e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2009
Commission File Number: 001-12117
FIRST ACCEPTANCE CORPORATION
(Exact name of registrant as specified in its charter)
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Delaware
(State or other jurisdiction
of incorporation or organization)
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75-1328153
(I.R.S. Employer
Identification No.) |
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3322 West End Ave, Suite 1000
Nashville, Tennessee
(Address of principal executive offices)
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37203
(Zip Code) |
(615) 844-2800
(Registrants telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files)(d).
Yes o No o
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller
reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
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Large accelerated filer o | |
Accelerated filer o | |
Non-accelerated filer o | |
Smaller reporting company þ |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act).
Yes o No þ
At November 9, 2009, there were 48,308,406 shares outstanding of the registrants common stock, par
value $0.01 per share.
FIRST ACCEPTANCE CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2009
INDEX
i
PART I FINANCIAL INFORMATION
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Item 1. |
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Financial Statements |
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
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September 30, |
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June 30, |
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2009 |
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2009 |
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(Unaudited) |
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ASSETS |
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Fixed maturities, available-for-sale at fair value (amortized
cost of $178,003 and $140,849, respectively) |
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$ |
181,640 |
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$ |
140,311 |
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Cash and cash equivalents |
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37,271 |
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77,201 |
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Premiums and fees receivable, net of allowance of $458 and $419 |
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45,633 |
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45,309 |
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Other assets |
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9,845 |
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11,866 |
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Property and equipment, net |
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3,604 |
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3,921 |
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Deferred acquisition costs |
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4,197 |
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3,896 |
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Goodwill |
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70,092 |
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70,092 |
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Identifiable intangible assets |
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6,360 |
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6,360 |
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TOTAL ASSETS |
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$ |
358,642 |
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$ |
358,956 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Loss and loss adjustment expense reserves |
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$ |
81,736 |
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$ |
83,973 |
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Unearned premiums and fees |
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56,608 |
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57,350 |
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Debentures payable |
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41,240 |
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41,240 |
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Other liabilities |
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11,884 |
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16,537 |
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Total liabilities |
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191,468 |
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199,100 |
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Stockholders equity: |
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Preferred stock, $.01 par value, 10,000 shares authorized |
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Common stock, $.01 par value, 75,000 shares authorized;
48,308 and 48,312 shares issued and outstanding,
respectively |
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483 |
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483 |
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Additional paid-in capital |
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465,103 |
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464,720 |
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Accumulated other comprehensive income (loss) |
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3,637 |
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(538 |
) |
Accumulated deficit |
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(302,049 |
) |
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(304,809 |
) |
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Total stockholders equity |
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167,174 |
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159,856 |
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TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
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$ |
358,642 |
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$ |
358,956 |
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See notes to consolidated financial statements.
1
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(in thousands, except per share data)
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Three Months Ended |
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September 30, |
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2009 |
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2008 |
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Revenues: |
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Premiums earned |
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$ |
48,467 |
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$ |
61,838 |
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Commission and fee income |
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6,954 |
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8,243 |
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Investment income |
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1,913 |
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2,723 |
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Net realized losses on fixed maturities,
available-for-sale |
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(22 |
) |
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(1,215 |
) |
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57,312 |
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71,589 |
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Costs and expenses: |
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Losses and loss adjustment expenses |
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33,153 |
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43,732 |
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Insurance operating expenses |
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19,570 |
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21,446 |
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Other operating expenses |
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273 |
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392 |
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Litigation settlement |
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(381 |
) |
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145 |
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Stock-based compensation |
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383 |
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495 |
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Depreciation and amortization |
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464 |
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469 |
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Interest expense |
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989 |
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1,157 |
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54,451 |
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67,836 |
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Income before income taxes |
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2,861 |
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3,753 |
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Provision for income taxes |
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101 |
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1,912 |
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Net income |
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$ |
2,760 |
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$ |
1,841 |
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Net income per share: |
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Basic and diluted |
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$ |
0.06 |
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$ |
0.04 |
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Number of shares used to calculate net income per share: |
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Basic |
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47,877 |
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47,655 |
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Diluted |
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48,853 |
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49,244 |
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Reconciliation of net income to comprehensive income (loss): |
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Net income |
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$ |
2,760 |
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$ |
1,841 |
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Net unrealized change in investments |
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4,175 |
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(3,462 |
) |
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Comprehensive income (loss) |
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$ |
6,935 |
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$ |
(1,621 |
) |
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Detail of net realized losses on fixed maturities, available-for-sale: |
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Net realized gains on sales |
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$ |
299 |
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$ |
50 |
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Unrealized losses on fixed maturities with other-than-temporary
impairment charges |
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(321 |
) |
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(1,265 |
) |
Non-credit portion included in comprehensive income (loss) |
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Other-than-temporary impairment charges recognized in income |
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(321 |
) |
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(1,265 |
) |
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Net realized losses on fixed maturities, available-for-sale |
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$ |
(22 |
) |
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$ |
(1,215 |
) |
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See notes to consolidated financial statements.
2
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in thousands)
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Three Months Ended |
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September 30, |
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2009 |
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2008 |
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Cash flows from operating activities: |
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Net income |
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$ |
2,760 |
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$ |
1,841 |
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Adjustments to reconcile net income to cash used in operating activities: |
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Depreciation and amortization |
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464 |
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469 |
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Stock-based compensation |
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383 |
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|
495 |
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Deferred income taxes |
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|
1,701 |
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Other-than-temporary impairment on investment securities |
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321 |
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1,265 |
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Net realized gains on sales of investments |
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(299 |
) |
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(50 |
) |
Other |
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127 |
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39 |
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Change in: |
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Premiums and fees receivable |
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(324 |
) |
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5,670 |
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Loss and loss adjustment expense reserves |
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(2,237 |
) |
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(2,776 |
) |
Unearned premiums and fees |
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(742 |
) |
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(6,963 |
) |
Litigation settlement |
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1,480 |
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145 |
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Other |
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(4,383 |
) |
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(4,367 |
) |
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Net cash used in operating activities |
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(2,450 |
) |
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(2,531 |
) |
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Cash flows from investing activities: |
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Purchases of fixed maturities, available-for-sale |
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(51,298 |
) |
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(10,036 |
) |
Maturities and paydowns of fixed maturities, available-for-sale |
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2,452 |
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|
3,409 |
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Sales of fixed maturities, available-for-sale |
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11,545 |
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2,488 |
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Net change in receivable/payable for securities |
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(1,045 |
) |
Capital expenditures |
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(149 |
) |
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(254 |
) |
Other |
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(21 |
) |
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(85 |
) |
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Net cash used in investing activities |
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(37,471 |
) |
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(5,523 |
) |
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Cash flows from financing activities: |
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Payments on borrowings |
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(9 |
) |
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(1,491 |
) |
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Net cash used in financing activities |
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(9 |
) |
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(1,491 |
) |
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Net decrease in cash and cash equivalents |
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|
(39,930 |
) |
|
|
(9,545 |
) |
Cash and cash equivalents, beginning of period |
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|
77,201 |
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|
38,646 |
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Cash and cash equivalents, end of period |
|
$ |
37,271 |
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$ |
29,101 |
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|
See notes to consolidated financial statements.
3
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. General
The consolidated financial statements of First Acceptance Corporation (the Company) included
herein have been prepared without audit pursuant to the rules and regulations of the Securities and
Exchange Commission. Accordingly, certain information and disclosures normally included in
financial statements prepared in accordance with U.S. generally accepted accounting principles have
been omitted. In the opinion of management, the consolidated financial statements reflect all
adjustments (consisting of normal recurring adjustments) necessary for a fair statement of the
interim periods. Certain reclassifications have been made to the prior years consolidated
financial statements to conform with the current year presentation.
