liquidity needs, for both the holding
company and its insurance company subsidiaries, in both the short-term and the reasonably
foreseeable future. Any future growth strategy may require external financing, and we may from time
to time seek to obtain external financing. We cannot assure that additional sources of financing
will be available to us on favorable terms, or at all, or that any such financing would not
negatively impact our results of operations.
Former Credit Facility
We entered into an amendment to our credit agreement effective September 10, 2008 and
terminated the credit facility effective October 31, 2008. The amended terms (i) accelerated the
maturity date of the term loan facility to October 31, 2008, (ii) eliminated the revolving credit
facility and (iii) removed all financial covenants for
the remaining term. The unpaid balance under our credit agreement was paid in full on October
31, 2008. We entered into an interest rate swap agreement in January 2006 that fixed the interest
rate on the term loan facility at 6.63%. Effective September 30, 2008, we cancelled the interest
rate swap agreement for $0.1 million.
Trust Preferred Securities
On June 15, 2007, First Acceptance Statutory Trust I (FAST I), our wholly-owned
unconsolidated subsidiary trust entity, completed a private placement whereby FAST I issued 40,000
shares of preferred securities at $1,000 per share to outside investors and 1,240 shares of common
securities to us, also at $1,000 per share. FAST I used the proceeds from the sale of the preferred
securities to purchase $41.2 million of junior subordinated debentures from us. The debentures will
mature on July 30, 2037 and are redeemable by the Company in whole or in part beginning on July 30,
2012, at which time the preferred securities are callable. The debentures pay a fixed rate of
9.277% until July 30, 2012, after which the rate becomes variable (LIBOR plus 375 basis points).
The obligations of the Company under the junior subordinated debentures represent full and
unconditional guarantees by the Company of FAST Is obligations for the preferred securities.
Dividends on the preferred securities are cumulative, payable quarterly in arrears and are
deferrable at the Companys option for up to five years. The dividends on these securities are the
same as the interest on the debentures. The Company cannot pay dividends on its common stock during
any such deferments. FAST I does not meet the requirements for consolidation of Financial
Accounting Standards Board Interpretation No. 46(R), Consolidation of Variable Interest Entities
An Interpretation of ARB No. 51.
38
FIRST ACCEPTANCE CORPORATION 10-K
Off-Balance Sheet Arrangements
We use off-balance sheet arrangements (e.g., operating leases) where the economics and sound
business principles warrant their use.
Contractual Obligations
The following table summarizes all of our contractual obligations by period as of June 30,
2009 (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due By Period |
|
|
|
|
|
|
|
Less |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
than |
|
|
1-3 |
|
|
3-5 |
|
|
More than |
|
|
|
Total |
|
|
1 year |
|
|
Years |
|
|
Years |
|
|
5 years |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss adjustment expense
reserves (1) |
|
$ |
83,973 |
|
|
$ |
31,154 |
|
|
$ |
37,788 |
|
|
$ |
11,168 |
|
|
$ |
3,863 |
|
Debentures payable (2) |
|
|
97,833 |
|
|
|
3,826 |
|
|
|
7,652 |
|
|
|
3,753 |
|
|
|
82,602 |
|
Capitalized lease obligations |
|
|
227 |
|
|
|
70 |
|
|
|
145 |
|
|
|
12 |
|
|
|
|
|
Operating leases (3) |
|
|
21,050 |
|
|
|
9,242 |
|
|
|
8,897 |
|
|
|
1,639 |
|
|
|
1,272 |
|
Litigation settlement (4) |
|
|
3,093 |
|
|
|
3,093 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance agreement obligations |
|
|
444 |
|
|
|
410 |
|
|
|
34 |
|
|
|
|
|
|
|
|
|
Other |
|
|
189 |
|
|
|
103 |
|
|
|
86 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual cash obligations |
|
$ |
206,809 |
|
|
$ |
47,898 |
|
|
$ |
54,602 |
|
|
$ |
16,572 |
|
|
$ |
87,737 |
|
|
|
|
(1) |
|
Loss and loss adjustment expense reserves do not have contractual maturity dates;
however, based on historical payment patterns, the amount presented is our estimate of the
expected timing of these payments. The timing of these payments is subject to significant
uncertainty. We maintain a portfolio of marketable investments with varying maturities and a
substantial amount of cash and cash equivalents intended to provide adequate cash flows for
such payments. |
|
(2) |
|
Payments due by period assume a contractual fixed interest rate of 9.277% until
July 30, 2012, after which the rate becomes variable (LIBOR plus 375 basis points, or 4.345%
as of June 30, 2009). |
|
(3) |
|
Consists primarily of rental obligations under real estate leases related to our
retail locations and corporate offices. |
|
(4) |
|
Consists primarily of the provision associated with the estimated utilization of
available premium credits for Georgia and Alabama litigation settlement class members who
were insured by the Company at June 30, 2009 and received the premium credits. For additional
information with respect to the litigation settlements, see Item 3. Legal Proceedings and
Note 17 to our consolidated financial statements. |
Critical Accounting Estimates
The preparation of consolidated financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that affect amounts
reported in the consolidated financial statements. As more information becomes known, these
estimates and assumptions could change, thus having an impact on the amounts reported in the
future. The following are considered to be our critical accounting estimates.
Valuation of deferred tax asset
We maintain income taxes in accordance with Statement of Financial Accounting Standards No.
109, Accounting for Income Taxes, whereby deferred income tax assets and liabilities result from
temporary differences. Temporary differences are differences between the tax basis of assets and
liabilities and operating loss and tax credit carryforwards and their reported amounts in the
consolidated financial statements that will result in taxable or deductible amounts in future
years. Valuation of the deferred tax asset is considered a critical accounting estimate because the
determination of our ability to utilize the asset involves a number of management assumptions
relating to future operations that could materially affect the determination of the ultimate value
and, therefore, the carrying amount of our deferred tax asset.
39
FIRST ACCEPTANCE CORPORATION 10-K
Goodwill and identifiable intangible assets
Goodwill and other identifiable intangible assets are attributable to our insurance operations
and were initially recorded at their estimated fair values at the date of acquisition. Goodwill and
other intangible assets having an indefinite useful life are not amortized for financial statement
purposes. In accordance with Statement of Financial Accounting Standards No. 142, Goodwill and
Other Intangible Assets, we are required to perform annual impairment tests of our goodwill and
intangible assets. We perform our annual impairment tests as of the last day of the fourth quarter
of each fiscal year. In the event that facts and circumstances indicate that the goodwill and other
identifiable intangible assets may be impaired, an interim impairment test would be required.
Intangible assets with finite lives have been fully amortized over their useful lives.
The goodwill impairment test is a two-step process that requires us to make judgments in
determining what assumptions to use in the calculation. The first step of the process consists of
estimating the fair value of each reporting unit based on valuation techniques, including a
discounted cash flow model using revenue and profit forecasts, and comparing those estimated fair
values with the carrying values of those assets and liabilities, which includes the allocated
goodwill. If the estimated fair value is less than the carrying value, a second step is performed
to compute the amount of the impairment, if any, by determining an implied fair value of
goodwill. The determination of the implied fair value of goodwill of a reporting unit requires us
to allocate the estimated fair value of the reporting unit to the assets and liabilities of the
reporting unit. Any unallocated fair value represents the implied fair value of goodwill, which
is compared to its corresponding carrying value.
Our evaluation includes multiple assumptions, including estimated discounted cash flows and
other estimates that may change over time. If future discounted cash flows become less than those
projected by us, further impairment charges may become necessary that could have a materially
adverse impact on our results of operations and financial condition. As quoted market prices in
active stock markets are relevant evidence of fair value, a significant decrease in our common
stock trading price could also indicate that an impairment of
goodwill exists.
Investments
Our investments are recorded at fair value, which is typically based on publicly available
quoted prices. From time to time, the carrying value of our investments may be temporarily impaired
because of the inherent volatility of publicly-traded investments. Management reviews investments
for impairment on a quarterly basis. A decline in the fair value of any available-for-sale security
below cost that is deemed to be other-than-temporary would result in a charge against income for
the credit-related portion of any such impairment.
The determination of whether unrealized losses are other-than-temporary requires judgment
based on subjective as well as objective factors. We routinely monitor our fixed maturities
portfolio for changes in fair value that might indicate potential impairments and perform detailed
reviews on such securities. Changes in fair value are evaluated to determine the extent to which
such changes are attributable to (i) fundamental factors specific to the issuer or (ii)
market-related factors such as interest rates or sector declines.
Securities with declines attributable to issuer-specific fundamentals are reviewed to identify
all available evidence to estimate the potential for impairment. Resources used include historical
financial data included in SEC filings for corporate bonds and performance data regarding the
underlying loans for CMOs. Securities with declines attributable to market or sector declines where
we do not intend to sell the security and it is more likely than not that we will not be required
to sell the security before the recovery of its amortized cost basis are not deemed to be
other-than-temporary.
Losses and loss adjustment expense reserves
Loss and loss adjustment expense reserves represent our best estimate of our ultimate
liability for losses and loss adjustment expenses relating to events that occurred prior to the end
of any given accounting period but have not been paid. Months and potentially years may elapse
between the occurrence of an automobile accident covered by one of our insurance policies, the
reporting of the accident and the payment of the claim. We record a liability for estimates of
losses that will be paid for accidents that have been reported, which is referred to as case
reserves. As accidents are not always reported when they occur, we estimate liabilities for
accidents that have occurred but have not been reported.
We are directly liable for loss and loss adjustment expenses under the terms of the insurance
policies that our insurance company subsidiaries underwrite. Each of the insurance company
subsidiaries establishes a reserve for
40
FIRST ACCEPTANCE CORPORATION 10-K
all of its unpaid losses, including case reserves and IBNR reserves, and estimates for the cost to
settle the claims. We estimate our IBNR reserves by estimating our ultimate liability for loss and
loss adjustment expense reserves first, and then reducing that amount by the amount of cumulative
paid claims and by the amount of our case reserves. We rely primarily on historical loss experience
in determining reserve levels, on the assumption that historical loss experience provides a good
indication of future loss experience. We also consider various other factors, such as inflation,
claims settlement patterns, legislative activity and litigation trends. Our actuarial staff
continually monitors these estimates on a state and coverage level. We utilize our actuarial staff
to determine appropriate reserve levels. As experience develops or new information becomes known,
we increase or decrease the level of our reserves in the period in which changes to the estimates
are determined. Accordingly, the actual losses and loss adjustment expenses may differ materially
from the estimates we have recorded. See Item 1. Business Loss and Loss Adjustment Expense
Reserves for additional information.
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 this report, other than statements of historical fact, are
forward-looking statements. You can identify these statements from our use of the words may,
should, could, potential, continue, plan, forecast, estimate, project, believe,
intent, anticipate, expect, target, is likely, will, or the negative of these terms and
similar expressions. These statements are made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. These forward-looking statements may include,
among other things:
|
|
|
statements and assumptions relating to future growth, income, income per share and
other financial performance measures, as well as managements short-term and long-term
performance goals; |
|
|
|
|
statements relating to the anticipated effects on results of operations or financial
condition from recent and expected developments or events; |
|
|
|
|
statements relating to our business and growth strategies; and |
|
|
|
|
any other statements or assumptions that are not historical facts. |
We believe that our expectations are based on reasonable assumptions. However, these
forward-looking statements involve known and unknown risks, uncertainties and other important
factors that could cause our actual results, performance or achievements, or industry results to
differ materially from our expectations of future results, performance or achievements expressed or
implied by these forward-looking statements. Our past results of operations do not necessarily
indicate our future results. We discuss these and other uncertainties in Item 1A. Risk Factors,
as well as other sections, of this report.
You should not place undue reliance on any forward-looking statements. These statements speak
only as of the date of this report. Except as otherwise required by applicable laws, we undertake
no obligation to publicly update or revise any forward-looking statements or the risk factors
described in this report, whether as a result of new information, future events, changed
circumstances or any other reason after the date of this report.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Market risk represents the potential economic loss arising from adverse changes in the fair
value of financial instruments. Our exposures to market risk relate primarily to our investment
portfolio, which is exposed primarily to interest rate risk and credit risk. The fair value of our
fixed maturity portfolio is directly impacted by changes in market interest rates; generally, the
fair value of fixed-income investments moves inversely with movements in market interest rates. Our
fixed maturity portfolio is comprised of substantially all fixed rate investments with primarily
short-term and intermediate-term maturities. This portfolio composition allows
flexibility in reacting to fluctuations of interest rates. The portfolios of our insurance
company subsidiaries are managed to achieve an adequate risk-adjusted return while maintaining
sufficient liquidity to meet policyholder obligations.
41
FIRST ACCEPTANCE CORPORATION 10-K
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 |
|
$ |
145,403 |
|
|
$ |
142,833 |
|
|
$ |
140,311 |
|
|
$ |
137,851 |
|
|
$ |
135,440 |
|
|
$ |
130,804 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table provides information about our fixed maturity investments at June 30, 2009
which are sensitive to interest rate risk. The table shows expected principal cash flows (at par
value, which differs from amortized cost as a result of discounts at the time of purchase and OTTI)
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities |
|
|
|
|
|
|
Securities |
|
|
Securities |
|
|
with No |
|
|
|
|
|
|
with |
|
|
with |
|
|
Unrealized |
|
|
|
|
|
|
Unrealized |
|
|
Unrealized |
|
|
Gains or |
|
|
|
|
Year Ended June 30, |
|
Gains |
|
|
Losses |
|
|
Losses |
|
|
Amount |
|
2010 |
|
$ |
8,655 |
|
|
$ |
1,703 |
|
|
$ |
250 |
|
|
$ |
10,608 |
|
2011 |
|
|
14,980 |
|
|
|
901 |
|
|
|
|
|
|
|
15,881 |
|
2012 |
|
|
22,556 |
|
|
|
3,301 |
|
|
|
|
|
|
|
25,857 |
|
2013 |
|
|
15,137 |
|
|
|
3,257 |
|
|
|
|
|
|
|
18,394 |
|
2014 |
|
|
7,783 |
|
|
|
1,878 |
|
|
|
|
|
|
|
9,661 |
|
Thereafter |
|
|
39,076 |
|
|
|
20,707 |
|
|
|
|
|
|
|
59,783 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
108,187 |
|
|
$ |
31,747 |
|
|
$ |
250 |
|
|
$ |
140,184 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value |
|
$ |
114,065 |
|
|
$ |
25,882 |
|
|
$ |
364 |
|
|
$ |
140,311 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On June 15, 2007, our wholly-owned unconsolidated trust entity, FAST I, used the proceeds from
its sale of trust preferred securities to purchase $41.2 million of junior subordinated debentures.
The debentures pay a fixed rate of 9.277% until July 30, 2012, after which the rate becomes
variable (LIBOR plus 375 basis points).
Credit Risk
Credit risk is managed by diversifying the portfolio to avoid concentrations in any single
industry group or issuer and by limiting investments in securities with lower credit ratings. The
largest investment in any one fixed maturity security, excluding U.S. government and agency
securities, is $1.9 million, or 1% of the fixed maturity portfolio. The top five investments make
up 7% of the fixed maturity portfolio. The average credit quality rating for our fixed maturity
portfolio was AA+ at June 30, 2009. There are no fixed maturities in the portfolio that have not
produced investment income during the previous twelve months.
42
FIRST ACCEPTANCE CORPORATION 10-K
The following table shows our fixed maturity portfolio by Standard & Poors Corporation rating
as of June 30, 2009 (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
Amortized |
|
|
Amortized |
|
|
Fair |
|
|
Fair |
|
Comparable Rating |
|
Cost |
|
|
Cost |
|
|
Value |
|
|
Value |
|
AAA |
|
$ |
55,069 |
|
|
|
39.1 |
% |
|
$ |
56,165 |
|
|
|
40.0 |
% |
AA+, AA, AA- |
|
|
24,256 |
|
|
|
17.2 |
% |
|
|
24,200 |
|
|
|
17.2 |
% |
A+, A, A- |
|
|
42,602 |
|
|
|
30.3 |
% |
|
|
42,968 |
|
|
|
30.6 |
% |
BBB+, BBB, BBB- |
|
|
15,514 |
|
|
|
11.0 |
% |
|
|
14,272 |
|
|
|
10.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment grade |
|
|
137,441 |
|
|
|
97.6 |
% |
|
|
137,605 |
|
|
|
98.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BB+, BB, BB- |
|
|
2,955 |
|
|
|
2.1 |
% |
|
|
2,473 |
|
|
|
1.8 |
% |
CCC+, CCC, CCC- |
|
|
60 |
|
|
|
0.1 |
% |
|
|
60 |
|
|
|
0.1 |
% |
CC+, CC, CC- |
|
|
393 |
|
|
|
0.2 |
% |
|
|
173 |
|
|
|
0.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-investment grade |
|
|
3,408 |
|
|
|
2.4 |
% |
|
|
2,706 |
|
|
|
2.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
140,849 |
|
|
|
100.0 |
% |
|
$ |
140,311 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
The mortgage industry has experienced a rise in mortgage delinquencies and foreclosures,
particularly among lower quality exposures (sub-prime and Alt-A). As a result of these
increasing delinquencies and foreclosures, many CMOs with underlying sub-prime and Alt-A mortgages
as collateral experienced significant declines in fair value. We have only modest exposure to
sub-prime investments and no exposure to Alt-A investments. At June 30, 2009, our fixed maturity
portfolio included three CMOs having sub-prime exposure with a fair value of $0.7 million, one of
which was rated investment grade.
