e10vk
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended June 30, 2011
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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3813 Green Hills Village Drive, Nashville, Tennessee
(Address of principal executive offices)
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37215
(Zip Code) |
(615) 844-2800
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Title of Each Class
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Name of exchange on which registered |
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Common Stock, $.01 par value per share
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New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section
13 or 15(d) of the Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate website, if any, every Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes o No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
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Large accelerated filer o
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Accelerated filero
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Non-accelerated filer o
(Do not check if a smaller reporting company)
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Smaller reporting company þ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes o No þ
The aggregate market value of the voting and non-voting stock held
by non-affiliates of the registrant, based on the closing price of these shares on the New York
Stock Exchange on December 31, 2010, was $30,202,145. For the purposes of this disclosure only,
the registrant has assumed that its directors, executive officers and beneficial owners of 5% or
more of the registrants common stock are affiliates of the registrant.
As of August 31, 2011, there were 48,458,178 shares of the registrants common stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
All of the information called for by Part III of this report is incorporated by reference to
the Definitive Proxy Statement for our 2011 Annual Meeting of Shareholders, which will be held on
November 15, 2011.
FIRST ACCEPTANCE CORPORATION 10-K
Index to Annual Report on Form 10-K
i
FIRST ACCEPTANCE CORPORATION 10-K
PART I
Item 1. Business
General
First Acceptance Corporation (the Company, we or us) is a retailer, servicer and
underwriter of non-standard personal automobile insurance based in Nashville, Tennessee. We
currently write non-standard personal automobile insurance in 12 states and are licensed as an
insurer in 13 additional states. We own and operate three insurance company subsidiaries: First
Acceptance Insurance Company, Inc. (FAIC), First Acceptance Insurance Company of Georgia, Inc.
(FAIC-GA) and First Acceptance Insurance Company of Tennessee, Inc. (FAIC-TN). Non-standard
personal automobile insurance is made available to individuals who are categorized as
non-standard because of their inability or unwillingness to obtain standard insurance coverage
due to various factors, including payment history, payment preference, failure in the past to
maintain continuous insurance coverage, driving record and/or vehicle type, and in most instances
who are required by law to buy a minimum amount of automobile insurance. At August 31, 2011, we
leased and operated 384 retail locations, staffed with employee-agents. Our employee-agents
primarily sell non-standard personal automobile insurance products underwritten by us, as well as
certain commissionable ancillary products and other insurance products. In select markets, we also
sell our products through 13 retail locations operated by independent agents.
Personal Automobile Insurance Market
Personal automobile insurance is the largest line of property and casualty insurance in the
United States with, according to SNL Financial, an estimated market size of $166 billion in
premiums earned for the year ended December 31, 2010. Personal automobile insurance provides
drivers with coverage for liability to others for bodily injury and property damage and for
physical damage to the drivers vehicle from collision and other perils.
The market for personal automobile insurance is generally divided into three product segments:
non-standard, standard and preferred insurance. We believe that the premiums earned in the
non-standard automobile insurance market segment in the United States represent between 15% and 25%
of the total personal automobile insurance market.
Competition
The non-standard personal automobile insurance business is highly competitive. We believe that
our primary competition comes not only from national companies or their subsidiaries, but also from
non-standard insurers and independent agents that operate only in specific regions or states. We
compete against other vertically integrated insurance companies and independent agents that market
insurance on behalf of a number of insurers. We compete with these other insurers on factors such
as initial down payment, availability of monthly payment plans, price, customer service and claims
service. We believe that our significant competitors are the Affirmative, Berkshire Hathaway (which
includes GEICO), Bristol West, Direct General, Infinity, Permanent General, Progressive and Safe
Auto insurance groups.
Our Business
We are a vertically integrated business that acts as the agency, servicer and underwriter of
non-standard personal automobile insurance. We believe our business model allows us to identify and
satisfy the needs of our target customers and eliminates many of the inefficiencies associated with
a non-integrated automobile insurance model. Our retail locations are staffed with employee-agents
who primarily sell non-standard personal automobile insurance products underwritten by us, as well
as certain commissionable ancillary products. Our vertical integration, combined with our
conveniently located retail locations, enables us to control the point of sale and to retain
significant revenue that would otherwise be lost in a non-integrated insurance business model.
We offer customers automobile insurance with low down payments, competitive monthly payments,
convenient locations and a high level of personal service. This strategy makes it easier for our
customers to obtain
automobile insurance, which is legally mandated in the states in
1
FIRST ACCEPTANCE CORPORATION 10-K
which we currently operate.
Currently, our policy renewal rate (the percentage of policies that are renewed after completion of
the full uninterrupted policy term) is approximately 38%, which, due to the payment patterns of our
customers, is lower than the average renewal rate of standard personal automobile insurance
providers. However, we accept customers seeking insurance who have previously terminated coverage
provided by us without imposing any additional requirements on such customers. Our business model
and systems allow us to issue policies efficiently and, when necessary, cancel them to minimize the
potential for credit loss while adhering to regulatory cancellation notice requirements.
In addition to a low down payment and competitive monthly rates, we offer customers valuable
face-to-face contact and speed of service as many of our customers prefer not to purchase a new
automobile insurance policy over the phone or through the internet. Substantially all of our
customers make their payments at our retail locations. For our customers, our employee-agents are
not only the face of the Company, but also the preferred interface for buying insurance. Our
policies are issued at the point of sale, and applications are processed in two business days, as
opposed to the much longer period that is often typical in the automobile insurance industry.
In the future, we may explore growth opportunities by introducing additional insurance
products and expanding into new geographic markets through opening new retail locations and
pursuing selective acquisitions, including acquisitions of local agencies who write non-standard
automobile insurance for other insurance companies. We recognize a growing consumer demand to
purchase personal automobile insurance over the phone and through the internet. We are focused on
improving our ability to meet consumer expectations in these distribution channels.
Our Products
Our core business involves issuing automobile insurance policies to individuals who are
categorized as non-standard, based primarily on their inability or unwillingness to obtain
insurance coverage from standard carriers due to various factors, including their payment history
or need for monthly payment plans, failure to maintain continuous insurance coverage or driving
record. We believe that a majority of our customers seek non-standard insurance due to their
failure to maintain continuous coverage or their need for affordable monthly payments, rather than
as a result of poor driving records. The majority of our customers purchase the minimum amount of
coverage required by law.
In addition to non-standard personal automobile insurance, we also offer our customers
optional products that provide ancillary reimbursements and benefits in the event of an automobile
accident. Those products generally provide reimbursements for medical expenses and hospital stays
as a result of injuries sustained in an automobile accident, automobile towing and rental, bail
bond premiums and ambulance services. We also offer and underwrite a tenant homeowner policy that
provides contents and liability coverage to those of our customers who are renters.
Marketing
Our marketing strategy is based on promoting brand recognition of our products and encouraging
prospective customers to visit one of our retail locations. Our primary advertising strategy
combines local print media advertising with low-cost television and radio advertising. We market
our business under the name Acceptance Insurance in all areas except in the Chicago-area, where
we currently use the names Yale Insurance and Insurance Plus.
Distribution
We primarily distribute our products through our retail locations. We believe the local office
concept is attractive to most of our customers, as they desire the face-to-face assistance they
cannot receive via the internet or over the telephone. Our advertisements promote local phone
numbers that are answered at either the local retail office or one of our regional customer service
centers, which are located in Nashville, Tennessee and Chicago, Illinois. The entire sales process
can be completed at the local retail office where the down payment is collected and a policy is
issued. Future payments can be made either at the local office, by telephone, over the internet, or
mailed to our Nashville customer service center.
2
FIRST ACCEPTANCE CORPORATION 10-K
We recognize the growing consumer preferences to purchase personal automobile insurance over
the phone and through the internet. We are focused on improving our ability to meet customer
expectations in these distribution channels. Within the next twelve months we expect to be able to
quote and bind policies over the phone and through the internet. As a part of these initiatives, we
will add electronic signature capability to our current process. In most cases, this will eliminate
the requirement for customers to visit our local offices to bind a policy.
Underwriting and Pricing
Our underwriting and pricing systems are fully automated. We believe that these systems
provide a competitive advantage to us because they give us the ability to capture relevant pricing
information, improve efficiencies, increase the accuracy and consistency of underwriting decisions
and reduce training costs.
Pricing is generally based on the specific type of vehicle and the drivers age, gender,
marital status, driving experience and location. We also review loss trends in each of the states
in which we operate to assess the adequacy of our rates and underwriting standards. We adjust rates
periodically, as necessary, and as permitted by applicable regulatory authorities, to maintain or
improve underwriting results in each market.
During fiscal year 2010 we began the process of implementing a new pricing program that is
based on multivariate analysis of our historical results and uses insurance scoring as a variable.
We believe that this new pricing program provides us with greater pricing segmentation and improves
our pricing relative to the risk we are insuring. Currently, approximately 32% of our policies in
force (PIF) have been underwritten using this new pricing program, which has now been implemented
in nine of the twelve states in which we operate. We plan to implement the new pricing program in
the three remaining states in which we operate by December 2011.
Claims Handling
Non-standard personal automobile insurance customers generally have a higher frequency of
claims than preferred and standard personal automobile insurance customers. We focus on controlling
the claims process and costs, thereby limiting losses, by internally managing the entire claims
process. We strive to promptly assess claims, manage against fraud, and identify loss trends and
capture information that is useful in establishing loss reserves and determining premium rates. Our
claims process is designed to promote expedient, fair and consistent claims handling, while
controlling loss adjustment expenses.
Our claims operation includes adjusters, appraisers, re-inspectors, special investigators and
claims administrative personnel. We conduct our claims operations out of our Nashville office and
through regional claims offices in Tampa, Florida and Chicago, Illinois. Our employees generally
handle all claims from the initial report of the claim until the final settlement. We believe that
directly employing claims personnel, rather than using independent contractors, results in improved
customer service, lower loss payments and lower loss adjustment expenses. In territories where we
do not believe a staff appraiser would be cost-effective, we utilize the services of independent
appraisers to inspect physical damage to automobiles. The work of independent appraisers is
supervised by regional staff appraisal managers.
While we are strongly committed to settling promptly and fairly the meritorious claims of our
customers and claimants, we are equally committed to defending against non-meritorious claims.
Litigated claims and lawsuits are primarily managed by one of our specially trained litigation
adjusters. Suspicious claims are referred to a special investigation unit. When a dispute arises,
we seek to minimize our claims litigation defense costs by attempting to negotiate flat-fee
representation with local outside counsel specializing in automobile insurance claim defense. We
believe that our efforts to obtain high quality claims defense litigation services at a fixed or
carefully controlled cost have helped us control claims losses and expenses.
3
FIRST ACCEPTANCE CORPORATION 10-K
Loss and Loss Adjustment Expense Reserves
Automobile accidents generally result in insurance companies making payments (referred to as
losses) to individuals or companies to compensate for physical damage to an automobile or other
property and/or an injury to a person. Months and sometimes years may elapse between the occurrence
of an accident, report of the accident to the insurer and payment of the claim. Insurers record a
liability for estimates of losses that will be paid for accidents reported to them, which are
referred to as case reserves. As accidents are not always reported promptly, insurers estimate
incurred but not reported, or IBNR, reserves to cover expected losses for accidents that have
occurred, but have not been reported to the insurer. Insurers also incur expenses in connection
with the handling and settling of claims that are referred to as loss adjustment expenses and
record a liability for the estimated costs to settle their expected unpaid losses.
We are directly liable for loss and loss adjustment expenses under the terms of the insurance
policies underwritten by our insurance company subsidiaries. Each of our insurance company
subsidiaries establishes a reserve for all of its unpaid losses, including case reserves and IBNR
reserves, and estimates for the cost to settle the claims. We estimate our IBNR reserves by
estimating our ultimate liability for loss and loss adjustment expense reserves first, and then
reducing that amount by the amount of the cumulative paid claims and by the amount of our case
reserves. We rely primarily on historical loss experience in determining reserve levels on the
assumption that historical loss experience provides a good indication of future loss experience. We
also consider other factors, such as inflation, claims settlement patterns, legislative activity
and litigation trends. We review our loss and loss adjustment expense reserve estimates on a
quarterly basis and adjust those reserves each quarter to reflect any favorable or unfavorable
development as historical loss experience develops or new information becomes known.
We periodically review our methods of establishing case and IBNR reserves and update them if
necessary. Our actuarial staff reviews our reserves and loss trends on a quarterly basis. We
believe that the liabilities that we have recorded for unpaid losses and loss adjustment expenses
at June 30, 2011 are adequate to cover the final net cost of losses and loss adjustment expenses
incurred through that date.
The following table sets forth the year-end reserves since we began operations as an insurance
company in 2004 and the subsequent development of these reserves through June 30, 2011. The purpose
of the table is to show a cumulative deficiency or redundancy for each year which represents the
aggregate amount by which original estimates of reserves at that year-end have changed in
subsequent years. The top line of the table presents the net reserves at the balance sheet date for
each of the years indicated. This represents the estimated amounts of losses and loss adjustment
expenses for claims arising in all years that were unpaid at the balance sheet date, including the
IBNR reserve, at the end of each successive year. The next portion of the table presents the
re-estimated amount of the previously recorded reserves based on experience at the end of each
succeeding year, including cumulative payments since the end of the respective year. As more
information becomes known about the payments and the frequency and severity of claims for
individual years, the estimate changes accordingly. Favorable loss development, shown as a
cumulative redundancy in the table, exists when the original reserve estimate is greater than the
re-estimated reserves. Adverse loss development, which would be shown as a cumulative deficiency in
the table, exists when the original reserve estimate is less than the re-estimated reserves.
Information with respect to the cumulative development of gross reserves, without adjustment for
the effect of reinsurance, also appears at the bottom portion of the table.
4
FIRST ACCEPTANCE CORPORATION 10-K
In evaluating the information in the table below, you should note that each amount entered
incorporates the cumulative effect of all changes in amounts entered for prior periods. Conditions
and trends that have affected the development of liability in the past may not necessarily recur in
the future.
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At June 30 (in thousands) |
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2004 |
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2005 |
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2006 |
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2007 |
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2008 |
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2009 |
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2010 |
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2011 |
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Net liability for loss and loss
adjustment expense reserves, originally
estimated |
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$ |
18,137 |
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$ |
39,289 |
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$ |
61,521 |
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$ |
91,137 |
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$ |
101,148 |
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$ |
83,895 |
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$ |
73,152 |
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$ |
68,291 |
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Cumulative amounts paid at: |
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One year later |
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13,103 |
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28,024 |
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51,420 |
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68,196 |
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62,964 |
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50,641 |
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49,292 |
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Two years later |
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16,579 |
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34,754 |
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61,627 |
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84,095 |
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78,232 |
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64,644 |
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Three years later |
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17,795 |
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37,025 |
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64,986 |
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88,888 |
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84,178 |
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Four years later |
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18,472 |
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37,802 |
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66,721 |
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91,129 |
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Five years later |
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18,743 |
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38,068 |
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67,725 |
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Six years later |
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18,894 |
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38,393 |
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Seven years later |
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18,979 |
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Liability re-estimated at: |
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One year later |
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17,781 |
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37,741 |
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65,386 |
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89,738 |
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89,766 |
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72,672 |
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71,431 |
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Two years later |
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17,244 |
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38,226 |
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68,491 |
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92,860 |
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86,726 |
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73,593 |
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Three years later |
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16,973 |
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37,484 |
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67,100 |
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91,864 |
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88,555 |
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Four years later |
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17,978 |
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38,289 |
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67,599 |
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93,422 |
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Five years later |
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18,900 |
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38,411 |
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68,783 |
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Six years later |
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18,975 |
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38,583 |
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Seven years later |
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19,084 |
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Net cumulative redundancy (deficiency) |
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(947 |
) |
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706 |
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(7,262 |
) |
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(2,285 |
) |
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12,593 |
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10,302 |
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1,721 |
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Gross liability end of year |
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$ |
30,434 |
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$ |
42,897 |
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$ |
62,822 |
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$ |
91,446 |
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$ |
101,407 |
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$ |
83,973 |
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$ |
73,198 |
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$ |
68,424 |
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Reinsurance receivables |
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|
12,297 |
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|
3,608 |
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1,301 |
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|
309 |
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259 |
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|
78 |
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|
46 |
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|
133 |
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Net liability end of year |
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$ |
18,137 |
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$ |
39,289 |
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$ |
61,521 |
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$ |
91,137 |
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$ |
101,148 |
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$ |
83,895 |
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$ |
73,152 |
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$ |
68,291 |
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Gross re-estimated liability latest |
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$ |
31,393 |
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$ |
41,933 |
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$ |
69,908 |
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$ |
93,783 |
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$ |
88,722 |
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$ |
73,710 |
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$ |
71,509 |
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Re-estimated reinsurance receivables latest |
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|
12,309 |
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|
3,350 |
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|
1,125 |
|
|
|
361 |
|
|
|
167 |
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|
117 |
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|
78 |
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Net re-estimated latest |
|
$ |
19,084 |
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|
$ |
38,583 |
|
|
$ |
68,783 |
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|
$ |
93,422 |
|
|
$ |
88,555 |
|
|
$ |
73,593 |
|
|
$ |
71,431 |
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
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|
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|
|
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|
Gross cumulative redundancy (deficiency) |
|
$ |
(959 |
) |
|
$ |
964 |
|
|
$ |
(7,086 |
) |
|
$ |
(2,337 |
) |
|
$ |
12,685 |
|
|
$ |
10,263 |
|
|
$ |
1,690 |
|
|
|
|
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|
|
|
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|
At June 30, 2011, we had $68.4 million of loss and loss adjustment expense reserves,
which included $42.0 million in IBNR reserves and $26.4 million in case reserves. Reinsurance
receivables of $0.1 million offset gross reserves of $68.4 million at June 30, 2011 in the above
table. For a reconciliation of net loss and loss adjustment expense reserves from the beginning to
the end of the year for the last three fiscal years, see Note 8 to our consolidated financial
statements.
As reflected in the table above, on reserves at June 30, 2010, we have experienced a favorable
net reserve development of $1.7 million, which decreased our loss and loss adjustment expense
reserves for prior accident years and increased our income before income taxes for the 2011 fiscal
year. We believe that the favorable development for the year ended June 30, 2011 was primarily due
to lower than anticipated severity of accidents occurring during the fiscal 2009 and 2010 accident
years, specifically in bodily injury coverage in Texas, Tennessee and South Carolina and physical
damage coverages in Georgia, partially offset by higher loss adjustment expenses specific to bodily
injury and Florida no-fault coverages. The favorable development for the year ended June 30, 2010
was due to lower than anticipated severity of accidents occurring during the fiscal 2007 and 2008
accident years, primarily in bodily injury coverage in Georgia and South Carolina, an improvement
in our claim handling practices and a shift in policy mix toward renewal policies, which have lower
loss ratios than new policies.
Loss and loss adjustment expense reserve estimates were reviewed on a quarterly basis and
adjusted each quarter to reflect any favorable or adverse development. Development assumptions were
based upon historical accident quarters. We analyzed our reserves for each type of coverage, by
state and for loss and loss adjustment expense separately to determine our loss and loss adjustment
expense reserves. To determine the best estimate, we reviewed the results of four estimation
methods, including the reported development method, the paid development method, the reported
Bornhuetter-Ferguson method and the paid Bornhuetter-Ferguson method for each set of data. In each
quarterly review, we develop a point estimate for a subset of our business. We did not prepare
separate point estimates for our entire business using each of the estimation methods. In
determining our loss and loss adjustment expense reserves, we selected different estimation methods
as appropriate for the various subsets of our business. The methods selected varied by coverage and
by state, and considerations included the number and value of the case reserves for
open claims, incurred and paid loss relativities, and suspected strengths and weaknesses for each
of the procedures.
5
FIRST ACCEPTANCE CORPORATION 10-K
Other factors considered in establishing reserves include assumptions regarding
loss frequency and loss severity. We believe assumptions regarding loss frequency are reliable
because injured parties generally report their claims in a reasonably short period of time after an
accident. Loss severity is more difficult to estimate because severity is affected by changes in
underlying costs, including medical costs, settlements or judgments, and regulatory changes.
Based upon the foregoing, we calculated a single point estimate of our net loss and loss
adjustment expense reserves at June 30, 2011. We believe that estimate is our best estimate of our
loss and loss adjustment expense reserves at June 30, 2011. The loss and loss adjustment expense
reserves in our consolidated financial statements for the fiscal year ended June 30, 2011 are equal
to the estimate determined by our actuarial staff.
We believe that our estimate regarding changes in loss severity is the most significant factor
that can potentially impact our IBNR reserve estimate. We believe that there is a reasonable
possibility of increases or decreases in our estimated claim severities, with the largest potential
changes occurring in the most recent accident years. An increase in loss severity of unpaid losses,
ranging from 0.5% to 3.0% dependent upon the accident year, would result in adverse development of
net loss and loss adjustment expense reserve levels at June 30, 2011 and a decrease in income
before income taxes of approximately $5.9 million. Conversely, a comparable decrease in loss
severity would result in favorable development of net loss and loss adjustment expense reserve
levels at June 30, 2011 and an increase in income before income taxes of approximately $5.9
million.
Reinsurance
Reinsurance is an arrangement in which a company called a reinsurer agrees in a contract to
assume specified risks written by an insurance company, known as a ceding company, by paying the
insurance company all or a portion of the insurance companys losses arising under specified
classes of insurance policies, in return for a reinsurance premium. Through August 31, 2004, our
insurance companies ceded approximately 50% of their non-standard personal automobile insurance
premiums and losses on a quota-share basis to unaffiliated reinsurers. Commencing August 1, 2010,
our insurance companies began utilizing excess-of-loss reinsurance with an unaffiliated reinsurer
to limit our exposure to losses under liability coverages for automobile insurance policies issued
with limits greater than the minimum statutory requirements. Historically, the amount of such
policies written by our insurance companies has not been material.
Although FAIC is licensed in Texas, the majority of our business there is currently written by
a managing general agency subsidiary through a program with a county mutual insurance company and
is assumed by us through 100% quota-share reinsurance.
Ratings
In December 2010, A.M. Best, which rates insurance companies based on factors of concern to
policyholders, reaffirmed the ratings of our insurance company subsidiaries at B (Fair) with a
Rating Outlook of positive. Publications of A.M. Best indicate that the B (Fair) rating, which
is the seventh highest rating amongst a scale of 15 ratings, is assigned to those companies that in
A.M. Bests opinion have a fair ability to meet their ongoing obligations to policyholders, but are
financially vulnerable to adverse changes in underwriting and economic conditions. A Rating
Outlook is assigned to a rating to indicate its potential direction over an intermediate term,
generally defined as 12 to 36 months. A positive outlook indicates a possible rating upgrade due to
favorable financial/market trends relative to the current rating level.