In connection with the preparation of these consolidated interim financial statements, the
Company has evaluated subsequent events through November 9, 2009, which is the date the financial
statements were issued. The results of operations for the interim periods are not necessarily
indicative of the results of operations to be expected for the full year. These consolidated
financial statements should be read in conjunction with the Companys audited consolidated
financial statements included in its Annual Report on Form 10-K for the fiscal year ended June 30,
2009.
2. Investments
Fair Value
Fair value is the price that would be received upon the sale of an asset or paid to
transfer a liability in an orderly transaction between market participants at the measurement date.
The Company holds available-for-sale fixed maturity investments, which are carried at fair value.
Fair value measurements are generally based upon observable and unobservable
inputs. Observable inputs are based on market data from independent sources, while unobservable
inputs reflect the Companys view of market assumptions in the absence of observable market
information. All assets and liabilities that are carried at fair value are classified and disclosed
in one of the following categories:
|
Level 1 |
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Quoted prices in active markets for identical assets or liabilities. |
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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. |
4
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
The following table presents the fair-value measurements for each major category of assets
that are measured on a recurring basis at September 30, 2009 (in thousands).
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Fair Value Measurements Using |
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Quoted Prices |
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in Active |
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Significant |
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Markets for |
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Other |
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Significant |
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Identical |
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Observable |
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Unobservable |
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Assets |
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Inputs |
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Inputs |
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Description |
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Total |
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(Level 1) |
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(Level 2) |
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(Level 3) |
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Fixed maturities, available-for-sale: |
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U.S. government and agencies |
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$ |
24,107 |
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|
$ |
24,107 |
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|
$ |
|
|
|
$ |
|
|
State |
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|
8,341 |
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|
|
|
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|
8,341 |
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|
|
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Political subdivisions |
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|
1,863 |
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|
|
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|
1,863 |
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Revenue and assessment |
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|
28,123 |
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|
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28,123 |
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|
|
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Corporate bonds |
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|
74,885 |
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|
|
|
|
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|
74,885 |
|
|
|
|
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Collateralized mortgage obligations: |
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|
|
|
|
|
|
|
|
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|
|
|
|
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Agency backed |
|
|
31,628 |
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|
|
|
|
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|
31,628 |
|
|
|
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|
Non-agency backed residential |
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|
6,066 |
|
|
|
|
|
|
|
2,772 |
|
|
|
3,294 |
|
Non-agency backed commercial |
|
|
6,627 |
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|
|
|
|
|
|
6,627 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities, available-for-sale |
|
|
181,640 |
|
|
|
24,107 |
|
|
|
154,239 |
|
|
|
3,294 |
|
Cash and cash equivalents |
|
|
37,271 |
|
|
|
37,271 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
218,911 |
|
|
$ |
61,378 |
|
|
$ |
154,239 |
|
|
$ |
3,294 |
|
|
|
|
|
|
|
|
|
|
|
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|
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 collateralized mortgage obligations (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 security 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.
5
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Based on the above categorization, the following table represents the quantitative disclosure
for those assets included in category Level 3 at September 30, 2009 (in thousands).
|
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|
|
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|
Fair Value |
|
|
|
Measurements |
|
|
|
Using |
|
|
|
Significant |
|
|
|
Unobservable |
|
|
|
Inputs |
|
|
|
(Level 3) |
|
Balance at July 1, 2009 |
|
$ |
2,637 |
|
Total gains or losses (realized or unrealized): |
|
|
|
|
Included in net income |
|
|
22 |
|
Included in other comprehensive income (loss) |
|
|
263 |
|
Purchases, sales, issuances and settlements |
|
|
(2 |
) |
Transfers in to Level 3 |
|
|
2,390 |
|
Transfers out of Level 3 |
|
|
(2,016 |
) |
|
|
|
|
Balance at September 30, 2009 |
|
$ |
3,294 |
|
|
|
|
|
Investment Income and Net Realized Gains and Losses
The major categories of investment income follow (in thousands).
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
Fixed maturities, available-for-sale |
|
$ |
2,029 |
|
|
$ |
2,630 |
|
Cash and cash equivalents |
|
|
19 |
|
|
|
179 |
|
Other |
|
|
29 |
|
|
|
29 |
|
Investment expenses |
|
|
(164 |
) |
|
|
(115 |
) |
|
|
|
|
|
|
|
|
|
$ |
1,913 |
|
|
$ |
2,723 |
|
|
|
|
|
|
|
|
The components of net realized gains (losses) on fixed maturities, available-for-sale are as
follows (in thousands).
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
Gains |
|
$ |
303 |
|
|
$ |
59 |
|
Losses |
|
|
(4 |
) |
|
|
(9 |
) |
Other-than-temporary impairment |
|
|
(321 |
) |
|
|
(1,265 |
) |
|
|
|
|
|
|
|
|
|
$ |
(22 |
) |
|
$ |
(1,215 |
) |
|
|
|
|
|
|
|
Realized gains and losses on sales of securities are computed based on specific
identification. The non-credit related portion of other-than-temporary impairment (OTTI) charges
are included in other comprehensive income (loss). The amounts of such charges taken for securities
still owned at September 30, 2009 and June 30, 2009 were $0.6 million for non-agency backed
residential CMOs and $0.6 million for non-agency backed commercial CMOs.
6
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Fixed Maturities, Available-for-Sale
The following tables summarize the Companys fixed maturity securities (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
September 30, 2009 |
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
U.S. government and agencies |
|
$ |
23,542 |
|
|
$ |
565 |
|
|
$ |
|
|
|
$ |
24,107 |
|
State |
|
|
7,975 |
|
|
|
370 |
|
|
|
(4 |
) |
|
|
8,341 |
|
Political subdivisions |
|
|
1,825 |
|
|
|
59 |
|
|
|
(21 |
) |
|
|
1,863 |
|
Revenue and assessment |
|
|
27,169 |
|
|
|
1,014 |
|
|
|
(60 |
) |
|
|
28,123 |
|
Corporate bonds |
|
|
72,076 |
|
|
|
3,046 |
|
|
|
(237 |
) |
|
|
74,885 |
|
Collateralized mortgage obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency backed |
|
|
29,991 |
|
|
|
1,637 |
|
|
|
|
|
|
|
31,628 |
|
Non-agency backed residential |
|
|
7,806 |
|
|
|
17 |
|
|
|
(1,757 |
) |
|
|
6,066 |
|
Non-agency backed commercial |
|
|
7,619 |
|
|
|
1 |
|
|
|
(993 |
) |
|
|
6,627 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
178,003 |
|
|
$ |
6,709 |
|
|
$ |
(3,072 |
) |
|
$ |
181,640 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth the scheduled maturities of our fixed maturity securities at
September 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 |
|
$ |
3,896 |
|
|
$ |
978 |
|
|
$ |
|
|
|
$ |
4,874 |
|
After one through five years |
|
|
81,628 |
|
|
|
492 |
|
|
|
|
|
|
|
82,120 |
|
After five through ten years |
|
|
38,429 |
|
|
|
734 |
|
|
|
|
|
|
|
39,163 |
|
After ten years |
|
|
5,203 |
|
|
|
5,959 |
|
|
|
|
|
|
|
11,162 |
|
No single maturity date |
|
|
32,236 |
|
|
|
11,917 |
|
|
|
168 |
|
|
|
44,321 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
161,392 |
|
|
$ |
20,080 |
|
|
$ |
168 |
|
|
$ |
181,640 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
The following table reflects the number of securities with gross unrealized gains and losses.