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 $38.9 million of municipal bonds, of which $26.8 million are
insured. Of the insured bonds, 66% are insured with MBIA, 18% with AMBAC and 16% with XL Capital.
These securities are paying their principal and periodic interest timely.
The following table presents the underlying ratings as of June 30, 2009, represented by the
lower of either Standard and Poors, Fitchs, or Moodys ratings, of the municipal bond portfolio
(in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insured |
|
|
Uninsured |
|
|
Total |
|
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
Fair |
|
|
Fair |
|
|
Fair |
|
|
Fair |
|
|
Fair |
|
|
Fair |
|
|
|
Value |
|
|
Value |
|
|
Value |
|
|
Value |
|
|
Value |
|
|
Value |
|
AAA |
|
$ |
|
|
|
|
|
|
|
$ |
4,792 |
|
|
|
39 |
% |
|
$ |
4,792 |
|
|
|
12 |
% |
AA+, AA, AA- |
|
|
13,573 |
|
|
|
51 |
% |
|
|
6,254 |
|
|
|
52 |
% |
|
|
19,827 |
|
|
|
51 |
% |
A+, A, A- |
|
|
11,727 |
|
|
|
44 |
% |
|
|
1,050 |
|
|
|
9 |
% |
|
|
12,777 |
|
|
|
33 |
% |
BBB+, BBB, BBB- |
|
|
1,502 |
|
|
|
5 |
% |
|
|
|
|
|
|
|
|
|
|
1,502 |
|
|
|
4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
26,802 |
|
|
|
100 |
% |
|
$ |
12,096 |
|
|
|
100 |
% |
|
$ |
38,898 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43
FIRST ACCEPTANCE CORPORATION 10-K
Item 8. Financial Statements and Supplementary Data
44
FIRST ACCEPTANCE CORPORATION 10-K
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
First Acceptance Corporation
We have audited the accompanying consolidated balance sheets of First Acceptance Corporation and
subsidiaries (the Company) as of June 30, 2009 and 2008, and the related consolidated statements
of operations, stockholders equity, and cash flows for each of the three years in the period ended
June 30, 2009. Our audits also included the financial statement schedules listed in the index at
Item 15(a). These financial statements and schedules are the responsibility of the Companys
management. Our responsibility is to express an opinion on these consolidated financial statements
and schedules based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of First Acceptance
Corporation and subsidiaries at June 30, 2009 and 2008, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended June 30, 2009, in conformity with U.S. generally
accepted accounting principles. Also, in our opinion, the related financial statement schedules,
when considered in relation to the basic financial statements taken as a whole, present fairly, in
all material respects, the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), First Acceptance Corporation and subsidiaries internal
control over financial reporting as of June 30, 2009, based on criteria established in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated September 14, 2009 expressed an unqualified opinion thereon.
Nashville, Tennessee
September 14, 2009
45
FIRST ACCEPTANCE CORPORATION 10-K
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
First Acceptance Corporation
We have audited First Acceptance Corporation and subsidiaries (the Company) internal control
over financial reporting as of June 30, 2009, based on criteria established in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (the COSO criteria). The Companys management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting included in the accompanying Managements Annual Report on
Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the
Companys internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk,
and performing such other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, First Acceptance Corporation and subsidiaries maintained, in all material respects,
effective internal control over financial reporting as of June 30, 2009, based on the COSO
criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheets of First Acceptance Corporation and
subsidiaries as of June 30, 2009 and 2008, and the related consolidated statements of operations,
stockholders equity, and cash flows for each of the three years in the period ended June 30, 2009,
and our report dated September 14, 2009 expressed an unqualified opinion thereon.
Nashville, Tennessee
September 14, 2009
46
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
2009 |
|
|
2008 |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities, available-for-sale at fair value (amortized
cost of $140,849 and $190,040, respectively) |
|
$ |
140,311 |
|
|
$ |
189,570 |
|
Cash and cash equivalents |
|
|
77,201 |
|
|
|
38,646 |
|
Premiums and fees receivable, net of allowance of $419 and $651 |
|
|
45,309 |
|
|
|
63,377 |
|
Deferred tax asset, net |
|
|
|
|
|
|
17,593 |
|
Other assets |
|
|
11,866 |
|
|
|
10,177 |
|
Property and equipment, net |
|
|
3,921 |
|
|
|
4,876 |
|
Deferred acquisition costs |
|
|
3,896 |
|
|
|
4,549 |
|
Goodwill |
|
|
70,092 |
|
|
|
138,082 |
|
Identifiable intangible assets |
|
|
6,360 |
|
|
|
6,360 |
|
|
|
|
|
|
|
|
TOTAL ASSETS |
|
$ |
358,956 |
|
|
$ |
473,230 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss adjustment expense reserves |
|
$ |
83,973 |
|
|
$ |
101,407 |
|
Unearned premiums and fees |
|
|
57,350 |
|
|
|
77,237 |
|
Notes payable |
|
|
|
|
|
|
3,913 |
|
Debentures payable |
|
|
41,240 |
|
|
|
41,240 |
|
Other liabilities |
|
|
16,537 |
|
|
|
23,974 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
199,100 |
|
|
|
247,771 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity: |
|
|
|
|
|
|
|
|
Preferred stock, $.01 par value, 10,000 shares authorized |
|
|
|
|
|
|
|
|
Common stock, $.01 par value, 75,000 shares authorized;
48,312 and 48,055 shares issued and outstanding,
respectively |
|
|
483 |
|
|
|
481 |
|
Additional paid-in capital |
|
|
464,720 |
|
|
|
462,601 |
|
Accumulated other comprehensive loss |
|
|
(538 |
) |
|
|
(470 |
) |
Accumulated deficit |
|
|
(304,809 |
) |
|
|
(237,153 |
) |
|
|
|
|
|
|
|
Total stockholders equity |
|
|
159,856 |
|
|
|
225,459 |
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
|
$ |
358,956 |
|
|
$ |
473,230 |
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
47
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned |
|
$ |
224,113 |
|
|
$ |
285,914 |
|
|
$ |
300,661 |
|
Commission and fee income |
|
|
31,759 |
|
|
|
36,479 |
|
|
|
37,324 |
|
Investment income |
|
|
9,504 |
|
|
|
11,250 |
|
|
|
8,863 |
|
Net realized gains (losses) on fixed maturities,
available-for-sale |
|
|
89 |
|
|
|
(1,244 |
) |
|
|
(61 |
) |
Other |
|
|
|
|
|
|
|
|
|
|
850 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
265,465 |
|
|
|
332,399 |
|
|
|
347,637 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Losses and loss adjustment expenses |
|
|
149,277 |
|
|
|
219,943 |
|
|
|
241,908 |
|
Insurance operating expenses |
|
|
87,124 |
|
|
|
98,433 |
|
|
|
97,629 |
|
Other operating expenses |
|
|
1,307 |
|
|
|
2,415 |
|
|
|
2,623 |
|
Litigation settlement |
|
|
1,570 |
|
|
|
7,468 |
|
|
|
|
|
Stock-based compensation |
|
|
2,053 |
|
|
|
1,507 |
|
|
|
1,063 |
|
Depreciation and amortization |
|
|
1,910 |
|
|
|
1,679 |
|
|
|
1,624 |
|
Interest expense |
|
|
4,138 |
|
|
|
4,977 |
|
|
|
1,874 |
|
Goodwill impairment |
|
|
67,990 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
315,369 |
|
|
|
336,422 |
|
|
|
346,721 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
(49,904 |
) |
|
|
(4,023 |
) |
|
|
916 |
|
Provision for income taxes |
|
|
18,396 |
|
|
|
13,822 |
|
|
|
17,586 |
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(68,300 |
) |
|
$ |
(17,845 |
) |
|
$ |
(16,670 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted |
|
$ |
(1.43 |
) |
|
$ |
(0.37 |
) |
|
$ |
(0.35 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares used to calculate net loss per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted |
|
|
47,664 |
|
|
|
47,628 |
|
|
|
47,584 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of net loss to comprehensive loss: |
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(68,300 |
) |
|
$ |
(17,845 |
) |
|
$ |
(16,670 |
) |
Unrealized change in investments |
|
|
(68 |
) |
|
|
2,303 |
|
|
|
690 |
|
Other |
|
|
|
|
|
|
(121 |
) |
|
|
121 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(68,368 |
) |
|
|
(15,663 |
) |
|
|
(15,859 |
) |
Applicable provision for income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss |
|
$ |
(68,368 |
) |
|
$ |
(15,663 |
) |
|
$ |
(15,859 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Detail of net realized gains (losses) on fixed
maturities, available-for-sale: |
|
|
|
|
|
|
|
|
|
|
|
|
Net realized gains (losses) on sales |
|
$ |
2,509 |
|
|
$ |
170 |
|
|
$ |
(61 |
) |
Unrealized losses on fixed maturities with
other-than-temporary impairment charges |
|
|
(3,640 |
) |
|
|
|
|
|
|
|
|
Non-credit portion included in comprehensive
income (loss) |
|
|
1,220 |
|
|
|
(1,414 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other-than-temporary impairment charges recognized
in income (loss) |
|
|
(2,420 |
) |
|
|
(1,414 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized gains (losses) on fixed maturities,
available-for-sale |
|
$ |
89 |
|
|
$ |
(1,244 |
) |
|
$ |
(61 |
) |
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
48
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
other |
|
|
|
|
|
|
Total |
|
|
|
Common Stock |
|
|
paid-in |
|
|
comprehensive |
|
|
Accumulated |
|
|
stockholders |
|
|
|
Shares |
|
|
Amount |
|
|
capital |
|
|
loss |
|
|
deficit |
|
|
equity |
|
Balances at June 30, 2006 |
|
|
47,535 |
|
|
$ |
475 |
|
|
$ |
459,049 |
|
|
$ |
(3,463 |
) |
|
$ |
(202,638 |
) |
|
$ |
253,423 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16,670 |
) |
|
|
(16,670 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized change on
investments (net of tax of $0) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
690 |
|
|
|
|
|
|
|
690 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized change on interest rate
swap agreement |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
121 |
|
|
|
|
|
|
|
121 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale of common stock |
|
|
50 |
|
|
|
1 |
|
|
|
590 |
|
|
|
|
|
|
|
|
|
|
|
591 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation |
|
|
5 |
|
|
|
|
|
|
|
1,063 |
|
|
|
|
|
|
|
|
|
|
|
1,063 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of shares under Employee
Stock Purchase Plan |
|
|
25 |
|
|
|
|
|
|
|
266 |
|
|
|
|
|
|
|
|
|
|
|
266 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at June 30, 2007 |
|
|
47,615 |
|
|
|
476 |
|
|
|
460,968 |
|
|
|
(2,652 |
) |
|
|
(219,308 |
) |
|
|
239,484 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17,845 |
) |
|
|
(17,845 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized change on
investments (net of tax of $0) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,303 |
|
|
|
|
|
|
|
2,303 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized change on interest rate
swap agreement |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(121 |
) |
|
|
|
|
|
|
(121 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of restricted common stock |
|
|
400 |
|
|
|
4 |
|
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation |
|
|
5 |
|
|
|
1 |
|
|
|
1,506 |
|
|
|
|
|
|
|
|
|
|
|
1,507 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of shares under Employee
Stock Purchase Plan |
|
|
35 |
|
|
|
|
|
|
|
131 |
|
|
|
|
|
|
|
|
|
|
|
131 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at June 30, 2008 |
|
|
48,055 |
|
|
|
481 |
|
|
|
462,601 |
|
|
|
(470 |
) |
|
|
(237,153 |
) |
|
|
225,459 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
effect of accounting change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(644 |
) |
|
|
644 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(68,300 |
) |
|
|
(68,300 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized change on
investments (net of tax of $0) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
576 |
|
|
|
|
|
|
|
576 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of restricted common stock |
|
|
225 |
|
|
|
2 |
|
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation |
|
|
5 |
|
|
|
|
|
|
|
2,053 |
|
|
|
|
|
|
|
|
|
|
|
2,053 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of shares under Employee
Stock Purchase Plan |
|
|
27 |
|
|
|
|
|
|
|
68 |
|
|
|
|
|
|
|
|
|
|
|
68 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at June 30, 2009 |
|
|
48,312 |
|
|
$ |
483 |
|
|
$ |
464,720 |
|
|
$ |
(538 |
) |
|
$ |
(304,809 |
) |
|
$ |
159,856 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
49
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(68,300 |
) |
|
$ |
(17,845 |
) |
|
$ |
(16,670 |
) |
Adjustments to reconcile net loss to cash provided by (used in)
operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
1,910 |
|
|
|
1,679 |
|
|
|
1,624 |
|
Stock-based compensation |
|
|
2,053 |
|
|
|
1,507 |
|
|
|
1,063 |
|
Deferred income taxes |
|
|
17,593 |
|
|
|
13,343 |
|
|
|
17,132 |
|
Goodwill impairment |
|
|
67,990 |
|
|
|
|
|
|
|
|
|
Other-than-temporary impairment on investment securities |
|
|
2,420 |
|
|
|
1,414 |
|
|
|
|
|
Net realized gains (losses) on sales of investments |
|
|
(2,509 |
) |
|
|
(170 |
) |
|
|
61 |
|
Other |
|
|
129 |
|
|
|
113 |
|
|
|
132 |
|
Change in: |
|
|
|
|
|
|
|
|
|
|
|
|
Premiums and fees receivable |
|
|
18,023 |
|
|
|
8,349 |
|
|
|
(6,614 |
) |
Loss and loss adjustment expense reserves |
|
|
(17,434 |
) |
|
|
9,961 |
|
|
|
28,624 |
|
Unearned premiums and fees |
|
|
(19,887 |
) |
|
|
(11,594 |
) |
|
|
10,500 |
|
Litigation settlement |
|
|
(3,975 |
) |
|
|
6,721 |
|
|
|
|
|
Other |
|
|
(3,328 |
) |
|
|
4,890 |
|
|
|
875 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities |
|
|
(5,315 |
) |
|
|
18,368 |
|
|
|
36,727 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of fixed maturities, available-for-sale |
|
|
(16,228 |
) |
|
|
(44,408 |
) |
|
|
(101,295 |
) |
Maturities and paydowns of fixed maturities, available-for-sale |
|
|
19,980 |
|
|
|
13,697 |
|
|
|
7,048 |
|
Sales of fixed maturities, available-for-sale |
|
|
46,128 |
|
|
|
18,719 |
|
|
|
45,932 |
|
Net change in receivable/payable for securities |
|
|
(1,045 |
) |
|
|
20,019 |
|
|
|
(22,889 |
) |
Purchase of common stock in trust |
|
|
|
|
|
|
|
|
|
|
(1,240 |
) |
Capital expenditures |
|
|
(1,003 |
) |
|
|
(2,422 |
) |
|
|
(1,769 |
) |
Cash paid for acquisitions |
|
|
|
|
|
|
|
|
|
|
(1,037 |
) |
Other |
|
|
(130 |
) |
|
|
(253 |
) |
|
|
(254 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
47,702 |
|
|
|
5,352 |
|
|
|
(75,504 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from borrowings |
|
|
|
|
|
|
|
|
|
|
5,000 |
|
Payments on borrowings |
|
|
(3,913 |
) |
|
|
(19,147 |
) |
|
|
(5,552 |
) |
Proceeds from issuance of debentures |
|
|
|
|
|
|
|
|
|
|
41,240 |
|
Net proceeds from issuance of common stock |
|
|
68 |
|
|
|
131 |
|
|
|
857 |
|
Other |
|
|
13 |
|
|
|
(219 |
) |
|
|
(141 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
(3,832 |
) |
|
|
(19,235 |
) |
|
|
41,404 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents |
|
|
38,555 |
|
|
|
4,485 |
|
|
|
2,627 |
|
Cash and cash equivalents, beginning of year |
|
|
38,646 |
|
|
|
34,161 |
|
|
|
31,534 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year |
|
$ |
77,201 |
|
|
$ |
38,646 |
|
|
$ |
34,161 |
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
50
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
General
First Acceptance Corporation (the Company) is a holding company based in Nashville,
Tennessee with operating subsidiaries whose primary operations include the selling, servicing and
underwriting of non-standard personal automobile insurance. The Company writes non-standard
personal automobile insurance in 12 states and is licensed as an insurer in 13 additional states.