In evaluating a companys financial and operating performance, A.M. Best reviews the companys
profitability, leverage and liquidity, as well as its book of business, the adequacy and soundness
of its reinsurance (if any), the quality and estimated market value of its assets, the adequacy of
its loss reserves, the adequacy of its surplus, its capital structure, the experience and
competence of its management and its market presence. A.M. Bests ratings reflect its opinion of an
insurance companys financial strength, operating performance and ability to meet its obligations
to policyholders, and are not recommendations to potential or current investors to buy, sell or
hold our common stock.
Financial institutions and reinsurance companies sometimes use the A.M. Best ratings to help
assess the financial strength and quality of insurance companies. The current ratings of our
insurance company subsidiaries or their failure to maintain such ratings may dissuade a financial
institution or reinsurance company from conducting
business with us or increase our potential interest or reinsurance costs, respectively. We do not
believe that the majority of our customers are motivated to purchase our products and services
based on our A.M. Best rating.
6
FIRST ACCEPTANCE CORPORATION 10-K
Regulatory Environment
Insurance Company Regulation. We and our insurance company subsidiaries are regulated by
governmental agencies in the states in which we conduct business and by various federal statutes
and regulations. These state regulations vary by jurisdiction but, among other matters, usually
involve:
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regulating premium rates and forms; |
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setting minimum solvency standards; |
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setting capital and surplus requirements; |
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licensing companies, agents and, in some states, adjusters; |
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setting requirements for and limiting the types and amounts of investments; |
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establishing requirements for the filing of annual statements and other financial
reports; |
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conducting periodic statutory examinations of the affairs of insurance companies; |
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requiring prior approval of changes in control and of certain transactions with
affiliates; |
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limiting the amount of dividends that may be paid without prior regulatory approval; and |
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setting standards for advertising and other market conduct activities. |
Required Licensing. We operate under licenses issued by various state insurance authorities.
Such licenses may be of perpetual duration or periodically renewable, provided we continue to meet
applicable regulatory requirements. The licenses govern, among other things, the types of insurance
coverages and products that may be offered in the licensing state. Such licenses are typically
issued only after an appropriate application is filed and prescribed criteria are met. All of our
licenses are in good standing. Currently, we hold property and casualty insurance licenses in the
following 25 states:
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Alabama
Arizona
Arkansas
Colorado
Florida
Georgia
Illinois
Indiana
Iowa
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Kansas
Kentucky
Louisiana
Mississippi
Missouri
Nevada
New Mexico
Ohio
Oklahoma
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Pennsylvania
South Carolina
Tennessee
Texas
Utah
Virginia
West Virginia |
As required by our current operations, we hold managing general agency licenses in Texas
and Florida and motor club licenses in Mississippi and Tennessee. To expand into a new state or
offer a new line of insurance or other new product, we must apply for and obtain the appropriate
licenses.
Insurance Holding Company Regulation. We operate as an insurance holding company system and
are subject to regulation in the jurisdictions in which our insurance company subsidiaries conduct
business. These regulations require that each insurance company in the holding company system
register with the insurance department of its state of domicile and furnish information concerning
the operations of companies in the holding company system which may materially affect the
operations, management or financial condition of the insurers in the holding company domiciled in
that state. We have insurance company subsidiaries that are organized and domiciled under the
insurance statutes of Texas, Georgia and Tennessee. The insurance laws in each of these states
similarly provide that all transactions among members of a holding company system be done at arms
length and be shown to be fair and reasonable to the regulated insurer. Transactions between
insurance company subsidiaries and their parents and affiliates typically must be disclosed to the
state regulators, and any material or extraordinary transaction requires prior approval of the
applicable state insurance regulator. A change of control of a domestic insurer or of any
controlling person requires the prior approval of the state insurance regulator. In general, any
person who acquires 10% or more of the outstanding voting securities of the insurer or its parent
company is
presumed to have acquired control of the domestic insurer. To the best of our knowledge, we
are in compliance with the regulations discussed above.
7
FIRST ACCEPTANCE CORPORATION 10-K
Restrictions on Paying Dividends. We may at times rely on dividends from our insurance
company subsidiaries to meet corporate cash requirements. State insurance regulatory authorities
require insurance companies to maintain specified levels of statutory capital and surplus. The
amount of an insurers capital and surplus following payment of any dividends must be reasonable in
relation to the insurers outstanding liabilities and adequate to meet its financial needs. Prior
approval from state insurance regulatory authorities is generally required in order for an
insurance company to declare and pay extraordinary dividends. The payment of ordinary dividends is
limited by the amount of capital and surplus available to the insurer, as determined in accordance
with state statutory accounting practices and other applicable limitations. State insurance
regulatory authorities that have jurisdiction over the payment of dividends by our insurance
company subsidiaries may in the future adopt statutory provisions more restrictive than those
currently in effect. See Note 18 to our consolidated financial statements for a discussion of the
ability of our insurance company subsidiaries to pay dividends.
Regulation of Rates and Policy Forms. Most states in which our insurance company subsidiaries
operate have insurance laws that require insurance companies to file premium rate schedules and
policy or coverage forms for review and approval. In many cases, such rates and policy forms must
be approved prior to use. State insurance regulators have broad discretion in judging whether an
insurers rates are adequate, not excessive and not unfairly discriminatory. Generally, property
and casualty insurers are unable to implement rate increases until they show that the costs
associated with providing such coverage have increased. The speed at which an insurer can change
rates in response to competition or increasing costs depends, in part, on the method by which the
applicable states rating laws are administered. There are three basic rate administration systems:
(i) the insurer must file and obtain regulatory approval of the new rate before using it; (ii) the
insurer may begin using the new rate and immediately file it for regulatory review; or (iii) the
insurer may begin using the new rate and file it in a specified period of time for regulatory
review. Under all three rating systems, the state insurance regulators have the authority to
disapprove the rate subsequent to its filing. Thus, insurers who begin using new rates before the
rates are approved may be required to issue premium refunds or credits to policyholders if the new
rates are ultimately deemed excessive and disapproved by the applicable state insurance
authorities. In some states there has historically been pressure to reduce premium rates for
automobile and other personal insurance or to limit how often an insurer may request increases for
such rates. To the best of our knowledge, we are in compliance with all such applicable rate
regulations.
Guaranty Funds. Under state insurance guaranty fund laws, insurers doing business in a state
can be assessed for certain obligations of insolvent insurance companies to policyholders and
claimants. Maximum contributions required by law in any one year vary between 1% and 2% of annual
premiums written in that state. In most states, guaranty fund assessments are recoverable either
through future policy surcharges or offsets to state premium tax liabilities. To date, we have not
received any material unrecoverable assessments.
Investment Regulation. Our insurance company subsidiaries are subject to state laws and
regulations that require diversification of their investment portfolios and limitations on the
amount of investments in certain categories. Failure to comply with these laws and regulations
would cause non-conforming investments to be treated as non-admitted assets for purposes of
measuring statutory surplus and, in some instances, would require divestiture. If a non-conforming
asset is treated as a non-admitted asset, it would lower the affected subsidiarys surplus and
thus, its ability to write additional premiums and pay dividends. To the best of our knowledge, our
insurance company subsidiaries are in compliance with all such investment regulations.
Restrictions on Cancellation, Non-Renewal or Withdrawal. Many states have laws and
regulations that limit an insurers ability to exit a market. For example, certain states limit an
automobile insurers ability to cancel or not renew policies. Some states prohibit an insurer from
withdrawing one or more lines of business from the state, except pursuant to a plan approved by the
state insurance department. The state insurance department may disapprove a plan that may lead to
market disruption. Laws and regulations that limit cancellations and non-renewals and that subject
business withdrawals to prior approval requirements may restrict an insurers ability to exit
unprofitable markets. To the best of our knowledge, we are in compliance with all such laws and
regulations.
8
FIRST ACCEPTANCE CORPORATION 10-K
Privacy Regulations. In 1999, the United States Congress enacted the Gramm-Leach-Bliley Act,
which protects consumers from the unauthorized dissemination of certain nonpublic personal
information. Subsequently, the majority of states have implemented additional regulations to
address privacy issues. These laws and regulations apply to all financial institutions, including
insurance companies, and require us to maintain appropriate procedures for managing and protecting
certain nonpublic personal information of our customers and to fully disclose our privacy practices
to our customers. We may also be exposed to future privacy laws and regulations, which could impose
additional costs and impact our results of operations or financial condition. To the best of our
knowledge, we are in compliance with all applicable privacy laws and regulations.
Licensing of Our Employee-Agents and Adjusters. All of our employees who sell, solicit or
negotiate insurance are licensed, as required, by the state in which they work, for the applicable
line or lines of insurance they offer. Our employee-agents generally must renew their licenses
annually and adhere to minimum annual continuing education requirements. In certain states in which
we operate, our insurance claims adjusters are also required to be licensed and are subject to
annual continuing education requirements.
Unfair Claims Practices. Generally, insurance companies, adjusting companies and individual
claims adjusters are prohibited by state statutes from engaging in unfair claims practices which
could indicate a general business practice. Unfair claims practices include, but are not limited
to:
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misrepresenting pertinent facts or insurance policy provisions relating to coverages at
issue; |
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failing to acknowledge and act reasonably promptly upon communications regarding claims
arising under insurance policies; |
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failing to affirm or deny coverage of claims in a reasonable time after proof of loss
statements have been completed; |
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attempting to settle claims for less than the amount to which a reasonable person would
have believed such person was entitled; |
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attempting to settle claims on the basis of an application that was altered without
notice to, knowledge or consent of the insured; |
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making known to insureds or claimants a policy of appealing from arbitration awards in
favor of insureds or claimants for the purpose of compelling them to accept settlements or
compromises less than the amount awarded in arbitration; |
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delaying the investigation or payment of claims by requiring an insured, claimant or the
physician of either to submit a preliminary claim report and then requiring the subsequent
submission of formal proof of loss forms, both of which submissions contain substantially
the same information; |
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failing to settle claims promptly, where liability has become reasonably clear, under
one portion of the insurance policy coverage in order to influence settlements under other
portions of the insurance policy coverage; and |
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not attempting in good faith to effectuate prompt, fair and equitable settlements of
claims in which liability has become reasonably clear. |
We set business conduct policies and conduct regular training to ensure that our
employee-adjusters and other claims personnel are aware of these prohibitions, and we require them
to conduct their activities in compliance with these statutes. To the best of our knowledge, we
have not engaged in any unfair claims practices.
Quarterly and Annual Financial Reporting. We are required to file quarterly and annual
financial reports with states utilizing statutory accounting practices that are different from U.S.
generally accepted accounting principles, which generally reflect our insurance company
subsidiaries on a going concern basis. The statutory accounting practices used by state regulators,
in keeping with the intent to assure policyholder protection, are generally based on a liquidation
concept. For statutory financial information on our insurance company subsidiaries, see Note 18 to
our consolidated financial statements included in this report.
Periodic Financial and Market Conduct Examinations. The state insurance departments that have
jurisdiction over our insurance company subsidiaries conduct on-site visits and examinations of the
insurers affairs,
especially as to their financial condition, ability to fulfill their obligations to policyholders,
market conduct, claims practices and compliance with other laws and applicable regulations.
Generally, these examinations are conducted every three to five years. If circumstances dictate,
regulators are authorized to conduct special or target
9
FIRST ACCEPTANCE CORPORATION 10-K
examinations of insurers, insurance agencies
and insurance adjusting companies to address particular concerns or issues. The results of these
examinations can give rise to regulatory orders requiring remedial, injunctive or other corrective
action on the part of the company that is the subject of the examination. FAIC has been examined by
the Texas Department of Insurance for financial condition through December 31, 2007. FAIC-GA has
been examined by the Georgia Department of Insurance for financial condition through December 31,
2007. FAIC-TN received an organizational examination by the Tennessee Department of Commerce and
Insurance at December 4, 2006. Examinations of financial condition through December 31, 2010 for
all three insurance companies are currently in process. During the fiscal year ended June 30,
2010, FAIC was examined for market conduct by the states of Illinois and Pennsylvania. None of our
insurance company subsidiaries have ever been the subject of a target examination.
Risk-Based Capital. In order to enhance the regulation of insurer solvency, the National
Association of Insurance Commissioners, or NAIC, has adopted a formula and model law to implement
risk-based capital, or RBC, requirements designed to assess the minimum amount of statutory
capital that an insurance company needs to support its overall business operations and to ensure
that it has an acceptably low expectation of becoming financially impaired. RBC is used to set
capital requirements based on the size and degree of risk taken by the insurer and taking into
account various risk factors such as asset risk, credit risk, underwriting risk, interest rate risk
and other relevant business risks. The NAIC model law provides for increasing levels of regulatory
intervention as the ratio of an insurers total adjusted capital decreases relative to its RBC,
culminating with mandatory control of the operations of the insurer by the domiciliary insurance
department at the so-called mandatory control level. This calculation is performed on a calendar
year basis, and at December 31, 2010, each of our insurance companies all maintained an RBC level
that was in excess of an amount that would require any corrective actions on their part.
RBC is a comprehensive financial analysis system affecting nearly all types of licensed
insurers, including our insurance company subsidiaries. It is designed to evaluate the relative
financial condition of the insurer by application of a weighting formula to the companys assets
and its policyholder obligations. The key RBC calculation is to recast total surplus, after
application of the RBC formula, in terms of an authorized control level RBC. The authorized control
level RBC is a number determined under the RBC formula in accordance with certain RBC instructions.
Once the authorized control level RBC is determined, it is contrasted against the companys total
adjusted capital. A high multiple generally indicates stronger capitalization and financial
strength, while a lower multiple reflects lesser capitalization and strength. Each states statutes
also create certain RBC multiples at which either the company or the regulator must take action.
For example, there are four defined RBC levels that trigger different regulatory events. The
minimum RBC level is called the company action level RBC and is generally defined as the product of
2.0 and the companys authorized control level RBC. Next is a regulatory action level RBC, which is
defined as the product of 1.5 and the companys authorized control level RBC. Below the regulatory
action level RBC is the authorized control level RBC. Finally, there is a mandatory control level
RBC, which means the product of 0.70 and the companys authorized control level RBC.
As long as the companys total adjusted capital stays above the company action level RBC
(i.e., at greater than 2.0 times the authorized control level RBC), regulators generally will not
take any corrective action. However, if an insurance companys total adjusted capital falls below
the company action level RBC, but remains above the regulatory action level RBC, the company is
required to submit an RBC plan to the applicable state regulator(s) that identifies the conditions
that contributed to the substandard RBC level and identifies a remediation plan to increase the
companys total adjusted capital above 2.0 times its authorized control level RBC. If a companys
total adjusted capital falls below its regulatory action level RBC but remains above its authorized
control level RBC, then the regulator may require the insurer to submit an RBC plan, perform a
financial examination or analysis on the companys assets and liabilities, and may issue an order
specifying corrective action for the company to take to improve its RBC number. In the event an
insurance companys total adjusted capital falls below its authorized control level RBC, the state
regulator may require the insurer to submit an RBC plan or may place the insurer under regulatory
supervision. If an insurance companys total adjusted capital were to fall below its mandatory
control level RBC, the regulator is obligated to place the insurer under regulatory control, which
could ultimately include, among other actions, administrative supervision, rehabilitation or
liquidation.
At December 31, 2010, FAICs total adjusted capital was 6.2 times its authorized control level
RBC, requiring no corrective action on FAICs part. Likewise, at December 31, 2010, FAIC-GA and
FAIC-TN had total adjusted capital of 3.9 and 4.5, respectively, times their authorized control
level RBC.
10
FIRST ACCEPTANCE CORPORATION 10-K
IRIS Ratios. The NAIC Insurance Regulatory Information System, or IRIS, is part of a
collection of analytical tools designed to provide state insurance regulators with an integrated
approach to screening and analyzing the financial condition of insurance companies operating in
their respective states. IRIS is intended to assist state insurance regulators in targeting
resources to those insurers in greatest need of regulatory attention. IRIS consists of two phases:
statistical and analytical. In the statistical phase, the NAIC database generates key financial
ratio results based on financial information obtained from insurers annual statutory statements.
The analytical phase is a review of the annual statements, financial ratios and other automated
solvency tools. The primary goal of the analytical phase is to identify companies that appear to
require immediate regulatory attention. A ratio result falling outside the defined range of IRIS
ratios is not considered a failing result; rather, unusual values are viewed as part of the
regulatory early monitoring system. Furthermore, in some years, it may not be unusual for
financially sound insurance companies to have several ratios with results outside the defined
ranges.
At December 31, 2010, our insurance company subsidiaries did not have any IRIS ratios outside
the defined ranges.
Employees
At June 30, 2011, we had approximately 1,045 employees. Our employees are not covered by any
collective bargaining agreements.
Available Information
We file reports with the United States Securities and Exchange Commission (SEC), including
Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, and other reports from time to time.
The public may read and copy any materials filed with the SEC at the SECs Public Reference Room at
100 F Street, N.E., Washington D.C. 20549. The public may obtain information about the operation of
the Public Reference Room by calling the SEC at 1-800-SEC-0330. We are an electronic filer, and the
SEC maintains an internet site at www.sec.gov that contains our reports, proxy and information
statements, and other information filed electronically. The SEC website address is provided as an
inactive textual reference only, and the information provided on the SEC website is not part of
this report and is therefore not incorporated by reference unless such information is otherwise
specifically referenced elsewhere in this report.
Internet Website
We maintain an internet website at the following address: www.firstacceptancecorp.com. The
information on the Companys website is not incorporated by reference in this report. We make
available on or through our website certain reports and amendments to those reports that we file
with, or furnish to, the SEC in accordance with the Securities Exchange Act of 1934, as amended.
These include our Annual Reports on Form 10-K, our Quarterly Reports on Form 10-Q, our current
reports on Form 8-K, and any amendments to these reports. We make this information available on our
website free of charge as soon as reasonably practicable after we electronically file the
information with, or furnish it to, the SEC.
11
FIRST ACCEPTANCE CORPORATION 10-K
Item 1A. Risk Factors
Investing in the Company involves risk. You should carefully consider the following risk
factors, any of which could have a significant or material adverse effect on the Company. This
information should be considered together with the other information contained in this report and
in the other reports and materials filed by us with the SEC, as well as news releases and other
information publicly disseminated by us from time to time.
Our business may be adversely affected by adverse economic conditions and other negative
developments in the non-standard personal automobile insurance industry.
Substantially all of our gross premiums written are generated from sales of non-standard
personal automobile insurance policies. As a result of our concentration in this line of business,
negative developments in the economic, competitive or regulatory conditions affecting the
non-standard personal automobile insurance industry and our customers could reduce our revenues,
increase our expenses or otherwise have a material adverse effect on our results of operations and
financial condition. Continued weak economic conditions in the United States have resulted, and
could continue to result, in fewer customers purchasing and maintaining non-standard personal
automobile insurance policies and certain customers reducing their insurance coverage, which
adversely impacts our revenues and profitability. Developments affecting the non-standard personal
automobile insurance industry and our customers could have a greater effect on us compared with
more diversified insurers that also sell other types of automobile insurance products or write
other additional lines of insurance.
Our results may fluctuate as a result of cyclical changes in the non-standard personal automobile
insurance industry.
The non-standard personal automobile insurance industry is cyclical in nature. Likewise,
adverse economic conditions impact our customers and many will choose to reduce their coverage or
go uninsured during a weak economy. Employment rates, sales of used vehicles, consumer confidence
and other factors affect our customers purchasing habits. In the past, the industry has also been
characterized by periods of price competition and excess capacity followed by periods of high
premium rates and shortages of underwriting capacity. If new competitors enter the market, existing
competitors may attempt to increase market share by lowering rates. Such conditions could lead to
reduced prices, which would negatively impact our revenues and profitability. Given the cyclical
nature of the industry and the economy, these conditions may negatively impact our revenues and
profitability.
Due to our largely fixed cost structure, our profitability may decline if our sales volume declines
significantly.
Our reliance on leased retail locations staffed by employee-agents results in a cost structure
that has a high proportion of fixed costs as compared with other more traditional insurers. In
times of increasing sales volume, our acquisition cost per policy decreases, improving our expense
ratio, which we believe is one of the significant advantages of our business model. However, in
times of declining sales volume, the opposite occurs. Decreases in our sales volume, without
corresponding decreases in our costs, would adversely impact our results of operations and
profitability.
Our loss and loss adjustment expenses may exceed our reserves, which would adversely impact our
results of operations and financial condition.
We establish reserves for the estimated amount of claims under the terms of the insurance
policies underwritten by our insurance company subsidiaries. The amount of the reserves is
determined based on historical claims information, industry statistics and other factors. The
establishment of appropriate reserves is an inherently uncertain process due to a number of
factors, including the difficulty in predicting the frequency and severity of claims, the rate of
inflation, changes in trends, ongoing interpretation of insurance policy provisions by courts,
inconsistent decisions in lawsuits regarding coverage and broader theories of liability. Any
changes in claims settlement practices can also lead to changes in loss payment patterns, which are
used to estimate reserve levels. Our ability to accurately estimate our loss and loss adjustment
expense reserves may be made more difficult by changes in our business, including entry into new
markets, changes in sales practices, or changes in our customers purchasing habits. If our
reserves prove to be inadequate, we will be required to increase our loss reserves and the amount
of any such increase would reduce our income in the period that the deficiency is recognized. The
historic development of reserves for loss and loss adjustment expenses may not necessarily reflect
future trends in the development of these amounts. Consequently, our actual losses could materially
exceed our loss reserves, which would have a material adverse effect on our results of operations
and financial condition.
12
FIRST ACCEPTANCE CORPORATION 10-K
Our investment portfolio may suffer reduced returns or other-than-temporary impairment losses,
which could reduce our profitability.
Our results of operations depend, in part, on the performance of our investment portfolio. At
June 30, 2011, substantially all of our investment portfolio was invested either directly or
indirectly in debt securities, primarily in marketable, investment-grade, U.S. government
securities, municipal bonds, corporate bonds and collateralized mortgage obligations. Fluctuations
in interest rates and economic declines affect our returns on, and the fair value of, debt
securities. Unrealized gains and losses on debt securities are recognized in other comprehensive
income (loss) and increase or decrease our stockholders equity. At June 30, 2011, the fair value
of our investment portfolio exceeded the amortized cost by $9.5 million. An increase in interest
rates could reduce the fair value of our investments in debt securities. At June 30, 2011, the
impact of an immediate 100 basis point increase in market interest rates on our fixed maturities
and cash equivalents portfolio would have resulted in an estimated decrease in fair value of 3.4%,
or approximately $6.1 million. Defaults by third parties who fail to pay or perform obligations
could reduce our investment income and could also result in investment losses to our portfolio. See
Critical Accounting Estimates Investments in Item 7 of this report and Note 2 to our
consolidated financial statements regarding determination of other-than-temporary impairment losses
on investment securities.
Our business may be adversely affected by negative developments in the states in which we operate.