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 |
At: |
|
12 months |
|
months |
|
Gains |
September 30, 2009 |
|
|
5 |
|
|
|
27 |
|
|
|
150 |
|
June 30, 2009 |
|
|
3 |
|
|
|
37 |
|
|
|
133 |
|
The following tables reflect the fair value and gross unrealized losses of those securities in
a continuous unrealized loss position for greater than 12 months. Gross unrealized losses are
further segregated by the percentage of amortized cost (in thousands, except number of securities).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number |
|
|
|
|
|
|
Gross |
|
Gross Unrealized Losses |
|
of |
|
|
Fair |
|
|
Unrealized |
|
at September 30, 2009: |
|
Securities |
|
|
Value |
|
|
Losses |
|
Less than 10% |
|
|
13 |
|
|
$ |
10,239 |
|
|
$ |
(452 |
) |
Greater than 10% |
|
|
14 |
|
|
|
6,257 |
|
|
|
(2,577 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
27 |
|
|
$ |
16,496 |
|
|
$ |
(3,029 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number |
|
|
|
|
|
|
Gross |
|
Gross Unrealized Losses |
|
of |
|
|
Fair |
|
|
Unrealized |
|
at June 30, 2009: |
|
Securities |
|
|
Value |
|
|
Losses |
|
Less than 10%
|
|
|
17 |
|
|
$ |
15,368 |
|
|
$ |
(766 |
) |
Greater than 10%
|
|
|
20 |
|
|
|
8,970 |
|
|
|
(4,348 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
37 |
|
|
$ |
24,338 |
|
|
$ |
(5,114 |
) |
|
|
|
|
|
|
|
|
|
|
The following tables set 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 (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value of |
|
|
|
|
|
|
|
|
|
|
Securities with |
|
|
|
|
|
|
Severity of Gross Unrealized Losses |
|
Length of |
|
Gross |
|
|
Gross |
|
|
|
|
|
|
|
|
|
|
Greater |
|
Gross Unrealized Losses |
|
Unrealized |
|
|
Unrealized |
|
|
Less |
|
|
5% to |
|
|
than |
|
at September 30, 2009: |
|
Losses |
|
|
Losses |
|
|
than 5% |
|
|
10% |
|
|
10% |
|
Less than or equal to: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months |
|
$ |
2,537 |
|
|
$ |
(41 |
) |
|
$ |
(41 |
) |
|
$ |
|
|
|
$ |
|
|
Six months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months |
|
|
37 |
|
|
|
(1 |
) |
|
|
(1 |
) |
|
|
|
|
|
|
|
|
Twelve months |
|
|
1,010 |
|
|
|
(1 |
) |
|
|
(1 |
) |
|
|
|
|
|
|
|
|
Greater than twelve months |
|
|
16,496 |
|
|
|
(3,029 |
) |
|
|
(83 |
) |
|
|
(369 |
) |
|
|
(2,577 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
20,080 |
|
|
$ |
(3,072 |
) |
|
$ |
(126 |
) |
|
$ |
(369 |
) |
|
$ |
(2,577 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value of |
|
|
|
|
|
|
|
|
|
|
Securities with |
|
|
|
|
|
|
Severity of Gross Unrealized Losses |
|
Length of |
|
Gross |
|
|
Gross |
|
|
|
|
|
|
|
|
|
|
Greater |
|
Gross Unrealized Losses |
|
Unrealized |
|
|
Unrealized |
|
|
Less |
|
|
5% to |
|
|
than |
|
at June 30, 2009: |
|
Losses |
|
|
Losses |
|
|
than 5% |
|
|
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 Financial Accounting Standards
Board (FASB) Accounting Standards Codification (ASC) 320-10-65, Recognition and Presentation of
Other-Than-Temporary Impairments (Prior authoritative literature: FASB Staff Position No. FAS
115-2)
(FASB ASC 320-10-65). 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 at the
date of acquisition.
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 maturity
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 makes a determination as to the probability of recovering principal and interest on the
security.
The number and amount of securities for which the Company has recorded OTTI are presented in
the following table (in thousands, except for the number of securities).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
|
Number |
|
|
|
|
|
|
Number |
|
|
|
|
|
|
of |
|
|
|
|
|
|
of |
|
|
|
|
|
|
Securities |
|
|
OTTI |
|
|
Securities |
|
|
OTTI |
|
Corporate bonds |
|
|
|
|
|
$ |
|
|
|
|
2 |
|
|
$ |
(721 |
) |
Collateralized mortgage obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-agency backed residential |
|
|
3 |
|
|
|
(321 |
) |
|
|
3 |
|
|
|
(283 |
) |
Non-agency backed commercial |
|
|
|
|
|
|
|
|
|
|
3 |
|
|
|
(261 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3 |
|
|
$ |
(321 |
) |
|
|
8 |
|
|
$ |
(1,265 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Since the adoption of FASB ASC 320-10-65, the following is a progression of the credit-related
portion of OTTI on fixed maturity securities owned at September 30, 2009 (in thousands).
|
|
|
|
|
Balance at June 30, 2009 |
|
$ |
(2,870 |
) |
Additional credit impairments on: |
|
|
|
|
Previously impaired securities |
|
|
(49 |
) |
Securities without previous impairments |
|
|
(272 |
) |
|
|
|
|
|
|
|
(321 |
) |
Reductions for securities sold |
|
|
552 |
|
|
|
|
|
Balance at September 30, 2009 |
|
$ |
(2,639 |
) |
|
|
|
|
On a quarterly basis, the Company reviews cash flow estimates for certain non-agency backed
CMOs of lesser credit quality following the guidance of FASB ASC 325-40-65, Amendments to the
Impairment Guidance of EITF Issue No. 99-20 (Prior authoritative literature: FSP EITF 99-20-1)
(FASB ASC 325-40-65).
Accordingly, when changes in estimated cash flows from the cash flows previously estimated occur
due to actual or estimated prepayment or 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 FASB ASC 325-40-65, the Company prepares
quarterly projected cash flow analyses and recognizes OTTI when it determines that a loss is
probable. The Company has recognized OTTI related to certain non-agency backed CMOs as the
underlying cash flows have been adversely impacted due to a reduction in prepayments from mortgage
refinancing and an increase in actual and projected delinquencies in the underlying mortgages.
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 for which OTTI charges have been
recorded. 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.
The OTTI charges in fiscal year 2009 on corporate bonds were recorded 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 September 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.
10
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
3. Net Income Per Share
The following table sets forth the computation of basic and diluted net income per share (in
thousands, except per share data).
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
Net income |
|
$ |
2,760 |
|
|
$ |
1,841 |
|
|
|
|
|
|
|
|
Weighted average common basic shares |
|
|
47,877 |
|
|
|
47,655 |
|
Effect of dilutive securities |
|
|
976 |
|
|
|
1,589 |
|
|
|
|
|
|
|
|
Weighted average common dilutive shares |
|
|
48,853 |
|
|
|
49,244 |
|
|
|
|
|
|
|
|
Basic and diluted net income per share |
|
$ |
0.06 |
|
|
$ |
0.04 |
|
|
|
|
|
|
|
|
For the three months ended September 30, 2009, options to purchase approximately 5.3 million
shares of common stock, a dilutive effect of approximately 0.5 million shares, and 0.4 million
shares of unvested restricted common stock were included in the computation of diluted income per
share. For the three months ended September 30, 2008, options to purchase approximately 5.4 million
shares of common stock, a dilutive effect of approximately 1.2 million shares, and 0.4 million
shares of unvested restricted common stock were included in the computation of diluted income per
share.