The Company issues policies of insurance through three wholly-owned subsidiaries, First Acceptance
Insurance Company, Inc., First Acceptance Insurance Company of Georgia, Inc. and First Acceptance
Insurance Company of Tennessee, Inc. (the Insurance Companies). The Company has limited
activities related to its attempts to market and dispose of foreclosed real estate held for sale.
Basis of Consolidation and Reporting
The accompanying consolidated financial statements include the accounts of the Company and its
subsidiaries which are all wholly owned. These financial statements have been prepared in
conformity with U.S. generally accepted accounting principles. All intercompany accounts and
transactions have been eliminated in consolidation.
Reclassifications
Certain reclassifications have been made to the prior years consolidated financial statements
to conform with the current year presentation.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting
principles requires management to make estimates and assumptions that affect the amounts reported
in the financial statements and accompanying notes. It also requires disclosure of contingent
assets and liabilities at the date of the consolidated financial statements and the reported
revenues and expenses during the period. Actual results could differ from those estimates.
Investments
Fixed maturities, available-for-sale, include bonds with fixed principal payment schedules and
mortgage-backed securities which are amortized using the retrospective method. These securities
are carried at fair value with the corresponding unrealized appreciation or depreciation, net of
deferred income taxes, reported in other comprehensive income or loss.
Premiums and discounts on collateralized mortgage obligations (CMOs) are amortized over a
period based on estimated future principal payments, including prepayments. Prepayment assumptions
are reviewed periodically and adjusted to reflect actual prepayments and changes in expectations.
The most significant determinants of prepayments are the difference between interest rates on the
underlying mortgages and the current mortgage loan rates and the structure of the security. Other
factors affecting prepayments include the size, type and age of underlying mortgages, the
geographic location of the mortgaged properties and the credit worthiness of the borrowers.
Variations from anticipated prepayments will affect the life and yield of these securities.
Investment securities are exposed to various risks such as interest rate, market and credit
risk. Fair values of securities fluctuate based on changing market conditions; significant changes
in market conditions could materially affect portfolio value in the near term. Management reviews
investments for impairment on a quarterly basis. Fair values of investments are based on prices
quoted in the most active market for each security. If quoted prices are not available, fair value
is estimated based on the fair value of comparable securities, discounted cash flow models or
51
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
similar methods. Any decline in the fair value of any available-for-sale security below cost
that is deemed to be other-than-temporary would result in a reduction in the amortized cost of the
security.
In April 2009, the Financial Accounting Standards Board (FASB) issued Staff Position No.
115-2, Recognition and Presentation of Other-Than-Temporary Impairments (FSP FAS 115-2). Under
this guidance, if management can assert that it does not intend to sell an impaired fixed maturity
security and it is more likely than not that it will not have to sell the security before recovery
of its amortized cost basis, then an entity may separate other-than-temporary impairments (OTTI)
into the following two components: (i) the amount related to credit losses (charged against income)
and (ii) the amount related to all other factors (recorded in other comprehensive loss). The
credit-related portion of an OTTI is measured by comparing a securitys amortized cost to the
present value of its current expected cash flows discounted at its effective yield prior to the
impairment charge. If management intends to sell an impaired security, or it is more likely than
not that it will be required to sell the security before recovery, an impairment charge is required
to reduce the amortized cost of that security to fair value. The Company adopted FSP FAS 115-2
effective April 1, 2009, and recorded a cumulative effect adjustment of $0.6 million to reclassify
the non-credit component of previously recognized impairments from accumulated deficit to
accumulated other comprehensive loss.
Realized gains and losses on sales of securities are computed based on specific
identification.
Cash and Cash Equivalents
Cash and cash equivalents consist of bank demand deposits and highly-liquid investments. All
investments with original maturities of three months or less are considered cash equivalents.
Revenue Recognition
Insurance premiums earned are recognized on a pro-rata basis over the respective terms of the
policies. Written premiums are recorded as of the effective date of the policies for the full
policy premium, although most policyholders elect to pay on a monthly installment basis. Policy
and renewal fees are included in premiums earned and are recognized on a pro-rata basis over the
respective terms of the policies. Premiums are generally collected in advance of providing risk
coverage, minimizing the Companys exposure to credit risk. Premiums receivable are recorded net of
an estimated allowance for uncollectible amounts.
Commission income and other fees on policies written for unaffiliated insurance companies are
recognized at the date the customer is initially billed or as of the effective date of the
insurance policy, whichever is later. Commissions on premium endorsements are recognized when
premiums are processed. Motor club fees written by an affiliate are earned on a pro-rata basis
over the respective terms of the contracts and included in commission and fee income. Fees are
paid monthly by motor club members and are generally collected in advance of providing coverage,
minimizing the Companys exposure to credit risk.
Fee income includes installment fees to compensate the Company for the costs of providing
installment payment plans, as well as late payment, policy cancellation, policy rewrite and
reinstatement fees. Installment fees are recognized as revenue when each installment is billed,
while all other fees are recognized on a collected basis.
Income Taxes
Income taxes are accounted for under the liability method. Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply
to taxable income in the years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized
in income in the period that includes the enactment date.
52
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
A valuation allowance for the deferred tax asset is established based upon managements
estimate of whether it is more likely than not that the Company would not realize tax benefits in
future periods to the full extent available. Changes in the valuation allowance are recognized in
income during the period in which the circumstances that cause such a change in managements
estimate occur.
The Company accounts for income tax uncertainties under the provisions of FASB Interpretation
No. 48, Accounting for Uncertainty in Income Taxes An Interpretation of FASB Statement No. 109
(FIN 48). The Company has recognized no additional liability or reduction in deferred tax asset
for unrecognized tax benefits and the Company had no FIN 48 tax liabilities at June 30, 2009 and
2008. Any interest and penalties incurred in connection with income taxes are recorded as a
component of the provision (benefit) for income taxes. The Company is generally not subject to U.S.
federal, state or local income tax examinations by tax authorities for taxable years prior to June
30, 2005.
Advertising Costs
Advertising costs are expensed when incurred. Advertising expense for the years ended June 30,
2009, 2008 and 2007 was $9.6 million, $11.9 million and $11.7 million, respectively. At June 30,
2009 and 2008, prepaid advertising costs, which are included in other assets in the accompanying
consolidated balance sheets, were $2.2 million and $2.4 million, respectively.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is provided over the estimated
useful lives of the assets (generally ranging from three to seven years) using the straight-line
method. Leasehold improvements are amortized over the shorter of the lives of the respective leases
or the service lives of the improvements. Repairs and maintenance are charged to expense as
incurred. Equipment under capitalized lease obligations is stated at the present value of the
minimum lease payments at the beginning of the lease term.
Foreclosed Real Estate Held for Sale
Foreclosed real estate held for sale is recorded at the lower of cost or fair value less
estimated costs to sell. The Company periodically reviews its portfolio of foreclosed real estate
held for sale using current information including (i) independent appraisals, (ii) general economic
factors affecting the area where the property is located, (iii) recent sales activity and asking
prices for comparable properties and (iv) costs to sell and/or develop that would serve to lower
the expected proceeds from the disposal of the real estate. Gains (losses) realized on liquidation
are recorded directly to operations and included in other revenues. Foreclosed real estate held for
sale assets at June 30, 2009 and 2008 of $0.7 million and $0.6 million, respectively, are included
in other assets.
Deferred Acquisition Costs
Deferred acquisition costs include premium taxes and other variable underwriting and direct
sales costs incurred in connection with writing business. These costs are deferred and amortized
over the policy period in which the related premiums are earned, to the extent that such costs are
deemed recoverable from future unearned premiums and anticipated investment income. Amortization
expense for the years ended June 30, 2009, 2008 and 2007 was $15.8 million, $18.2 million and $20.5
million, respectively.
Goodwill and Other Identifiable Intangible Assets
Goodwill and other identifiable intangible assets are attributable to the Companys insurance
operations and were initially recorded at their estimated fair values at the date of acquisition.
Goodwill and other intangible assets having an indefinite useful life are not amortized for
financial statement purposes. In accordance with FASB Statement No. 142, Goodwill and Other
Intangible Assets, the Company is required to perform annual impairment
tests of its goodwill and intangible assets. The Company performs its annual impairment tests as of
the last day of the fourth quarter of each fiscal year. In the event that facts and circumstances
indicate that the goodwill and other identifiable intangible assets may be impaired, an interim
impairment test would be required. Intangible assets with finite lives have been fully amortized
over their useful lives.
53
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The goodwill impairment test is a two-step process that requires management to make judgments
in determining what assumptions to use in the calculation. The first step of the process consists
of estimating the fair value of each reporting unit based on valuation techniques, including a
discounted cash flow model using revenue and profit forecasts, and comparing those estimated fair
values with the carrying values of those assets and liabilities, which includes the allocated
goodwill. If the estimated fair value is less than the carrying value, a second step is performed
to compute the amount of the impairment, if any, by determining an implied fair value of
goodwill. The determination of the implied fair value of goodwill of a reporting unit requires
the Company to allocate the estimated fair value of the reporting unit to the assets and
liabilities of the reporting unit. Any unallocated fair value represents the implied fair value
of goodwill, which is compared to its corresponding carrying value.
As a result of adverse impact of the difficult economic conditions on our customers and our
business and the resulting decline in our
share price during the most recent quarter, we have estimated that a goodwill impairment charge
would be required upon the completion of a detailed allocation of the reporting unit fair value.
Accordingly, the Company recognized a non-cash, pre-tax goodwill impairment charge of $68.0 million
in the fourth quarter of fiscal year 2009. Due to the complexity of the fair value calculations
involved, it is expected that the goodwill impairment charge will be finalized by the end of the
first quarter of fiscal year 2010 and it is not expected to differ materially from this estimate.
The key assumptions used to determine the fair value of the Companys reporting unit, from a market
participants perspective, included (i) long-term revenue growth rates ranging from 5% to 10%, (ii)
a discount rate of 14.5%, which was based on an estimated weighted average cost of capital adjusted
for the risks associated with its operations, and (iii) recent industry transaction trends in price
to tangible book multiples and related returns on tangible equity.
Management does not believe that the estimated goodwill impairment charge will have a
materially adverse impact on the continuing operations, liquidity, or statutory surplus of the Company.
The Companys evaluation includes multiple assumptions, including estimated discounted cash
flows and other estimates that may change over time. If future discounted cash flows become less
than those projected by the Company, further impairment charges may become necessary that could
have a materially adverse impact on the Companys results of operations and financial condition. As
quoted market prices in active stock markets are relevant evidence of fair value, a significant
decrease in the Companys common stock trading price could also indicate that an impairment of
goodwill exists.
Loss and Loss Adjustment Expense Reserves
Loss and loss adjustment expense reserves are undiscounted and represent case-basis estimates
of reported losses and estimates based on certain actuarial assumptions regarding the past
experience of reported losses, including an estimate of losses incurred but not reported.
Management believes that the loss and loss adjustment reserves are adequate to cover the ultimate
liability. However, such estimate may be more or less than the amount ultimately paid when the
claims are finally settled.
Recent Accounting Pronouncements
Effective July 1, 2008, the Company adopted the provisions of FASB Statement No. 157, Fair
Value Measurements (SFAS 157), which defines fair value, establishes a framework for measuring
fair value and expands disclosures about fair value measurements. This statement applies under
other accounting pronouncements that require or permit fair value measurements, the FASB having
previously concluded in those accounting
pronouncements that fair value is the relevant measurement attribute. Accordingly, this
statement does not require any new fair value measurements. The adoption of SFAS 157 did not have a
material impact on the results of operations or financial condition of the Company. In October
2008, the FASB issued FASB Staff Position No. FAS 157-3, Determining the Fair Value of a Financial
Asset When the Market for That Asset is Not Active (FSP 157-3). FSP 157-3 clarifies the
application of SFAS 157 in cases where a market is not active. The Company has considered the
guidance provided by FSP 157-3 in its determination of estimated fair values effective June 30,
2009, and the impact was not material. In April 2009, the FASB issued FASB Staff Position No. FAS
157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Indentifying Transactions That Are Not Orderly (FSP 157-4). FSP 157-4
provides guidance on estimating the fair value of an asset or liability when there is no active
market and on identifying transactions that are not orderly. The
54
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Company has considered the guidance provided by FSP 157-4 in its determination of estimated
fair values as of June 30, 2009, and the impact was not material.
Effective July 1, 2008, the Company adopted the provisions of FASB Statement No. 159,
Establishing the Fair Value Option for Financial Assets and Liabilities (SFAS 159), which
includes an amendment to FASB Statement No. 115, Accounting for Certain Investments in Debt and
Equity Securities (SFAS 115). SFAS 159 permits entities to choose to measure many financial
instruments and certain other items at fair value. The objective is to improve financial reporting
by providing entities with the opportunity to mitigate volatility in reported earnings caused by
measuring related assets and liabilities differently without having to apply complex hedge
accounting provisions. This statement applies to all entities and most of the provisions of this
statement apply only to entities that elect the fair value option. However, the amendment to SFAS
115 applies to all entities with available-for-sale and trading securities. The Company did not
elect the fair value option and, as a result, the adoption of SFAS 159 did not have an impact on
the Companys results of operations or financial condition.
Effective April 1, 2009, the Company adopted the provisions of FSP FAS 115-2. Under this
guidance, if management can assert that it does not intend to sell an impaired fixed maturity
security and it is more likely than not that it will not have to sell the security before recovery
of its amortized cost basis, then an entity may separate OTTI into the following two components:
(i) the amount related to credit losses (recognized in income) and (ii) the amount related to all
other factors (recorded in other comprehensive loss). Both components are required to be shown in
the consolidated statements of operations. The credit-related portion of an OTTI is measured by
comparing a securitys amortized cost to the present value of its current expected cash flows
discounted at its effective yield prior to the impairment charge. If management intends to sell an
impaired security, or it is more likely than not that it will be required to sell the security
before recovery, an impairment charge is required to reduce the amortized cost of that security to
fair value. As a result of the adoption of this pronouncement, the Company recorded a cumulative
effect adjustment of $0.6 million to reclassify the non-credit component of previously recognized
impairments from accumulated deficit to accumulated other comprehensive loss. This reclassification
had no impact on reported earnings for the year ended June 30, 2009.
In April 2009, the FASB issued FASB Staff Position No. FAS 107-1 and APB Opinion No. 28-1,
Interim Disclosures about Fair Value of Financial Instruments, which requires fair value
disclosures in interim financial statements for financial instruments that are not reflected in the
balance sheet at fair value. Formerly, these disclosures were only required annually. The Company
will include these disclosures beginning with its quarter ending September 30, 2009.
In May 2009, the FASB issued Statement No. 165, Subsequent Events (SFAS 165), which
establishes general standards of accounting for, and disclosure of, events that occur after the
balance sheet date, but before financial statements are issued or are available to be issued. SFAS
165 is effective for interim or annual financial periods ending after June 15, 2009. The adoption
of SFAS 165 did not have a material effect on the Companys financial condition or results of
operations. The Company has evaluated subsequent events through the date the consolidated financial
statements were issued, which was September 14, 2009.
In June 2009, the FASB issued Statement No. 168, The FASB Accounting Standards Codification
and the Hierarchy of Generally Accepted Accounting Principles (SFAS 168), which establishes the
FASB Accounting Standards Codification as the single source of authoritative accounting principles
recognized by the FASB. Codification does not create new accounting and reporting standards but
organizes their structure. The Company will adopt SFAS 168 beginning with its quarter ending
September 30, 2009.
Supplemental Cash Flow Information
During the years ended June 30, 2009, 2008 and 2007, the Company paid $0.5 million, $0.5
million and $0.8 million, respectively, in income taxes and $4.0 million, $4.3 million and $1.7
million, respectively, in interest.