We currently operate in 12 states located primarily in the Southeastern and Midwestern United
States. For the year ended June 30, 2011, approximately 69% of our premiums earned were generated
from insurance policies written in five states. Our revenues and profitability are affected by
prevailing economic, demographic, regulatory, competitive and other conditions in the states in
which we operate. Changes in any of these conditions could make it more costly or difficult for us
to conduct business. Adverse regulatory developments, which could include reductions in the maximum
rates permitted to be charged, restrictions on rate increases, fundamental changes to the design or
implementation of the automobile insurance regulatory framework, or economic conditions that result
in fewer customers purchasing or maintaining insurance (or purchasing or maintaining reduced
coverages), could reduce our revenues, increase our expenses or otherwise have a material adverse
effect on our results of operations and financial condition. These developments could have a
greater effect on us, as compared with more diversified insurers that also sell other types of
automobile insurance products, write other additional lines of insurance coverages or whose
premiums are not concentrated in a single line of insurance.
Our business is highly competitive, which may make it difficult for us to market our core products
effectively and profitably.
The non-standard personal automobile insurance business is highly competitive. We believe that
our primary insurance company competition comes not only from national insurance companies or their
subsidiaries, but also from non-standard insurers and independent agents that operate in a specific
region or single state in which we also operate. We believe that our significant competitors are
the Affirmative, Berkshire Hathaway (which includes GEICO), Bristol West, Direct General, Infinity,
Permanent General, Progressive and Safe Auto insurance groups. Some of our competitors have
substantially greater financial and other resources than us, and they may offer a broader range of
products or competing products at lower prices, and may offer products through multiple
distribution channels. Our revenues, profitability and financial condition could be materially
adversely affected if we are required to decrease or are unable to increase prices to stay
competitive, or if we do not successfully retain our current customers and attract new customers.
In addition, innovation by competitors or other market participants may increase the level of
competition in the industry. This can include product, pricing, or marketing innovations, new or
improved services, technology advances, or new modes of doing business that enhance the customers
ability to shop and compare prices from multiple companies, among other initiatives. Our ability to
react to such advances and navigate the new competitive environment is important to our success.
13
FIRST ACCEPTANCE CORPORATION 10-K
Our ability to attract, develop, and retain talented employees, managers, and executives, and to
maintain appropriate staffing levels, is critical to our success.
Our success depends on our ability to attract, develop, and retain talented employees,
including executives, other key managers and employee-agents. Our loss of certain key employees, or
the failure to attract and develop talented new executives and managers, could have a materially
adverse effect on our business. In addition, we must forecast volume and other factors in changing
business environments with reasonable accuracy and adjust our hiring and training programs and
employment levels accordingly. Our failure to recognize the need for such adjustments, or our
failure or inability to react appropriately on a timely basis, could lead either to over-staffing
(which would adversely affect our cost structure) or under-staffing (impairing our ability to
service our business) in one or more locations. In either such event, our financial results,
customer relationships, and brand could be materially adversely affected.
Pricing, claim and coverage issues and class action litigation are continually emerging in the
automobile insurance industry, and these issues could adversely impact our revenues, profitability,
or our methods of doing business.
As automobile insurance industry practices and regulatory, judicial and consumer conditions
change, litigation and unexpected and unintended issues related to claims, coverages and business
practices may emerge. These issues can have an adverse effect on our business by subjecting us to
liability, changing the way we price and market our products, extending coverage beyond our
underwriting intent, requiring us to obtain additional licenses or increasing the size of claims.
Examples of some issues include:
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concerns over the use of an applicants credit score or zip code as a factor in making
risk selections and pricing decisions; |
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plaintiffs targeting automobile insurers in purported class action litigation relating
to sales and marketing practices and claims-handling practices, such as total loss
evaluation methodology, the use of aftermarket (non-original equipment manufacturer) parts
and the alleged diminution in value to insureds vehicles involved in accidents; and |
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consumer groups lobbying state legislatures to regulate and require separate licenses
for individuals and companies engaged in the sale of ancillary products or services. |
The effects of these and other unforeseen emerging issues could subject us to liability or
negatively affect our revenues, profitability, or our methods of doing business.
We may have difficulties successfully implementing and maintaining our new pricing program.
We are currently implementing a new pricing program that is based on multivariate analysis of
our historical results and will use insurance scoring as a variable. The new pricing program has
been implemented in nine of the states in which we operate, and implementation in our remaining
states is continuing. The success of our new pricing program will depend on our ability to properly
design and accurately set rates in each of the states in which we currently operate. There are no
assurances that this new pricing program will be approved by all of the insurance departments in
these states. In addition, our success is also dependent upon our ability to develop and maintain
information systems to effectively support the administration of this program. Our failure to
properly design and price this new program could cause us to under price risks, which would
negatively affect our loss ratio, or we could overprice risks, which could make our rates
uncompetitive and reduce our number of policies in force. The inability to successfully implement
this new program could adversely affect our operating results and financial condition.
14
FIRST ACCEPTANCE CORPORATION 10-K
Our business may be adversely affected if we do not underwrite risks accurately and charge adequate
rates to policyholders.
Our financial condition, cash flows, and results of operations depend on our ability to
underwrite and set rates accurately for a full spectrum of risks. The role of the pricing function
is to ensure that rates are adequate to generate sufficient premium to pay losses, loss adjustment
expenses, and underwriting expenses, and to earn a profit. Pricing involves the acquisition and
analysis of historical accident and loss data, and the projection of future accident trends, loss
costs and expenses, and inflation trends, among other factors, for each of our products and in many
different markets. As a result, our ability to price accurately is subject to a number of risks and
uncertainties, including, without limitation:
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the availability of sufficient reliable data; |
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uncertainties inherent in estimates and assumptions, generally; |
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our ability to conduct a complete and accurate analysis of available data; |
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our ability to timely recognize changes in trends and to predict both the severity and
frequency of future losses with reasonable accuracy; |
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our ability to predict changes in certain operating expenses with reasonable accuracy; |
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the development, selection, and application of appropriate rating formulae or other
pricing methodologies; |
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our ability to innovate with new pricing strategies, and the success of those
innovations; |
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our ability to implement rate changes and obtain any required regulatory approvals on a
timely basis; |
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our ability to predict policyholder retention accurately; |
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unanticipated court decisions, legislation, or regulatory action; |
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the occurrence and severity of catastrophic events, such as hurricanes, hail storms,
other severe weather, and terrorist events; |
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our understanding of the impact of ongoing changes in our claim settlement practices;
and |
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changing driving patterns. |
The realization of one or more of such risks may result in our pricing being based on
inadequate or inaccurate data or inappropriate analyses, assumptions, or methodologies, and may
cause us to estimate incorrectly future changes in the frequency or severity of claims. As a
result, we could under price risks, which would negatively affect our underwriting profit margins,
or we could overprice risks, which could reduce our volume and competitiveness. In either event,
our operating results, financial condition, and cash flows could be materially adversely affected.
In addition, under pricing insurance policies over time could erode the surplus of one or more of
our insurance subsidiaries, constraining our ability to write new business.
Our results are dependent on our ability to adjust claims accurately.
We must accurately evaluate and pay claims that are made under our insurance policies. Many
factors can affect our ability to pay claims accurately, including the training, experience, and
skill of our claims representatives, the extent of and our ability to recognize fraudulent or
inflated claims, the effectiveness of our management, and our ability to develop or select and
implement appropriate procedures, technologies, and systems to support our claims functions. Our
failure to pay claims fairly, accurately, and in a timely manner, or to deploy claims resources
appropriately, could result in unanticipated costs to us, lead to material litigation, undermine
customer goodwill and our reputation in the marketplace, and impair our brand image and, as a
result, materially adversely affect our competitiveness, financial results, prospects, and
liquidity.
We may write-off intangible assets, such as goodwill.
As a result of purchase accounting for our business combination transactions, our consolidated
balance sheet at June 30, 2011 contained intangible assets designated as goodwill and other
identifiable intangible assets totaling $25.9 million. On an ongoing basis, we evaluate whether
facts and circumstances indicate any impairment of value of intangible assets. As circumstances
change, we cannot assure you that the value of these intangible assets will be realized by us. If
we determine that a material impairment has occurred, we will be required to write-off the
impaired portion of intangible assets, which could have a material adverse effect on our
results of operations in the period in which the write-off occurs.
15
FIRST ACCEPTANCE CORPORATION 10-K
Our insurance company subsidiaries are subject to regulatory restrictions on paying dividends to
our holding company.
Our holding company may rely, in part, on receiving dividends from the insurance company
subsidiaries to pay its obligations. State insurance laws limit the ability of our insurance
company subsidiaries to pay dividends and require our insurance company subsidiaries to maintain
specified minimum levels of statutory capital and surplus. These restrictions affect the ability of
our insurance company subsidiaries to pay dividends to our holding company and may require our
subsidiaries to obtain the prior approval of regulatory authorities, which could slow the timing of
such payments or reduce the amount that can be paid. The limits on the amount of dividends that can
be paid by our insurance company subsidiaries may affect the ability of our holding company to pay
its obligations. The dividend-paying ability of the insurance company subsidiaries is discussed in
Note 18 to our consolidated financial statements.
Our ability to use net operating loss carry forwards to reduce tax payments may be limited by
applicable law.
Based on our calculations and in accordance with the rules stated in the Internal Revenue Code
of 1986, as amended (the Code), we do not believe that any ownership change, as described in
the following paragraph and as defined in Section 382 of the Code, has occurred with respect to our
net operating losses (NOLs) and accordingly we believe that there was no annual limitation under
Section 382 of the Code on our ability to use NOLs to reduce our past taxable income. We did not
obtain, and do not plan to obtain, an Internal Revenue Service (IRS) ruling or opinion of counsel
regarding either of these conclusions. All NOLs that were subject to Section 382 as a result of
the April 2004 acquisition of USAuto Holdings, Inc. (US Auto) have now expired. However, related
NOLs of $18.4 million were utilized in years still subject to examination by federal tax
authorities.
Generally, an ownership change occurs if certain persons or groups increase their aggregate
ownership of our total capital stock by more than 50 percentage points in any three-year period. If
an ownership change occurs, our ability to use our NOLs to reduce income taxes is limited to an
annual amount (the Section 382 limitation) equal to the fair market value of our stock
immediately prior to the ownership change multiplied by the long term tax-exempt interest rate,
which is published monthly by the IRS. In the event of an ownership change, NOLs that exceed the
Section 382 limitation in any year will continue to be allowed as carry forwards for the remainder
of the carry forward period and such excess NOLs can be used to offset taxable income for years in
the carry forward period subject to the Section 382 limitation in each year. Regardless of whether
an ownership change occurs, the carry forward period for NOLs is 20 years from the year in which
the losses giving rise to the NOLs were incurred. The most recent losses that gave rise to our
current NOLs were incurred in 2011 and will expire in 2031. If the carry forward period for any NOL
were to expire before that NOL had been fully utilized, the use of the unutilized portion of that
NOL would be permanently prohibited. Our use of new NOLs arising after the date of an ownership
change would not be affected by the Section 382 limitation, unless there were another ownership
change after those new NOLs arose.
It is impossible for us to state that an ownership change will not occur in the future.
Limitations imposed by Code Section 382 and the restrictions contained in our certificate of
incorporation may limit our ability to issue additional stock to raise capital or acquire
businesses. To the extent not prohibited by our certificate of incorporation, we may decide in the
future that it is necessary or in our interest to take certain actions that could result in an
ownership change.
Code Section 269 permits the IRS to disallow any deduction, credit or allowance, including the
utilization of NOLs, that otherwise would not be available but for the acquisition of control of a
corporation, including acquisition by merger, for the principal purpose of avoiding federal income
taxes, including avoidance through the use of NOLs. If the IRS were to assert that the principal
purpose of the April 2004 acquisition of USAuto was the avoidance of federal income tax, we would
have the burden of proving that this was not the principal purpose. The determination of the
principal purpose of a transaction is purely a question of fact and requires an analysis of all the
facts and circumstances surrounding the transaction. Courts generally have been reluctant to apply
Code Section 269 where a reasonable business purpose existed for the timing and form of the
transaction, even if the availability of tax benefits was also an acknowledged consideration in the
transaction. We think that Code Section 269 should not apply to the acquisition of USAuto because
we can show that genuine business purposes existed for the USAuto acquisition and that tax
avoidance was not the principal purpose for the merger. Our primary objective of the merger was to
seek long-term growth for our stockholders through an acquisition. To that end, we redeployed a
significant amount of our existing capital and offered our existing stockholders the right to make
a substantial additional investment in the Company to facilitate the acquisition of USAuto. If,
nevertheless, the IRS were to assert that Code Section 269 applied and if such assertion were
sustained, the utilization of our past NOLs would be severely limited
or extinguished. Due to the fact that the application of Code Section 269 is ultimately a
question of fact, there can be no assurance that the IRS would not prevail if it were to assert the
application of Code Section 269.
16
FIRST ACCEPTANCE CORPORATION 10-K
Our insurance company subsidiaries are subject to statutory capital and surplus requirements and
other standards, and their failure to meet these requirements or standards could subject them to
regulatory actions.
Our insurance company subsidiaries are subject to RBC standards and other minimum statutory
capital and surplus requirements imposed under the laws of their respective states of domicile. The
RBC standards, which are based upon the RBC Model Act adopted by the NAIC, require our insurance
company subsidiaries to annually report their results of RBC calculations to the state departments
of insurance and the NAIC.
Failure to meet applicable RBC requirements or minimum statutory capital and surplus
requirements could subject our insurance company subsidiaries to further examination or corrective
action imposed by state regulators, including limitations on their writing of additional business,
state supervision or even liquidation. Any changes in existing RBC standards or minimum statutory
capital and surplus requirements may require our insurance company subsidiaries to increase their
statutory capital and surplus levels, which they may be unable to do. This calculation is performed
on a calendar year basis, and at December 31, 2010, our insurance company subsidiaries maintained
RBC levels in excess of an amount that would require any corrective actions on their part.
State regulators also screen and analyze the financial condition of insurance companies using
the NAIC IRIS system. As part of IRIS, the NAIC database generates key financial ratio results
obtained from an insurers annual statutory statements. A ratio result falling outside the defined
range of IRIS ratios may result in further examination by a state regulator to determine if
corrective action is necessary. At December 31, 2010, our insurance company subsidiaries had no
IRIS ratios outside the defined ranges. We cannot assure you however that regulatory authorities
will not conduct any such examination of the financial condition of our insurance company
subsidiaries, or of the outcome of any such investigation. See Item 1. Business Regulatory
Environment.
We rely on our information technology and communication systems, and the failure of these systems
could materially adversely affect our business.
Our business is highly dependent on the proprietary integrated technology systems that enable
timely and efficient communication and data sharing among the various segments of our integrated
operations. These systems are used in all our operations, including quotation, policy issuance,
customer service, underwriting, claims, accounting, and communications. We have a technical staff
that develops, maintains and supports all elements of our technology infrastructure. However,
disruption of power systems or communication systems or any failure of our systems could result in
deterioration in our ability to respond to customers requests, write and service new business, and
process claims in a timely manner. We believe we have appropriate types and levels of insurance to
protect our real property, systems, and other assets. However, insurance does not provide full
reimbursement for all losses, both direct and indirect, that may result from an event affecting our
information technology and communication systems.
Severe weather conditions and other catastrophes may result in an increase in the number and amount
of claims filed against us.
Our business is exposed to the risk of severe weather conditions and other catastrophes.
Catastrophes can be caused by various events, including natural events, such as severe winter
weather, hurricanes, tornados, windstorms, earthquakes, hailstorms, thunderstorms and fires, and
other events, such as explosions, terrorist attacks and riots. The incidence and severity of
catastrophes and severe weather conditions are inherently unpredictable. Severe weather conditions
generally result in more automobile accidents and damage, leading to an increase in the number of
claims filed and/or the amount of compensation sought by claimants.
We may have difficulties in managing any expansion into new markets.
Our future growth plans may include expanding into new states by opening new retail locations,
acquiring the business and assets of other companies, or introducing additional insurance products
or distribution methods. In order to grow our business successfully, we must apply for and maintain
necessary licenses, properly design and price our products and identify, hire and train new
employees. Our expansion would also place significant demands on our existing management,
operations, systems, accounting, internal controls and financial resources. Any failure by us to
manage growth and to respond to changes in our business could have a material adverse effect on our
business, financial condition and results of operations.
17
FIRST ACCEPTANCE CORPORATION 10-K
A few of our stockholders have significant control over us, and their interests may differ from
yours.
Three of our stockholders, Gerald J. Ford, our Chairman of the Board; Stephen J. Harrison, our
Chief Executive Officer and a current director; and Thomas M. Harrison, Jr., a current director, in
the aggregate, control approximately 62% of our outstanding common stock. If these stockholders
acted or voted together, they would have the power to control the election and removal of our
directors. They would also have significant control over other matters requiring stockholder
approval, including the approval of major corporate transactions and proposed amendments to our
certificate of incorporation. This concentration of ownership may delay or prevent a change in
control of the Company, as well as frustrate attempts to replace or remove current management, even
when a change may be in the best interests of our other stockholders. Furthermore, the interests of
these stockholders may not always coincide with the interests of the Company or other stockholders.
We may not be successful in identifying acquisition candidates or integrating their operations,
which could harm our financial results.
Our growth strategy may include acquiring other companies and businesses. In order to grow our
business by acquisition, we must identify acquisition candidates and successfully integrate the
acquired operations. We could face increased costs if we are unable to successfully integrate the
operations of any acquired business into our operations, and we could experience disruption of our
business and distraction of our management, which may not be offset by corresponding increases in
revenues. The integration of operations after an acquisition is subject to risks, including, among
others, loss of key personnel of the acquired company, difficulty associated with assimilating the
personnel, information systems and operations of the acquired company, potential disruption of
ongoing business, maintenance of uniform standards, controls, procedures and policies and
impairment of the acquired companys reputation and relationships with its employees and clients.
It is also possible that we may not realize, either at all or in a timely manner, any or all
benefits from acquisitions and may incur significant costs in connection with any acquisitions.
Failure to successfully integrate any acquisitions could materially adversely affect the results of
our operations.
We and our subsidiaries are subject to comprehensive regulation and supervision that may restrict
our ability to earn profits.
We and our subsidiaries are subject to comprehensive regulation and supervision by the
insurance departments in the states where our subsidiaries are domiciled and where our subsidiaries
sell insurance and ancillary products, issue policies and handle claims. Certain regulatory
restrictions and prior approval requirements may affect our subsidiaries ability to operate,
change their operations or obtain necessary rate adjustments in a timely manner or may increase our
costs and reduce profitability.
Among other things, regulation and supervision of us and our subsidiaries extends to:
Required Licensing. We and our subsidiaries operate under licenses issued by various state
insurance authorities. These licenses govern, among other things, the types of insurance coverages,
agency and claims services and motor club products that we and our subsidiaries may offer consumers
in the particular state. If a regulatory authority denies or delays granting any such license, our
ability to enter new markets or offer new products could be substantially impaired.
Transactions Between Insurance Companies and Their Affiliates. Our insurance company
subsidiaries are organized and domiciled under the insurance statutes of Texas, Georgia and
Tennessee. The insurance laws in these states provide that all transactions among members of an
insurance holding company system must be done at arms length and shown to be fair and reasonable
to the regulated insurer. Transactions between our insurance company subsidiaries and other
subsidiaries generally must be disclosed to the state regulators, and prior approval of the
applicable regulator generally is required before any material or extraordinary transaction may be
consummated. State regulators may refuse to approve or delay approval of such a transaction, which
may impact our ability to innovate or operate efficiently.
Regulation of Rates and Policy Forms. The insurance laws of most states in which our insurance
company subsidiaries operate require insurance companies to file premium rate schedules and policy
forms for review and approval. State insurance regulators have broad discretion in judging whether
our rates are adequate, not excessive
and not unfairly discriminatory. The speed at which we can change our rates in
18
FIRST ACCEPTANCE CORPORATION 10-K
response to market
conditions or increasing costs depends, in part, on the method by which the applicable states
rating laws are administered. Generally, state insurance regulators have the authority to
disapprove our requested rates. If as permitted in some states, we begin using new rates before
they are approved, we may be required to issue premium refunds or credits to our policyholders if
the new rates are ultimately disapproved by the applicable state regulator. In some states, there
has been pressure in past years to reduce premium rates for automobile and other personal insurance
or to limit how often an insurer may request increases for such rates. In states where such
pressure is applied, our ability to respond to market developments or increased costs in that state
may be adversely affected.
Investment Restrictions. Our insurance company subsidiaries are subject to state laws and
regulations that require diversification of their investment portfolios and that limit the amount
of investments in certain categories. Failure to comply with these laws and regulations would cause
non-conforming investments to be treated as non-admitted assets for purposes of measuring statutory
surplus and, in some instances, would require divestiture. If a non-conforming asset is treated as
a non-admitted asset, it would lower the affected subsidiarys surplus and thus, its ability to
write additional premiums and pay dividends.
Restrictions on Cancellation, Non-Renewal or Withdrawal. Many states have laws and regulations
that limit an insurers ability to exit a market. For example, certain states limit an automobile
insurers ability to cancel or not renew policies. Some states prohibit an insurer from withdrawing
from one or more lines of business in the state, except pursuant to a plan approved by the state
insurance department. The state insurance department may disapprove a plan that may lead to market
disruption. These laws and regulations that limit cancellations and non-renewals and that subject
business withdrawals to prior approval restrictions could limit our ability to exit unprofitable
markets or discontinue unprofitable products in the future.
Our success depends partly on our ability to efficiently manage complexity.
The fast pace of change and innovation in our business, combined with ongoing technological,
regulatory, and other developments, results in significant levels of complexity in our products and
in the systems and processes we use to run our business. The complexity may create a barrier to
implementing certain new ideas, and may lead to the increased possibility of error in executing our
business strategies, as well as difficult management decisions regarding the allocation of
available resources (such as information technology resources) for multiple potential initiatives
or projects. Our inability to manage this complexity effectively, to bring new ideas to market, to
allocate and prioritize appropriately our resources, or to prevent errors could result in
substantially increased costs, liability to third parties, regulatory investigations and sanctions,
poor customer experiences, and damage to our brand.
Provisions in our certificate of incorporation and bylaws may prevent a takeover or a change in
management that you may deem favorable.
Our certificate of incorporation contains prohibitions on the transfer of our common stock to
avoid limitations on the use of the NOL carryforwards and other federal income tax attributes.
These restrictions could prevent or inhibit a third party from acquiring us. Our certificate of
incorporation generally prohibits, without the prior approval of our board of directors, any
transfer of common stock, any subsequent issue of voting stock or stock that participates in our
earnings or growth, and certain options with respect to such stock, if the transfer of such stock
or options would (i) cause any group or person to own 4.9% or more, by aggregate value, of the
outstanding shares of our common stock, (ii) increase the ownership position of any person or group
that already owns 4.9% or more, by aggregate value, of the outstanding shares of our common stock,
or (iii) cause any person or group to be treated like the owner of 4.9% or more, by aggregate
value, of our outstanding shares of common stock for tax purposes.