4. Income Taxes
The provision for income taxes consisted of the following (in thousands).
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
Federal: |
|
|
|
|
|
|
|
|
Current |
|
$ |
|
|
|
$ |
44 |
|
Deferred |
|
|
|
|
|
|
1,687 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,731 |
|
|
|
|
|
|
|
|
|
|
State: |
|
|
|
|
|
|
|
|
Current |
|
|
101 |
|
|
|
167 |
|
Deferred |
|
|
|
|
|
|
14 |
|
|
|
|
|
|
|
|
|
|
|
101 |
|
|
|
181 |
|
|
|
|
|
|
|
|
|
|
$ |
101 |
|
|
$ |
1,912 |
|
|
|
|
|
|
|
|
11
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
The provision for income taxes differs from the amounts computed by applying the statutory
federal corporate tax rate of 35% to income before income taxes as a result of the following (in
thousands).
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
Provision for income taxes at statutory rate |
|
$ |
1,001 |
|
|
$ |
1,314 |
|
Tax effect of: |
|
|
|
|
|
|
|
|
Tax-exempt investment income |
|
|
(4 |
) |
|
|
(6 |
) |
Change in the beginning of the year balance of
the valuation allowance for deferred tax
assets allocated to income taxes |
|
|
(1,000 |
) |
|
|
252 |
|
State income taxes, net of federal income tax
benefit and state valuation allowance |
|
|
101 |
|
|
|
122 |
|
Other |
|
|
3 |
|
|
|
230 |
|
|
|
|
|
|
|
|
|
|
$ |
101 |
|
|
$ |
1,912 |
|
|
|
|
|
|
|
|
The Company had a valuation allowance of $23.9 million and $24.9 million at September 30, 2009
and June 30, 2009, 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 September 30, 2009
and June 30, 2009.
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. The
Company is 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 objectively verified. 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 historical results and established a valuation allowance against all net
deferred tax assets at September 30, 2009 and June 30, 2009. The deferred tax valuation allowance
may be adjusted 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 adjusted, the Company would record an income tax benefit for the amount of the adjustment.
5. Goodwill and 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. The Company performs required annual impairment tests of its goodwill
and intangible assets 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 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.
12
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
As a result of the adverse impact of difficult economic conditions on the Companys customers
and business and the resulting decline in its share price during the fourth quarter of fiscal year
2009, the Company estimated that a goodwill impairment was probable. Accordingly, the Company
recognized an estimated 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, the
analysis of the goodwill impairment charge recognized during the fourth quarter of the 2009 fiscal
year was finalized during the first quarter of fiscal year 2010 and the amount of the impairment
did not differ from the initial estimate.
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.
6. 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 ASC
450-20, Loss Contingencies (Prior authoritative literature: FASB Statement No. 5)
(FASB ASC 450-20).
Pursuant to FASB
ASC 450-20, 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 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 losses related to the litigation settlements
entered into during fiscal year 2009 related to 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. Pursuant to the terms of the 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 and Alabama class members commenced January 1, 2009 and March 7, 2009, respectively.
At this time, the Company is unable to estimate the costs associated with the 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. 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.
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 class members who were insured by the Company on December 31, 2008
and received the premium credits. During the fiscal year ended June 30, 2009, $1.3 million of
available premium credits were utilized and $0.9 million were forfeited, resulting in a remaining
settlement accrual of $3.0 million at June 30, 2009. During the three months ended September 30,
2009, $1.0 million of available premium credits were utilized and $0.4 million were forfeited,
resulting in a remaining settlement accrual of $1.6 million at September 30, 2009. The Company is
not able to reasonably estimate and, therefore, did not accrue any estimated costs for class
members that were not insured by the Company on September 30, 2009 that received the premium
credits as a result of the uncertainties associated
13
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
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 classified in the litigation settlement expenses line item
in the Companys consolidated statements of operations. The litigation settlement accrual for those
currently estimable costs associated with the utilization of available premium credits is
classified in other liabilities in the Companys consolidated balance sheet. Management intends to
adjust the initial estimated accrual as necessary during future periods to account for the impact
of the actual rate of redemption and forfeiture of the premium credits and reimbursement
certificates.
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 at June 30, 2009.
7. Fair Value of Financial Instruments
The carrying values and fair values of certain of the Companys financial instruments at
September 30, 2009 and June 30, 2009 were as follows (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009 |
|
June 30, 2009 |
|
|
Carrying |
|
Fair |
|
Carrying |
|
Fair |
|
|
Value |
|
Value |
|
Value |
|
Value |
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities, available-for-sale |
|
$ |
181,640 |
|
|
$ |
181,640 |
|
|
$ |
140,311 |
|
|
$ |
140,311 |
|
Cash and cash equivalents |
|
|
37,271 |
|
|
|
37,271 |
|
|
|
77,201 |
|
|
|
77,201 |
|
Premiums and fees receivable, net |
|
|
45,633 |
|
|
|
45,633 |
|
|
|
45,309 |
|
|
|
45,309 |
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized lease obligations |
|
|
215 |
|
|
|
215 |
|
|
|
224 |
|
|
|
224 |
|
Debentures payable |
|
|
41,240 |
|
|
|
18,964 |
|
|
|
41,240 |
|
|
|
15,568 |
|
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.
8. 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 debt and other general corporate overhead expenses.
14
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
The following table presents selected financial data by business segment (in thousands).
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
Revenues: |
|
|
|
|
|
|
|
|
Insurance |
|
$ |
57,283 |
|
|
$ |
71,556 |
|
Real estate and corporate |
|
|
29 |
|
|
|
33 |
|
|
|
|
|
|
|
|
Consolidated total |
|
$ |
57,312 |
|
|
$ |
71,589 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes: |
|
|
|
|
|
|
|
|
Insurance |
|
$ |
4,476 |
|
|
$ |
5,763 |
|
Real estate and corporate |
|
|
(1,615 |
) |
|
|
(2,010 |
) |
|
|
|
|
|
|
|
Consolidated total |
|
$ |
2,861 |
|
|
$ |
3,753 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
June 30, |
|
|
|
2009 |
|
|
2009 |
|
Total assets: |
|
|
|
|
|
|
|
|
Insurance |
|
$ |
345,892 |
|
|
$ |
348,801 |
|
Real estate and corporate |
|
|
12,750 |
|
|
|
10,155 |
|
|
|
|
|
|
|
|
Consolidated total |
|
$ |
358,642 |
|
|
$ |
358,956 |
|
|
|
|
|
|
|
|
9. Recent Accounting Pronouncements
In June 2009, the FASB issued Accounting Standards Update (ASU) No. 2009-01, Generally
Accepted Accounting Principles (Topic 105)
(FASB ASU No. 2009-01), 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
and requires the Company to update all existing U.S. generally accepted accounting principles
references to the new codification references for all future filings. The Company adopted the
provisions of FASB ASU No. 2009-01 in the quarter ended September 30, 2009.
In August 2009, the FASB issued ASU No. 2009-05, Fair Value Measurements and Disclosures (Topic
820) Measuring Liabilities at Fair Value (FASB ASU No. 2009-05), which amends FASB ASC 820 by clarifying that in
circumstances in which a quoted price in an active market for the identical liability is not
available, a reporting entity is required to measure fair value using a valuation technique that
uses either the quoted price of the identical liability when traded as an asset or quoted prices
for similar liabilities when traded as assets. The Company adopted the
provisions of FASB ASU No. 2009-05 upon issuance. The adoption did not have an impact on the
Companys results of operations or financial condition.