Basic and Diluted Net Income (Loss) Per Share
Basic net income (loss) per share is computed by dividing net income (loss) available to
common shareholders by the weighted average number of common shares, while diluted net income
(loss) per share is computed by dividing net income (loss) available to common shareholders by the
weighted average number of such
55
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
common shares and dilutive share equivalents. Dilutive share equivalents result from the
assumed exercise of employee stock options and vesting of restricted common stock and are
calculated using the treasury stock method.
2. Business Combinations
Effective January 12, 2006, the Company acquired certain assets (principally the trade names,
customer lists and relationships and the lease rights to 72 retail locations) of two non-standard
automobile insurance agencies under common control in Chicago, Illinois. The Company received a
monthly fee from the seller through December 31, 2006 totaling $5.0 million as compensation for
servicing the run-off of business previously written by the agencies through other insurance
companies. Fees of $0.9 million and $4.1 million were recognized and included in other revenues
during the years ended June 30, 2007 and 2006, respectively. Of the $2.6 million in acquired
identifiable intangible assets, $1.6 million was assigned to trademark and trade names, which are
not subject to amortization. The remaining $1.0 million of acquired identifiable intangible assets
relates to the value of customer lists and relationships and was fully amortized over a 30-month
period through June 2008 in proportion to anticipated policy expirations.
For the years ended June 30, 2008 and 2007, amortization related to all identifiable
intangible assets was $0.1 million and $0.4 million, respectively. At June 30, 2008, there were no
remaining identifiable intangible assets subject to amortization.
3. Investments
Restrictions
At June 30, 2009, fixed maturities and cash equivalents with a fair value of $6.5 million
(amortized cost of $6.9 million) were on deposit with various insurance departments as a
requirement of doing business in those states. Cash equivalents of $6.2 million were on deposit
with another insurance company as collateral for an assumed reinsurance contract.
Fair Value
Fair value is the price that would be received upon the sale of an asset or paid to transfer a
liability in an orderly transaction between market participants at the measurement date. The
Company holds available-for-sale fixed maturity investments, which are carried at fair value.
Fair value measurements are generally based upon observable and unobservable inputs.
Observable inputs are based on market data from independent sources, while unobservable inputs
reflect the Companys view of market assumptions in the absence of observable market information.
All assets and liabilities that are carried at fair value are classified and disclosed in one of
the following categories:
|
Level 1 |
|
Quoted prices in active markets for identical assets or liabilities. |
|
|
Level 2 |
|
Quoted market prices for similar assets or liabilities in active
markets; quoted prices by independent pricing services for identical or similar
assets or liabilities in markets that are not active; and valuations, using models
or other valuation techniques, that use observable market data. All significant
inputs are observable, or derived from observable information in the marketplace, or
are supported by observable levels at which transactions are executed in the market
place. |
|
|
Level 3 |
|
Instruments that use non-binding broker quotes or model driven
valuations that do not have observable market data. |
56
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table presents the fair-value measurements for each major category of assets
that are measured on a recurring basis as of June 30, 2009 (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using |
|
|
|
|
|
|
|
Quoted Prices |
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active |
|
|
Significant |
|
|
|
|
|
|
|
|
|
|
Markets for |
|
|
Other |
|
|
Significant |
|
|
|
|
|
|
|
Identical |
|
|
Observable |
|
|
Unobservable |
|
|
|
|
|
|
|
Assets |
|
|
Inputs |
|
|
Inputs |
|
Description |
|
Total |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
Fixed maturities, available-for-sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agencies |
|
$ |
11,180 |
|
|
$ |
11,180 |
|
|
$ |
|
|
|
$ |
|
|
State |
|
|
8,563 |
|
|
|
|
|
|
|
8,563 |
|
|
|
|
|
Political subdivisions |
|
|
1,854 |
|
|
|
|
|
|
|
1,854 |
|
|
|
|
|
Revenue and assessment |
|
|
28,481 |
|
|
|
|
|
|
|
28,481 |
|
|
|
|
|
Corporate bonds |
|
|
46,726 |
|
|
|
|
|
|
|
46,726 |
|
|
|
|
|
Collateralized mortgage obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency backed |
|
|
31,926 |
|
|
|
|
|
|
|
31,926 |
|
|
|
|
|
Non-agency backed residential |
|
|
5,618 |
|
|
|
|
|
|
|
3,688 |
|
|
|
1,930 |
|
Non-agency backed commercial |
|
|
5,963 |
|
|
|
|
|
|
|
5,256 |
|
|
|
707 |
|
|
|
|
|
|
|
Total fixed maturities, available-for-sale |
|
|
140,311 |
|
|
|
11,180 |
|
|
|
126,494 |
|
|
|
2,637 |
|
Cash and cash equivalents |
|
|
77,201 |
|
|
|
77,201 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
217,512 |
|
|
$ |
88,381 |
|
|
$ |
126,494 |
|
|
$ |
2,637 |
|
|
|
|
|
|
|
The fair values of the Companys fixed maturities are determined by management after taking
into consideration available sources of data. All of the portfolio valuations classified as Level 1
or Level 2 in the above table are priced exclusively by utilizing the services of independent
pricing sources using observable market data. The Level 2 classified security valuations are
obtained from a single independent pricing service. The Level 3 classified securities in the table
above consist of five CMOs that are priced from non-binding broker quotes obtained from a single
dealer familiar with each particular security or model driven valuations that do not have
observable market data. Based on the nature of these securities and the lack of similar securities
trading to obtain observable market data, the Company believes that these Level 3 valuations are
more subjective in nature. The Company has not made any adjustments to the prices obtained from the
independent pricing sources and dealers.
The Company has reviewed the pricing techniques and methodologies of the independent pricing
sources and dealers and believes that their policies adequately consider market activity, either
based on specific transactions for the issue valued or based on modeling of securities with similar
credit quality, duration, yield and structure that were recently traded. The Company monitored
security-specific valuation trends and discussed material changes or the absence of expected
changes with the pricing sources to understand the underlying factors and inputs and to validate
the reasonableness of the pricing.
57
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Based on the above categorization, the following table represents the quantitative disclosure
for those assets included in category Level 3 as of June 30, 2009 (in thousands).
|
|
|
|
|
|
|
Fair Value |
|
|
|
Measurements |
|
|
|
Using |
|
|
|
Significant |
|
|
|
Unobservable |
|
|
|
Inputs |
|
|
|
(Level 3) |
|
Balance at July 1, 2008 |
|
$ |
167 |
|
Total gains or losses (realized or unrealized): |
|
|
|
|
Included in net income (loss) |
|
|
(63 |
) |
Included in comprehensive income (loss) |
|
|
(24 |
) |
Purchases, sales, issuances and settlements |
|
|
(25 |
) |
Transfers in and/or out of Level 3 |
|
|
2,582 |
|
|
|
|
|
Balance at June 30, 2009 |
|
$ |
2,637 |
|
|
|
|
|
Investment Income and Net Realized Gains and Losses
The major categories of investment income follow (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Fixed maturities, available-for-sale |
|
$ |
9,588 |
|
|
$ |
9,747 |
|
|
$ |
7,770 |
|
Cash and cash equivalents |
|
|
383 |
|
|
|
1,824 |
|
|
|
1,520 |
|
Other |
|
|
116 |
|
|
|
117 |
|
|
|
5 |
|
Investment expenses |
|
|
(583 |
) |
|
|
(438 |
) |
|
|
(432 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
9,504 |
|
|
$ |
11,250 |
|
|
$ |
8,863 |
|
|
|
|
|
|
|
|
|
|
|
The components of net realized gains (losses) on fixed maturities, available-for-sale are as
follows (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Realized gains on sales |
|
$ |
2,662 |
|
|
$ |
424 |
|
|
$ |
90 |
|
Realized losses on sales |
|
|
(153 |
) |
|
|
(254 |
) |
|
|
(151 |
) |
Other-than-temporary impairment losses |
|
|
(2,420 |
) |
|
|
(1,414 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
89 |
|
|
$ |
(1,244 |
) |
|
$ |
(61 |
) |
|
|
|
|
|
|
|
|
|
|
The non-credit related portion of OTTI charges are included in other comprehensive loss. The
amounts of such charges taken for securities still owned at June 30, 2009 were $0.6 million for
non-agency backed residential CMOs and $0.6 million for non-agency backed commercial CMOs.
58
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Fixed Maturities, Available-for-Sale
The following tables summarize the Companys fixed maturity securities (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
June 30, 2009 |
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
U.S. government and agencies |
|
$ |
10,744 |
|
|
$ |
473 |
|
|
$ |
(37 |
) |
|
$ |
11,180 |
|
State |
|
|
8,238 |
|
|
|
344 |
|
|
|
(19 |
) |
|
|
8,563 |
|
Political subdivisions |
|
|
1,834 |
|
|
|
52 |
|
|
|
(32 |
) |
|
|
1,854 |
|
Revenue and assessment |
|
|
27,816 |
|
|
|
831 |
|
|
|
(166 |
) |
|
|
28,481 |
|
Corporate bonds |
|
|
45,737 |
|
|
|
1,654 |
|
|
|
(665 |
) |
|
|
46,726 |
|
Collateralized mortgage obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency backed |
|
|
30,656 |
|
|
|
1,270 |
|
|
|
|
|
|
|
31,926 |
|
Non-agency backed residential |
|
|
8,178 |
|
|
|
1 |
|
|
|
(2,561 |
) |
|
|
5,618 |
|
Non-agency backed commercial |
|
|
7,646 |
|
|
|
|
|
|
|
(1,683 |
) |
|
|
5,963 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
140,849 |
|
|
$ |
4,625 |
|
|
$ |
(5,163 |
) |
|
$ |
140,311 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
June 30, 2008 |
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
U.S. government and agencies |
|
$ |
32,046 |
|
|
$ |
1,112 |
|
|
$ |
(1 |
) |
|
$ |
33,157 |
|
State |
|
|
7,423 |
|
|
|
168 |
|
|
|
(77 |
) |
|
|
7,514 |
|
Political subdivisions |
|
|
3,606 |
|
|
|
7 |
|
|
|
(28 |
) |
|
|
3,585 |
|
Revenue and assessment |
|
|
30,066 |
|
|
|
288 |
|
|
|
(440 |
) |
|
|
29,914 |
|
Corporate bonds |
|
|
47,381 |
|
|
|
154 |
|
|
|
(1,006 |
) |
|
|
46,529 |
|
Collateralized mortgage obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency backed |
|
|
52,701 |
|
|
|
650 |
|
|
|
(255 |
) |
|
|
53,096 |
|
Non-agency backed residential |
|
|
8,766 |
|
|
|
|
|
|
|
(721 |
) |
|
|
8,045 |
|
Non-agency backed commercial |
|
|
8,051 |
|
|
|
|
|
|
|
(321 |
) |
|
|
7,730 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
190,040 |
|
|
$ |
2,379 |
|
|
$ |
(2,849 |
) |
|
$ |
189,570 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth the scheduled maturities of the Companys fixed maturity
securities at June 30, 2009 based on their fair values (in thousands). Actual maturities may differ
from contractual maturities because certain securities may be called or prepaid by the issuers.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities |
|
|
|
|
|
|
Securities |
|
|
Securities |
|
|
with No |
|
|
All |
|
|
|
with |
|
|
with |
|
|
Unrealized |
|
|
Fixed |
|
|
|
Unrealized |
|
|
Unrealized |
|
|
Gains or |
|
|
Maturity |
|
|
|
Gains |
|
|
Losses |
|
|
Losses |
|
|
Securities |
|
One year or less |
|
$ |
4,376 |
|
|
$ |
905 |
|
|
$ |
250 |
|
|
$ |
5,531 |
|
After one through five years |
|
|
50,827 |
|
|
|
1,951 |
|
|
|
|
|
|
|
52,778 |
|
After five through ten years |
|
|
21,554 |
|
|
|
5,490 |
|
|
|
|
|
|
|
27,044 |
|
After ten years |
|
|
4,777 |
|
|
|
6,674 |
|
|
|
|
|
|
|
11,451 |
|
No single maturity date |
|
|
32,531 |
|
|
|
10,862 |
|
|
|
114 |
|
|
|
43,507 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
114,065 |
|
|
$ |
25,882 |
|
|
$ |
364 |
|
|
$ |
140,311 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
59
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The fair value and gross unrealized losses of fixed maturities, available-for-sale, by
the length of time that individual securities have been in a continuous unrealized loss position
follows (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 months |
|
|
12 months or longer |
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Gross |
|
|
Total Gross |
|
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
Unrealized |
|
|
Unrealized |
|
June 30, 2009 |
|
Fair Value |
|
|
Losses |
|
|
Fair Value |
|
|
Losses |
|
|
Losses |
|
U.S. government and agencies |
|
$ |
963 |
|
|
$ |
(37 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
(37 |
) |
State |
|
|
|
|
|
|
|
|
|
|
678 |
|
|
|
(19 |
) |
|
|
(19 |
) |
Political subdivisions |
|
|
48 |
|
|
|
(1 |
) |
|
|
471 |
|
|
|
(31 |
) |
|
|
(32 |
) |
Revenue and assessment |
|
|
533 |
|
|
|
(11 |
) |
|
|
4,305 |
|
|
|
(155 |
) |
|
|
(166 |
) |
Corporate bonds |
|
|
|
|
|
|
|
|
|
|
8,022 |
|
|
|
(665 |
) |
|
|
(665 |
) |
Collateralized mortgage obligations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency backed |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-agency backed
residential |
|
|
|
|
|
|
|
|
|
|
4,898 |
|
|
|
(2,561 |
) |
|
|
(2,561 |
) |
Non-agency backed
commercial |
|
|
|
|
|
|
|
|
|
|
5,964 |
|
|
|
(1,683 |
) |
|
|
(1,683 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,544 |
|
|
$ |
(49 |
) |
|
$ |
24,338 |
|
|
$ |
(5,114 |
) |
|
$ |
(5,163 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 months |
|
|
12 months or longer |
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Gross |
|
|
Total Gross |
|
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
Unrealized |
|
|
Unrealized |
|
June 30, 2008 |
|
Fair Value |
|
|
Losses |
|
|
Fair Value |
|
|
Losses |
|
|
Losses |
|
U.S. government and agencies |
|
$ |
1,000 |
|
|
$ |
(1 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
(1 |
) |
State |
|
|
1,056 |
|
|
|
(77 |
) |
|
|
|
|
|
|
|
|
|
|
(77 |
) |
Political subdivisions |
|
|
1,540 |
|
|
|
(6 |
) |
|
|
537 |
|
|
|
(22 |
) |
|
|
(28 |
) |
Revenue and assessment |
|
|
13,237 |
|
|
|
(439 |
) |
|
|
23 |
|
|
|
(1 |
) |
|
|
(440 |
) |
Corporate bonds |
|
|
30,055 |
|
|
|
(566 |
) |
|
|
2,572 |
|
|
|
(440 |
) |
|
|
(1,006 |
) |
Collateralized mortgage obligations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency backed |
|
|
13,365 |
|
|
|
(255 |
) |
|
|
|
|
|
|
|
|
|
|
(255 |
) |
Non-agency backed
residential |
|
|
2,080 |
|
|
|
(78 |
) |
|
|
5,216 |
|
|
|
(643 |
) |
|
|
(721 |
) |
Non-agency backed
commercial |
|
|
4,857 |
|
|
|
(110 |
) |
|
|
2,041 |
|
|
|
(211 |
) |
|
|
(321 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
67,190 |
|
|
$ |
(1,532 |
) |
|
$ |
10,389 |
|
|
$ |
(1,317 |
) |
|
$ |
(2,849 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The number of securities with gross unrealized gains and losses follows. Gross unrealized
losses are further segregated by the length of time that individual securities have been in a
continuous unrealized loss position.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Unrealized Losses |
|
|
|
|
Less than |
|
Greater |
|
Gross |
|
|
or equal to |
|
than 12 |
|
Unrealized |
As of: |
|
12 months |
|
months |
|
Gains |
June 30, 2009 |
|
|
3 |
|
|
|
37 |
|
|
|
133 |
|
June 30, 2008 |
|
|
79 |
|
|
|
16 |
|
|
|
108 |
|
The fair value and gross unrealized losses of those securities in a continuous unrealized loss
position for greater than 12 months at June 30, 2009 follows. Gross unrealized losses are further
segregated by the percentage of amortized cost (in thousands, except number of securities).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number |
|
|
|
|
|
|
Gross |
|
|
|
of |
|
|
Fair |
|
|
Unrealized |
|
Gross Unrealized Losses |
|
Securities |
|
|
Value |
|
|
Losses |
|
Less than 10% |
|
|
17 |
|
|
$ |
15,368 |
|
|
$ |
(766 |
) |
Greater than 10% |
|
|
20 |
|
|
|
8,970 |
|
|
|
(4,348 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
37 |
|
|
$ |
24,338 |
|
|
$ |
(5,114 |
) |
|
|
|
|
|
|
|
|
|
|
60
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 June 30, 2009 (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value of |
|
|
|
|
|
|
|
|
|
|
Securities with |
|
|
|
|
|
|
Severity of Gross Unrealized Losses |
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
|
|
|
|
Greater |
|
Length of |
|
Unrealized |
|
|
Unrealized |
|
|
Less |
|
|
|
|
|
|
than |
|
Gross Unrealized Losses: |
|
Losses |
|
|
Losses |
|
|
than 5% |
|
|
5% to 10% |
|
|
10% |
|
Less than or equal to: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Six months |
|
|
1,011 |
|
|
|
(38 |
) |
|
|
(38 |
) |
|
|
|
|
|
|
|
|
Nine months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve months |
|
|
533 |
|
|
|
(11 |
) |
|
|
(11 |
) |
|
|
|
|
|
|
|
|
Greater than twelve months |
|
|
24,338 |
|
|
|
(5,114 |
) |
|
|
(249 |
) |
|
|
(517 |
) |
|
|
(4,348 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
25,882 |
|
|
$ |
(5,163 |
) |
|
$ |
(298 |
) |
|
$ |
(517 |
) |
|
$ |
(4,348 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other-Than-Temporary Impairment
Effective April 1, 2009, the Company adopted the provisions of FSP FAS 115-2. Under this
guidance, the Company separates OTTI into the following two components: (i) the amount related to
credit losses which is recognized in the consolidated statement of operations and (ii) the amount
related to all other factors which is recorded in other comprehensive income (loss). The
credit-related portion of an OTTI is measured by comparing a securitys amortized cost to the
present value of its current expected cash flows discounted at its effective yield prior to the
impairment charge. As a result of the adoption of this pronouncement, the cumulative effect
resulted in an adjustment of $0.6 million to reclassify the non-credit component of previously
recognized impairments from accumulated deficit to accumulated other comprehensive loss.