Our certificate of incorporation and bylaws also contain the following provisions that could
prevent or inhibit a third party from acquiring us:
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the requirement that only stockholders owning at least one-third of the outstanding shares of our common stock may call a special stockholders meeting; and |
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the requirement that stockholders owning at least two-thirds of the outstanding shares
of our common stock must approve any amendment to our certificate of incorporation
provisions concerning the transfer restrictions and the ability to call special
stockholders meetings. |
19
FIRST ACCEPTANCE CORPORATION 10-K
Under our certificate of incorporation, we may issue shares of preferred stock on terms that
are unfavorable to the holders of our common stock. The issuance of shares of preferred stock could
also prevent or inhibit a third party from acquiring us. The existence of these provisions could
depress the price of our common stock, could delay or prevent a takeover attempt or could prevent
attempts to replace or remove incumbent management.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
We lease office space in Nashville, Tennessee for our corporate offices, claims, customer
service and data center (approximately 53,000 square feet). We also lease office space for our
regional claims offices in Chicago, Illinois and Tampa, Florida and for our regional customer
service center in Chicago, Illinois. Our retail locations are all leased and typically are located
in storefronts in retail shopping centers, and each location typically contains less than 1,000
square feet of space. See Note 7 to our consolidated financial statements for further information
about our leases.
Item 3. Legal Proceedings
We and our subsidiaries are named from time to time as defendants in various legal actions
that are incidental to our business, including those which arise out of or are related to the
handling of claims made in connection with our insurance policies and claims handling. The
plaintiffs in some of these lawsuits have alleged bad faith or extracontractual damages, and some
have sought punitive damages or class action status. We believe that the resolution of these legal
actions will not have a material adverse effect on our financial condition or results of
operations. However, the ultimate outcome of these matters is uncertain.
Item 4. (Removed and Reserved)
20
FIRST ACCEPTANCE CORPORATION 10-K
PART II
Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
Market Information
Our common stock is currently quoted on the New York Stock Exchange under the symbol FAC.
The following table sets forth quarterly high and low sales prices for our common stock for the
periods indicated. All price quotations represent prices between dealers, without accounting for
retail mark-ups, mark-downs or commissions, and may not represent actual transactions.
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Price Range |
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Year Ended June 30, 2010 |
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First Quarter |
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$ |
3.12 |
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$ |
1.92 |
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Second Quarter |
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2.80 |
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1.68 |
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Third Quarter |
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2.63 |
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1.78 |
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Fourth Quarter |
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2.28 |
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1.55 |
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Year Ended June 30, 2011 |
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First Quarter |
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$ |
1.87 |
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$ |
1.57 |
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Second Quarter |
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1.95 |
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1.60 |
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Third Quarter |
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2.00 |
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1.63 |
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Fourth Quarter |
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2.05 |
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1.62 |
|
The
closing price of our common stock on August 30, 2011 was $1.46.
Holders
According to the records of our transfer agent, there were approximately 450 holders of record
of our common stock on August 30, 2011, including record holders such as banks and brokerage firms
who hold shares for beneficial holders, and 48,458,178 shares of our common stock were outstanding.
Dividends
We paid no dividends during the two most recent fiscal years. We do not anticipate paying cash
dividends in the future. Any future determination to pay dividends will be at the discretion of our
Board of Directors and will depend upon, among other factors, our results of operations, financial
condition, capital requirements and contractual restrictions.
Stock Transfer Restrictions
Our certificate of incorporation (the Charter) contains prohibitions on the transfer of our
common stock to avoid limitations on the use of our NOL carryforwards and other federal income tax
attributes. The Charter generally prohibits, without the prior approval of our Board of Directors,
any transfer of common stock, any subsequent issue of voting stock or stock that participates in
our earnings or growth, and certain options with respect to such stock, if the transfer of such
stock would cause any group or person to own 4.9% or more (by aggregate value) of our outstanding
shares or cause any person to be treated like the owner of 4.9% or more (by aggregate value) of our
outstanding shares for tax purposes. Transfers in violation of this prohibition will be void,
unless our Board of Directors consents to the transfer. If void, upon our demand, the purported
transferee must return the shares to our agent to be sold, or if already sold, the purported
transferee must forfeit some, or possibly all, of the sale proceeds. In connection with certain
changes in the ownership of the holders of our shares, we may require the holder to dispose of some
or all of such shares. For this purpose, person is defined broadly to mean any individual,
corporation, estate, debtor, association, company, partnership, joint venture, or similar
organization.
21
FIRST ACCEPTANCE CORPORATION 10-K
Performance Graph
The following graph compares the total cumulative shareholder return for $100 invested in our
common shares against the cumulative total return of the Russell 3000 Index and the S&P Property &
Casualty Insurance Index on June 30, 2006 to the end of the most recently completed fiscal year.
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|
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|
|
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|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
2006 |
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
2010 |
|
|
2011 |
|
First Acceptance Corporation |
|
|
100.00 |
|
|
|
86.25 |
|
|
|
27.16 |
|
|
|
18.08 |
|
|
|
14.52 |
|
|
|
15.70 |
|
Russell 3000 |
|
|
100.00 |
|
|
|
120.07 |
|
|
|
104.84 |
|
|
|
76.99 |
|
|
|
89.09 |
|
|
|
117.93 |
|
S&P Property & Casualty
Insurance |
|
|
100.00 |
|
|
|
114.39 |
|
|
|
80.09 |
|
|
|
62.31 |
|
|
|
78.97 |
|
|
|
84.72 |
|
Unregistered Sales of Equity Securities and Use of Proceeds
The following table provides information regarding repurchases by us of our common stock
during the periods indicated. We repurchased 3,350 shares from employees during the three months
ended June 30, 2011 to cover payroll withholding taxes in connection with the vesting of restricted
common stock.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of |
|
|
Dollar Value of |
|
|
|
|
|
|
|
Total |
|
|
Average |
|
|
Shares Purchased |
|
|
Shares that May |
|
|
|
|
|
|
|
Number |
|
|
Price |
|
|
as Part of Publicly |
|
|
Yet Be Purchased |
|
Period |
|
Period |
|
|
of Shares |
|
|
Paid per |
|
|
Announced Plans |
|
|
Under the Plans or |
|
Beginning |
|
Ending |
|
|
Purchased |
|
|
Share |
|
|
or Programs |
|
|
Programs |
|
April 1, 2011 |
|
April 30, 2011 |
|
|
3,350 |
|
|
$ |
1.84 |
|
|
|
|
|
|
|
|
|
May 1, 2011 |
|
May 31, 2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 1, 2011 |
|
June 30, 2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
3,350 |
|
|
$ |
1.84 |
|
|
|
|
|
|
|
|
|
22
FIRST ACCEPTANCE CORPORATION 10-K
Item 6. Selected Financial Data
The following tables provide selected historical consolidated financial and operating data of
the Company at the dates and for the periods indicated. In conjunction with the data provided in
the following tables and in order to more fully understand our historical consolidated financial
and operating data, you should also read our Managements Discussion and Analysis of Financial
Condition and Results of Operations and our consolidated financial statements and the accompanying
notes included in this report. We derived our selected historical consolidated financial data at
June 30, 2011 and 2010 and for the years ended June 30, 2011, 2010 and 2009 from our consolidated
financial statements included in this report. We derived our selected historical consolidated
financial data at June 30, 2009, 2008 and 2007 and for the years ended June 30, 2008 and 2007 from
our consolidated financial statements which are not included in this report. The results for past
periods are not necessarily indicative of the results to be expected for any future period.
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
(in thousands, except per share data) |
|
Statement of Operations Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned |
|
$ |
173,041 |
|
|
$ |
187,046 |
|
|
$ |
224,113 |
|
|
$ |
285,914 |
|
|
$ |
300,661 |
|
Commission and fee income |
|
|
29,483 |
|
|
|
28,852 |
|
|
|
31,759 |
|
|
|
36,479 |
|
|
|
37,324 |
|
Investment income |
|
|
8,395 |
|
|
|
7,958 |
|
|
|
9,504 |
|
|
|
11,250 |
|
|
|
8,863 |
|
Net realized gains (losses) on
investments, available-for-sale |
|
|
(185 |
) |
|
|
(683 |
) |
|
|
89 |
|
|
|
(1,244 |
) |
|
|
(61 |
) |
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
850 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
210,734 |
|
|
|
223,173 |
|
|
|
265,465 |
|
|
|
332,399 |
|
|
|
347,637 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and loss adjustment expenses |
|
|
129,167 |
|
|
|
126,995 |
|
|
|
149,277 |
|
|
|
219,943 |
|
|
|
241,908 |
|
Insurance operating expenses |
|
|
77,822 |
|
|
|
79,833 |
|
|
|
87,124 |
|
|
|
98,433 |
|
|
|
97,629 |
|
Other operating expenses |
|
|
1,369 |
|
|
|
2,233 |
|
|
|
1,307 |
|
|
|
2,415 |
|
|
|
2,623 |
|
Litigation settlement |
|
|
(9 |
) |
|
|
(361 |
) |
|
|
1,570 |
|
|
|
7,468 |
|
|
|
|
|
Stock-based compensation |
|
|
998 |
|
|
|
1,048 |
|
|
|
2,053 |
|
|
|
1,507 |
|
|
|
1,063 |
|
Depreciation and amortization |
|
|
1,605 |
|
|
|
2,013 |
|
|
|
1,910 |
|
|
|
1,679 |
|
|
|
1,624 |
|
Interest expense |
|
|
3,930 |
|
|
|
3,931 |
|
|
|
4,138 |
|
|
|
4,977 |
|
|
|
1,874 |
|
Goodwill and intangible assets
impairment(1) |
|
|
52,434 |
|
|
|
|
|
|
|
67,990 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
267,316 |
|
|
|
215,692 |
|
|
|
315,369 |
|
|
|
336,422 |
|
|
|
346,721 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
(56,582 |
) |
|
|
7,481 |
|
|
|
(49,904 |
) |
|
|
(4,023 |
) |
|
|
916 |
|
Provision for income taxes(1) |
|
|
198 |
|
|
|
441 |
|
|
|
18,396 |
|
|
|
13,822 |
|
|
|
17,586 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(56,780 |
) |
|
$ |
7,040 |
|
|
$ |
(68,300 |
) |
|
$ |
(17,845 |
) |
|
$ |
(16,670 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Share Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
(1.18 |
) |
|
$ |
0.15 |
|
|
$ |
(1.43 |
) |
|
$ |
(0.37 |
) |
|
$ |
(0.35 |
) |
Diluted |
|
$ |
(1.18 |
) |
|
$ |
0.15 |
|
|
$ |
(1.43 |
) |
|
$ |
(0.37 |
) |
|
$ |
(0.35 |
) |
Number of shares used to calculate net
income (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
48,171 |
|
|
|
47,961 |
|
|
|
47,664 |
|
|
|
47,628 |
|
|
|
47,584 |
|
Diluted |
|
|
48,171 |
|
|
|
48,418 |
|
|
|
47,664 |
|
|
|
47,628 |
|
|
|
47,584 |
|
|
|
|
(1) |
|
The year ended June 30, 2011 includes a goodwill and intangible assets
impairment charge of $52.4 million. The year ended June 30, 2009 includes a goodwill
impairment charge of $68.0 million, a related increase in the tax provision of $15.3 million,
and a tax benefit of $5.1 million related to the utilization of federal net operating loss
(NOL) carryforwards that were previously reserved for through a valuation allowance. The
provision for income taxes for the year ended June 30, 2008 includes a charge of $11.4 million
related to the expiration of certain federal NOL carryforwards as well as an increase in the
valuation allowance of $3.6 million for the deferred tax asset for certain federal NOL
carryforwards resulting in a charge totaling $15.0 million. The provision for income taxes for
the year ended June 30, 2007 includes an increase in the valuation allowance for the deferred
tax asset of $6.9 million as well as $10.0 million related to the expiration of certain
federal NOL carryforwards resulting in a charge totaling $16.9 million. |
23
FIRST ACCEPTANCE CORPORATION 10-K
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
(in thousands, except per share data) |
|
Balance Sheet Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and total investments |
|
$ |
216,120 |
|
|
$ |
222,734 |
|
|
$ |
217,512 |
|
|
$ |
228,216 |
|
|
$ |
210,716 |
|
Total assets |
|
|
296,294 |
|
|
|
356,342 |
|
|
|
358,956 |
|
|
|
473,230 |
|
|
|
498,892 |
|
Loss and loss adjustment expense reserves |
|
|
68,424 |
|
|
|
73,198 |
|
|
|
83,973 |
|
|
|
101,407 |
|
|
|
91,446 |
|
Notes and debentures payable |
|
|
41,240 |
|
|
|
41,240 |
|
|
|
41,240 |
|
|
|
45,153 |
|
|
|
64,300 |
|
Total liabilities |
|
|
174,066 |
|
|
|
179,152 |
|
|
|
199,100 |
|
|
|
247,771 |
|
|
|
259,408 |
|
Total stockholders equity |
|
|
122,228 |
|
|
|
177,190 |
|
|
|
159,856 |
|
|
|
225,459 |
|
|
|
239,484 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Book value per common share |
|
$ |
2.52 |
|
|
$ |
3.65 |
|
|
$ |
3.31 |
|
|
$ |
4.69 |
|
|
$ |
5.03 |
|
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with our consolidated financial
statements and accompanying notes included in this report. This discussion contains forward-looking
statements that involve risks and uncertainties. Our actual results could differ materially from
those anticipated in these forward-looking statements as a result of various factors, including
those discussed below and elsewhere in this report, particularly under the caption Item 1A. Risk
Factors.
Forward-Looking Statements
This report contains forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. All statements made in this report, other than statements of historical fact, are
forward-looking statements. You can identify these statements from our use of the words may,
should, could, potential, continue, plan, forecast, estimate, project, believe,
intent, anticipate, expect, target, is likely, will, or the negative of these terms and
similar expressions. These statements are made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. These forward-looking statements may include,
among other things statements and assumptions relating to:
|
|
|
our future growth, income, income per share and other financial performance
measures; |
|
|
|
|
the anticipated effects on our results of operations or financial condition from
recent and expected developments or events; |
|
|
|
|
the financial condition of, and other issues relating to the strength of and
liquidity available to, issuers of securities held in our investment portfolio; |
|
|
|
|
the accuracy and adequacy of our loss reserving methodologies; and |
|
|
|
|
our business and growth strategies. |
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, as well as other sections, of this report.
You should not place undue reliance on any forward-looking statements. These statements speak
only as of the date of this report. Except as otherwise required by applicable laws, we undertake
no obligation to publicly update or revise any forward-looking statements or the risk factors
described in this report, whether as a result of new information, future events, changed
circumstances or any other reason after the date of this report.
24
FIRST ACCEPTANCE CORPORATION 10-K
General
We are principally a retailer, servicer and underwriter of non-standard personal automobile
insurance. We also own two tracts of land in San Antonio, Texas that are held for sale.
Non-standard personal automobile insurance is made available to individuals who are categorized as
non-standard because of their inability or unwillingness to obtain standard insurance coverage
due to various factors, including payment history, payment preference, failure in the past to
maintain continuous insurance coverage, driving record and/or vehicle type. Generally, our
customers are required by law to buy a minimum amount of automobile insurance.
At August 31, 2011, we leased and operated 384 retail locations (or stores) staffed by
employee-agents who primarily sell non-standard personal automobile insurance products underwritten
by us as well as certain commissionable ancillary products. In most states, our employee-agents
also sell a complementary tenant homeowner insurance product underwritten by us. At August 31,
2011, we wrote non-standard personal automobile insurance in 12 states and were licensed in 13
additional states.
The following table shows the number of our retail locations. Retail location counts are based
upon the date that a location commenced or ceased writing business.
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
|
2011 |
|
|
2010 |
|
Retail locations beginning of period |
|
|
394 |
|
|
|
418 |
|
Opened |
|
|
1 |
|
|
|
1 |
|
Closed |
|
|
(10 |
) |
|
|
(25 |
) |
|
|
|
|
|
|
|
Retail locations end of period |
|
|
385 |
|
|
|
394 |
|
|
|
|
|
|
|
|
The following table shows the number of our retail locations by state.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
Alabama |
|
|
24 |
|
|
|
25 |
|
|
|
25 |
|
Florida |
|
|
31 |
|
|
|
31 |
|
|
|
39 |
|
Georgia |
|
|
60 |
|
|
|
60 |
|
|
|
61 |
|
Illinois |
|
|
68 |
|
|
|
74 |
|
|
|
78 |
|
Indiana |
|
|
17 |
|
|
|
17 |
|
|
|
18 |
|
Mississippi |
|
|
8 |
|
|
|
8 |
|
|
|
8 |
|
Missouri |
|
|
12 |
|
|
|
12 |
|
|
|
12 |
|
Ohio |
|
|
27 |
|
|
|
27 |
|
|
|
27 |
|
Pennsylvania |
|
|
16 |
|
|
|
16 |
|
|
|
17 |
|
South Carolina |
|
|
26 |
|
|
|
26 |
|
|
|
27 |
|
Tennessee |
|
|
20 |
|
|
|
19 |
|
|
|
20 |
|
Texas |
|
|
76 |
|
|
|
79 |
|
|
|
86 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
385 |
|
|
|
394 |
|
|
|
418 |
|
|
|
|
|
|
|
|
|
|
|
Developments during the Year
On March 1, 2011, we announced the resignation of Edward L. Pierce as our President and Kevin
P. Cohn as our Senior Vice President and Chief Financial Officer. In light of these resignations,
the Board of Directors of the Company elected Mark A. Kelly and Michael J. Bodayle as interim
President and interim Chief Financial Officer, respectively. On May 17, 2011, the Board of
Directors appointed John R. Barnett as Senior Vice President of Finance, in which capacity Mr.
Barnett will serve as the Companys principal financial and accounting officer. For a more detailed
description of these management changes, see our Current Reports on Form 8-K filed with the United
States Securities and Exchange Commission (SEC) on March 2, 2011, April 1, 2011 and May 23, 2011.
25
FIRST ACCEPTANCE CORPORATION 10-K
Consolidated Results of Operations
Overview
Our primary focus is the selling, servicing and underwriting of non-standard personal
automobile insurance. Our real estate and corporate segment consists of activities related to the
disposition of real estate held for sale, interest expense associated with debt, and other general
corporate overhead expenses.
The following table presents selected financial data for our insurance operations and real
estate and corporate segments (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Insurance |
|
$ |
210,618 |
|
|
$ |
223,054 |
|
|
$ |
265,341 |
|
Real estate and corporate |
|
|
116 |
|
|
|
119 |
|
|
|
124 |
|
|
|
|
|
|
|
|
|
|
|
Consolidated total |
|
$ |
210,734 |
|
|
$ |
223,173 |
|
|
$ |
265,465 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes: |
|
|
|
|
|
|
|
|
|
|
|
|
Insurance |
|
$ |
(50,407 |
) |
|
$ |
14,568 |
|
|
$ |
(42,536 |
) |
Real estate and corporate |
|
|
(6,175 |
) |
|
|
(7,087 |
) |
|
|
(7,368 |
) |
|
|
|
|
|
|
|
|
|
|
Consolidated total |
|
$ |
(56,582 |
) |
|
$ |
7,481 |
|
|
$ |
(49,904 |
) |
|
|
|
|
|
|
|
|
|
|
Our insurance operations generate revenues primarily from selling, servicing and underwriting
non-standard personal automobile insurance policies and related products 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 gross premiums earned by state (in thousands). Effective August
1, 2010, our insurance company subsidiaries began utilizing excess-of-loss reinsurance with an
unaffiliated reinsurer to limit our exposure to losses under liability coverages for automobile
insurance policies issued with limits greater than the minimum statutory requirements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
Gross premiums earned: |
|
|
|
|
|
|
|
|
|
|
|
|
Georgia |
|
$ |
37,666 |
|
|
$ |
40,712 |
|
|
$ |
49,762 |
|
Texas |
|
|
23,262 |
|
|
|
24,243 |
|
|
|
25,971 |
|
Illinois |
|
|
22,916 |
|
|
|
24,550 |
|
|
|
27,583 |
|
Florida |
|
|
19,361 |
|
|
|
20,808 |
|
|
|
26,113 |
|
Alabama |
|
|
16,871 |
|
|
|
19,338 |
|
|
|
23,948 |
|
Ohio |
|
|
13,518 |
|
|
|
12,452 |
|
|
|
12,914 |
|
Tennessee |
|
|
10,627 |
|
|
|
11,764 |
|
|
|
15,269 |
|
South Carolina |
|
|
9,803 |
|
|
|
11,424 |
|
|
|
17,887 |
|
Pennsylvania |
|
|
9,186 |
|
|
|
10,566 |
|
|
|
11,437 |
|
Indiana |
|
|
4,547 |
|
|
|
4,962 |
|
|
|
5,537 |
|
Missouri |
|
|
2,825 |
|
|
|
3,261 |
|
|
|
3,907 |
|
Mississippi |
|
|
2,630 |
|
|
|
2,966 |
|
|
|
3,785 |
|
|
|
|
|
|
|
|
|
|
|
Total gross premiums earned |
|
|
173,212 |
|
|
|
187,046 |
|
|
|
224,113 |
|
Premiums ceded |
|
|
(171 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net premiums earned |
|
$ |
173,041 |
|
|
$ |
187,046 |
|
|
$ |
224,113 |
|
|
|
|
|
|
|
|
|
|
|
26
FIRST ACCEPTANCE CORPORATION 10-K
The following table presents the change in the total number of policies in force (PIF) for
the insurance operations. PIF increase as a result of new policies issued and decrease as a result
of policies that are canceled or expire and are not renewed.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
Policies in force beginning of period |
|
|
154,655 |
|
|
|
158,222 |
|
|
|
194,079 |
|
Net decrease during period |
|
|
(10,245 |
) |
|
|
(3,567 |
) |
|
|
(35,857 |
) |
|
|
|
|
|
|
|
|
|
|
Policies in force end of period |
|
|
144,410 |
|
|
|
154,655 |
|
|
|
158,222 |
|
|
|
|
|
|
|
|
|
|
|
The following tables present total PIF for the insurance operations segregated by policies
that were sold through our open and closed retail locations as well as our independent agents. For
our retail locations, PIF are further segregated by (i) new and renewal and (ii) liability-only or
full coverage. New policies are defined as those policies issued to both first-time customers and
customers who have reinstated a lapsed or cancelled policy. Renewal policies are those policies
which renewed after completing their full uninterrupted policy term. Liability-only policies are
defined as those policies including only bodily injury (or no-fault) and property damage coverages,
which are the required coverages in most states. For comparative purposes, the PIF data with
respect to closed retail locations for each of the periods presented below includes all retail
locations closed at June 30, 2011.