15
FIRST ACCEPTANCE CORPORATION 10-Q
|
|
|
Item 2. |
|
Managements Discussion and Analysis of Financial Condition and Results of Operations |
Managements Discussion and Analysis of Financial Condition and Results of Operations contains
forward-looking statements which involve risks and uncertainties. Our actual results may differ
significantly from the results discussed in the forward-looking statements. Factors that might
cause such a difference include those discussed in Item 1A. Risk Factors in our Annual Report on
Form 10-K for the fiscal year ended June 30, 2009. The following discussion should be read in
conjunction with our consolidated financial statements included with this report and our
consolidated financial statements and related Managements Discussion and Analysis of Financial
Condition and Results of Operations for the fiscal year ended June 30, 2009 included in our Annual
Report on Form 10-K.
General
At September 30, 2009, we leased and operated 415 retail locations (or stores) staffed by
employee-agents. Our employee-agents exclusively sell non-standard automobile insurance products
underwritten by us. At September 30, 2009, we wrote non-standard personal automobile insurance in
12 states and were licensed in 13 additional states. See the discussion in Item 1. Business -
General in our Annual Report on Form 10-K for the fiscal year ended June 30, 2009 for additional
information with respect to our business.
The following table shows the change in the number of our retail locations for the periods
presented. Retail location counts are based upon the date that a location commenced or ceased
writing business.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
September 30, |
|
|
2009 |
|
2008 |
Retail locations beginning of period |
|
|
418 |
|
|
|
431 |
|
Opened |
|
|
|
|
|
|
1 |
|
Closed |
|
|
(3 |
) |
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
Retail locations end of period |
|
|
415 |
|
|
|
429 |
|
|
|
|
|
|
|
|
|
|
The following tables show the number of our retail locations by state.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
June 30, |
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
Alabama |
|
|
25 |
|
|
|
25 |
|
|
|
25 |
|
|
|
25 |
|
Florida |
|
|
36 |
|
|
|
39 |
|
|
|
39 |
|
|
|
40 |
|
Georgia |
|
|
61 |
|
|
|
61 |
|
|
|
61 |
|
|
|
61 |
|
Illinois |
|
|
78 |
|
|
|
81 |
|
|
|
78 |
|
|
|
80 |
|
Indiana |
|
|
18 |
|
|
|
19 |
|
|
|
18 |
|
|
|
19 |
|
Mississippi |
|
|
8 |
|
|
|
8 |
|
|
|
8 |
|
|
|
8 |
|
Missouri |
|
|
12 |
|
|
|
13 |
|
|
|
12 |
|
|
|
14 |
|
Ohio |
|
|
27 |
|
|
|
29 |
|
|
|
27 |
|
|
|
29 |
|
Pennsylvania |
|
|
17 |
|
|
|
18 |
|
|
|
17 |
|
|
|
19 |
|
South Carolina |
|
|
27 |
|
|
|
28 |
|
|
|
27 |
|
|
|
28 |
|
Tennessee |
|
|
20 |
|
|
|
20 |
|
|
|
20 |
|
|
|
20 |
|
Texas |
|
|
86 |
|
|
|
88 |
|
|
|
86 |
|
|
|
88 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
415 |
|
|
|
429 |
|
|
|
418 |
|
|
|
431 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
FIRST ACCEPTANCE CORPORATION 10-Q
Consolidated Results of Operations
Overview
Our primary focus is the selling, servicing and underwriting of non-standard personal
automobile insurance. Our real estate and corporate segment consists of activities related to the
disposition of real estate held for sale, interest expense associated with debt, and other general
corporate overhead expenses. Our insurance operations generate revenues from selling, servicing and
underwriting non-standard personal automobile insurance policies in 12 states. We conduct our
underwriting operations through three insurance company subsidiaries: First Acceptance Insurance
Company, Inc., First Acceptance Insurance Company of Georgia, Inc. and First Acceptance Insurance
Company of Tennessee, Inc. Our insurance revenues are primarily generated from:
|
|
|
premiums earned, including policy and renewal fees, from sales of policies
written and assumed by our insurance company subsidiaries; |
|
|
|
|
commission and fee income, including installment billing fees on policies
written, agency fees and commissions and fees for other ancillary products and
services; and |
|
|
|
|
investment income earned on the invested assets of the insurance company
subsidiaries. |
The following table presents premiums earned by state (in thousands).
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
Premiums earned: |
|
|
|
|
|
|
|
|
Georgia |
|
$ |
10,902 |
|
|
$ |
13,427 |
|
Illinois |
|
|
6,331 |
|
|
|
7,361 |
|
Texas |
|
|
5,912 |
|
|
|
7,002 |
|
Florida |
|
|
5,261 |
|
|
|
7,616 |
|
Alabama |
|
|
5,210 |
|
|
|
6,572 |
|
South Carolina |
|
|
3,138 |
|
|
|
5,450 |
|
Tennessee |
|
|
3,104 |
|
|
|
4,415 |
|
Ohio |
|
|
2,952 |
|
|
|
3,451 |
|
Pennsylvania |
|
|
2,819 |
|
|
|
2,787 |
|
Indiana |
|
|
1,221 |
|
|
|
1,563 |
|
Missouri |
|
|
827 |
|
|
|
1,128 |
|
Mississippi |
|
|
790 |
|
|
|
1,066 |
|
|
|
|
|
|
|
|
Total premiums earned |
|
$ |
48,467 |
|
|
$ |
61,838 |
|
|
|
|
|
|
|
|
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.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
September 30, |
|
|
2009 |
|
2008 |
Policies in force beginning of period |
|
|
158,222 |
|
|
|
194,079 |
|
Net decrease during period |
|
|
(5,356 |
) |
|
|
(23,524 |
) |
|
|
|
|
|
|
|
|
|
Policies in force end of period |
|
|
152,866 |
|
|
|
170,555 |
|
|
|
|
|
|
|
|
|
|
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.
17
FIRST ACCEPTANCE CORPORATION 10-Q
Expense Ratio Expense ratio is the ratio (expressed as a percentage) of insurance operating
expenses to premiums earned. Insurance operating expenses are reduced by commission and fee income
from insureds. 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.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
September 30, |
|
|
2009 |
|
2008 |
Loss and loss adjustment expense |
|
|
68.4 |
% |
|
|
70.7 |
% |
Expense |
|
|
26.0 |
% |
|
|
21.4 |
% |
|
|
|
|
|
|
|
|
|
Combined |
|
|
94.4 |
% |
|
|
92.1 |
% |
|
|
|
|
|
|
|
|
|
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.
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 or based upon changes in interest rates or the credit quality of specific
securities.
The value of our consolidated investment portfolio was $181.6 million at September 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 September
30, 2009, we had gross unrealized gains of $6.7 million and gross unrealized losses of $3.1
million.
At September 30, 2009, 98.6% 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
September 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 had a fair value of $44.3 million at September 30, 2009 and represented
24% of our fixed maturity portfolio. At September 30, 2009, 95% of our CMOs were considered
investment grade by each of the nationally recognized rating agencies. In addition, 84% of our CMOs
were rated AAA and 71% of our CMOs were backed by agencies of the United States government. Of the
non-agency backed CMOs, 47% were rated AAA.