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.
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.
61
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The number and amount of securities for which the Company has recorded OTTI are presented in
the following table (in thousands). Impairment in fiscal year 2009 included additional charges to
the six CMOs initially impaired in fiscal year 2008. The Company recognized no OTTI in fiscal year
2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
|
2009 |
|
|
2008 |
|
|
|
Number of |
|
|
|
|
|
|
Number of |
|
|
|
|
|
|
Securities |
|
|
OTTI |
|
|
Securities |
|
|
OTTI |
|
Corporate bonds |
|
|
3 |
|
|
$ |
(871 |
) |
|
|
|
|
|
$ |
|
|
Collateralized mortgage obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-agency backed residential |
|
|
5 |
|
|
|
(1,564 |
) |
|
|
3 |
|
|
|
(778 |
) |
Non-agency backed commercial |
|
|
4 |
|
|
|
(1,205 |
) |
|
|
3 |
|
|
|
(636 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12 |
|
|
|
(3,640 |
) |
|
|
6 |
|
|
|
(1,414 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portion of loss recognized in accumulated
other comprehensive loss |
|
|
|
|
|
|
1,220 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net OTTI recognized in income |
|
|
|
|
|
$ |
(2,420 |
) |
|
|
|
|
|
$ |
(1,414 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following is a rollforward of OTTI showing the amounts that have been recognized in net
loss and reclassified to accumulated other comprehensive loss as a result of the cumulative effect
of accounting change (in thousands).
|
|
|
|
|
Recognized in net loss: |
|
|
|
|
Year ended June 30, 2008 |
|
$ |
(1,414 |
) |
Nine months ended March 31, 2009 |
|
|
(1,987 |
) |
|
|
|
|
|
|
|
(3,401 |
) |
Cumulative effect of accounting change |
|
|
644 |
|
|
|
|
|
Balance at April 1, 2009 |
|
|
(2,757 |
) |
Recognized in net loss: |
|
|
|
|
Three months ended June 30, 2009 |
|
|
(433 |
) |
|
|
|
|
|
|
$ |
(3,190 |
) |
|
|
|
|
On a quarterly basis, the Company reviews cash flow estimates for certain non-agency backed
CMOs of lessor credit quality following the guidance of FSP EITF 99-20-1, Amendments to the
Impairment Guidance of EITF Issue No. 99-20 (FSP EITF 99-20-1). Accordingly, when changes in
estimated cash flows from previous estimates occur due to actual prepayment and credit loss
experience, and the present value of the revised cash flows is less than the present value
previously estimated, OTTI is deemed to have occurred. For non-agency backed CMOs not subject to
FSP EITF 99-20-1, the Company prepares quarterly projected cash flow analyses and when it is
indicated that a principal loss is probable, OTTI is deemed to have occurred. The timing of
projected cash flows on CMOs has changed as economic conditions have prevented the underlying
borrowers from refinancing the mortgages underlying these securities, thereby reducing the amount
of projected prepayments. Likewise, economic conditions have caused an increase in the actual and
projected delinquencies in the underlying mortgages. These factors have resulted in the OTTI that
the Company has recognized related to non-agency backed CMOs.
The Companys review of non-agency backed CMOs included an analysis of available information
such as collateral quality, anticipated cash flows, credit enhancements, default rates, loss
severities, the securities relative position in their respective capital structures, and credit
ratings from statistical rating agencies. The Company reviews quarterly projected cash flow
analyses for each security utilizing current assumptions regarding (i) actual and anticipated
delinquencies, (ii) delinquency transition-to-default rates, and (iii) loss severities. Based on
its quarterly reviews, the Company determined that there had not been an adverse change in
projected cash flows, except in the case of those securities previously discussed which incurred
OTTI charges. The Company believes that the unrealized losses on these securities are not
necessarily predictive of the ultimate performance of the underlying collateral. The Company does
not intend to sell these securities and it is more likely than not that the Company will not be
required to sell these securities before the recovery of their amortized cost basis.
62
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The OTTI charges on corporate bonds was recognized as 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 decline, and (iii) a series of
downgrades to their credit ratings. Based on the factors that existed at the time of impairment,
the Company did not believe that these bonds would recover their unrealized losses in the near
future.
The Company believes that the remaining securities having unrealized losses at June 30, 2009
were not other-than-temporarily impaired. The Company also does not intend to sell any of these
securities and it is more likely than not that the Company will not be required to sell any of
these securities before the recovery of their amortized cost basis.
4. Reinsurance
Total premiums written and earned are summarized as follows (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
Written |
|
|
Earned |
|
|
Written |
|
|
Earned |
|
|
Written |
|
|
Earned |
|
Direct |
|
$ |
187,935 |
|
|
$ |
206,358 |
|
|
$ |
253,807 |
|
|
$ |
265,630 |
|
|
$ |
290,784 |
|
|
$ |
280,946 |
|
Assumed |
|
|
17,044 |
|
|
|
17,755 |
|
|
|
20,167 |
|
|
|
20,284 |
|
|
|
19,872 |
|
|
|
19,715 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
204,979 |
|
|
$ |
224,113 |
|
|
$ |
273,974 |
|
|
$ |
285,914 |
|
|
$ |
310,656 |
|
|
$ |
300,661 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumed business represents private-passenger non-standard automobile insurance premiums
produced by a managing general agency subsidiary in Texas written through a program with a county
mutual insurance company and assumed by the Company through 100% quota-share reinsurance.
The percentages of premiums assumed to net premiums written for the years ended June 30, 2009,
2008 and 2007 were 8%, 7% and 6%, respectively.
5. Stock-Based Compensation Plans
Employee Stock-Based Incentive Plan
The Company has issued stock options (Stock Option Awards) and restricted common stock
(Restricted Stock Awards) to employees under its 2002 Long Term Incentive Plan, as amended (the
Plan), and accounts for such issuances in accordance with FASB Statement No. 123 (Revised), Share
Based Payment. At June 30, 2009, there were 2,110,748 shares remaining available for issuance under
the Plan. Stock Option Awards are generally granted with an exercise price equal to the market
price of the Companys stock at the date of grant. Stock Option Awards expire over ten years and
generally vest equally in annual installments over four or five years, while the Restricted Stock
Awards vest in designated installments through October 1, 2011. Certain awards provide for
accelerated vesting if there is a change in control (as defined in the Plan).
During the years ended June 30, 2009 and 2008, the Company issued Restricted Stock Awards for
224,574 and 400,000 shares, respectively, of restricted common stock to certain employees pursuant
to the Plan and Restricted Stock Award Agreements. Pursuant to the Restricted Stock Award
Agreements, 190,000 Restricted Stock Awards vested on July 1, 2009, 240,000 Restricted Stock Awards
will vest in annual installments through fiscal year 2012, 17,537 Restricted Stock Awards will vest
equally in annual installments over four years through fiscal year 2013 and 177,037 Restricted
Stock Awards will vest equally in annual installments over five years through fiscal year 2014.
Expected compensation expense related to the issuance of these Restricted Stock Awards is $1.8
million, which will be amortized through March 2014.
63
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Compensation expense related to Stock Option Awards is calculated under the fair value method
and is recorded on a straight-line basis over the vesting period. Fair value of the Stock Option
Awards was estimated at the grant dates using the Black-Scholes option pricing model based on the
following assumptions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
2009 |
|
2008 |
|
2007 |
Expected option term |
|
|
|
|
|
10 years |
|
|
10 years |
|
Annualized volatility rate |
|
|
|
|
|
|
31 to 43 |
% |
|
|
32 to 33 |
% |
Risk-free rate of return |
|
|
|
|
|
|
3.48 to 5.02 |
% |
|
|
4.74 to 4.77 |
% |
Dividend yield |
|
|
|
|
|
|
0 |
% |
|
|
0 |
% |
A summary of the status of the Plan as of June 30, 2009, 2008 and 2007 and changes during the
years then ended is presented below (in thousands, except per share data).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Aggregate |
|
|
|
|
|
|
|
|
|
|
|
Exercise |
|
|
Intrinsic |
|
|
|
Options |
|
|
Exercise Price |
|
|
Price |
|
|
Value |
|
Options outstanding at June 30, 2006 |
|
|
4,081 |
|
|
$ |
3.00-$ 8.13 |
|
|
$ |
3.37 |
|
|
|
|
|
Granted |
|
|
635 |
|
|
$ |
10.12-$11.81 |
|
|
$ |
11.61 |
|
|
|
|
|
Exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at June 30, 2007 |
|
|
4,716 |
|
|
$ |
3.00-$11.81 |
|
|
$ |
4.48 |
|
|
|
|
|
Granted |
|
|
955 |
|
|
$ |
3.04-$10.08 |
|
|
$ |
3.26 |
|
|
|
|
|
Exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(215 |
) |
|
$ |
3.04-$11.81 |
|
|
$ |
7.89 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at June 30, 2008 |
|
|
5,456 |
|
|
$ |
3.00-$11.81 |
|
|
$ |
4.13 |
|
|
|
|
|
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(148 |
) |
|
$ |
3.00-$11.81 |
|
|
$ |
7.51 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at June 30, 2009 |
|
|
5,308 |
|
|
$ |
3.00-$11.81 |
|
|
$ |
4.04 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable/vested at June 30, 2009 |
|
|
4,402 |
|
|
$ |
3.00-$11.81 |
|
|
$ |
3.71 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average estimated fair value of Stock Option Awards granted during the years
ended June 30, 2008, and 2007 was $1.90 and $6.27, respectively. There were no Stock Option Awards
granted during the year ended June 30, 2009. As of June 30, 2009, the weighted average remaining
contractual life of options outstanding and exercisable/vested is approximately 4.8 years and 4.1
years, respectively.
Employee Stock Purchase Plan
The Companys Board of Directors has adopted the First Acceptance Corporation Employee Stock
Purchase Plan (ESPP) whereby eligible employees may purchase shares of the Companys common stock
at a price equal to the lower of the closing market price on the first or last trading day of a
six-month period. ESPP participants can authorize payroll deductions, administered through an
independent plan custodian, of up to 15% of their salary to purchase semi-annually (June 30 and
December 31) up to $25,000 of the Companys common stock during each calendar year. The Company has
reserved 200,000 shares of common stock for issuance under the ESPP. Employees purchased
approximately 27,000, 35,000 and 25,000 shares during the years ended June 30, 2009, 2008 and 2007,
respectively. Compensation expense attributable to subscriptions to purchase shares under the ESPP
was $17,000, $27,000 and $25,000 for the years ended June 30, 2009, 2008 and 2007. At June 30,
2009, 79,138 shares remain available for issuance under the ESPP.
64
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
6. Employee Benefit Plan
The Company sponsors a defined contribution retirement plan (401k Plan) under Section 401(k)
of the Internal Revenue Code. The 401k Plan covers substantially all employees who meet specified
service requirements. Under the 401k Plan, the Company may, at its discretion, match 100% of the
first 3% of an employees salary plus 50% of the next 2% up to the maximum allowed by the Internal
Revenue Code. The Companys contributions to the 401k Plan for the years ended June 30, 2009, 2008
and 2007 were $0.8 million, $0.7 million and $0.7 million, respectively.
7. Property and Equipment
The components of property and equipment are as follows (in thousands).
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
2009 |
|
|
2008 |
|
Furniture and equipment |
|
$ |
8,027 |
|
|
$ |
7,967 |
|
Leasehold improvements |
|
|
2,105 |
|
|
|
2,060 |
|
Capitalized leases |
|
|
826 |
|
|
|
588 |
|
Aircraft |
|
|
190 |
|
|
|
190 |
|
|
|
|
|
|
|
|
|
|
|
11,148 |
|
|
|
10,805 |
|
Less: accumulated depreciation |
|
|
(7,227 |
) |
|
|
(5,929 |
) |
|
|
|
|
|
|
|
Property and equipment, net |
|
$ |
3,921 |
|
|
$ |
4,876 |
|
|
|
|
|
|
|
|
Depreciation and amortization expense related to property and equipment was $1.9 million, $1.6
million and $1.2 million for the years ended June 30, 2009, 2008 and 2007, respectively.
8. Lease Commitments
Operating Leases
The Company is committed under various lease agreements for office space and equipment.
Certain lease agreements contain renewal options and rent escalation clauses. Rental expense for
2009, 2008 and 2007 was $10.7 million, $12.2 million and $11.6 million, respectively. Future
minimum lease payments under these agreements follow (in thousands).
|
|
|
|
|
Year Ending June 30, |
|
Amount |
|
2010 |
|
$ |
9,242 |
|
2011 |
|
|
5,867 |
|
2012 |
|
|
3,030 |
|
2013 |
|
|
1,219 |
|
2014 |
|
|
420 |
|
Thereafter |
|
|
1,272 |
|
|
|
|
|
Total |
|
$ |
21,050 |
|
|
|
|
|
65
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Capital Leases
The maturities of the capitalized lease obligations secured by equipment as of June 30, 2009
are as follows (in thousands).
|
|
|
|
|
|
|
Capitalized |
|
|
|
Lease |
|
Year Ending June 30, |
|
Obligations |
|
2010 |
|
$ |
70 |
|
2011 |
|
|
81 |
|
2012 |
|
|
64 |
|
2013 |
|
|
12 |
|
|
|
|
|
|
|
$ |
227 |
|
Less: Amount representing executory costs |
|
|
(4 |
) |
|
|
|
|
Net minimum lease payments |
|
|
223 |
|
Less: Amount representing interest |
|
|
(4 |
) |
|
|
|
|
Present value of net minimum lease payments |
|
$ |
219 |
|
|
|
|
|
9. Losses and Loss Adjustment Expenses Incurred and Paid
Information regarding the reserve for unpaid losses and loss adjustment expenses (LAE) is as
follows (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
Liability for unpaid losses and LAE at beginning of year, gross |
|
$ |
101,407 |
|
|
$ |
91,446 |
|
|
$ |
62,822 |
|
Reinsurance balances receivable |
|
|
(259 |
) |
|
|
(309 |
) |
|
|
(1,301 |
) |
|
|
|
|
|
|
|
|
|
|
Liability for unpaid losses and LAE at beginning of year, net |
|
|
101,148 |
|
|
|
91,137 |
|
|
|
61,521 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Add: Provision for losses and LAE: |
|
|
|
|
|
|
|
|
|
|
|
|
Current year |
|
|
160,659 |
|
|
|
221,342 |
|
|
|
238,043 |
|
Prior years |
|
|
(11,382 |
) |
|
|
(1,399 |
) |
|
|
3,865 |
|
|
|
|
|
|
|
|
|
|
|
Net losses and LAE incurred |
|
|
149,277 |
|
|
|
219,943 |
|
|
|
241,908 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Losses and LAE paid: |
|
|
|
|
|
|
|
|
|
|
|
|
Current year |
|
|
103,566 |
|
|
|
141,736 |
|
|
|
160,872 |
|
Prior years |
|
|
62,964 |
|
|
|
68,196 |
|
|
|
51,420 |
|
|
|
|
|
|
|
|
|
|
|
Net losses and LAE paid |
|
|
166,530 |
|
|
|
209,932 |
|
|
|
212,292 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability for unpaid losses and LAE at end of year, net |
|
|
83,895 |
|
|
|
101,148 |
|
|
|
91,137 |
|
Reinsurance balances receivable |
|
|
78 |
|
|
|
259 |
|
|
|
309 |
|
|
|
|
|
|
|
|
|
|
|
Liability for unpaid losses and LAE at end of year, gross |
|
$ |
83,973 |
|
|
$ |
101,407 |
|
|
$ |
91,446 |
|
|
|
|
|
|
|
|
|
|
|
Management believes that the favorable change in the estimate of unpaid losses and loss
adjustment expenses of $11.4 million for the year ended June 30, 2009 was due to lower than
anticipated severity and frequency of accidents in the states in which the Company operates. The
year-over-year improvement reflects among other things, favorable severity trends in property and
physical damage coverages, rate actions taken in a number of states to improve underwriting
profitability, improvement in the Companys underwriting and claim handling practices, and the
shift in business mix toward renewal policies, which have lower loss ratios than new policies.