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
2011 |
|
|
2010 |
|
Retail locations: |
|
|
|
|
|
|
|
|
Open retail locations: |
|
|
|
|
|
|
|
|
New |
|
|
63,957 |
|
|
|
69,746 |
|
Renewal |
|
|
76,215 |
|
|
|
77,193 |
|
|
|
|
|
|
|
|
|
|
|
140,172 |
|
|
|
146,939 |
|
|
|
|
|
|
|
|
|
|
Closed retail locations: |
|
|
|
|
|
|
|
|
New |
|
|
177 |
|
|
|
1,763 |
|
Renewal |
|
|
2,133 |
|
|
|
3,769 |
|
|
|
|
|
|
|
|
|
|
|
2,310 |
|
|
|
5,532 |
|
|
|
|
|
|
|
|
|
|
Independent agents |
|
|
1,928 |
|
|
|
2,184 |
|
|
|
|
|
|
|
|
Total policies in force |
|
|
144,410 |
|
|
|
154,655 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
2011 |
|
|
2010 |
|
Retail locations: |
|
|
|
|
|
|
|
|
Open retail locations: |
|
|
|
|
|
|
|
|
Liability-only |
|
|
85,439 |
|
|
|
89,096 |
|
Full coverage |
|
|
54,733 |
|
|
|
57,843 |
|
|
|
|
|
|
|
|
|
|
|
140,172 |
|
|
|
146,939 |
|
|
|
|
|
|
|
|
|
|
Closed retail locations: |
|
|
|
|
|
|
|
|
Liability-only |
|
|
1,354 |
|
|
|
3,472 |
|
Full coverage |
|
|
956 |
|
|
|
2,060 |
|
|
|
|
|
|
|
|
|
|
|
2,310 |
|
|
|
5,532 |
|
|
|
|
|
|
|
|
|
|
Independent agents |
|
|
1,928 |
|
|
|
2,184 |
|
|
|
|
|
|
|
|
Total policies in force |
|
|
144,410 |
|
|
|
154,655 |
|
|
|
|
|
|
|
|
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, net of ceded reinsurance.
27
FIRST ACCEPTANCE CORPORATION 10-K
Expense Ratio Expense ratio is the ratio (expressed as a percentage) of insurance operating
expenses to net 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
Loss and loss adjustment expense |
|
|
74.7 |
% |
|
|
67.9 |
% |
|
|
66.6 |
% |
Expense |
|
|
27.9 |
% |
|
|
27.3 |
% |
|
|
24.7 |
% |
|
|
|
|
|
|
|
|
|
|
Combined |
|
|
102.6 |
% |
|
|
95.2 |
% |
|
|
91.3 |
% |
|
|
|
|
|
|
|
|
|
|
Excluding the severance and related benefits charges incurred in connection with the
separation of certain executive officers of $1.3 million during March 2011, the expense and
combined ratios for the year ended June 30, 2011 were 27.2% and 101.8%, respectively.
Investments
We use the services of an independent investment manager to manage our 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. 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). 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 based upon changes in interest rates or the credit quality
of specific securities.
The value of our consolidated investment portfolio was $186.8 million at June 30, 2011 and
consisted of fixed maturity securities and an investment in a mutual fund, all carried at fair
value with unrealized gains and losses reported as a separate component of stockholders equity. At
June 30, 2011, we had gross unrealized gains of $10.1 million and gross unrealized losses of $0.6
million in our consolidated investment portfolio.
At June 30, 2011, 95.5% of the fair value of our fixed maturity portfolio was rated
investment grade (a credit rating of AAA to BBB-) by nationally recognized rating organizations.
The average credit rating of our fixed maturity portfolio was AA- at June 30, 2011. Investment
grade securities generally bear lower yields and have lower degrees of risk than those that are
unrated or non-investment grade. We believe 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 $33.6 million at June 30, 2011 and represented 19% of
our fixed maturity portfolio. At June 30, 2011, 84% of our CMOs were considered investment grade by
nationally recognized rating agencies. In addition, 76% of our CMOs were rated AAA and 62% of our
CMOs were backed by agencies of the United States government. Of the non-agency backed CMOs, 36%
were rated AAA.
28
FIRST ACCEPTANCE CORPORATION 10-K
The following table summarizes our investment securities at June 30, 2011 (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized |
|
|
Gross Unrealized |
|
|
Gross Unrealized |
|
|
Fair |
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
U.S. government and agencies |
|
$ |
24,897 |
|
|
$ |
1,250 |
|
|
$ |
|
|
|
$ |
26,147 |
|
State |
|
|
7,396 |
|
|
|
280 |
|
|
|
|
|
|
|
7,676 |
|
Political subdivisions |
|
|
1,798 |
|
|
|
20 |
|
|
|
(1 |
) |
|
|
1,817 |
|
Revenue and assessment |
|
|
25,819 |
|
|
|
1,123 |
|
|
|
(171 |
) |
|
|
26,771 |
|
Corporate bonds |
|
|
78,199 |
|
|
|
4,686 |
|
|
|
(240 |
) |
|
|
82,645 |
|
Collateralized mortgage obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency backed |
|
|
19,541 |
|
|
|
1,440 |
|
|
|
|
|
|
|
20,981 |
|
Non-agency backed residential |
|
|
5,758 |
|
|
|
243 |
|
|
|
(173 |
) |
|
|
5,828 |
|
Non-agency backed commercial |
|
|
6,215 |
|
|
|
556 |
|
|
|
(11 |
) |
|
|
6,760 |
|
Redeemable preferred stock |
|
|
176 |
|
|
|
|
|
|
|
(3 |
) |
|
|
173 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities, available-for-sale |
|
|
169,799 |
|
|
|
9,598 |
|
|
|
(599 |
) |
|
|
178,798 |
|
Investment in mutual fund,
available-for-sale |
|
|
7,501 |
|
|
|
516 |
|
|
|
|
|
|
|
8,017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
177,300 |
|
|
$ |
10,114 |
|
|
$ |
(599 |
) |
|
$ |
186,815 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth the scheduled maturities of our fixed maturity securities at
June 30, 2011 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 with No |
|
|
All |
|
|
|
Securities with |
|
|
Securities with |
|
|
Unrealized Gains or |
|
|
Fixed Maturity |
|
|
|
Unrealized Gains |
|
|
Unrealized Losses |
|
|
Losses |
|
|
Securities |
|
One year or less |
|
$ |
14,120 |
|
|
$ |
80 |
|
|
$ |
1,500 |
|
|
$ |
15,700 |
|
After one through five years |
|
|
75,186 |
|
|
|
26 |
|
|
|
|
|
|
|
75,212 |
|
After five through ten years |
|
|
37,510 |
|
|
|
|
|
|
|
|
|
|
|
37,510 |
|
After ten years |
|
|
8,980 |
|
|
|
7,827 |
|
|
|
|
|
|
|
16,807 |
|
No single maturity date |
|
|
31,450 |
|
|
|
2,119 |
|
|
|
|
|
|
|
33,569 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
167,246 |
|
|
$ |
10,052 |
|
|
$ |
1,500 |
|
|
$ |
178,798 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other-Than-Temporary Impairment
In accordance with Financial Accounting Standards Board (FASB) Accounting Standards
Codification (ASC) 320-10-65, Recognition and Presentation of Other-Than-Temporary Impairments,
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 prior to
the impairment charge.
The determination of whether unrealized losses are other-than-temporary requires judgment
based on subjective as well as objective factors. We routinely monitor our investment 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 SEC 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-temporarily impaired.
29
FIRST ACCEPTANCE CORPORATION 10-K
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 (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 review 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 an adverse change in projected cash flows, except in the case of
those securities discussed in Note 2 to our consolidated financial statements, which incurred OTTI
charges recognized in the consolidated statement of operations of $0.4 million and $1.0 million for
the years ended June 30, 2011 and 2010. We believe that the unrealized losses on the remaining
non-agency backed CMOs for which OTTI charges have not been recorded 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.
We believe that the remaining securities having unrealized losses at June 30, 2011 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.
Year Ended June 30, 2011 Compared with the Year Ended June 30, 2010
Consolidated Results
Revenues for the year ended June 30, 2011 decreased 6% to $210.7 million from $223.2 million
in the prior year. Loss before income taxes for the year ended June 30, 2011 was $56.6 million,
compared with income before income taxes of $7.5 million for the year ended June 30, 2010. The loss
before income taxes for the year ended June 30, 2011 included a goodwill and intangible assets
impairment charge of $52.4 million, or $1.09 per share on a diluted basis, favorable development of
$1.7 million for losses occurring in prior fiscal years, charges of $1.7 million incurred in
connection with the separation of certain executive officers during March 2011 (comprised of $1.3
million in accrued severance and benefits and a $0.4 million non-cash charge related to the vesting
of certain stock awards) and $0.4 million of other-than-temporary impairment charges on
investments. Net loss for the year ended June 30, 2011 was $56.8 million, compared with net income
of $7.0 million for the year ended June 30, 2010. Basic and diluted net loss per share were $1.18
for the year ended June 30, 2011, compared with basic and diluted net income per share of $0.15 for
the year ended June 30, 2010.
Insurance Operations
Revenues from insurance operations were $210.6 million for the year ended June 30, 2011,
compared with $223.1 million for the year ended June 30, 2010. Loss before income taxes from
insurance operations for the year ended June 30, 2011 was $50.4 million, compared with income
before income taxes from insurance operations of $14.6 million for the year ended June 30, 2010.
30
FIRST ACCEPTANCE CORPORATION 10-K
Premiums Earned
Premiums earned decreased by $14.0 million, or 7%, to $173.0 million for the year ended June
30, 2011, from $187.0 million for the year ended June 30, 2010. The decrease in premiums earned was
primarily due to a decline in the number of PIF from 154,655 at June 30, 2010 to 144,410 at June
30, 2011, which was impacted by the closure of underperforming stores. At June 30, 2011, we
operated 385 stores, compared with 394 stores at June 30, 2010. Premiums earned were also
negatively impacted by an increase in the percentage of PIF with liability-only coverage. Although
the number of PIF sold through our open stores decreased from 146,939 at June 30, 2010 to 140,172
at June 30, 2011, for those policies quoted, we have experienced a higher close ratio for the year
ended June 30, 2011 compared with the prior year.
Commission and Fee Income
Commission and fee income increased 2% to $29.5 million for the year ended June 30, 2011, from
$28.9 million for the year ended June 30, 2010. This increase in commission and fee income was a
result of higher fee income related to commissionable ancillary products sold through our retail
locations offset by the decrease in the number of PIF.
Investment Income
Investment income increased to $8.4 million during the year ended June 30, 2011 from $8.0
million during the year ended June 30, 2010. This increase in investment income was primarily a
result of the higher yield obtained on the mutual fund investment made in June 2010. At June 30,
2011 and 2010, the tax-equivalent book yields for our fixed maturities portfolio were 4.9% and
4.3%, respectively, with effective durations of 3.38 and 3.16 years, respectively.
Net Realized Losses on Investments, Available-for-Sale
Net realized losses on investments, available-for-sale during the year ended June 30, 2011
included $0.2 million in net realized gains on sales and redemptions and $0.4 million of charges
related to OTTI on certain non-agency backed CMOs. Net realized losses on investments,
available-for-sale during the year ended June 30, 2010 included $0.3 million in net realized gains
on sales and redemptions and $1.0 million of charges related to OTTI on certain non-agency backed
CMOs. For additional information with respect to the determination of OTTI losses on investment
securities, see Critical Accounting Estimates Investments below and Note 2 to our consolidated
financial statements.
Loss and Loss Adjustment Expenses
The loss and loss adjustment expense ratio was 74.7% for the year ended June 30, 2011,
compared with 67.9% for the year ended June 30, 2010. We experienced favorable development related
to prior fiscal years of $1.7 million for the year ended June 30, 2011, compared with $11.2 million
for the year ended June 30, 2010. The favorable development for the year ended June 30, 2011 was
primarily due to lower than anticipated severity of accidents occurring during the fiscal 2009 and
2010 accident years, specifically in bodily injury coverage in Texas, Tennessee and South Carolina
and physical damage coverages in Georgia, partially offset by higher loss adjustment expenses
specific to bodily injury and Florida no-fault coverages.
Excluding the development related to prior fiscal years, the loss and loss adjustment expense
ratios for the years ended June 30, 2011 and 2010 were 75.6% and 74.0%, respectively. The
year-over-year increase in the loss and loss adjustment expense ratio was primarily due to (i) the
increase in the percentage of liability-only policies which generally have a higher expected loss
and loss adjustment expense ratio than full-coverage policies, (ii) higher loss adjustment expense
due to anti-fraud and litigation-avoidance initiatives and (iii) the impact of Spring 2011
storm-related losses.
We have substantially completed the process of implementing a new multivariate pricing
program. We believe this new pricing program provides us with greater pricing segmentation and
improves our pricing relative to the risk we are insuring. Currently, approximately 32% of our PIF
have been underwritten using this new pricing program, which has now been implemented in nine of
the twelve states in which we operate. We plan to implement the new pricing program in the three
remaining states in which we operate by December 2011.
31
FIRST ACCEPTANCE CORPORATION 10-K
Operating Expenses
Insurance operating expenses decreased 3% to $77.8 million for the year ended June 30, 2011
from $79.8 million for the year ended June 30, 2010. The decrease was primarily a result of the
reduction in costs (such as employee-agent commissions and premium taxes) that varied along with
the decrease in premiums earned as well as savings realized from the closure of underperforming
stores, offset by severance and related benefits charges of $1.3 million incurred in connection
with the separation of certain executive officers during March 2011.
The expense ratio was 27.9% for the year ended June 30, 2011, compared with 27.3% for the year
ended June 30, 2010. Excluding the severance and related benefits charges noted above, the expense
ratio for the year ended June 30, 2011 was 27.2%, compared to 27.3% in the prior fiscal year.
Overall, the combined ratio increased to 102.6% for the year ended June 30, 2011 from 95.2%
for the year ended June 30, 2010. Excluding the severance and related benefits charges noted above,
the combined ratio for the year ended June 30, 2011 was 101.8%.
Goodwill and Intangible Assets Impairment
We recorded a non-cash, pre-tax goodwill and intangible assets impairment charge in fiscal
year 2011 of $52.4 million. We are required to perform periodic impairment tests of our goodwill
and intangible assets. The goodwill impairment test is a two-step process that requires us to make
judgments in determining what assumptions to use in the calculation. The first step of the process
consists of estimating the fair value of each reporting unit based on valuation techniques,
including a discounted cash flow model using revenue and profit forecasts and recent industry
transaction and trading multiples of our peers, and comparing those estimated fair values with the
carrying values of the assets and liabilities of the reporting unit, which includes the allocated
goodwill. If the estimated fair value is less than the carrying value, a second step is performed
to compute the amount of the impairment, if any, by determining an implied fair value of
goodwill. The determination of the implied fair value of goodwill of a reporting unit requires us
to allocate the estimated fair value of the reporting unit to the assets and liabilities of the
reporting unit. Any unallocated fair value represents the implied fair value of goodwill, which
is compared to its corresponding carrying value.
The fair value of our reporting unit, from a market participants perspective, was estimated
utilizing both (i) a cash flow projection derived from our long-range strategic plan using a
discount rate of 14.5%, which was based on an estimated weighted average cost of capital adjusted
for the risks associated with our operations and (ii) recent industry transaction and trading
trends in price to tangible book multiples and related returns on tangible equity. As a result of
recent trends in industry transaction and trading multiples, we recognized a non-cash, pre-tax
goodwill impairment charge of $50.9 million in the fourth quarter of fiscal year 2011, which
included a $1.9 million addition to deferred tax liabilities.
A variance in the discount rate could have had a significant effect on the amount of the
goodwill impairment charge recognized. A one percent (1%) increase or decrease in the discount rate
would have caused an increase or decrease in the goodwill impairment charge of approximately $15
million.
Indefinite-lived intangible assets primarily consist of acquired trademarks and trade names.
In measuring the fair value for these intangible assets, we utilize the relief-from-royalty method.
This method assumes that trademarks and trade names have value to the extent that their owner is
relieved of the obligation to pay royalties for the benefits received from them. This method
requires us to estimate the future revenue for the related brands, the appropriate royalty rate and
the weighted average cost of capital. As a result of decisions made by management during the most
recent quarter regarding entity-wide branding initiatives, we recognized a non-cash, pre-tax
impairment charge of $1.6 million related to trade name intangible assets.
We do not believe that these non-cash impairment charges will have a materially adverse impact
on the continuing operations, liquidity, or statutory surplus of the Company.
32
FIRST ACCEPTANCE CORPORATION 10-K
Our evaluation includes multiple assumptions that may change over time. If future discounted
cash flows become less than those projected by us or unfavorable industry transaction multiples and
trading trends continue, further impairment charges may become necessary that could have a
materially adverse impact on our results of operations in the period in which the write-off occurs.
As quoted market prices in active stock markets are relevant evidence of fair value, a significant
decline in our common stock trading price may indicate an impairment of goodwill.
Provision for Income Taxes
The provision for income taxes for the year ended June 30, 2011 was $0.2 million, compared
with $0.4 million for fiscal year 2010. The provision for income taxes relates to current state
income taxes for certain subsidiaries with taxable income. The current fiscal year includes an
adjustment that reduced certain accrued state income taxes. At June 30, 2011 and 2010, we
established a valuation allowance to reduce deferred tax assets to the amount that is more likely
than not to be realized. In assessing our ability to support the realizability of our deferred tax
assets, we considered both positive and negative evidence. We 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 determine 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 adjustment.
Real Estate and Corporate
Loss before income taxes from real estate and corporate operations for the year ended June 30,
2011 was $6.2 million, compared with a loss from real estate and corporate operations before income
taxes of $7.1 million for the year ended June 30, 2010. 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. We incurred $3.9 million of
interest expense during both the years ended June 30, 2011 and 2010 related to the debentures
issued in June 2007.
Year Ended June 30, 2010 Compared with the Year Ended June 30, 2009
Consolidated Results
Revenues for the year ended June 30, 2010 decreased 16% to $223.2 million from $265.5 million
in the prior year. Income before income taxes for the year ended June 30, 2010 was $7.5 million,
compared with a loss before income taxes of $49.9 million for the year ended June 30, 2009. The
loss before income taxes for the year ended June 30, 2009 included a goodwill impairment charge of
$68.0 million. Net income for the year ended June 30, 2010 was $7.0 million, compared with a net
loss of $68.3 million for the year ended June 30, 2009. The net loss for the year ended June 30,
2009 included the goodwill impairment charge and an additional net charge of $10.2 million
resulting from the $15.3 million tax effect of the goodwill impairment charge and the establishment
of a full valuation allowance on the remaining deferred tax assets offset by a tax benefit of $5.1
million related to the utilization of federal NOL carryforwards that were to expire on June 30,
2009 that had been previously reserved for through a valuation allowance. Basic and diluted net
income per share was $0.15 for the year ended June 30, 2010, compared with basic and diluted net
loss per share of $1.43 for the year ended June 30, 2009.
Insurance Operations
Revenues from insurance operations were $223.1 million for the year ended June 30, 2010,
compared with $265.3 million for the year ended June 30, 2009. Income before income taxes from
insurance operations for the year ended June 30, 2010 was $14.6 million, compared with loss before
income taxes from insurance operations of $42.5 million for the year ended June 30, 2009.
33
FIRST ACCEPTANCE CORPORATION 10-K
Premiums Earned
Premiums earned decreased by $37.1 million, or 16.5%, to $187.0 million for the year ended
June 30, 2010, from $224.1 million for the year ended June 30, 2009. The decrease in premiums
earned was due to weak economic conditions, which 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. The closure of underperforming stores also contributed toward the decrease in premiums
earned. The number of policies in force at June 30, 2010 decreased 2.3% over the same date in 2009
from 158,222 to 154,655, due to the factors noted above. At June 30, 2010, we operated 394 stores,
compared with 418 stores at June 30, 2009.
Commission and Fee Income
Commission and fee income decreased 9% to $28.9 million for the year ended June 30, 2010, from
$31.8 million for the year ended June 30, 2009. The decrease in commission and fee income 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 retail locations.
Investment Income
Investment income decreased to $8.0 million during the year ended June 30, 2010 from $9.5
million during the year ended June 30, 2009. The decrease in investment income was primarily a
result of the sale of fixed maturity investments in fiscal year 2009 to generate taxable income to
utilize expiring NOLs and the reduced yields obtained on reinvestment. At June 30, 2010 and 2009,
the tax-equivalent book yield for our fixed maturities portfolio was 4.3% and 3.5%, respectively,
with effective durations of 3.16 and 2.26 years, respectively.
Net Realized Gains (Losses) on Investments, Available-for-Sale
Net realized losses on investments, available-for-sale during the year ended June 30, 2010
included $0.3 million in net realized gains on sales and redemptions and $1.0 million of charges
related to OTTI on certain non-agency backed CMOs. Net realized gains on investments,
available-for-sale during the year ended June 30, 2009 included $2.5 million in net realized gains
on sales and redemptions and $2.4 million of charges related to OTTI on investments, which was
comprised of $1.5 million related to certain non-agency backed CMOs and $0.9 million related to
three corporate bonds. For additional information with respect to the determination of OTTI losses
on investment securities, see Critical Accounting Estimates Investments below and Note 2 to
our consolidated financial statements.
Loss and Loss Adjustment Expenses
The loss and loss adjustment expense ratio was 67.9% for the year ended June 30, 2010,
compared with 66.6% for the year ended June 30, 2009. We experienced favorable development related
to prior periods of $11.2 million for the year ended June 30, 2010, compared with $11.4 million for
the year ended June 30, 2009. The favorable development for the year ended June 30, 2010 was due to
lower than anticipated severity of accidents occurring during the fiscal 2007 and 2008 accident
years, primarily in bodily injury coverage in Georgia and South Carolina, an improvement in our
claim handling practices and a shift in business mix toward renewal policies, which have lower loss
ratios than new policies. The favorable development for the year ended June 30, 2009 was primarily
due to both lower than anticipated severity and frequency of accidents, most notably in our
property and physical damage coverages.
Excluding the favorable development related to prior periods, the loss and loss adjustment
expense ratios for the years ended June 30, 2010 and 2009 were 74.0% and 71.7%, respectively. The
year-over-year increase in the loss and loss adjustment expense ratio was due to higher frequency
of accidents experienced during the first half of calendar year 2010.
34
FIRST ACCEPTANCE CORPORATION 10-K
Operating Expenses
Insurance operating expenses decreased 8% to $79.8 million for the year ended June 30, 2010
from $87.1 million for the year ended June 30, 2009. The decrease was primarily a result of a
reduction in costs (such as employee-agent commissions and premium taxes) that varied along with
the decrease in premiums earned as well as savings realized from the closure of underperforming
stores.
The expense ratio increased from 24.7% for the year ended June 30, 2009 to 27.3% for fiscal
year 2010. The year-over-year increase in the expense ratio was due to the decrease in premiums
earned, which resulted in a higher percentage of fixed expenses in our retail operations (such as
rent and base salary).