18
FIRST ACCEPTANCE CORPORATION 10-Q
The following table summarizes our fixed maturity securities at September 30, 2009 (in
thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
U.S. government and agencies |
|
$ |
23,542 |
|
|
$ |
565 |
|
|
$ |
|
|
|
$ |
24,107 |
|
State |
|
|
7,975 |
|
|
|
370 |
|
|
|
(4 |
) |
|
|
8,341 |
|
Political subdivisions |
|
|
1,825 |
|
|
|
59 |
|
|
|
(21 |
) |
|
|
1,863 |
|
Revenue and assessment |
|
|
27,169 |
|
|
|
1,014 |
|
|
|
(60 |
) |
|
|
28,123 |
|
Corporate bonds |
|
|
72,076 |
|
|
|
3,046 |
|
|
|
(237 |
) |
|
|
74,885 |
|
Collateralized mortgage obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency backed |
|
|
29,991 |
|
|
|
1,637 |
|
|
|
|
|
|
|
31,628 |
|
Non-agency backed residential |
|
|
7,806 |
|
|
|
17 |
|
|
|
(1,757 |
) |
|
|
6,066 |
|
Non-agency backed commercial |
|
|
7,619 |
|
|
|
1 |
|
|
|
(993 |
) |
|
|
6,627 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
178,003 |
|
|
$ |
6,709 |
|
|
$ |
(3,072 |
) |
|
$ |
181,640 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth the scheduled maturities of our fixed maturity securities at
September 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 |
|
$ |
3,896 |
|
|
$ |
978 |
|
|
$ |
|
|
|
$ |
4,874 |
|
After one through five years |
|
|
81,628 |
|
|
|
492 |
|
|
|
|
|
|
|
82,120 |
|
After five through ten years |
|
|
38,429 |
|
|
|
734 |
|
|
|
|
|
|
|
39,163 |
|
After ten years |
|
|
5,203 |
|
|
|
5,959 |
|
|
|
|
|
|
|
11,162 |
|
No single maturity date |
|
|
32,236 |
|
|
|
11,917 |
|
|
|
168 |
|
|
|
44,321 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
161,392 |
|
|
$ |
20,080 |
|
|
$ |
168 |
|
|
$ |
181,640 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other-Than-Temporary Impairment
Effective April 1, 2009, we adopted the provisions of Financial Accounting Standards Board
(FASB) Accounting Standards Codification (ASC) 320-10-65, Recognition and Presentation of
Other-Than-Temporary Impairments (Prior authoritative literature: FASB Staff Position No. FAS
115-2). Under this guidance, we separate other-than-temporary impairment (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.
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 maturity 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 filings with the Securities and Exchange Commission 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.
19
FIRST ACCEPTANCE CORPORATION 10-Q
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 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 FASB ASC 325-40-65, Amendments to the Impairment
Guidance of EITF Issue No. 99-20 (Prior authoritative literature: FSP EITF 99-20-1)
(FASB ASC 325-40-65). Accordingly,
when changes in estimated cash flows from the cash flows previously estimated occur due to actual
or estimated prepayment or 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 FASB ASC 325-40-65, we prepare quarterly projected cash flow
analyses and recognize OTTI when it is determined that a loss is probable. We have
recognized OTTI related to certain non-agency backed CMOs as the underlying cash flows have been
adversely impacted due to a reduction in prepayments from mortgage refinancing and an increase in
actual and projected delinquencies in the underlying mortgages.
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 in Note 2 to our consolidated financial statements which
incurred OTTI charges of $0.3 million. 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 in fiscal year 2009 on corporate bonds were recorded
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 September 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.
Three Months Ended September 30, 2009 Compared with the Three Months Ended September 30, 2008
Consolidated Results
Revenues for the three months ended September 30, 2009 decreased 20% to $57.3 million from
$71.6 million in the same period in the prior year. Income before income taxes for the three months
ended September 30, 2009 was $2.9 million, compared with $3.8 million for the three months ended
September 30, 2008. Net income for the three months ended September 30, 2009 was $2.8 million,
compared with $1.8 million for the three months ended September 30, 2008. Basic and diluted net
income per share was $0.06 for the three months ended September 30, 2009, compared with $0.04 for
the three months ended September 30, 2008.
20
FIRST ACCEPTANCE CORPORATION 10-Q
Insurance Operations
Revenues from insurance operations were $57.3 million for the three months ended September 30,
2009, compared with $71.6 million for the three months ended September 30, 2008. Income before
income taxes from insurance operations for the three months ended September 30, 2009 was $4.5
million, compared with income before income taxes from insurance operations of $5.8 million for the
three months ended September 30, 2008.
Premiums Earned
Premiums earned decreased by $13.4 million, or 22%, to $48.5 million for the three months
ended September 30, 2009, from $61.8 million for the three months ended September 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 54% of the $13.4 million decline in
premiums earned for the three months ended September 30, 2009 was in our Florida, Georgia and South
Carolina markets.
The number of insured policies in force at September 30, 2009 decreased 10% over the same date
in 2008 from 170,555 to 152,866, primarily due to the factors noted above. At September 30, 2009,
we operated 415 stores, compared with 429 stores at September 30, 2008.
Commission and Fee Income
Commission and fee income decreased 16% to $7.0 million for the three months ended September
30, 2009, from $8.2 million for the three months ended September 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 ancillary products sold through our network of retail locations.
Investment Income
Investment income decreased to $1.9 million during the three months ended September 30, 2009
from $2.7 million during the three months ended September 30, 2008. This decrease was primarily as
a result of the increase in cash and cash equivalents from the sale of fixed maturity investments
in fiscal year 2009 and the significant decline in yields on cash equivalents. At September 30,
2009 and 2008, the tax-equivalent book yields for our portfolio were 4.1% and 5.2%, respectively,
with effective durations of 3.22 and 3.50 years, respectively, which both declined as a result of
the increase in cash equivalents and the decline in yields previously discussed.
Net realized gains (losses) on fixed maturities, available-for-sale
Net realized gains (losses) on fixed maturities, available-for-sale during the three months
ended September 30, 2009 included $0.3 million in net realized gains on sales and $0.3 million of
charges related to OTTI on certain non-agency backed CMOs. The three months ended September 30,
2008 included $1.3 million of charges related to OTTI and $0.1 million in net realized gains on
sales.
Loss and Loss Adjustment Expenses
The loss and loss adjustment expense ratio was 68.4% for the three months ended September 30,
2009, compared with 70.7% for the three months ended September 30, 2008. For the three months ended
September 30, 2009 and 2008, we experienced favorable development on losses related to prior
periods of approximately $3.7 million and $4.3 million, respectively.
The favorable development for the three months ended September 30, 2009 was due to lower than
anticipated severity and frequency of accidents. Excluding favorable development, the loss and loss
adjustment expense ratios for the three months ended September 30, 2009 and 2008 were 75.9% and
77.7%, respectively. 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
21
FIRST ACCEPTANCE CORPORATION 10-Q
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 9% to $19.6 million for the three months ended
September 30, 2009 from $21.4 million for the three months ended September 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 partially offset by $0.4 million in
costs associated with employee severance and the closure of underperforming stores.
The expense ratio increased from 21.4% for the three months ended September 30, 2008 to 26.0%
for the same period in the current fiscal year. The year-over-year increase in the expense ratio
was due to the drop in premiums earned, which resulted in a higher percentage of fixed expenses
(such as rent and base salary).
Overall, the combined ratio increased to 94.4% for the three months ended September 30, 2009
from 92.1% for the three months ended September 30, 2008.