The favorable change in the estimate of unpaid losses and loss adjustment expenses of $1.4
million for the year ended June 30, 2008 was primarily the result of lower than anticipated
severity and frequency of accidents in certain states in which the Company operates. There were no
individual factors that had a material impact in this favorable change.
66
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The unfavorable change in the estimate of unpaid losses and loss adjustment expenses of $3.9
million for the year ended June 30, 2007 was impacted by the limited historical loss experience in
the Companys newer states which required more judgment in determining loss reserve estimates for
those states. Such unfavorable change was primarily related to the bodily injury and Personal
Injury Protection coverages in Florida.
10. Notes Payable
The Company entered into an amendment to its credit agreement effective September 10, 2008.
The amended terms (i) accelerated the maturity date of the term loan facility to October 31, 2008,
(ii) eliminated the revolving credit facility and (iii) removed all financial covenants for the
remaining term. The unpaid balance under the Companys credit agreement was paid in full on October
31, 2008. The Company entered into an interest rate swap agreement in January 2006 that fixed the
interest rate on the term loan facility at 6.63%. Effective September 30, 2008, the Company
cancelled the interest rate swap agreement for $0.1 million.
11. Debentures Payable
In June 2007, First Acceptance Statutory Trust I (FAST I), a wholly-owned unconsolidated
subsidiary trust of the Company, issued 40,000 shares of preferred securities at $1,000 per share
to outside investors and 1,240 shares of common securities to the Company, also at $1,000 per
share. The sole assets of FAST I are $41.2 million of junior subordinated debentures issued by the
Company. The debentures will mature on July 30, 2037 and are redeemable by the Company in whole or
in part beginning on July 30, 2012, at which time the preferred securities are callable. The
debentures pay a fixed rate of 9.277% until July 30, 2012, after which the rate becomes variable
(LIBOR plus 375 basis points).
The obligations of the Company under the junior subordinated debentures represent full and
unconditional guarantees by the Company of FAST Is obligations for the preferred securities.
Dividends on the preferred securities are cumulative, payable quarterly in arrears and are
deferrable at the Companys option for up to five years. The dividends on these securities are the
same as the interest on the debentures. The Company cannot pay dividends on its common stock during
such deferments.
The debentures are classified as debentures payable in the Companys consolidated balance
sheets and the interest paid on these debentures is classified as interest expense in the
consolidated statements of operations.
12. Income Taxes
The provision for income taxes consisted of the following (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Federal: |
|
|
|
|
|
|
|
|
|
|
|
|
Current |
|
$ |
295 |
|
|
$ |
31 |
|
|
$ |
75 |
|
Deferred |
|
|
17,440 |
|
|
|
13,496 |
|
|
|
17,132 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,735 |
|
|
|
13,527 |
|
|
|
17,207 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State: |
|
|
|
|
|
|
|
|
|
|
|
|
Current |
|
|
508 |
|
|
|
448 |
|
|
|
379 |
|
Deferred |
|
|
153 |
|
|
|
(153 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
661 |
|
|
|
295 |
|
|
|
379 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
18,396 |
|
|
$ |
13,822 |
|
|
$ |
17,586 |
|
|
|
|
|
|
|
|
|
|
|
67
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The provision for income taxes differs from the amounts computed by applying the statutory
federal corporate tax rate of 35% to income (loss) before income taxes as a result of the following
(in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Provision (benefit) for income taxes at
statutory rate |
|
$ |
(17,466 |
) |
|
$ |
(1,408 |
) |
|
$ |
321 |
|
Tax effect of: |
|
|
|
|
|
|
|
|
|
|
|
|
Tax-exempt investment income |
|
|
(16 |
) |
|
|
(32 |
) |
|
|
(78 |
) |
Change in the beginning of the year
balance of the valuation allowance for
deferred tax asset allocated to income
taxes |
|
|
(6,113 |
) |
|
|
3,571 |
|
|
|
6,882 |
|
Net operating loss carryforward expirations |
|
|
24,534 |
|
|
|
11,380 |
|
|
|
9,990 |
|
Goodwill |
|
|
16,724 |
|
|
|
|
|
|
|
|
|
State income taxes, net of federal income
tax benefit and state valuation allowance |
|
|
482 |
|
|
|
139 |
|
|
|
246 |
|
Other |
|
|
251 |
|
|
|
172 |
|
|
|
225 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
18,396 |
|
|
$ |
13,822 |
|
|
$ |
17,586 |
|
|
|
|
|
|
|
|
|
|
|
The tax effects of temporary differences that give rise to the net deferred tax assets and
liabilities at June 30, 2009 and 2008 are presented below (in thousands).
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Net operating loss carryforwards |
|
$ |
4,207 |
|
|
$ |
33,884 |
|
Stock option compensation |
|
|
4,089 |
|
|
|
3,475 |
|
Unearned
premiums and loss and loss adjustment expense reserves |
|
|
5,524 |
|
|
|
7,316 |
|
Goodwill |
|
|
3,847 |
|
|
|
|
|
Net unrealized change on investments |
|
|
188 |
|
|
|
164 |
|
Alternative minimum tax (AMT) credit carryforwards |
|
|
1,609 |
|
|
|
1,314 |
|
Accrued expenses and other nondeductible items |
|
|
4,290 |
|
|
|
3,993 |
|
Other |
|
|
2,532 |
|
|
|
1,377 |
|
|
|
|
|
|
|
|
|
|
|
26,286 |
|
|
|
51,523 |
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Deferred acquisition costs |
|
|
(1,364 |
) |
|
|
(1,592 |
) |
Goodwill |
|
|
|
|
|
|
(2,264 |
) |
|
|
|
|
|
|
|
|
|
|
(1,364 |
) |
|
|
(3,856 |
) |
|
|
|
|
|
|
|
|
|
Total net deferred tax asset |
|
|
24,922 |
|
|
|
47,667 |
|
Less: Valuation allowance |
|
|
(24,922 |
) |
|
|
(30,074 |
) |
|
|
|
|
|
|
|
Net deferred tax asset |
|
$ |
|
|
|
$ |
17,593 |
|
|
|
|
|
|
|
|
The Company had a valuation allowance of $24.9 million and $30.1 million at June 30, 2009 and
2008, respectively, to reduce net deferred tax assets to the amount that is more likely than not to be
realized, which included all net deferred tax assets at June 30, 2009. The change in the total
valuation allowance for the year ended June 30, 2009 was a decrease of $5.2 million. The current
year tax provision was increased by a net charge of $10.2 million resulting from the $15.3 million
tax effect of the goodwill impairment charge and the establishment of a full valuation allowance on
the remaining net deferred tax assets offset by a tax benefit of $5.1 million related to the
utilization of federal net operating loss (NOL) carryforwards that were to expire on June 30,
2009 that had been previously reserved for through a valuation allowance.
In assessing the realization of deferred tax assets, management considered whether it was more
likely than not that some portion or all of the deferred tax assets will not be realized. Under
FASB Statement No. 109, Accounting for Income Taxes, the Company was required to assess whether a
valuation allowance should be established against the Companys deferred tax assets based on the
consideration of all available evidence using a more likely than not standard. In making such
judgments, significant weight is given to evidence that can be
68
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
objectively verified. As a result of the goodwill impairment charge of $68.0 million, the Company is in a cumulative
pre-tax loss over a three-year period. In assessing the Companys ability to support the
realizability of its deferred tax assets, management has considered both positive and negative
evidence. The Company has placed greater weight on the uncertainty associated with the current
economic challenges and the related goodwill impairment charge. Therefore, the Company established
a valuation allowance against all net deferred tax assets. The deferred tax valuation allowance may be
released in future years if management considers that it is more likely than not that some portion
or all of the deferred tax assets will be realized. In the event the deferred tax valuation
allowance is released, the Company would record an income tax benefit for the portion or all of the
deferred tax valuation allowance released.
The net changes in the total valuation allowance for the years ended June 30, 2008 and 2007
were increases of $3.0 million and $6.6 million, respectively. The increases during fiscal years
2008 and 2007 included charges of $11.4 million and $10.0 million, respectively, related to the
expiration of certain federal NOL carryforwards due to taxable income for the respective fiscal
years being less than the Companys previous estimates of taxable income.
At
June 30, 2009, the Company had state NOL carryforwards of $11.3 million that begin to
expire in 2019 and AMT credit carryforwards of $1.6 million that have no expiration date. At June
30, 2009, the Company had gross NOL carryforwards for federal income tax purposes of $12.0 million,
which are available to offset future federal taxable income. As discussed previously, on a
tax-affected basis, all remaining federal NOL carryforwards at June 30, 2009 have been fully
reserved for through a valuation allowance.
The gross federal NOL carryforwards will expire in 2010 through 2023, as shown in the
following table (in thousands).
|
|
|
|
|
Expiration Year Ended June 30, |
|
Amount |
|
2010 |
|
$ |
7,095 |
|
2011 |
|
|
2,099 |
|
2012 |
|
|
|
|
2013 |
|
|
2 |
|
Thereafter |
|
|
2,823 |
|
|
|
|
|
Total NOL carryforwards |
|
$ |
12,019 |
|
|
|
|
|
13. Net Loss Per Share
Statement of Financial Accounting Standards No. 128, Earnings Per Share, specifies the
computation, presentation and disclosure requirements for earnings per share (EPS). Basic EPS
are computed using the weighted average number of shares outstanding. Diluted EPS are computed
using the weighted average number of shares outstanding adjusted for the incremental shares
attributed to outstanding securities with a right to purchase or convert into common stock.
The following table sets forth the computation of basic and diluted net loss per share (in
thousands, except per share data).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Net loss |
|
$ |
(68,300 |
) |
|
$ |
(17,845 |
) |
|
$ |
(16,670 |
) |
|
|
|
|
|
|
|
|
|
|
Weighted average common basic shares |
|
|
47,664 |
|
|
|
47,628 |
|
|
|
47,584 |
|
Effect of dilutive securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common dilutive shares |
|
|
47,664 |
|
|
|
47,628 |
|
|
|
47,584 |
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share |
|
$ |
(1.43 |
) |
|
$ |
(0.37 |
) |
|
$ |
(0.35 |
) |
|
|
|
|
|
|
|
|
|
|
For the year ended June 30, 2009, options to purchase approximately 5.3 million shares of
common stock, a dilutive effect of approximately 0.8 million shares, and 0.6 million shares of
unvested restricted common stock were not included in the computation of diluted net income per
share as their inclusion would have been anti-dilutive.
69
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the year ended June 30, 2008, options to purchase approximately 5.5 million shares of
common stock, a dilutive effect of approximately 1.5 million shares, and 0.4 million shares of
unvested restricted common stock were not included in the computation of diluted net loss per share
as their inclusion would have been anti-dilutive.
For the year ended June 30, 2007, options to purchase approximately 4.7 million shares of
common stock, a dilutive effect of approximately 2.1 million shares were not included in the
computation of diluted net loss per share as their inclusion would have been anti-dilutive.
14. Concentrations of Credit Risk
At June 30, 2009, the Company had certain concentrations of credit risk with several financial
institutions in the form of cash and cash equivalents, which amounted to $77.2 million. For
purposes of evaluating credit risk, the stability of financial institutions conducting business
with the Company and the amount of available Federal Deposit Insurance Corporation insurance is
periodically reviewed. If the financial institutions failed to completely perform under terms of
the financial instruments, the exposure for credit loss would be the amount of the financial
instruments less amounts covered by regulatory insurance.
The Company primarily transacts business either directly with its policyholders or through
three independently-owned insurance agencies in Tennessee who exclusively write insurance policies
on behalf of the Company. Direct policyholders make payments directly to the Company. Balances
due from policyholders are generally secured by the related unearned premium. The Company requires
a down payment at the time the policy is originated and subsequent scheduled payments are monitored
in order to prevent the Company from providing coverage beyond the date for which payment has been
received. If subsequent payments are not made timely, the policy is generally canceled at no loss
to the Company. Policyholders whose premiums are written through the independent agencies make
their payments to these agencies that in turn remit these payments to the Company. Balances due to
the Company resulting from premium payments made to these agencies are unsecured.
15. Related Party Transactions
Certain of the Companys executives are covered by employment agreements covering, among other
things, base compensation, incentive-bonus determinations and payments in the event of termination,
or a change in control of the Company.
Effective May 2004, the Company entered into an advisory services agreement with an entity
controlled by a current director of the Company to render advisory services in connection with
financings, mergers and acquisitions and other related matters involving the Company. In
consideration for the advisory services to be provided, the Company paid the advisor a quarterly
fee of $62,500 for a four-year period through April 2008. There are no further amounts due related
to the advisory services agreement.
In September 2006, the Company sold 50,000 shares of common stock to an executive officer for
an aggregate purchase price of $0.6 million, or $11.81 per share, which was the closing price of
the common stock on the New York Stock Exchange on the date of sale.
16. Severance
During the years ended June 30, 2009 and 2008, the Company entered into separation agreements
with certain officers and management personnel. Accordingly, the Company incurred charges during
the years ended June 30, 2009 and 2008 of approximately $0.2 million and $1.1 million,
respectively. Fiscal year 2008 includes a $0.1 million non-cash charge related to the vesting of
remaining unvested stock options. The remaining severance
and benefit accrual of $0.2 million as of June 30, 2009 is classified in other liabilities in the
Companys consolidated balance sheets. Severance and benefits charges are included in insurance
operating expenses, and the non-cash charge related to the vesting of remaining unvested stock
options is included in stock-based compensation expense in the consolidated statements of
operations. The insurance operations segment includes the accrued severance and benefits charge,
and the real estate and corporate segment includes the accelerated vesting charge.
70
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
17. Litigation
The Company is named as a defendant in various lawsuits, arising in the ordinary course of
business, generally relating to its insurance operations. All legal actions relating to claims made
under insurance policies are considered by the Company in establishing its loss and loss adjustment
expense reserves. The Company also faces lawsuits that seek damages beyond policy limits, commonly
known as bad faith claims, as well as class action and individual lawsuits that involve issues
arising in the course of the Companys business. The Company continually evaluates potential
liabilities and reserves for litigation of these types using the criteria established by FASB
Statement No. 5, Accounting for Contingencies (SFAS 5). Pursuant to SFAS 5, reserves for a loss
may only be recognized if the likelihood of occurrence is probable and the amount can be reasonably
estimated. If a loss, while not probable, is judged to be reasonably possible, management will
disclose, if it can be estimated, a possible range of loss or state that an estimate cannot be
made. Management evaluates each legal action in accordance with SFAS 5 and records reserves for
losses as warranted by establishing a reserve in its consolidated balance sheets in loss and loss
adjustment expense reserves for bad faith claims and in other liabilities for other lawsuits.
Amounts incurred are recorded in the Companys consolidated statements of operations in losses and
loss adjustment expenses for bad faith claims and in insurance operating expenses for other
lawsuits unless otherwise disclosed.