Overall, the combined ratio increased to 95.2% for the year ended June 30, 2010 from 91.3% for
the year ended June 30, 2009.
Litigation Settlement
Litigation settlement costs for the year ended June 30, 2010 were $(0.4) million, compared
with $1.6 million for fiscal year 2009. The reduction in expense during the year ended June 30,
2010 related primarily to the forfeiture of premium credits by Georgia and Alabama class members.
The year ended June 30, 2009 included costs incurred in connection with our settlement and defense
of the litigation as described further in Note 15 to our consolidated financial statements, a $2.95
million insurance recovery from our insurance carrier regarding coverage for the costs and expenses
we incurred relating to the settlement, and reductions in expense related to the forfeiture of
premium credits by Georgia and Alabama class members.
Goodwill Impairment
We recorded a non-cash, pre-tax goodwill impairment charge in fiscal year 2009 of $68.0
million as a result of the adverse impact of difficult economic conditions on our customers and
business and the resulting decline in its share price during the fourth quarter of fiscal year
2009. The fair value of our reporting unit, from a market participants perspective, was estimated
utilizing both (i) a cash flow projection derived from our long-range strategic plan using a
discount rate of 14.5%, which was based on an estimated weighted average cost of capital adjusted
for the risks associated with our operations and (ii) recent industry transaction and trading
trends in price to tangible book multiples and related returns on tangible equity. This non-cash
goodwill impairment charge did not have a materially adverse impact on the continuing operations,
liquidity, or statutory surplus of the Company.
Provision for Income Taxes
The provision for income taxes for the year ended June 30, 2010 was $0.4 million, compared
with $18.4 million for fiscal year 2009. The provision for income taxes for the year ended June 30,
2010 related to current state income taxes for certain subsidiaries with taxable income. At June
30, 2010 and 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 considered
both positive and negative evidence. We 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 determine 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 adjustment.
The provision for income taxes for the year ended June 30, 2009 included the establishment of
a full valuation allowance against our net deferred tax assets which, in combination with the tax
effect of the goodwill impairment charge, resulted in a net increase in the tax provision of $15.3
million during the three months ended June 30, 2009. This charge was partially offset by a $5.1
million tax benefit related to the utilization of tax NOL carryforwards expiring in 2009 that had
been previously reserved for through a valuation allowance resulting in a net increase in the tax
provision for the year of $10.2 million.
35
FIRST ACCEPTANCE CORPORATION 10-K
Real Estate and Corporate
Loss before income taxes from real estate and corporate operations for the year ended June 30,
2010 was $7.1 million, compared with a loss from real estate and corporate operations before income
taxes of $7.4 million for the year ended June 30, 2009. 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.
We incurred $3.9 million of interest expense during both the years ended June 30, 2010 and
2009 related to the debentures issued in June 2007. During the year ended June 30, 2009, we
incurred $0.1 million of interest expense in connection with borrowings under our former credit
facility. The credit facility was repaid in full and terminated on October 31, 2008.
Liquidity and Capital Resources
Our primary sources of funds are premiums, fees and investment income from our insurance
company subsidiaries and commissions and fee income from our non-insurance company subsidiaries.
Our primary uses of funds are the payment of claims and operating expenses. Net cash used in
operating activities for the year ended June 30, 2011 and 2010 was $6.2 million and $1.1 million,
respectively. Net cash used in operating activities for both periods was primarily the result of a
decrease in cash collected from premiums written. Net cash provided by investing activities for the
year ended June 30, 2011 was $9.3 million compared with net cash used in investing activities of
$49.9 million for the prior fiscal year. The year ended June 30, 2011 included net reductions in
our investment portfolio of $9.9 million, while the prior fiscal year included net additions to our
investment portfolio of $48.3 million. The net reductions in the current fiscal year were primarily
a result of maturities and redemptions. The net additions in the prior fiscal year were primarily
the result of the reinvestment of the proceeds from sales in the prior fiscal year of investments
to generate taxable income to utilize expiring tax net operating loss carryforwards.
Our holding company requires cash for general corporate overhead expenses and for debt service
related to our debentures payable. The holding companys primary source of unrestricted cash to
meet its obligations is the sale of ancillary products to our insureds and, if necessary, the
holding company may receive dividends from our insurance company subsidiaries. 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 June 30, 2011, we had $12.0 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). Based on current LIBOR interest
rates, our interest expense related to the debentures would decrease beginning in August 2012.
State insurance laws limit the amount of dividends that may be paid from our insurance company
subsidiaries. Based on our earned surplus, we believe that we have total dividend capacity for the
next twelve months of $15.3 million, of which $3.4 million would be deemed extraordinary and
subject to regulatory approval.
The National Association of Insurance Commissioners Model Act for risk-based capital provides
formulas to determine each December 31 on an annual basis 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 also statutory guidelines that suggest that on an annual
calendar year basis an insurance company should not exceed a ratio of net premiums written to
statutory capital and surplus of 3-to-1. On a combined basis, the ratios for our insurance company
subsidiaries of net premiums written for the last twelve months to statutory capital and surplus
were 1.49-to-1 at June 30, 2011. Based on our current forecast on a combined basis, we anticipate
that our risk-based capital levels will be adequate and that our ratio of net premiums written to
statutory capital and surplus will not exceed the 3-to-1 statutory guideline for the reasonably
foreseeable future. We therefore believe that our insurance company subsidiaries have sufficient
statutory capital and surplus available to support their net premium writings in this time frame.
36
FIRST ACCEPTANCE CORPORATION 10-K
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.
Contractual Obligations
The following table summarizes all of our contractual obligations by period at June 30, 2011
(in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due By Period |
|
|
|
Total |
|
|
Less than 1 year |
|
|
1-3 Years |
|
|
3-5 Years |
|
|
More than 5 years |
|
Loss and loss adjustment expense
reserves (1) |
|
$ |
68,424 |
|
|
$ |
25,522 |
|
|
$ |
29,833 |
|
|
$ |
8,553 |
|
|
$ |
4,516 |
|
Debentures payable (2) |
|
|
86,581 |
|
|
|
3,826 |
|
|
|
3,477 |
|
|
|
3,296 |
|
|
|
75,982 |
|
Capitalized lease obligations |
|
|
75 |
|
|
|
63 |
|
|
|
12 |
|
|
|
|
|
|
|
|
|
Operating leases (3) |
|
|
18,505 |
|
|
|
7,389 |
|
|
|
7,673 |
|
|
|
2,514 |
|
|
|
929 |
|
Severance obligations |
|
|
996 |
|
|
|
996 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
127 |
|
|
|
127 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual cash obligations |
|
$ |
174,708 |
|
|
$ |
37,923 |
|
|
$ |
40,995 |
|
|
$ |
14,363 |
|
|
$ |
81,427 |
|
|
|
|
(1) |
|
Loss and loss adjustment expense reserves do not have contractual maturity
dates; however, based on historical payment patterns, the amount presented is our estimate of
the expected timing of these payments. The timing of these payments is subject to significant
uncertainty. We maintain a portfolio of marketable investments with varying maturities and a
substantial amount of cash and cash equivalents intended to provide adequate cash flows for
such payments. |
|
(2) |
|
Payments due by period assume a contractual fixed interest rate of 9.277% until
July 30, 2012, after which the rate becomes variable (LIBOR plus 375 basis points, or 3.996%
at July 1, 2011). |
|
(3) |
|
Consists primarily of rental obligations under real estate leases related to our
retail locations and corporate offices. |
Trust Preferred Securities
On June 15, 2007, First Acceptance Statutory Trust I (FAST I), our wholly-owned
unconsolidated subsidiary trust entity, completed a private placement whereby FAST I issued 40,000
shares of preferred securities at $1,000 per share to outside investors and 1,240 shares of common
securities to us, also at $1,000 per share. FAST I used the proceeds from the sale of the preferred
securities to purchase $41.2 million of junior subordinated debentures from us. The debentures will
mature on July 30, 2037 and are redeemable by the Company in whole or in part beginning on July 30,
2012, at which time the preferred securities are callable. The debentures pay a fixed rate of
9.277% until July 30, 2012, after which the rate becomes variable (LIBOR plus 375 basis points).
The obligations of the Company under the junior subordinated debentures represent full and
unconditional guarantees by the Company of FAST Is obligations for the preferred securities.
Dividends on the preferred securities are cumulative, payable quarterly in arrears and are
deferrable at the Companys option for up to five years. The dividends on these securities, which
have not been deferred, are the same as the interest on the debentures. The Company cannot pay
dividends on its common stock during any such deferments. FAST I does not meet the requirements for
consolidation of FASB ASC 810-10, Variable Interest Entities.
Off-Balance Sheet Arrangements
We use off-balance sheet arrangements (e.g., operating leases) where the economics and sound
business principles warrant their use. For additional information with respect to our operating
leases, see Contractual Obligations above and Note 7 to our consolidated financial statements.
37
FIRST ACCEPTANCE CORPORATION 10-K
Critical Accounting Estimates
The preparation of consolidated financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that affect amounts
reported in the consolidated financial statements. As more information becomes known, these
estimates and assumptions could change, thus having an impact on the amounts reported in the
future. The following are considered to be our critical accounting estimates.
Valuation of Deferred Tax Asset
We maintain income taxes in accordance with FASB ASC 740-10, Income Taxes, whereby deferred
income tax assets and liabilities result from temporary differences. Temporary differences are
differences between the tax basis of assets and liabilities and operating loss and tax credit
carryforwards and their reported amounts in the consolidated financial statements that will result
in taxable or deductible amounts in future years. Valuation of the deferred tax asset is considered
a critical accounting estimate because the determination of our ability to utilize the asset
involves a number of management assumptions relating to future operations that could materially
affect the determination of the ultimate value and, therefore, the carrying amount of our deferred
tax asset.
Goodwill and Identifiable Intangible Assets
Goodwill and other identifiable intangible assets are attributable to our insurance operations
and were initially recorded at their estimated fair values at the date of acquisition. Goodwill and
other intangible assets having an indefinite useful life are not amortized for financial statement
purposes. We are required to perform annual impairment tests of our goodwill and intangible assets.
We perform our annual impairment tests as of the last day of the fourth quarter of each fiscal
year. In the event that facts and circumstances indicate that the goodwill and other identifiable
intangible assets may be impaired, an interim impairment test would be required. Intangible assets
with finite lives have been fully amortized over their useful lives.
The goodwill impairment test is a two-step process that requires us to make judgments in
determining what assumptions to use in the calculation. The first step of the process consists of
estimating the fair value of each reporting unit based on valuation techniques, including a
discounted cash flow model using revenue and profit forecasts and recent industry transaction and
trading multiples of our peers, and comparing those estimated fair values with the carrying values
of the assets and liabilities of the reporting unit, which includes the allocated goodwill. If the
estimated fair value is less than the carrying value, a second step is performed to compute the
amount of the impairment, if any, by determining an implied fair value of goodwill. The
determination of the implied fair value of goodwill of a reporting unit requires us to allocate
the estimated fair value of the reporting unit to the assets and liabilities of the reporting unit.
Any unallocated fair value represents the implied fair value of goodwill, which is compared to
its corresponding carrying value.
Our evaluation includes multiple assumptions that may change over time. If future discounted
cash flows become less than those projected by us, further impairment charges may become necessary
that could have a materially adverse impact on our results of operations and financial condition.
As quoted market prices in active stock markets are relevant evidence of fair value, a significant
decline in our common stock trading price may indicate an impairment of goodwill.
Investments
Our investments are recorded at fair value, which is typically based on publicly available
quoted prices. From time to time, the carrying value of our investments may be temporarily impaired
because of the inherent volatility of publicly-traded investments. Management reviews investments
for impairment on a quarterly basis. A decline in the fair value of any available-for-sale security
below cost that is deemed to be other-than-temporary would result in a charge against income for
the credit-related portion of any such impairment.
38
FIRST ACCEPTANCE CORPORATION 10-K
The determination of whether unrealized losses are other-than-temporary requires judgment
based on subjective as well as objective factors. We routinely monitor our investment portfolio for
changes in fair value that might indicate potential impairments and perform detailed reviews on
such securities. Changes in fair value are evaluated to determine the extent to which such changes
are attributable to (i) fundamental factors specific to the issuer or (ii) market-related factors
such as interest rates or sector declines.
Securities with declines attributable to issuer-specific fundamentals are reviewed to identify
all available evidence to estimate the potential for impairment. Resources used include historical
financial data included in SEC filings for corporate bonds and performance data regarding the
underlying loans for CMOs. Securities with declines attributable solely to market or sector
declines where we do not intend to sell the security and it is more likely than not that we will
not be required to sell the security before the recovery of its amortized cost basis are not deemed
to be other-than-temporarily impaired.
Losses and Loss Adjustment Expense Reserves
Loss and loss adjustment expense reserves represent our best estimate of our ultimate
liability for losses and loss adjustment expenses relating to events that occurred prior to the end
of any given accounting period but have not been paid. Months and potentially years may elapse
between the occurrence of an automobile accident covered by one of our insurance policies, the
reporting of the accident and the payment of the claim. We record a liability for estimates of
losses that will be paid for accidents that have been reported, which is referred to as case
reserves. As accidents are not always reported when they occur, we estimate liabilities for
accidents that have occurred but have not been reported (IBNR).
We are directly liable for loss and loss adjustment expenses under the terms of the insurance
policies underwritten by our insurance company subsidiaries. Each of our insurance company
subsidiaries establishes a reserve for all of its unpaid losses,
including case reserves
and IBNR reserves, and estimates for the cost to settle the claims. We estimate our IBNR reserves
by estimating our ultimate liability for loss and loss adjustment expense reserves first, and then
reducing that amount by the amount of cumulative paid claims and by the amount of our case
reserves. We rely primarily on historical loss experience in determining reserve levels, on the
assumption that historical loss experience provides a good indication of future loss experience. We
also consider various other factors, such as inflation, claims settlement patterns, legislative
activity and litigation trends. Our actuarial staff continually monitors these estimates on a state
and coverage level. We utilize our actuarial staff to determine appropriate reserve levels. As
experience develops or new information becomes known, we increase or decrease the level of our
reserves in the period in which changes to the estimates are determined. Accordingly, the actual
losses and loss adjustment expenses may differ materially from the estimates we have recorded. See
Item 1. Business Loss and Loss Adjustment Expense Reserves in this report for additional
information.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Market risk represents the potential economic loss arising from adverse changes in the fair
value of financial instruments. Our exposures to market risk relate primarily to our investment
portfolio, which is exposed primarily to interest rate risk and credit risk. The fair value of our
investment 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. Likewise, the underlying investments of our current
mutual fund investment are also fixed-income investments. 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.
39
FIRST ACCEPTANCE CORPORATION 10-K
Interest Rate Risk
The fair values of our fixed maturity investments fluctuate in response to changes in market
interest rates. Increases and decreases in prevailing interest rates generally translate into
decreases and increases, respectively, in the fair values of those instruments. Additionally, the
fair values of interest rate sensitive instruments may be affected by the creditworthiness of the
issuer, prepayment options, relative values of alternative investments, the liquidity of the
instrument and other general market conditions.
The following table summarizes the estimated effects of hypothetical increases and decreases
in interest rates resulting from parallel shifts in market yield curves on our fixed maturity
portfolio (in thousands). It is assumed that the effects are realized immediately upon the change
in interest rates. The hypothetical changes in market interest rates do not reflect what could be
deemed best or worst case scenarios. Variations in market interest rates could produce significant
changes in the timing of repayments due to prepayment options available. For these and other
reasons, actual results might differ from those reflected in the table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sensitivity to Instantaneous Interest Rate Changes (basis points) |
|
|
|
(100) |
|
|
(50) |
|
|
0 |
|
|
50 |
|
|
100 |
|
|
200 |
|
Fair value of fixed
maturity portfolio |
|
$ |
185,252 |
|
|
$ |
181,989 |
|
|
$ |
178,798 |
|
|
$ |
175,696 |
|
|
$ |
172,682 |
|
|
$ |
166,916 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table provides information about our fixed maturity investments at June 30, 2011
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 premiums or discounts at the time of
purchase and OTTI) by expected maturity date for each of the five fiscal years and collectively for
all fiscal years thereafter (in thousands). Callable bonds and notes are included based on call
date or maturity date depending upon which date produces the most conservative yield. CMOs and
sinking fund issues are included based on maturity year adjusted for expected payment patterns.
Actual cash flows may differ from those expected.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities with No |
|
|
All |
|
|
|
Securities with |
|
|
Securities with |
|
|
Unrealized Gains or |
|
|
Fixed Maturity |
|
Year Ended June 30, |
|
Unrealized Gains |
|
|
Unrealized Losses |
|
|
Losses |
|
|
Securities |
|
2012 |
|
$ |
14,630 |
|
|
$ |
80 |
|
|
$ |
1,500 |
|
|
$ |
16,210 |
|
2013 |
|
|
24,185 |
|
|
|
25 |
|
|
|
|
|
|
|
24,210 |
|
2014 |
|
|
19,365 |
|
|
|
|
|
|
|
|
|
|
|
19,365 |
|
2015 |
|
|
19,378 |
|
|
|
|
|
|
|
|
|
|
|
19,378 |
|
2016 |
|
|
12,662 |
|
|
|
|
|
|
|
|
|
|
|
12,662 |
|
Thereafter |
|
|
67,348 |
|
|
|
9,805 |
|
|
|
|
|
|
|
77,153 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
157,568 |
|
|
$ |
9,910 |
|
|
$ |
1,500 |
|
|
$ |
168,978 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value |
|
$ |
167,246 |
|
|
$ |
10,052 |
|
|
$ |
1,500 |
|
|
$ |
178,798 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 our investment portfolio to avoid concentrations in any
single industry group or issuer and by limiting investments in securities with lower credit
ratings. Our largest investment in any one investment, excluding U.S. government and agency
securities, is our investment in a single mutual fund with a fair value of $8.0 million, or 4% of
our investment portfolio. Our five largest individual investments make up 16% of our investment
portfolio. The average credit quality rating for our fixed maturity portfolio was AA- at June 30,
2011.
40
FIRST ACCEPTANCE CORPORATION 10-K
The following table presents the underlying ratings of our fixed maturity portfolio by
nationally recognized securities rating organizations at June 30, 2011 (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized |
|
|
% of |
|
|
Fair |
|
|
% of |
|
Comparable Rating |
|
Cost |
|
|
Amortized Cost |
|
|
Value |
|
|
Fair Value |
|
AAA |
|
$ |
62,898 |
|
|
|
37.0 |
% |
|
$ |
66,435 |
|
|
|
37.2 |
% |
AA+, AA, AA- |
|
|
35,255 |
|
|
|
20.8 |
% |
|
|
37,339 |
|
|
|
20.9 |
% |
A+, A, A- |
|
|
52,040 |
|
|
|
30.7 |
% |
|
|
54,559 |
|
|
|
30.5 |
% |
BBB+, BBB, BBB- |
|
|
12,086 |
|
|
|
7.1 |
% |
|
|
12,445 |
|
|
|
6.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment grade |
|
|
162,279 |
|
|
|
95.6 |
% |
|
|
170,778 |
|
|
|
95.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Not rated |
|
|
3,642 |
|
|
|
2.1 |
% |
|
|
3,691 |
|
|
|
2.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BB+, BB, BB- |
|
|
3,038 |
|
|
|
1.8 |
% |
|
|
3,304 |
|
|
|
1.9 |
% |
B+, B, B- |
|
|
169 |
|
|
|
0.1 |
% |
|
|
251 |
|
|
|
0.1 |
% |
CCC+, CCC, CCC- |
|
|
657 |
|
|
|
0.4 |
% |
|
|
666 |
|
|
|
0.4 |
% |
CC+, CC, CC- |
|
|
14 |
|
|
|
0.0 |
% |
|
|
76 |
|
|
|
0.0 |
% |
C+, C, C- |
|
|
|
|
|
|
0.0 |
% |
|
|
32 |
|
|
|
0.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-investment grade |
|
|
3,878 |
|
|
|
2.3 |
% |
|
|
4,329 |
|
|
|
2.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
169,799 |
|
|
|
100.0 |
% |
|
$ |
178,798 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
The mortgage industry has experienced a significant number of delinquencies and foreclosures,
particularly among lower quality exposures (sub-prime and Alt-A). As a result of these
delinquencies and foreclosures, many CMOs with underlying sub-prime and Alt-A mortgages as
collateral experienced significant declines in fair value. At June 30, 2011, our fixed maturity
portfolio included three CMOs having sub-prime exposure with a fair value of $0.9 million and no
exposure to Alt-A investments.
Our investment portfolio consists of $36.3 million of municipal bonds, of which $22.3 million
are insured. Of the insured bonds, 69% are insured with MBIA, 14% with AMBAC and 17% with XL
Capital. Currently, these securities are paying their principal and periodic interest timely.
The following table presents the underlying ratings at June 30, 2011, represented by the lower
of either Standard and Poors, Fitchs, or Moodys ratings, of the municipal bond portfolio (in
thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insured |
|
|
Uninsured |
|
|
Total |
|
|
|
Fair |
|
|
% of |
|
|
Fair |
|
|
% of |
|
|
Fair |
|
|
% of |
|
|
|
Value |
|
|
Fair Value |
|
|
Value |
|
|
Fair Value |
|
|
Value |
|
|
Fair Value |
|
AAA |
|
|
|
|
|
|
0 |
% |
|
|
4,643 |
|
|
|
33 |
% |
|
|
4,643 |
|
|
|
13 |
% |
AA+, AA, AA- |
|
|
10,494 |
|
|
|
47 |
% |
|
|
5,366 |
|
|
|
39 |
% |
|
|
15,860 |
|
|
|
43 |
% |
A+, A, A- |
|
|
10,201 |
|
|
|
46 |
% |
|
|
3,908 |
|
|
|
28 |
% |
|
|
14,109 |
|
|
|
39 |
% |
BBB+, BBB, BBB- |
|
|
1,644 |
|
|
|
7 |
% |
|
|
|
|
|
|
0 |
% |
|
|
1,644 |
|
|
|
5 |
% |
Not rated |
|
|
8 |
|
|
|
0 |
% |
|
|
|
|
|
|
0 |
% |
|
|
8 |
|
|
|
0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
22,347 |
|
|
|
100 |
% |
|
|
13,917 |
|
|
|
100 |
% |
|
|
36,264 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41
FIRST ACCEPTANCE CORPORATION 10-K
Item 8. Financial Statements and Supplementary Data
42
FIRST ACCEPTANCE CORPORATION 10-K
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
First Acceptance Corporation
We have audited the accompanying consolidated balance sheets of First Acceptance Corporation and
subsidiaries (the Company) as of June 30, 2011 and 2010, and the related consolidated statements
of operations, stockholders equity, and cash flows for each of the three years in the period ended
June 30, 2011. Our audits also included the financial statement schedule listed in the index at
Item 15(a). These financial statements and schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on these consolidated financial statements
and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of First Acceptance Corporation and subsidiaries at
June 30, 2011 and 2010, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended June 30, 2011, in conformity with U.S. generally
accepted accounting principles. Also, in our opinion, the related financial statement schedule,
when considered in relation to the basic financial statements taken as a whole, presents fairly, in
all material respects, the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), First Acceptance Corporation and subsidiaries internal control over
financial reporting as of June 30, 2011, based on criteria established in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated August 31, 2011 expressed an unqualified opinion thereon.