Litigation Settlement
Litigation settlement costs for the three months ended September 30, 2009 were $(0.4) million,
compared with $0.1 million for the same period in fiscal year 2008. The reduction in expense during
the three months ended September 30, 2009 related to the forfeiture of available premium credits by
Georgia and Alabama class members, while the costs during the three months ended September 30, 2008
were incurred in connection with our settlement and defense of the litigation.
Pursuant to the terms of the 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 and Alabama class members
commenced January 1, 2009 and March 7, 2009, respectively. At this time, we are unable to estimate
the costs associated with the 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.
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 class members who were insured by the Company on December 31, 2008 and received
the premium credits. During the fiscal year ended June 30, 2009, $1.3 million of available premium
credits were utilized and $0.9 million were forfeited, resulting in a remaining settlement accrual
of $3.0 million at June 30, 2009. During the three months ended September 30, 2009, $1.0 million of
available premium credits were utilized and $0.4 million were forfeited, resulting in a remaining
settlement accrual of $1.6 million at September 30, 2009. We are not able to reasonably estimate
and, therefore, did not accrue any estimated costs for class members that were not insured by the
Company on September 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 classified in the litigation settlement expenses line item
in our consolidated statements of operations. The litigation settlement accrual for those currently
estimable costs associated with the utilization of available premium credits is classified in other
liabilities in our consolidated balance sheet. 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. For additional information
with respect to the litigation settlements, see Note 6 to our consolidated financial statements.
22
FIRST ACCEPTANCE CORPORATION 10-Q
Provision for Income Taxes
The provision for income taxes for the three months ended September 30, 2009 was $0.1 million,
compared with $1.9 million for the same period in fiscal year 2009. The provision for income taxes
for the three months ended September 30, 2009 related to current state income taxes for certain
subsidiaries with taxable income. At September 30, 2009 and June 30, 2009, we established a full
valuation allowance against all net deferred tax assets. 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 historical results than on our outlook for future profitability.
The deferred tax valuation allowance may be adjusted in future periods if we consider 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 adjusted, we would record an income tax benefit for
the amount of the adjustment.
Real Estate and Corporate
Loss before income taxes from real estate and corporate operations for the three months ended
September 30, 2009 was $1.6 million, compared with a loss before income taxes from real estate and
corporate operations of $2.0 million for the three months ended September 30, 2008. Segment losses
consist of other operating expenses not directly related to our insurance operations, interest
expense and stock-based compensation offset by investment income on corporate invested assets.
During the three months ended September 30, 2008, we incurred $0.2 million of interest expense in
connection with borrowings under our former credit facility borrowings. The credit facility was
repaid in full and terminated on October 31, 2008. We incurred $1.0 million of interest expense
during both the three months ended September 30, 2009 and 2008 related to the debentures issued in
September 2007.
Liquidity and Capital Resources
Our primary sources of funds are premiums, fees and investment income from our insurance
company subsidiaries and commissions and fee income from our non-insurance company subsidiaries.
Our primary uses of funds are the payment of claims and operating expenses. Net cash used in
operating activities for both the three months ended September 30, 2009 and 2008 was $2.5 million.
Net cash used in both periods was primarily the result of a decrease in cash collected from
premiums written. Net cash used in investing activities for the three months ended September 30,
2009 was $37.5 million, compared with $5.5 million for the same period in the prior fiscal year.
The three months ended September 30, 2009 included net additions in our investment portfolio of
$37.3 million, while the same period in the prior fiscal year included net additions to our
investment portfolio of $4.1 million. Financing activities for the three months ended September 30,
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 the sale of
ancillary products to our insureds. The holding company also receives cash from operating
activities as a result of investment income. Through an intercompany tax allocation arrangement,
taxable losses of the holding company provide cash to the holding company to the extent that
taxable income is generated by the insurance company subsidiaries. At September 30, 2009, we had
$10.0 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 our future cash requirements outside of the insurance company subsidiaries.
The holding company has debt service requirements related to the debentures payable. The
debentures are interest-only and mature in full in July 2037. 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).
State insurance laws limit the amount of dividends that may be paid from our insurance company
subsidiaries. Based on our statutory capital and surplus, we believe our ordinary dividend capacity
for the next twelve months will be approximately $11 million.
23
FIRST ACCEPTANCE CORPORATION 10-Q
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 our insurance company subsidiaries, in both the short-term and the reasonably
foreseeable future. Any future growth strategy may require external financing, and we may from time
to time seek to obtain external financing. We cannot assure that additional sources of financing
will be available to us on favorable terms, or at all, or that any such financing would not
negatively impact our results of operations.
Critical Accounting Policies
There have been no significant changes to our critical accounting policies and estimates
during the three months ended September 30, 2009 compared with those disclosed in Item 7.
Managements Discussion and Analysis of Financial Condition and Results of Operations Critical
Accounting Policies included in our Annual Report on Form 10-K for the fiscal year ended June 30,
2009.
Off-Balance Sheet Arrangements
We have not entered into any new off-balance sheet arrangements since June 30, 2009. For
information with respect to our off-balance sheet arrangements at June 30, 2009, see Item 7.
Managements Discussion and Analysis of Financial Condition and Results of Operations
Off-Balance Sheet Arrangements included in our Annual Report on Form 10-K for the fiscal year
ended June 30, 2009.
Forward-Looking Statements
This report contains forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. All statements made in the report, other than statements of historical fact, are
forward-looking statements. You can identify these statements from our use of the words may,
should, could, potential, continue, plan, forecast, estimate, project, believe,
intent, anticipate, expect, target, is likely, will, or the negative of these terms,
and similar expressions. These statements are made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. These forward-looking statements may include,
among other things:
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statements and assumptions relating to future growth, income, income per share and
other financial performance measures, as well as managements short-term and long-term
performance goals; |
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statements relating to the anticipated effects on results of operations or financial
condition from recent and expected developments or events; |
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statements relating to our business and growth strategies; and |
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any other statements or assumptions that are not historical facts. |
We believe that our expectations are based on reasonable assumptions. However, these
forward-looking statements involve known and unknown risks, uncertainties and other important
factors that could cause our actual results, performance or achievements, or industry results to
differ materially from our expectations of future results, performance or achievements expressed or
implied by these forward-looking statements. In addition, our past results of operations do not
necessarily indicate our future results. We discuss these and other uncertainties in Item 1A.
Risk Factors of our Annual Report on Form 10-K for the fiscal year ended June 30, 2009.
24
FIRST ACCEPTANCE CORPORATION 10-Q
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.
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Item 3. |
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Quantitative and Qualitative Disclosures About Market Risk |
Market risk represents the potential economic loss arising from adverse changes in the fair
value of financial instruments. Our exposures to market risk relate primarily to our investment
portfolio, which is exposed primarily to interest rate risk and credit risk. The fair value of our
fixed maturity portfolio is directly impacted by changes in market interest rates; generally, the
fair value of fixed-income investments moves inversely with movements in market interest rates. Our
fixed maturity portfolio is comprised of substantially all fixed rate investments with primarily
short-term and intermediate-term maturities. This portfolio composition allows flexibility in
reacting to fluctuations of interest rates. The portfolios of our insurance company subsidiaries
are managed to achieve an adequate risk-adjusted return while maintaining sufficient liquidity to
meet policyholder obligations.
Interest Rate Risk
The fair values of our fixed maturity investments fluctuate in response to changes in market
interest rates. Increases and decreases in prevailing interest rates generally translate into
decreases and increases, respectively, in the fair values of those instruments. Additionally, the
fair values of interest rate sensitive instruments may be affected by the creditworthiness of the
issuer, prepayment options, relative values of alternative investments, the liquidity of the
instrument and other general market conditions.