The Company has established an accrual for a loss under SFAS 5 related to the settlement of
litigation brought against the Company in Alabama and Georgia with respect to its sales practices,
primarily the sale of motor club memberships currently or formerly sold in those states. The
Company entered into a Stipulation and Agreement of Settlement, which was approved by the court in
November 2008, with the plaintiffs in the Georgia litigation. On December 5, 2008, the Company
entered into a Stipulation and Agreement of Settlement, which was approved by the court in February
2009, with the plaintiffs in the Alabama litigation. Pursuant to the terms of these settlements,
eligible class members are entitled to certain premium credits towards a future automobile
insurance policy with the Company or a reimbursement certificate for future rental or towing
expenses. Benefits to the Georgia class members commenced January 1, 2009. Benefits to the Alabama
class members commenced March 7, 2009. As a part of the settlements, the Company agreed to pay
$6.5 million in fees and expenses for the attorneys for the Georgia and Alabama plaintiffs and to
pay all costs associated with the administration of the settlements.
At this time, the Company is unable to estimate the costs associated with the Georgia and
Alabama litigation settlements related to the utilization of reimbursement certificates. However,
sufficient information related to the premium credits has existed since December 31, 2008 to allow
the Company to reasonably estimate and accrue the total costs associated with the utilization of
available premium credits associated with the Georgia litigation and the Alabama litigation. The
final costs of the settlements will depend on, among other factors, the rate of redemption and
forfeiture of the premium credits and reimbursement certificates.
Regarding the Georgia and Alabama settlements, based upon its analysis of the premium credits
available to class members at December 31, 2008, the Company accrued approximately $5.2 million
associated with the estimated utilization of available premium credits for Georgia and Alabama
class members who were insured by the Company on December 31, 2008 and received the premium
credits. Since January 1, 2009, $1.3 million of available premium credits have been utilized and
$0.9 million have been forfeited. The Company is not able to reasonably estimate and, therefore,
did not accrue any estimated costs for Georgia and Alabama class members that were not insured by
the Company on June 30, 2009 that received the premium credits as a result of the uncertainties
associated with those class members purchasing a new automobile insurance policy from the
Company and utilizing the approximately $1.0 million of premium credits available to them.
The litigation settlement costs are set forth separately in the consolidated statements of
operations. During the year ended June 30, 2009, the Company paid $6.5 million in fees and expenses
to the attorneys for the Georgia and Alabama plaintiffs and $0.3 million in costs associated with
the administration of the settlements, all of which were accrued at June 30, 2008. During the year
ended June 30, 2009, the Company incurred an additional $0.2 million in legal costs in connection
with the defense of the litigation. The Company has a remaining accrual as of June 30, 2009 for
those currently estimable costs associated with the utilization of available premium credits of
$3.0 million. Management intends to adjust the initial estimated accrual as necessary during future
periods to account for the impact of actual rate of redemption and forfeiture of the premium
credits and reimbursement certificates.
71
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
In July 2009, the Company received $2.95 million from its insurance carrier regarding coverage
for the costs and expenses incurred by the Company relating to the settlement of the Georgia and
Alabama litigation. This insurance recovery was accrued in fiscal year 2009 and included in other
assets in the Companys consolidated balance sheet and as a reduction of litigation settlement
expenses in the Companys consolidated statement of operations.
The litigation costs are classified in the litigation settlement expenses line item in the
Companys consolidated statements of operations for the years ended June 30, 2009 and 2008. The
remaining litigation settlement accrual is classified in other liabilities in the Companys
consolidated balance sheets.
18. Fair Value of Financial Instruments
The carrying values and fair values of certain of the Companys financial instruments as of
June 30, 2009 and 2008 were as follows (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
2008 |
|
|
Carrying |
|
Fair |
|
Carrying |
|
Fair |
|
|
Value |
|
Value |
|
Value |
|
Value |
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities, available-for-sale |
|
$ |
140,311 |
|
|
$ |
140,311 |
|
|
$ |
189,570 |
|
|
$ |
189,570 |
|
Cash and cash equivalents |
|
|
77,201 |
|
|
|
77,201 |
|
|
|
38,646 |
|
|
|
38,646 |
|
Premiums and fees receivable, net |
|
|
45,309 |
|
|
|
45,309 |
|
|
|
63,377 |
|
|
|
63,377 |
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable |
|
|
|
|
|
|
|
|
|
|
3,913 |
|
|
|
3,913 |
|
Capitalized lease obligations |
|
|
224 |
|
|
|
224 |
|
|
|
211 |
|
|
|
211 |
|
Debentures payable |
|
|
41,240 |
|
|
|
15,568 |
|
|
|
41,240 |
|
|
|
30,668 |
|
The fair values as presented represent the Companys best estimates and may not be
substantiated by comparisons to independent markets. The fair value
of the debentures payable was based on current market rates offered
for debt with similar risks and maturities. Certain financial instruments and all non-financial
instruments are not required to be disclosed. Therefore, the aggregate fair values presented in
the table do not purport to represent the Companys underlying value.
72
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
19. Segment Information
The Company operates in two business segments with its primary focus being the selling,
servicing and underwriting of non-standard personal automobile insurance. The real estate and
corporate segment consists of the activities related to the disposition of foreclosed real estate
held for sale, interest expense associated with all debt and other general corporate overhead
expenses.
The following table presents selected financial data by business segment (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Insurance |
|
$ |
265,341 |
|
|
$ |
332,219 |
|
|
$ |
347,431 |
|
Real estate and corporate |
|
|
124 |
|
|
|
180 |
|
|
|
206 |
|
|
|
|
|
|
|
|
|
|
|
Consolidated total |
|
$ |
265,465 |
|
|
$ |
332,399 |
|
|
$ |
347,637 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes: |
|
|
|
|
|
|
|
|
|
|
|
|
Insurance |
|
$ |
(42,536 |
) |
|
$ |
4,685 |
|
|
$ |
6,252 |
|
Real estate and corporate |
|
|
(7,368 |
) |
|
|
(8,708 |
) |
|
|
(5,336 |
) |
|
|
|
|
|
|
|
|
|
|
Consolidated total |
|
$ |
(49,904 |
) |
|
$ |
(4,023 |
) |
|
$ |
916 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
2009 |
|
|
2008 |
|
Total assets: |
|
|
|
|
|
|
|
|
Insurance |
|
$ |
348,801 |
|
|
$ |
458,120 |
|
Real estate and corporate |
|
|
10,155 |
|
|
|
15,110 |
|
|
|
|
|
|
|
|
Consolidated total |
|
$ |
358,956 |
|
|
$ |
473,230 |
|
|
|
|
|
|
|
|
20. Statutory Financial Information and Accounting Policies
The statutory-basis financial statements of the Insurance Companies are prepared in accordance
with accounting practices prescribed or permitted by the Department of Insurance in each respective
state of domicile. Each state of domicile requires that insurance companies domiciled in those
states prepare their statutory-basis financial statements in accordance with the National
Association of Insurance Commissioners Accounting Practices and Procedures Manual subject to any
deviations prescribed or permitted by the insurance commissioner in each state of domicile. The
Insurance Companies are required to report their risk-based capital (RBC) each December 31.
Failure to maintain an adequate RBC could subject the Insurance Companies to regulatory action and
could restrict the payment of dividends. As of December 31, 2008, the RBC levels of the Insurance
Companies did not subject them to any regulatory action. However, as a part of its 2008 RBC
calculation, First Acceptance Insurance Company of Georgia, Inc. failed the Trend Test as the
litigation settlement expense it incurred in 2008 caused its combined ratio to exceed 120%. On
April 28, 2009, an explanation of this matter was provided to the Georgia Insurance Department.
Since that date, no regulatory action has been taken, nor is any such action anticipated.
At June 30, 2009 and 2008, on an unaudited consolidated statutory basis, capital and surplus
was $114.3 million and $113.1 million, respectively. For the fiscal year ended June 30, 2009, 2008
and 2007, unaudited consolidated statutory net income (loss) as filed was $7.3 million, $3.8
million and $(1.9) million, respectively.
The maximum amount of dividends which can be paid by First Acceptance Insurance Company, Inc.
(FAIC) to the Company, without the prior approval of the Texas insurance commissioner, is limited
to the greater of 10% of statutory capital and surplus as of December 31 of the next preceding year
or net income for the year. Accordingly, as of December 31, 2008, the maximum amount of dividends
available to be paid to the Company from FAIC without prior approval in any preceding twelve-month
period is approximately $11.0 million.
73
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
21. Selected Quarterly Financial Data (unaudited)
Interim results are not necessarily indicative of fiscal year performance because of the
impact of seasonal and short-term variations. Selected quarterly financial data for the years
ended June 30, 2009 and 2008 is summarized as follows (in thousands, except per share data).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended |
|
|
September 30, |
|
December 31, |
|
March 31, |
|
June 30, |
Year Ended June 30, 2009: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
71,589 |
|
|
$ |
65,080 |
|
|
$ |
67,097 |
|
|
$ |
61,699 |
|
Income (loss) before income taxes |
|
$ |
3,753 |
|
|
$ |
(1,388 |
) |
|
$ |
3,991 |
|
|
$ |
(56,260 |
) |
Net income (loss) |
|
$ |
1,841 |
|
|
$ |
(1,003 |
) |
|
$ |
2,394 |
|
|
$ |
(71,532 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net income
(loss) per share |
|
$ |
0.04 |
|
|
$ |
(0.02 |
) |
|
$ |
0.05 |
|
|
$ |
(1.50 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, 2008: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
87,158 |
|
|
$ |
82,341 |
|
|
$ |
83,985 |
|
|
$ |
78,915 |
|
Income (loss) before income taxes |
|
$ |
2,963 |
|
|
$ |
33 |
|
|
$ |
1,287 |
|
|
$ |
(8,306 |
) |
Net income (loss) |
|
$ |
1,892 |
|
|
$ |
(11,731 |
) |
|
$ |
758 |
|
|
$ |
(8,764 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net income
(loss) per share |
|
$ |
0.04 |
|
|
$ |
(0.25 |
) |
|
$ |
0.02 |
|
|
$ |
(0.18 |
) |
Loss before income taxes for the quarter ended June 30, 2009 of $56.3 million included a
goodwill impairment charge of $68.0 million (see Note 1), $4.5 million of favorable development in
the Companys estimate of unpaid loss and loss adjustment expenses, and an insurance recovery of
$2.95 million reflected as a reduction of litigation settlement expenses (see Note 17). Net loss
for the quarter ended June 30, 2009 included a net charge
to the tax provision of $10.2 million resulting from the
$15.3 million tax effect of the goodwill impairment charge and the establishment of a full
valuation allowance on the remaining deferred tax assets offset by a tax benefit of $5.1
million related to the utilization of federal NOL carryforwards that were to expire on June 30,
2009 that had been previously reserved for through a valuation allowance (see Note 12).
Loss before income taxes for the quarter ended June 30, 2008 of $8.3 million included $7.0
million in settlement, defense and administration costs associated with the litigation settlements
(see Note 17). Net loss for the quarter ended June 30, 2008 included an increase in the provision
for income taxes of $3.3 million due to the increase in the valuation allowance for the deferred
tax asset relating to certain federal NOL carryforwards expiring during fiscal year 2009 as a
result of the litigation settlements. Previously, during the quarter ended December 31, 2007, the
Company increased its valuation allowance for the deferred tax asset related to certain federal NOL
carryforwards that expire in fiscal year 2008 and 2009 by $11.6 million.
74
|
|
|
Item 9. |
|
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure |
None.
|
|
|
Item 9A. |
|
Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management team, including our
Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of our disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act
of 1934, as amended, or the Exchange Act) as of June 30, 2009. Based on that evaluation, our Chief
Executive Officer (principal executive officer) and Chief Financial Officer (principal financial
officer) concluded that our disclosure controls and procedures were effective as of June 30, 2009
to ensure that information required to be disclosed by us in the reports that we file or submit
under the Exchange Act is recorded, processed, summarized and reported within the time periods
specified in the SECs rules and forms.
Managements Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining effective internal control over
financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our
internal control over financial reporting is designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles.
Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, we conducted an assessment of the effectiveness of
our internal control over financial reporting based on the framework in Internal Control
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on our assessment under the Internal Control Integrated Framework, our
management concluded that our internal control over financial reporting was effective as of June
30, 2009.
Our independent registered public accounting firm, Ernst & Young LLP has issued an attestation
report on our internal control over financial reporting, which report appears herein.
Changes in Internal Control over Financial Reporting
During the fourth fiscal quarter of the period covered by this report, there has been no
change in our internal control over financial reporting that has materially affected, or is
reasonably likely to materially affect, our internal control over financial reporting.
|
|
|
Item 9B. |
|
Other Information |
None.
75
PART III
|
|
|
Item 10. |
|
Directors, Executive Officers and Corporate Governance |
Information with respect to our directors and executive officers, set forth in our Definitive
Proxy Statement for the Annual Meeting of Stockholders to be held November 17, 2009, is
incorporated herein by reference.
Information with respect to compliance with Section 16(a) of the Securities Exchange Act of
1934, as amended, set forth in our Definitive Proxy Statement for the Annual Meeting of
Stockholders to be held November 17, 2009, is incorporated herein by reference.
Information with respect to our code of business conduct and ethics, set forth in our
Definitive Proxy Statement for the Annual Meeting of Stockholders to be held November 17, 2009, is
incorporated herein by reference.
Information with respect to our corporate governance disclosures, set forth in our Definitive
Proxy Statement for the Annual Meeting of Stockholders to be held November 17, 2009, is
incorporated herein by reference.
On November 7, 2008, the Company filed with the New York Stock Exchange (NYSE) the Annual
CEO Certification regarding the Companys compliance with the NYSEs Corporate Governance listing
standards as required by Section 303A.12(a) of the NYSE Listed Company Manual. The Company has
filed as exhibits to this Annual Report on Form 10-K and to the Annual Report on Form 10-K for the
year ended June 30, 2008, the applicable certifications of its Chief Executive Officer and Chief
Financial Officer required under Section 302 of the Sarbanes-Oxley Act of 2002 regarding the
quality of the Companys public disclosures.
|
|
|
Item 11. |
|
Executive Compensation |
Information with respect to the compensation of our executive officers, set forth in our
Definitive Proxy Statement for the Annual Meeting of Stockholders to be held November 17, 2009, is
incorporated herein by reference.
|
|
|
Item 12. |
|
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters |
Information with respect to security ownership of certain beneficial owners and management and
related stockholder matters, set forth in our Definitive Proxy Statement for the Annual Meeting of
Stockholders to be held November 17, 2009, is incorporated herein by reference.
|
|
|
Item 13. |
|
Certain Relationships and Related Transactions, and Director Independence |
Information with respect to certain relationships and related transactions, and director
independence, set forth in our Definitive Proxy Statement for the Annual Meeting of Stockholders to
be held November 17, 2009, is incorporated herein by reference.
|
|
|
Item 14. |
|
Principal Accountant Fees and Services |
Information with respect to the fees paid to and services provided by our principal
accountants, set forth in our Definitive Proxy Statement for the Annual Meeting of Stockholders to
be held November 17, 2009, is incorporated herein by reference.
76
PART IV
|
|
|
Item 15. |
|
Exhibits, Financial Statement Schedules |
|
(a) |
|
Financial Statements, Financial Statement Schedules and Exhibits |
|
(1) |
|
Consolidated Financial Statements: See Index to Consolidated Financial
Statements in Part II, Item 8 of this Form 10-K. |
|
|
(2) |
|
Financial Statement Schedules: |
|
|
|
|
Schedule I Financial Information of Registrant (Parent Company) |
|
|
(3) |
|
Exhibits: See the exhibit listing set forth below. |
|
|
|
Exhibit |
|
|
Number |
|
|
|
|
|
2.1
|
|
Agreement and Plan of Merger by and among the Company, USAH Merger
Sub, Inc., USAuto Holdings, Inc. and the Stockholders of USAuto
Holdings, Inc., dated as of December 15, 2003 (incorporated by
reference to Exhibit 2.1 of Registration Statement No. 333-111161
on Form S-1, filed December 15, 2003). |
|
|
|
3.1
|
|
Restated Certificate of Incorporation of First Acceptance
Corporation (incorporated by reference to Exhibit 3.1 of the
Companys Current Report on Form 8-K dated May 3, 2004). |
|
|
|
3.2
|
|
Second Amended and Restated Bylaws of First Acceptance Corporation
(incorporated by reference to Exhibit 3 of the Companys Current
Report on Form 8-K dated November 9, 2007). |
|
|
|
4.1
|
|
Registration Rights Agreement, dated as of July 1, 2002, by and
between the Company and Donald J. Edwards (incorporated by
reference to Exhibit 4.1 of the Companys Current Report on Form
8-K dated July 11, 2002). |
|
|
|
4.2
|
|
Form of certificate representing shares of common stock, par value
$0.01 per share (incorporated by reference to Exhibit 4.1 of the
Companys Registration Statement on Form S-8 filed December 26,
2002). |
|
|
|
10.1
|
|
First Acceptance Corporation 2002 Long Term Incentive Plan, as
amended (incorporated by reference to Exhibit 4.4 of the Companys
Registration Statement on Form S-8 filed May 18, 2004).* |
|
|
|
10.2
|
|
Nonqualified Stock Option Agreement, dated as of July 9, 2002, by
and between the Company and Donald J. Edwards (incorporated by
reference to Exhibit 10.3 of the Companys Current Report on Form
8-K dated July 11, 2002).* |
|
|
|
10.3
|
|
Advisory Services Agreement, dated as of April 30, 2004, by and
between First Acceptance Corporation and Edwards Capital LLC
(incorporated by reference to Exhibit 10.1 of the Companys Current
Report on Form 8-K dated May 3, 2004).* |
|
|
|
10.4
|
|
Employment Agreement, dated as of April 30, 2004, by and between
First Acceptance Corporation and Thomas M. Harrison, Jr.