Nashville, Tennessee
August 31, 2011
43
FIRST ACCEPTANCE CORPORATION 10-K
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
First Acceptance Corporation
We have audited First Acceptance Corporation and subsidiaries (the Company) internal control
over financial reporting as of June 30, 2011, based on criteria established in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (the COSO criteria). The Companys management is responsible for maintaining effective
internal control over financial reporting, and for its assessment of the effectiveness of internal
control over financial reporting included in the accompanying Managements Annual Report on
Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the
Companys internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk,
and performing such other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, First Acceptance Corporation and subsidiaries maintained, in all material respects,
effective internal control over financial reporting as of June 30, 2011, based on the COSO
criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheets of First Acceptance Corporation and
subsidiaries as of June 30, 2011 and 2010, and the related consolidated statements of operations,
stockholders equity, and cash flows for each of the three years in the period ended June 30, 2011,
and our report dated August 31, 2011 expressed an unqualified opinion thereon.
Nashville, Tennessee
August 31, 2011
44
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
2011 |
|
|
2010 |
|
ASSETS |
|
|
|
|
|
|
|
|
Investments, available-for-sale at fair value (amortized cost
of $177,300 and $187,907, respectively) |
|
$ |
186,815 |
|
|
$ |
196,550 |
|
Cash and cash equivalents |
|
|
29,305 |
|
|
|
26,184 |
|
Premiums and fees receivable, net of allowance of $406 and $418 |
|
|
40,447 |
|
|
|
41,276 |
|
Other assets |
|
|
7,999 |
|
|
|
8,733 |
|
Property and equipment, net |
|
|
2,533 |
|
|
|
3,524 |
|
Deferred acquisition costs |
|
|
3,305 |
|
|
|
3,623 |
|
Goodwill |
|
|
21,090 |
|
|
|
70,092 |
|
Identifiable intangible assets |
|
|
4,800 |
|
|
|
6,360 |
|
|
|
|
|
|
|
|
TOTAL ASSETS |
|
$ |
296,294 |
|
|
$ |
356,342 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
Loss and loss adjustment expense reserves |
|
$ |
68,424 |
|
|
$ |
73,198 |
|
Unearned premiums and fees |
|
|
50,772 |
|
|
|
52,563 |
|
Debentures payable |
|
|
41,240 |
|
|
|
41,240 |
|
Other liabilities |
|
|
13,630 |
|
|
|
12,151 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
174,066 |
|
|
|
179,152 |
|
|
|
|
|
|
|
|
Stockholders equity: |
|
|
|
|
|
|
|
|
Preferred stock, $.01 par value, 10,000 shares authorized |
|
|
|
|
|
|
|
|
Common stock, $.01 par value, 75,000 shares authorized;
48,458 and 48,509 shares issued and outstanding,
respectively |
|
|
485 |
|
|
|
485 |
|
Additional paid-in capital |
|
|
466,777 |
|
|
|
465,831 |
|
Accumulated other comprehensive income |
|
|
9,515 |
|
|
|
8,643 |
|
Accumulated deficit |
|
|
(354,549 |
) |
|
|
(297,769 |
) |
|
|
|
|
|
|
|
Total stockholders equity |
|
|
122,228 |
|
|
|
177,190 |
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
|
$ |
296,294 |
|
|
$ |
356,342 |
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
45
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned |
|
$ |
173,041 |
|
|
$ |
187,046 |
|
|
$ |
224,113 |
|
Commission and fee income |
|
|
29,483 |
|
|
|
28,852 |
|
|
|
31,759 |
|
Investment income |
|
|
8,395 |
|
|
|
7,958 |
|
|
|
9,504 |
|
Net realized gains (losses) on investments,
available-for-sale |
|
|
(185 |
) |
|
|
(683 |
) |
|
|
89 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
210,734 |
|
|
|
223,173 |
|
|
|
265,465 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Losses and loss adjustment expenses |
|
|
129,167 |
|
|
|
126,995 |
|
|
|
149,277 |
|
Insurance operating expenses |
|
|
77,822 |
|
|
|
79,833 |
|
|
|
87,124 |
|
Other operating expenses |
|
|
1,369 |
|
|
|
2,233 |
|
|
|
1,307 |
|
Litigation settlement |
|
|
(9 |
) |
|
|
(361 |
) |
|
|
1,570 |
|
Stock-based compensation |
|
|
998 |
|
|
|
1,048 |
|
|
|
2,053 |
|
Depreciation and amortization |
|
|
1,605 |
|
|
|
2,013 |
|
|
|
1,910 |
|
Interest expense |
|
|
3,930 |
|
|
|
3,931 |
|
|
|
4,138 |
|
Goodwill and intangible assets impairment |
|
|
52,434 |
|
|
|
|
|
|
|
67,990 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
267,316 |
|
|
|
215,692 |
|
|
|
315,369 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
(56,582 |
) |
|
|
7,481 |
|
|
|
(49,904 |
) |
Provision for income taxes |
|
|
198 |
|
|
|
441 |
|
|
|
18,396 |
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(56,780 |
) |
|
$ |
7,040 |
|
|
$ |
(68,300 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
(1.18 |
) |
|
$ |
0.15 |
|
|
$ |
(1.43 |
) |
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
(1.18 |
) |
|
$ |
0.15 |
|
|
$ |
(1.43 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares used to calculate net income
(loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
48,171 |
|
|
|
47,961 |
|
|
|
47,664 |
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
48,171 |
|
|
|
48,418 |
|
|
|
47,664 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of net income (loss) to
comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(56,780 |
) |
|
$ |
7,040 |
|
|
$ |
(68,300 |
) |
Unrealized change in investments |
|
|
872 |
|
|
|
9,181 |
|
|
|
(68 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(55,908 |
) |
|
|
16,221 |
|
|
|
(68,368 |
) |
Applicable provision for income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) |
|
$ |
(55,908 |
) |
|
$ |
16,221 |
|
|
$ |
(68,368 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Detail of net realized gains (losses) on
investments, available-for-sale: |
|
|
|
|
|
|
|
|
|
|
|
|
Net realized gains on sales and redemptions |
|
$ |
228 |
|
|
$ |
300 |
|
|
$ |
2,509 |
|
Other-than-temporary impairment (OTTI) charges |
|
|
(22 |
) |
|
|
(1,446 |
) |
|
|
(3,640 |
) |
Non-credit portion included in comprehensive income (loss) |
|
|
2 |
|
|
|
954 |
|
|
|
1,220 |
|
OTTI charges reclassified from other
comprehensive income (loss) |
|
|
(393 |
) |
|
|
(491 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTTI charges recognized in net income (loss) |
|
|
(413 |
) |
|
|
(983 |
) |
|
|
(2,420 |
) |
|
|
|
|
|
|
|
|
|
|
Net realized gains (losses) on investments,
available-for-sale |
|
$ |
(185 |
) |
|
$ |
(683 |
) |
|
$ |
89 |
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
46
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
other |
|
|
|
|
|
|
Total |
|
|
|
Common Stock |
|
|
paid-in |
|
|
comprehensive |
|
|
Accumulated |
|
|
stockholders |
|
|
|
Shares |
|
|
Amount |
|
|
capital |
|
|
income (loss) |
|
|
deficit |
|
|
equity |
|
Balances at June 30, 2008 |
|
|
48,055 |
|
|
$ |
481 |
|
|
$ |
462,601 |
|
|
$ |
(470 |
) |
|
$ |
(237,153 |
) |
|
$ |
225,459 |
|
Cumulative effect of accounting
change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(644 |
) |
|
|
644 |
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(68,300 |
) |
|
|
(68,300 |
) |
Net unrealized change on investments
(net of tax of $0) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
576 |
|
|
|
|
|
|
|
576 |
|
Issuance of restricted common stock |
|
|
225 |
|
|
|
2 |
|
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation |
|
|
5 |
|
|
|
|
|
|
|
2,053 |
|
|
|
|
|
|
|
|
|
|
|
2,053 |
|
Issuance of shares under Employee
Stock Purchase Plan |
|
|
27 |
|
|
|
|
|
|
|
68 |
|
|
|
|
|
|
|
|
|
|
|
68 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at June 30, 2009 |
|
|
48,312 |
|
|
|
483 |
|
|
|
464,720 |
|
|
|
(538 |
) |
|
|
(304,809 |
) |
|
|
159,856 |
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,040 |
|
|
|
7,040 |
|
Net unrealized change on investments
(net of tax of $0) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,181 |
|
|
|
|
|
|
|
9,181 |
|
Issuance of restricted common stock |
|
|
160 |
|
|
|
2 |
|
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Forfeiture of restricted common stock |
|
|
(5 |
) |
|
|
|
|
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
(2 |
) |
Stock-based compensation |
|
|
5 |
|
|
|
|
|
|
|
1,048 |
|
|
|
|
|
|
|
|
|
|
|
1,048 |
|
Issuance of shares under Employee
Stock Purchase Plan |
|
|
37 |
|
|
|
|
|
|
|
67 |
|
|
|
|
|
|
|
|
|
|
|
67 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at June 30, 2010 |
|
|
48,509 |
|
|
|
485 |
|
|
|
465,831 |
|
|
|
8,643 |
|
|
|
(297,769 |
) |
|
|
177,190 |
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(56,780 |
) |
|
|
(56,780 |
) |
Net unrealized change on investments
(net of tax of $0) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
872 |
|
|
|
|
|
|
|
872 |
|
Forfeiture of restricted common stock |
|
|
(88 |
) |
|
|
(1 |
) |
|
|
(107 |
) |
|
|
|
|
|
|
|
|
|
|
(108 |
) |
Stock-based compensation |
|
|
5 |
|
|
|
|
|
|
|
998 |
|
|
|
|
|
|
|
|
|
|
|
998 |
|
Issuance of shares under Employee
Stock Purchase Plan |
|
|
32 |
|
|
|
1 |
|
|
|
55 |
|
|
|
|
|
|
|
|
|
|
|
56 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at June 30, 2011 |
|
|
48,458 |
|
|
$ |
485 |
|
|
$ |
466,777 |
|
|
$ |
9,515 |
|
|
$ |
(354,549 |
) |
|
$ |
122,228 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
47
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(56,780 |
) |
|
$ |
7,040 |
|
|
$ |
(68,300 |
) |
Adjustments to reconcile net income (loss) to cash used in
operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
1,605 |
|
|
|
2,013 |
|
|
|
1,910 |
|
Stock-based compensation |
|
|
998 |
|
|
|
1,048 |
|
|
|
2,053 |
|
Deferred income taxes |
|
|
(98 |
) |
|
|
|
|
|
|
17,593 |
|
Goodwill and intangible assets impairment |
|
|
52,434 |
|
|
|
|
|
|
|
67,990 |
|
Other-than-temporary impairment on investment securities |
|
|
413 |
|
|
|
983 |
|
|
|
2,420 |
|
Net realized gains on sales and redemptions of investments |
|
|
(228 |
) |
|
|
(300 |
) |
|
|
(2,509 |
) |
Other |
|
|
397 |
|
|
|
521 |
|
|
|
129 |
|
Change in: |
|
|
|
|
|
|
|
|
|
|
|
|
Premiums and fees receivable |
|
|
817 |
|
|
|
4,032 |
|
|
|
18,023 |
|
Loss and loss adjustment expense reserves |
|
|
(4,774 |
) |
|
|
(10,775 |
) |
|
|
(17,434 |
) |
Unearned premiums and fees |
|
|
(1,791 |
) |
|
|
(4,787 |
) |
|
|
(19,887 |
) |
Litigation settlement |
|
|
(46 |
) |
|
|
(97 |
) |
|
|
(3,975 |
) |
Other |
|
|
884 |
|
|
|
(795 |
) |
|
|
(3,328 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities |
|
|
(6,169 |
) |
|
|
(1,117 |
) |
|
|
(5,315 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of investments, available-for-sale |
|
|
(13,324 |
) |
|
|
(71,939 |
) |
|
|
(16,228 |
) |
Maturities and redemptions of investments, available-for-sale |
|
|
23,260 |
|
|
|
11,326 |
|
|
|
19,980 |
|
Sales of investments, available-for-sale |
|
|
|
|
|
|
12,362 |
|
|
|
46,128 |
|
Net change in receivable/payable for securities |
|
|
|
|
|
|
|
|
|
|
(1,045 |
) |
Capital expenditures |
|
|
(620 |
) |
|
|
(1,628 |
) |
|
|
(1,003 |
) |
Other |
|
|
(2 |
) |
|
|
(22 |
) |
|
|
(130 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
9,314 |
|
|
|
(49,901 |
) |
|
|
47,702 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Payments on borrowings |
|
|
|
|
|
|
|
|
|
|
(3,913 |
) |
Net proceeds from issuance of common stock |
|
|
56 |
|
|
|
67 |
|
|
|
68 |
|
Other |
|
|
(80 |
) |
|
|
(66 |
) |
|
|
13 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
(24 |
) |
|
|
1 |
|
|
|
(3,832 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
3,121 |
|
|
|
(51,017 |
) |
|
|
38,555 |
|
Cash and cash equivalents, beginning of year |
|
|
26,184 |
|
|
|
77,201 |
|
|
|
38,646 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year |
|
$ |
29,305 |
|
|
$ |
26,184 |
|
|
$ |
77,201 |
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
48
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
General
First Acceptance Corporation (the Company) is a holding company based in Nashville,
Tennessee with operating subsidiaries whose primary operations include the selling, servicing and
underwriting of non-standard personal automobile insurance and related products. The Company writes
non-standard personal automobile insurance in 12 states and is licensed as an insurer in 13
additional states. The Company issues policies of insurance through three wholly-owned
subsidiaries: First Acceptance Insurance Company, Inc., First Acceptance Insurance Company of
Georgia, Inc. and First Acceptance Insurance Company of Tennessee, Inc. (collectively, the
Insurance Companies).
Basis of Consolidation and Reporting
The accompanying consolidated financial statements include the accounts of the Company and its
subsidiaries which are all wholly owned. These financial statements have been prepared in
conformity with U.S. generally accepted accounting principles. All intercompany accounts and
transactions have been eliminated in consolidation.
Reclassifications
Certain reclassifications have been made to the prior years consolidated financial statements
to conform with the current year presentation.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting
principles requires management to make estimates and assumptions that affect the amounts reported
in the financial statements and accompanying notes. It also requires disclosure of contingent
assets and liabilities at the date of the consolidated financial statements and the reported
revenues and expenses during the period. Actual results could differ from those estimates.
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. Fair value
measurements are generally based upon observable and unobservable inputs. Observable inputs are
based on market data from independent sources, while unobservable inputs reflect the Companys view
of market assumptions in the absence of observable market information. All assets and liabilities
that are carried at fair value are classified and disclosed in one of the following categories:
|
Level 1 |
|
Quoted prices in active markets for identical assets or liabilities. |
|
|
Level 2 |
|
Quoted market prices for similar assets or liabilities in active markets;
quoted prices by independent pricing services for identical or similar assets or
liabilities in markets that are not active; and valuations, using models or other
valuation techniques, that use observable market data. All significant inputs are
observable, or derived from observable information in the marketplace, or are supported
by observable levels at which transactions are executed in the market place. |
|
|
Level 3 |
|
Instruments that use non-binding broker quotes or model driven valuations
that do not have observable market data. |
The Company categorizes methods used in the annual goodwill and intangible assets impairment
tests as Level 3. The Company used a discounted cash flow model and recent market transactions to
estimate the fair value of the reporting unit as a part of its goodwill impairment analysis as
discussed within Goodwill and Other Identifiable Intangible Assets section below. The Companys
discounted cash flow analysis utilized comprehensive cash flow projections, as well as assumptions
based on risks and market data to the extent available. To determine the
49
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
fair value of acquired trademarks and trade names, we used the relief-from-royalty method. This method assumes
that trademarks and trade names have value to the extent that their owner is relieved of the
obligation to pay royalties for the benefits received from them. This method requires us to
estimate the future revenue for the related brands, the appropriate royalty rate and the weighted
average cost of capital.
Investments
Investments, available-for-sale at fair value, include bonds with fixed principal payment
schedules and mortgage-backed securities which are amortized using the retrospective method. These
securities and the investment in the mutual fund are carried at fair value with the corresponding
unrealized appreciation or depreciation, net of deferred income taxes, reported in other
comprehensive income.
Premiums and discounts on collateralized mortgage obligations (CMOs) are amortized over a
period based on estimated future principal payments, including prepayments. Prepayment assumptions
are reviewed periodically and adjusted to reflect actual prepayments and changes in expectations.
The most significant determinants of prepayments are the difference between interest rates on the
underlying mortgages and the current mortgage loan rates and the structure of the security. Other
factors affecting prepayments include the size, type and age of underlying mortgages, the
geographic location of the mortgaged properties and the credit worthiness of the borrowers.
Variations from anticipated prepayments will affect the life and yield of these securities.
Investment securities are exposed to various risks such as interest rate, market and credit
risk. Fair values of securities fluctuate based on changing market conditions. Significant changes
in market conditions could materially affect portfolio value in the near term. Management reviews
investments for impairment on a quarterly basis. Fair values of investments are based on prices
quoted in the most active market for each security. If quoted prices are not available, fair value
is estimated based on the fair value of comparable securities, discounted cash flow models or
similar methods. Any decline in the fair value of any available-for-sale security below cost that
is deemed to be other-than-temporary would result in a reduction in the amortized cost of the
security.
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 (FASB ASC 320-10-65). Under this guidance, if management can
assert that it does not intend to sell an impaired fixed maturity security and it is more likely
than not that it will not have to sell the security before recovery of its amortized cost basis,
then an entity must separate other-than-temporary impairments (OTTI) into the following two
components: (i) the amount related to credit losses (charged against income) and (ii) the amount
related to all other factors (recorded in other comprehensive income). The credit-related portion
of an OTTI is measured by comparing a securitys amortized cost to the present value of its current
expected cash flows discounted at its effective yield prior to the impairment charge. If management
intends to sell an impaired security, or it is more likely than not that it will be required to
sell the security before recovery, an impairment charge is required to reduce the amortized cost of
that security to fair value. As a result of the adoption of this pronouncement, the cumulative
effect resulted in an adjustment in fiscal year 2009 of $0.6 million to reclassify the non-credit
component of previously recognized impairments from accumulated deficit to accumulated other
comprehensive loss.
Realized gains and losses on sales and redemptions of securities are computed based on
specific identification.
Cash and Cash Equivalents
Cash and cash equivalents consist of bank demand deposits and highly-liquid investments. All
investments with maturities of three months or less at the date of purchase are considered cash
equivalents.
50
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Revenue Recognition
Insurance premiums earned include policy and renewal fees and are recognized on a pro-rata
basis over the respective terms of the policies. Written premiums are recorded as of the effective
date of the policies for the full policy premium, although most policyholders elect to pay on a
monthly installment basis. Premiums and fees are generally collected in advance of providing risk
coverage, minimizing the Companys exposure to credit risk. Premiums receivable are recorded net of
an estimated allowance for uncollectible amounts. Commission and fee income includes installment
fees recognized when billed and commissions and fees from ancillary products recognized on a
pro-rata basis over the respective terms of the contracts.
Income Taxes
Income taxes are accounted for under the liability method. Deferred tax assets and liabilities
are recognized for the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized
in income in the period that includes the enactment date.
A valuation allowance for the deferred tax asset is established based upon managements
estimate of whether it is more likely than not that the Company would not realize tax benefits in
future periods to the full extent available. Changes in the valuation allowance are recognized in
income during the period in which the circumstances that cause such a change in managements
estimate occur.
The Company accounts for income tax uncertainties under the provisions of FASB ASC 740-10,
Income Taxes (FASB ASC 740-10). The Company has recognized no additional liability or reduction
in deferred tax assets for unrecognized tax benefits at June 30, 2011 and 2010. Any interest and
penalties incurred in connection with income taxes are recorded as a component of the provision for
income taxes. The Company is generally not subject to U.S. federal, state or local income tax
examinations by tax authorities for taxable years prior to June 30, 2006.
Advertising Costs
Advertising costs are expensed when incurred. Advertising expense for the years ended June 30,
2011, 2010 and 2009 was $6.9 million, $8.3 million and $9.6 million, respectively. At June 30, 2011
and 2010, prepaid advertising costs, which are included in other assets in the accompanying
consolidated balance sheets, were $0.8 million and $1.2 million, respectively.
Property and Equipment
Property and equipment are initially recorded at cost. Depreciation is provided over the
estimated useful lives of the assets (generally ranging from three to seven years) using the
straight-line method. Leasehold improvements are amortized over the shorter of the lives of the
respective leases or the service lives of the improvements. Repairs and maintenance are charged to
expense as incurred. Equipment under capitalized lease obligations is stated at the present value
of the minimum lease payments at the beginning of the lease term.
Foreclosed Real Estate Held for Sale
Foreclosed real estate held for sale is recorded at the lower of cost or fair value less
estimated costs to sell. The Company periodically reviews its portfolio of foreclosed real estate
held for sale using current information including (i) independent appraisals, (ii) general economic
factors affecting the area where the property is located, (iii) recent sales activity and asking
prices for comparable properties and (iv) costs to sell and/or develop that would serve to lower
the expected proceeds from the disposal of the real estate. Gains (losses) realized on liquidation
are recorded directly to operations and included in revenues. Foreclosed real estate held for sale
assets of $0.8 million at both June 30, 2011 and 2010 are included in other assets.
51
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Deferred Acquisition Costs
Deferred acquisition costs include premium taxes and other variable underwriting and direct
sales costs incurred in connection with writing business. These costs are deferred and amortized
over the policy period in which the related premiums are earned, to the extent that such costs are
deemed recoverable from future unearned premiums and anticipated investment income. Amortization
expense for the years ended June 30, 2011, 2010 and 2009 was $12.8 million, $13.8 million and $15.8
million, respectively.
Goodwill and Other Identifiable Intangible Assets
Goodwill and other identifiable intangible assets are attributable to the Companys insurance
operations and were initially recorded at their estimated fair values at the date of acquisition.
Goodwill and other intangible assets, primarily comprised of trade names, 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 recent industry transaction and
trading multiples of our peers, and comparing those estimated fair values with the carrying values
of the assets and liabilities of the reporting unit, 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.
The Company recorded a non-cash, pre-tax goodwill impairment charge in fiscal year 2009 of
$68.0 million as a result of the adverse impact of the difficult economic conditions on the
Companys customers and business and the resulting decline in the Companys share price during the
fourth quarter of fiscal year 2009. This goodwill impairment charge did not have a materially
adverse impact on the continuing operations, liquidity, or statutory surplus of the Company.