The following table summarizes the estimated effects of hypothetical increases and decreases
in interest rates resulting from parallel shifts in market yield curves on our fixed maturity
portfolio (in thousands). It is assumed that the effects are realized immediately upon the change
in interest rates. The hypothetical changes in market interest rates do not reflect what could be
deemed best or worst case scenarios. Variations in market interest rates could produce significant
changes in the timing of repayments due to prepayment options available. For these reasons, actual
results might differ from those reflected in the table.
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Sensitivity to Instantaneous Interest Rate Changes (basis points) |
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(100) |
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(50) |
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0 |
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50 |
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100 |
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200 |
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Fair value of fixed
maturity portfolio |
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$ |
188,802 |
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$ |
185,158 |
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$ |
181,640 |
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$ |
178,223 |
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$ |
174,909 |
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$ |
168,565 |
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25
FIRST ACCEPTANCE CORPORATION 10-Q
The following table provides information about our fixed maturity investments at September 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.
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Securities |
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Securities |
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Securities |
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with No |
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with |
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with |
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Unrealized |
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Unrealized |
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Unrealized |
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Gains or |
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Year Ended June 30, |
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Gains |
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Losses |
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Losses |
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Amount |
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2010 |
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$ |
5,913 |
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$ |
1,096 |
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$ |
|
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$ |
7,009 |
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2011 |
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|
14,438 |
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|
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903 |
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|
|
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|
15,341 |
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2012 |
|
|
20,483 |
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|
3,588 |
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24,071 |
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2013 |
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|
20,470 |
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|
|
1,808 |
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|
|
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|
22,278 |
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2014 |
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|
20,581 |
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|
1,908 |
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22,489 |
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Thereafter |
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71,263 |
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12,972 |
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84,235 |
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Total |
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$ |
153,148 |
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$ |
22,275 |
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$ |
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$ |
175,423 |
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Fair value |
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$ |
161,392 |
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$ |
20,080 |
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$ |
168 |
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$ |
181,640 |
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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 $5.1 million, or 3% of the fixed maturity portfolio. The top five investments make
up 12% of the fixed maturity portfolio. The average credit quality rating for our fixed maturity
portfolio was AA at September 30, 2009. There are no fixed maturities in the portfolio that have
not produced investment income during the previous twelve months.
The following table shows our fixed maturity portfolio by Standard & Poors Corporation rating
at September 30, 2009 (in thousands).
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% of |
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% of |
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Amortized |
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Amortized |
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Fair |
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Fair |
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Comparable Rating |
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Cost |
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Cost |
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Value |
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Value |
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AAA |
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$ |
76,443 |
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42.9 |
% |
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$ |
78,715 |
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43.3 |
% |
AA+, AA, AA- |
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35,401 |
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19.9 |
% |
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36,513 |
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20.1 |
% |
A+, A, A- |
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50,723 |
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28.5 |
% |
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51,856 |
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28.6 |
% |
BBB+, BBB, BBB- |
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12,081 |
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6.8 |
% |
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11,949 |
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6.6 |
% |
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Total investment grade |
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174,648 |
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98.1 |
% |
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179,033 |
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98.6 |
% |
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BB+, BB, BB- |
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1,935 |
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1.1 |
% |
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1,760 |
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0.9 |
% |
B+, B, B- |
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|
251 |
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0.1 |
% |
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|
111 |
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0.1 |
% |
CCC+, CCC, CCC- |
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|
812 |
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0.5 |
% |
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|
563 |
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0.3 |
% |
CC+, CC, CC- |
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|
357 |
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0.2 |
% |
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|
173 |
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0.1 |
% |
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Total non-investment grade |
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3,355 |
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1.9 |
% |
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|
2,607 |
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1.4 |
% |
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|
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|
|
|
|
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Total |
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$ |
178,003 |
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|
|
100.0 |
% |
|
$ |
181,640 |
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|
|
100.0 |
% |
|
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26
FIRST ACCEPTANCE CORPORATION 10-Q
The mortgage industry has experienced a rise in mortgage delinquencies and foreclosures,
particularly among lower quality exposures (sub-prime and Alt-A). As a result of these
increasing delinquencies and foreclosures, many CMOs with underlying sub-prime and Alt-A mortgages
as collateral experienced significant declines in fair value. We have only modest exposure to
sub-prime investments and no exposure to Alt-A investments. At September 30, 2009, our fixed
maturity portfolio included three CMOs having sub-prime exposure with a fair value of $0.8 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 $38.3 million of municipal bonds, of which $26.5 million are
insured. Of the insured bonds, 66% are insured with MBIA, 17% with AMBAC and 17% with XL Capital.
These securities are paying their principal and periodic interest timely.
The following table presents the underlying ratings as of September 30, 2009, represented by
the lower of either Standard and Poors, Fitchs, or Moodys ratings, of the municipal bond
portfolio (in thousands).
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Insured |
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Uninsured |
|
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Total |
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|
|
Fair |
|
|
% of |
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|
Fair |
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% of |
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|
Fair |
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% of |
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|
|
Value |
|
|
Fair Value |
|
|
Value |
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|
Fair Value |
|
|
Value |
|
|
Fair Value |
|
AAA |
|
$ |
|
|
|
|
|
|
|
$ |
4,807 |
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|
|
40 |
% |
|
$ |
4,807 |
|
|
|
12 |
% |
AA+, AA, AA- |
|
|
13,035 |
|
|
|
49 |
% |
|
|
6,022 |
|
|
|
51 |
% |
|
|
19,057 |
|
|
|
50 |
% |
A+, A, A- |
|
|
11,819 |
|
|
|
45 |
% |
|
|
1,050 |
|
|
|
9 |
% |
|
|
12,870 |
|
|
|
34 |
% |
BBB+, BBB, BBB- |
|
|
1,593 |
|
|
|
6 |
% |
|
|
|
|
|
|
|
|
|
|
1,593 |
|
|
|
4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Total |
|
$ |
26,447 |
|
|
|
100 |
% |
|
$ |
11,879 |
|
|
|
100 |
% |
|
$ |
38,327 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
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Item 4. |
|
Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
Our chief executive officer and chief financial officer have reviewed and evaluated the
effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) of the Securities Exchange Act of 1934, as amended, or Exchange Act) as of September 30,
2009. Based on that evaluation, our chief executive officer and chief financial officer have
concluded that our disclosure controls and procedures effectively ensure that information required
to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the Securities and Exchange
Commissions rules and forms.
Changes in Internal Control Over Financial Reporting
During the period covered by this report, there has been no change in our internal control
over financial reporting that has materially affected or is reasonably likely to materially affect
our internal control over financial reporting.
27
FIRST ACCEPTANCE CORPORATION 10-Q
PART II OTHER INFORMATION
The following exhibits are attached to this report:
31.1 |
|
Certification of Chief Executive Officer pursuant to Rule 13a-14(a). |
31.2 |
|
Certification of Chief Financial Officer pursuant to Rule 13a-14(a). |
32.1 |
|
Chief Executive Officers Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
32.2 |
|
Chief Financial Officers Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
28
FIRST ACCEPTANCE CORPORATION 10-Q
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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FIRST ACCEPTANCE CORPORATION
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November 9, 2009 |
By: |
/s/ Kevin P. Cohn
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Kevin P. Cohn |
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Senior Vice President and Chief Financial Officer
(Principal Financial Officer and Principal Accounting
Officer) |
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29