(incorporated by reference to Exhibit 10.4 of the Companys Current
Report on Form 8-K dated May 3, 2004).* |
|
|
|
10.5
|
|
Nonqualified Stock Option Agreement, dated as of April 30, 2004, by
and between First Acceptance Corporation and Stephen J. Harrison
(incorporated by reference to Exhibit 10.5 of the Companys Current
Report on Form 8-K dated May 3, 2004).* |
77
|
|
|
Exhibit |
|
|
Number |
|
|
|
|
10.6
|
|
Nonqualified Stock Option Agreement, dated as of April 30, 2004, by
and between First Acceptance Corporation and Thomas M. Harrison,
Jr. (incorporated by reference to Exhibit 10.6 of the Companys
Current Report on Form 8-K dated May 3, 2004).* |
|
|
|
10.7
|
|
Registration Rights Agreement, dated as of April 30, 2004, by and
among First Acceptance Corporation, Stephen J. Harrison and Thomas
M. Harrison, Jr. (incorporated by reference to Exhibit 10.7 of the
Companys Current Report on Form 8-K dated May 3, 2004). |
|
|
|
10.8
|
|
Form of Restricted Stock Award Agreement under the Companys 2002
Long Term Incentive Plan (incorporated by reference to Exhibit 10.1
of the Companys Current Report on Form 8-K dated November 3,
2004).* |
|
|
|
10.9
|
|
Form of Nonqualified Stock Option Agreement under the Companys
2002 Long Term Incentive Plan (incorporated by reference to Exhibit
10.2 of the Companys Current Report on Form 8-K dated November 3,
2004).* |
|
|
|
10.10
|
|
First Acceptance Corporation Employee Stock Purchase Plan
(incorporated by reference to Exhibit 10.1 of the Registration
Statement No. 333-121551 on Form S-8, filed December 22, 2004). |
|
|
|
10.11
|
|
Summary of Compensation for Non- Employee Directors and Named
Executive Officers. |
|
|
|
10.12
|
|
Asset Purchase Agreement, dated as of January 12, 2006, by and
among First Acceptance Corporation, Acceptance Insurance Agency of
Illinois, Inc., Insurance Plus Agency II, Inc., Yale International
Insurance Agency, Inc. and Constantine Danos (incorporated by
reference to Exhibit 10.1 of the Companys Current Report on Form
8-K dated January 18, 2006). |
|
|
|
10.13
|
|
Stock Purchase Agreement, dated as of September 13, 2006, by and
between First Acceptance Corporation and Edward Pierce
(incorporated by reference to Exhibit 99.2 of the Companys Current
Report on Form 8-K dated September 19, 2006).* |
|
|
|
10.14
|
|
Nonqualified Stock Option Agreement, dated as of September 13,
2006, by and between First Acceptance Corporation and Edward Pierce
(incorporated by reference to Exhibit 99.3 of the Companys Current
Report on Form 8-K dated September 19, 2006).* |
|
|
|
10.15
|
|
Amendment to Employment Agreement, dated as of September 13, 2006,
by and between First Acceptance Corporation and Thomas M. Harrison,
Jr. (incorporated by reference to Exhibit 99.5 of the Companys
Current Report on Form 8-K dated September 19, 2006).* |
|
|
|
10.16
|
|
Nonqualified Stock Option Agreement, dated as of October 9, 2006,
by and between First Acceptance Corporation and Kevin P. Cohn
(incorporated by reference to Exhibit 99.2 of the Companys Current
Report on Form 8-K dated October 12, 2006).* |
|
|
|
10.17
|
|
Second Amendment to the First Acceptance Corporation 2002 Long Term
Incentive Plan (incorporated by reference to Exhibit 10.1 of the
Companys Current Report on Form 10-Q dated May 10, 2007).* |
|
|
|
10.18
|
|
Form of Restricted Stock Award Agreement of Outside Directors under
the Companys 2002 Long Term Incentive Plan (incorporated by
reference to Exhibit 10.2 of the Companys Current Report on Form
10-Q dated May 10, 2007).* |
|
|
|
10.19
|
|
Form of Indemnification Agreement between the Company and each of
the Companys directors and executive officers (incorporated by
reference to Exhibit 10.3 of the Companys Current Report on Form
10-Q dated May 10, 2007).* |
|
|
|
10.20
|
|
Junior Subordinated Indenture, dated June 15, 2007, between First
Acceptance Corporation and Wilmington Trust Company (incorporated
by reference to Exhibit 99.2 of the Companys Current Report on
Form 8-K dated June 18, 2007). |
78
|
|
|
Exhibit |
|
|
Number |
|
|
|
|
10.21
|
|
Guarantee Agreement, dated June 15, 2007, between First Acceptance
Corporation and Wilmington Trust Company (incorporated by reference
to Exhibit 99.3 of the Companys Current Report on Form 8-K dated
June 18, 2007). |
|
|
|
10.22
|
|
Amended and Restated Trust Agreement, dated June 15, 2007, among
First Acceptance Corporation, Wilmington Trust Company and the
Administrative Trustees Named Therein (incorporated by reference to
Exhibit 99.4 of the Companys Current Report on Form 8-K dated June
18, 2007). |
|
|
|
10.23
|
|
Release Agreement, dated December 31, 2007, between First
Acceptance Corporation and Thomas M. Harrison, Jr. (incorporated by
reference to Exhibit 99.1 of the Companys Current Report on Form
8-K dated January 4, 2008).* |
|
|
|
10.24
|
|
Amended and Restated Employment Agreement, made as of February 8,
2008, to be effective January 1, 2008, by and between First
Acceptance Corporation and Stephen J. Harrison (incorporated by
reference to Exhibit 99.3 of the Companys Current Report on Form
8-K dated February 11, 2008).* |
|
|
|
10.25
|
|
Amended and Restated Employment Agreement, made as of February 8,
2008, to be effective January 1, 2008, by and between First
Acceptance Corporation and Edward Pierce (incorporated by reference
to Exhibit 99.4 of the Companys Current Report on Form 8-K dated
February 11, 2008).* |
|
|
|
10.26
|
|
Amended and Restated Employment Agreement, made as of February 8,
2008, to be effective January 1, 2008, by and between First
Acceptance Corporation and Kevin P. Cohn (incorporated by reference
to Exhibit 99.5 of the Companys Current Report on Form 8-K dated
February 11, 2008).* |
|
|
|
10.27
|
|
Employment Agreement, made as of February 8, 2008, to be effective
January 1, 2008, by and between First Acceptance Corporation and
William R. Pentecost (incorporated by reference to Exhibit 99.6 of
the Companys Current Report on Form 8-K dated February 11, 2008).* |
|
|
|
10.28
|
|
First Amendment to First Acceptance Corporation Employee Stock
Purchase Plan (incorporated by reference to Exhibit 10.1 of the
Companys Quarterly Report on Form 10-Q dated February 11, 2008). |
|
|
|
10.29
|
|
Restricted Stock Award Agreement, dated as of March 18, 2008,
between First Acceptance Corporation and Edward Pierce
(incorporated by reference to Exhibit 99.1 of the Companys Current
Report on Form 8-K dated March 21, 2008).* |
|
|
|
10.30
|
|
Form of Restricted Stock Award Agreement between First Acceptance
Corporation and Stephen J. Harrison and Edward Pierce (incorporated
by reference to Exhibit 99 of the Companys Current Report on Form
8-K dated October 6, 2008).* |
|
|
|
10.31
|
|
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
(incorporated by reference to Exhibit 10 of the Companys Quarterly
Report on Form 10-Q dated November 10, 2008). |
|
|
|
10.32
|
|
Stipulation and Agreement of Settlement, dated as of December 5,
2008, by First Acceptance Insurance Company, Inc., and its
predecessors and affiliates, USAuto Insurance Company, and Transit
Automobile Club, Inc., by and through their attorneys of record,
and Margaret Franklin and all other persons similarly situated, by
and through their attorneys of record (incorporated by reference to
Exhibit 99 of the Companys Current Report on Form 8-K dated
December 11, 2008). |
|
|
|
10.33
|
|
Employment Agreement, made as of February 8, 2008, to be effective
January 1, 2008, between First Acceptance Corporation and Daniel L.
Walker (incorporated by reference to Exhibit 10.1 of the Companys
Quarterly Report on Form 10-Q dated May 11, 2009).* |
79
|
|
|
10.34
|
|
Amended and Restated Employment Agreement, made as of February 8,
2008, to be effective January 1, 2008, between First Acceptance
Corporation and Keith E. Bornemann (incorporated by reference to
Exhibit 10.2 of the Companys Quarterly Report on Form 10-Q dated
May 11, 2009).* |
|
|
|
14
|
|
First Acceptance Corporation Code of Business Conduct and Ethics
(incorporated by reference to Exhibit 14 of the Companys Annual
Report on Form 10-K dated September 28, 2004). |
|
|
|
21
|
|
Subsidiaries of First Acceptance Corporation. |
|
|
|
23.1
|
|
Consent of Ernst & Young LLP. |
|
|
|
31.1
|
|
Certification of Chief Executive Officer pursuant to Rule 13a-14(a). |
|
|
|
31.2
|
|
Certification of Chief Financial Officer pursuant to Rule 13a-14(a). |
|
|
|
32.1
|
|
Chief Executive Officers Certification pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. |
|
|
|
32.2
|
|
Chief Financial Officers Certification pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. |
|
|
|
* |
|
Management contract or compensatory plan or arrangement. |
80
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
|
|
|
|
|
FIRST ACCEPTANCE CORPORATION
|
|
Date: September 14, 2009 |
By |
/s/ Stephen J. Harrison
|
|
|
|
Stephen J. Harrison |
|
|
|
Chief Executive Officer |
|
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the capacities and on the
dates indicated.
|
|
|
|
|
Signature |
|
Title |
|
Date |
|
|
|
|
|
/s/ Stephen J. Harrison
Stephen J. Harrison
|
|
Chief Executive Officer and
Director (Principal Executive
Officer)
|
|
September 14, 2009 |
|
|
|
|
|
/s/ Kevin P. Cohn
Kevin P. Cohn
|
|
Senior Vice President and Chief
Financial Officer (Principal
Financial Officer and Principal
Accounting Officer)
|
|
September 14, 2009 |
|
|
|
|
|
/s/ Gerald J. Ford
Gerald J. Ford
|
|
Chairman of the Board of Directors
|
|
September 14, 2009 |
|
|
|
|
|
/s/ Thomas M. Harrison, Jr.
Thomas M. Harrison, Jr.
|
|
Director
|
|
September 14, 2009 |
|
|
|
|
|
/s/ Rhodes R. Bobbitt
Rhodes R. Bobbitt
|
|
Director
|
|
September 14, 2009 |
|
|
|
|
|
|
|
Director
|
|
|
|
|
|
|
|
/s/ Donald J. Edwards
Donald J. Edwards
|
|
Director
|
|
September 14, 2009 |
|
|
|
|
|
/s/ Tom C. Nichols
Tom C. Nichols
|
|
Director
|
|
September 14, 2009 |
|
|
|
|
|
/s/ Lyndon L. Olson
Lyndon L. Olson
|
|
Director
|
|
September 14, 2009 |
|
|
|
|
|
/s/ William A. Shipp, Jr.
William A. Shipp, Jr.
|
|
Director
|
|
September 14, 2009 |
81
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
SCHEDULE I. FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY)
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
2009 |
|
|
2008 |
|
Balance Sheets |
|
|
|
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
Investment in subsidiaries, at equity in net assets |
|
$ |
190,941 |
|
|
$ |
257,305 |
|
Cash and cash equivalents |
|
|
3,058 |
|
|
|
2,465 |
|
Deferred tax asset, net |
|
|
|
|
|
|
8,927 |
|
Other assets |
|
|
7,035 |
|
|
|
3,335 |
|
Amounts due from subsidiaries |
|
|
62 |
|
|
|
383 |
|
|
|
|
|
|
|
|
|
|
$ |
201,096 |
|
|
$ |
272,415 |
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
Notes payable |
|
$ |
|
|
|
$ |
3,913 |
|
Debentures payable |
|
|
41,240 |
|
|
|
41,240 |
|
Other liabilities |
|
|
|
|
|
|
1,803 |
|
Stockholders equity |
|
|
159,856 |
|
|
|
225,459 |
|
|
|
|
|
|
|
|
|
|
$ |
201,096 |
|
|
$ |
272,415 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Statements of Operations |
|
|
|
|
|
|
|
|
|
|
|
|
Investment income |
|
$ |
124 |
|
|
$ |
180 |
|
|
$ |
206 |
|
Equity in income (loss) of subsidiaries, net of tax |
|
|
(58,650 |
) |
|
|
2,805 |
|
|
|
3,677 |
|
Expenses |
|
|
(7,492 |
) |
|
|
(8,888 |
) |
|
|
(5,542 |
) |
|
|
|
|
|
|
|
|
|
|
Loss before income taxes |
|
|
(66,018 |
) |
|
|
(5,903 |
) |
|
|
(1,659 |
) |
Provision for income taxes |
|
|
2,282 |
|
|
|
11,942 |
|
|
|
15,011 |
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(68,300 |
) |
|
$ |
(17,845 |
) |
|
$ |
(16,670 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Statements of Cash Flows |
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(68,300 |
) |
|
$ |
(17,845 |
) |
|
$ |
(16,670 |
) |
Equity in income (loss) of subsidiaries, net of tax |
|
|
58,650 |
|
|
|
(2,805 |
) |
|
|
(3,677 |
) |
Stock-based compensation |
|
|
2,053 |
|
|
|
1,507 |
|
|
|
1,063 |
|
Deferred income taxes |
|
|
8,927 |
|
|
|
15,747 |
|
|
|
18,037 |
|
Change in assets and liabilities |
|
|
(5,044 |
) |
|
|
(2,829 |
) |
|
|
3,322 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities |
|
|
(3,714 |
) |
|
|
(6,225 |
) |
|
|
2,075 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Investment in subsidiary |
|
|
(2,685 |
) |
|
|
|
|
|
|
(45,765 |
) |
Dividend from subsidiary |
|
|
10,975 |
|
|
|
17,609 |
|
|
|
6,435 |
|
Improvements to foreclosed real estate |
|
|
(138 |
) |
|
|
(253 |
) |
|
|
(254 |
) |
Purchase of common stock in trust |
|
|
|
|
|
|
|
|
|
|
(1,240 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
8,152 |
|
|
|
17,356 |
|
|
|
(40,824 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from borrowings |
|
|
|
|
|
|
|
|
|
|
5,000 |
|
Payments on borrowings |
|
|
(3,913 |
) |
|
|
(19,147 |
) |
|
|
(5,552 |
) |
Proceeds from issuance of debentures |
|
|
|
|
|
|
|
|
|
|
41,240 |
|
Net proceeds from issuance of common stock |
|
|
68 |
|
|
|
131 |
|
|
|
857 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
(3,845 |
) |
|
|
(19,016 |
) |
|
|
41,545 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
593 |
|
|
|
(7,885 |
) |
|
|
2,796 |
|
Cash and cash equivalents, beginning of year |
|
|
2,465 |
|
|
|
10,350 |
|
|
|
7,554 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year |
|
$ |
3,058 |
|
|
$ |
2,465 |
|
|
$ |
10,350 |
|
|
|
|
|
|
|
|
|
|
|
82