As a part of the Companys annual impairment test to evaluate the recoverability of goodwill
at June 30, 2011, the fair value of the Companys reporting unit, from a market participants
perspective, was estimated utilizing both (i) a cash flow projection derived from the Companys
long-range strategic plan using a discount rate of 14.5%, which was based on an estimated weighted
average cost of capital adjusted for the risks associated with its operations and (ii) recent
industry transaction and trading trends in price to tangible book multiples and related returns on
tangible equity. As a result of recent trends in industry transaction and trading multiples, the
Company recognized a non-cash, pre-tax goodwill impairment charge of $50.9 million in the fourth
quarter of fiscal year 2011, which included a $1.9 million addition to deferred tax liabilities.
Indefinite-lived intangible assets primarily consist of acquired trademarks and trade names.
In measuring the fair value for these intangible assets, the Company utilizes the
relief-from-royalty method. This method assumes that trademarks and trade names have value to the
extent that their owner is relieved of the obligation to pay royalties for the benefits received
from them. This method requires the Company to estimate the future revenue for the related brands,
the appropriate royalty rate and the weighted average cost of capital. As a result of decisions
made by management during the most recent quarter regarding entity-wide branding initiatives, the
Company recognized a non-cash, pre-tax impairment charge of $1.6 million related to trade name
intangible assets.
Management does not believe that these non-cash impairment charges will have a materially
adverse impact on the continuing operations, liquidity, or statutory surplus of the Company.
52
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The Companys evaluation includes multiple assumptions that may change over time. If future
discounted cash flows become less than those projected by the Company or unfavorable industry
transaction multiples and trading trends continue, further impairment charges may become necessary
that could have a materially adverse impact on the Companys results of operations in the period in
which the write-off occurs. As quoted market prices in active stock markets are relevant evidence
of fair value, a significant decline in the Companys common stock trading price may indicate an
impairment of goodwill.
Loss and Loss Adjustment Expense Reserves
Loss and loss adjustment expense reserves are undiscounted and represent case-basis estimates
of reported losses and estimates based on certain actuarial assumptions regarding the past
experience of reported losses, including an estimate of losses incurred but not reported.
Management believes that the loss and loss adjustment reserves are adequate to cover the ultimate
associated liability. However, such estimate may be more or less than the amount ultimately paid
when the claims are finally settled.
Recent Accounting Pronouncements
In December 2009, the FASB issued Accounting Standards Update (ASU) No. 2009-17,
Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities (Topic
810) (FASB ASU No. 2009-17), which amends FASB ASC 810-10, Variable Interest Entities. FASB ASU
No. 2009-17 amends the evaluation criteria to identify the primary beneficiary of a variable
interest entity and requires ongoing reassessment of whether an enterprise is the primary
beneficiary of the variable interest entity. The Company adopted the provisions of FASB ASU No.
2009-17 in the quarter ended September 30, 2010. The adoption did not have an impact on the
Companys results of operations or financial condition.
In October 2010, the FASB issued ASU No. 2010-26, Accounting for Costs Associated with
Acquiring or Renewing Insurance Contracts (a consensus of the FASB Emerging Issues Task Force) (Topic 944)
(FASB ASU No. 2010-26), which amends FASB ASC 944-340, Other Assets and Deferred Costs. FASB ASU
No. 2010-26 clarifies what costs should be deferred by insurance companies when issuing or renewing
insurance contracts. FASB ASU 2010-26 is effective for fiscal years, and interim periods within
those fiscal years, beginning on or after December 15, 2011. The Company is currently evaluating
the impact that the adoption of FASB ASU 2010-26 will have on its future consolidated financial
statements.
In May 2011, the FASB issued ASU No. 2011-04, Amendments to Achieve Common Fair Value
Measurement and Disclosure Requirements in U.S. GAAP and IFRSs, which amends certain measurement
and disclosure requirements related to fair value measurements to improve consistency with
international reporting standards. This guidance is effective prospectively for public entities for
interim and annual reporting periods beginning after December 15, 2011, with early adoption by
public entities prohibited. The Company is currently evaluating this guidance, but does not expect
its adoption will have a material effect on its future consolidated financial statements.
In June 2011, the FASB issued ASU No. 2011-05, Presentation of Comprehensive Income (FASB ASU
No. 2011-05), which will require a company to present components of net income and other
comprehensive income in one continuous statement or in two separate, but consecutive statements.
There are no changes to the components that are recognized in net income or other comprehensive
income under current GAAP. This guidance is effective for fiscal years, and interim periods within
those fiscal years, beginning after December 15, 2011, with early adoption permitted. The Company
is currently evaluating this guidance, but does not expect its adoption will have a material effect
on its future consolidated financial statements.
Supplemental Cash Flow Information
During the years ended June 30, 2011, 2010 and 2009, the Company paid $0.3 million, $0.7
million and $0.5 million, respectively, in income taxes and $3.9 million, $3.9 million and $4.0
million, respectively, in interest.
53
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Basic and Diluted Net Income (Loss) Per Share
Basic net income (loss) per share is computed by dividing net income (loss) available to
common shareholders by the weighted average number of common shares, while diluted net income
(loss) per share is computed by dividing net income (loss) available to common shareholders by the
weighted average number of such common shares and dilutive share equivalents. Dilutive share
equivalents result from the assumed exercise of employee stock options and vesting of restricted
common stock and are calculated using the treasury stock method.
2. Investments
Restrictions
At June 30, 2011, fixed maturities and cash equivalents with a fair value of $5.6 million
(amortized cost of $5.3 million) were on deposit with various insurance departments as a
requirement of doing business in those states. Fixed maturities and cash equivalents with a fair
value of $8.7 million were on deposit with another insurance company as collateral for an assumed
reinsurance contract.
Fair Value
The Company holds available-for-sale investments, which are carried at fair value. The
following tables present the fair-value measurements for each major category of assets that are
measured on a recurring basis (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using |
|
|
|
|
|
|
|
Quoted Prices |
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active |
|
|
Significant |
|
|
|
|
|
|
|
|
|
|
Markets for |
|
|
Other |
|
|
Significant |
|
|
|
|
|
|
|
Identical |
|
|
Observable |
|
|
Unobservable |
|
|
|
|
|
|
|
Assets |
|
|
Inputs |
|
|
Inputs |
|
June 30, 2011 |
|
Total |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
Fixed maturities, available-for-sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agencies |
|
$ |
26,147 |
|
|
$ |
26,147 |
|
|
$ |
|
|
|
$ |
|
|
State |
|
|
7,676 |
|
|
|
|
|
|
|
7,676 |
|
|
|
|
|
Political subdivisions |
|
|
1,817 |
|
|
|
|
|
|
|
1,817 |
|
|
|
|
|
Revenue and assessment |
|
|
26,771 |
|
|
|
|
|
|
|
26,771 |
|
|
|
|
|
Corporate bonds |
|
|
82,645 |
|
|
|
|
|
|
|
82,645 |
|
|
|
|
|
Collateralized mortgage obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency backed |
|
|
20,981 |
|
|
|
|
|
|
|
20,981 |
|
|
|
|
|
Non-agency backed residential |
|
|
5,828 |
|
|
|
|
|
|
|
5,828 |
|
|
|
|
|
Non-agency backed commercial |
|
|
6,760 |
|
|
|
|
|
|
|
6,760 |
|
|
|
|
|
Redeemable preferred stock |
|
|
173 |
|
|
|
173 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities, available-for-sale |
|
|
178,798 |
|
|
|
26,320 |
|
|
|
152,478 |
|
|
|
|
|
Investment in mutual fund,
available-for-sale |
|
|
8,017 |
|
|
|
8,017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments, available-for-sale |
|
|
186,815 |
|
|
|
34,337 |
|
|
|
152,478 |
|
|
|
|
|
Cash and cash equivalents |
|
|
29,305 |
|
|
|
29,305 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
216,120 |
|
|
$ |
63,642 |
|
|
$ |
152,478 |
|
|
$ |
|
|
|
|
|
|
|
|
54
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using |
|
|
|
|
|
|
|
Quoted Prices |
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active |
|
|
Significant |
|
|
|
|
|
|
|
|
|
|
Markets for |
|
|
Other |
|
|
Significant |
|
|
|
|
|
|
|
Identical |
|
|
Observable |
|
|
Unobservable |
|
|
|
|
|
|
|
Assets |
|
|
Inputs |
|
|
Inputs |
|
June 30, 2010 |
|
Total |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
Fixed maturities, available-for-sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agencies |
|
$ |
29,499 |
|
|
$ |
29,499 |
|
|
$ |
|
|
|
$ |
|
|
State |
|
|
7,848 |
|
|
|
|
|
|
|
7,848 |
|
|
|
|
|
Political subdivisions |
|
|
1,830 |
|
|
|
|
|
|
|
1,830 |
|
|
|
|
|
Revenue and assessment |
|
|
29,286 |
|
|
|
|
|
|
|
29,286 |
|
|
|
|
|
Corporate bonds |
|
|
78,803 |
|
|
|
|
|
|
|
78,803 |
|
|
|
|
|
Collateralized mortgage obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency backed |
|
|
28,036 |
|
|
|
|
|
|
|
28,036 |
|
|
|
|
|
Non-agency backed residential |
|
|
6,612 |
|
|
|
|
|
|
|
6,612 |
|
|
|
|
|
Non-agency backed commercial |
|
|
7,180 |
|
|
|
|
|
|
|
7,180 |
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities, available-for-sale |
|
|
189,094 |
|
|
|
29,499 |
|
|
|
159,595 |
|
|
|
|
|
Investment in mutual fund,
available-for-sale |
|
|
7,456 |
|
|
|
7,456 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments, available-for-sale |
|
|
196,550 |
|
|
|
36,955 |
|
|
|
159,595 |
|
|
|
|
|
Cash and cash equivalents |
|
|
26,184 |
|
|
|
26,184 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
222,734 |
|
|
$ |
63,139 |
|
|
$ |
159,595 |
|
|
$ |
|
|
|
|
|
|
|
|
The fair values of the Companys investments 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 tables 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. There were no transfers between Level 1 and Level 2 for the
years ended June 30, 2011 and 2010. The Companys policy is to recognize transfers between levels
at the end of the reporting period. The Company has not made any adjustments to the prices obtained
from the independent pricing sources.
The Company has reviewed the pricing techniques and methodologies of the independent pricing
service for Level 2 investments and believes that its 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 has made inquiries with the pricing service about
material changes or the absence of expected changes to understand the underlying factors and inputs
and to validate the reasonableness of the pricing.
55
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Based on the above categorization, there were no Level 3 classified security valuations at
June 30, 2011 and 2010. The following table represents the quantitative disclosure for those assets
classified as Level 3 during the year ended June 30, 2010 (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using |
|
|
|
Significant Unobservable Inputs (Level 3) |
|
|
|
|
|
|
|
Collateralized mortgage obligations |
|
|
|
|
|
|
|
|
|
|
Non-agency |
|
|
Non-agency |
|
|
|
|
|
|
Corporate |
|
|
backed- |
|
|
backed- |
|
|
|
|
|
|
bonds |
|
|
residential |
|
|
commercial |
|
|
Total |
|
Balance at July 1, 2009 |
|
$ |
|
|
|
$ |
1,930 |
|
|
$ |
707 |
|
|
$ |
2,637 |
|
Total gains or losses (realized or
unrealized): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in net income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in other comprehensive
income |
|
|
|
|
|
|
421 |
|
|
|
242 |
|
|
|
663 |
|
Transfers into Level 3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfers out of Level 3(a) |
|
|
|
|
|
|
(2,351 |
) |
|
|
(949 |
) |
|
|
(3,300 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2010 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Transferred from Level 3 to Level 2 as observable market data became available during
the period presented due to the increase in market activity for these securities. |
Investment Income and Net Realized Gains and Losses
The major categories of investment income follow (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
Fixed maturities, available-for-sale |
|
$ |
8,296 |
|
|
$ |
8,467 |
|
|
$ |
9,588 |
|
Investment in mutual fund, available-for-sale |
|
|
625 |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
|
8 |
|
|
|
30 |
|
|
|
383 |
|
Other |
|
|
117 |
|
|
|
117 |
|
|
|
116 |
|
Investment expenses |
|
|
(651 |
) |
|
|
(656 |
) |
|
|
(583 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
8,395 |
|
|
$ |
7,958 |
|
|
$ |
9,504 |
|
|
|
|
|
|
|
|
|
|
|
The components of net realized gains (losses) on investments, available-for-sale at fair value
follow (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
Gains |
|
$ |
231 |
|
|
$ |
326 |
|
|
$ |
2,662 |
|
Losses |
|
|
(3 |
) |
|
|
(26 |
) |
|
|
(153 |
) |
Other-than-temporary impairment |
|
|
(413 |
) |
|
|
(983 |
) |
|
|
(2,420 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(185 |
) |
|
$ |
(683 |
) |
|
$ |
89 |
|
|
|
|
|
|
|
|
|
|
|
Realized gains and losses on sales and redemptions are computed based on specific
identification. The non-credit related portion of OTTI is included in other comprehensive income
(loss). The amounts of non-credit OTTI for securities still owned was $1.1 million for non-agency
backed residential CMOs and $0.2 million for non-agency backed commercial CMOs at June 30, 2011 and
$1.2 million for non-agency backed residential CMOs and $0.5 million for non-agency backed
commercial CMOs at June 30, 2010.
56
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Investments, Available-for-Sale
The following tables summarize the Companys investment securities (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
June 30, 2011 |
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
U.S. government and agencies |
|
$ |
24,897 |
|
|
$ |
1,250 |
|
|
$ |
|
|
|
$ |
26,147 |
|
State |
|
|
7,396 |
|
|
|
280 |
|
|
|
|
|
|
|
7,676 |
|
Political subdivisions |
|
|
1,798 |
|
|
|
20 |
|
|
|
(1 |
) |
|
|
1,817 |
|
Revenue and assessment |
|
|
25,819 |
|
|
|
1,123 |
|
|
|
(171 |
) |
|
|
26,771 |
|
Corporate bonds |
|
|
78,199 |
|
|
|
4,686 |
|
|
|
(240 |
) |
|
|
82,645 |
|
Collateralized mortgage obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency backed |
|
|
19,541 |
|
|
|
1,440 |
|
|
|
|
|
|
|
20,981 |
|
Non-agency backed residential |
|
|
5,758 |
|
|
|
243 |
|
|
|
(173 |
) |
|
|
5,828 |
|
Non-agency backed commercial |
|
|
6,215 |
|
|
|
556 |
|
|
|
(11 |
) |
|
|
6,760 |
|
Redeemable preferred stock |
|
|
176 |
|
|
|
|
|
|
|
(3 |
) |
|
|
173 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities, available-for-sale |
|
|
169,799 |
|
|
|
9,598 |
|
|
|
(599 |
) |
|
|
178,798 |
|
Investment in mutual fund,
available-for-sale |
|
|
7,501 |
|
|
|
516 |
|
|
|
|
|
|
|
8,017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
177,300 |
|
|
$ |
10,114 |
|
|
$ |
(599 |
) |
|
$ |
186,815 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
June 30, 2010 |
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
U.S. government and agencies |
|
$ |
28,263 |
|
|
$ |
1,236 |
|
|
$ |
|
|
|
$ |
29,499 |
|
State |
|
|
7,461 |
|
|
|
387 |
|
|
|
|
|
|
|
7,848 |
|
Political subdivisions |
|
|
1,792 |
|
|
|
52 |
|
|
|
(14 |
) |
|
|
1,830 |
|
Revenue and assessment |
|
|
28,209 |
|
|
|
1,217 |
|
|
|
(140 |
) |
|
|
29,286 |
|
Corporate bonds |
|
|
73,868 |
|
|
|
5,181 |
|
|
|
(246 |
) |
|
|
78,803 |
|
Collateralized mortgage obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency backed |
|
|
26,262 |
|
|
|
1,774 |
|
|
|
|
|
|
|
28,036 |
|
Non-agency backed residential |
|
|
7,189 |
|
|
|
56 |
|
|
|
(633 |
) |
|
|
6,612 |
|
Non-agency backed commercial |
|
|
7,363 |
|
|
|
158 |
|
|
|
(341 |
) |
|
|
7,180 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities, available-for-sale |
|
|
180,407 |
|
|
|
10,061 |
|
|
|
(1,374 |
) |
|
|
189,094 |
|
Investment in mutual fund,
available-for-sale |
|
|
7,500 |
|
|
|
|
|
|
|
(44 |
) |
|
|
7,456 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
187,907 |
|
|
$ |
10,061 |
|
|
$ |
(1,418 |
) |
|
$ |
196,550 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
57
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following tables set forth the scheduled maturities of the Companys fixed maturity
securities 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 with No |
|
|
All |
|
|
|
Securities with |
|
|
Securities with |
|
|
Unrealized Gains or |
|
|
Fixed Maturity |
|
June 30, 2011 |
|
Unrealized Gains |
|
|
Unrealized Losses |
|
|
Losses |
|
|
Securities |
|
One year or less |
|
$ |
14,120 |
|
|
$ |
80 |
|
|
$ |
1,500 |
|
|
$ |
15,700 |
|
After one through five years |
|
|
75,186 |
|
|
|
26 |
|
|
|
|
|
|
|
75,212 |
|
After five through ten years |
|
|
37,510 |
|
|
|
|
|
|
|
|
|
|
|
37,510 |
|
After ten years |
|
|
8,980 |
|
|
|
7,827 |
|
|
|
|
|
|
|
16,807 |
|
No single maturity date |
|
|
31,450 |
|
|
|
2,119 |
|
|
|
|
|
|
|
33,569 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
167,246 |
|
|
$ |
10,052 |
|
|
$ |
1,500 |
|
|
$ |
178,798 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities with No |
|
|
All |
|
|
|
Securities with |
|
|
Securities with |
|
|
Unrealized Gains or |
|
|
Fixed Maturity |
|
June 30, 2010 |
|
Unrealized Gains |
|
|
Unrealized Losses |
|
|
Losses |
|
|
Securities |
|
One year or less |
|
$ |
9,137 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
9,137 |
|
After one through five years |
|
|
82,250 |
|
|
|
642 |
|
|
|
|
|
|
|
82,892 |
|
After five through ten years |
|
|
39,567 |
|
|
|
|
|
|
|
|
|
|
|
39,567 |
|
After ten years |
|
|
8,607 |
|
|
|
7,063 |
|
|
|
|
|
|
|
15,670 |
|
No single maturity date |
|
|
33,676 |
|
|
|
8,085 |
|
|
|
67 |
|
|
|
41,828 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
173,237 |
|
|
$ |
15,790 |
|
|
$ |
67 |
|
|
$ |
189,094 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair value and gross unrealized losses of investments, available-for-sale, by the length
of time that individual securities have been in a continuous unrealized loss position follows (in
thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 months |
|
|
12 months or longer |
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Gross |
|
|
Total Gross |
|
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
Unrealized |
|
|
Unrealized |
|
June 30, 2011 |
|
Fair Value |
|
|
Losses |
|
|
Fair Value |
|
|
Losses |
|
|
Losses |
|
U.S. government and agencies |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
State |
|
|
26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Political subdivisions |
|
|
500 |
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
(1 |
) |
Revenue and assessment |
|
|
2,956 |
|
|
|
(125 |
) |
|
|
947 |
|
|
|
(46 |
) |
|
|
(171 |
) |
Corporate bonds |
|
|
1,654 |
|
|
|
(9 |
) |
|
|
1,677 |
|
|
|
(231 |
) |
|
|
(240 |
) |
Collateralized mortgage obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency backed |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-agency backed residential |
|
|
920 |
|
|
|
(31 |
) |
|
|
710 |
|
|
|
(142 |
) |
|
|
(173 |
) |
Non-agency backed commercial |
|
|
|
|
|
|
|
|
|
|
489 |
|
|
|
(11 |
) |
|
|
(11 |
) |
Redeemable preferred stock |
|
|
173 |
|
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities, available-for-sale |
|
|
6,229 |
|
|
|
(169 |
) |
|
|
3,823 |
|
|
|
(430 |
) |
|
|
(599 |
) |
Investment in mutual fund, available-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
6,229 |
|
|
$ |
(169 |
) |
|
$ |
3,823 |
|
|
$ |
(430 |
) |
|
$ |
(599 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
58
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 months |
|
|
12 months or longer |
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Gross |
|
|
Total Gross |
|
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
|
Unrealized |
|
June 30, 2010 |
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
|
Losses |
|
U.S. government and agencies |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
State |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Political subdivisions |
|
|
|
|
|
|
|
|
|
|
488 |
|
|
|
(14 |
) |
|
|
(14 |
) |
Revenue and assessment |
|
|
3,057 |
|
|
|
(96 |
) |
|
|
1,490 |
|
|
|
(44 |
) |
|
|
(140 |
) |
Corporate bonds |
|
|
930 |
|
|
|
(32 |
) |
|
|
1,739 |
|
|
|
(214 |
) |
|
|
(246 |
) |
Collateralized mortgage obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency backed |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-agency backed residential |
|
|
505 |
|
|
|
(5 |
) |
|
|
5,848 |
|
|
|
(628 |
) |
|
|
(633 |
) |
Non-agency backed commercial |
|
|
|
|
|
|
|
|
|
|
1,732 |
|
|
|
(341 |
) |
|
|
(341 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities, available-for-sale |
|
|
4,492 |
|
|
|
(133 |
) |
|
|
11,297 |
|
|
|
(1,241 |
) |
|
|
(1,374 |
) |
Investment in mutual fund, available-for-sale |
|
|
7,456 |
|
|
|
(44 |
) |
|
|
|
|
|
|
|
|
|
|
(44 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
11,948 |
|
|
$ |
(177 |
) |
|
$ |
11,297 |
|
|
$ |
(1,241 |
) |
|
$ |
(1,418 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
June 30, 2011
|
|
|
7 |
|
|
|
5 |
|
|
|
151 |
|
June 30, 2010
|
|
|
6 |
|
|
|
18 |
|
|
|
153 |
|
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 June 30, 2011: |
|
Securities |
|
|
Value |
|
|
Losses |
|
Less than or equal to 10% |
|
|
2 |
|
|
$ |
1,435 |
|
|
$ |
(57 |
) |
Greater than 10% |
|
|
3 |
|
|
|
2,388 |
|
|
|
(373 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
5 |
|
|
$ |
3,823 |
|
|
$ |
(430 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number |
|
|
|
|
|
|
Gross |
|
Gross Unrealized Losses |
|
of |
|
|
Fair |
|
|
Unrealized |
|
at June 30, 2010: |
|
Securities |
|
|
Value |
|
|
Losses |
|
Less than or equal to 10% |
|
|
11 |
|
|
$ |
7,931 |
|
|
$ |
(276 |
) |
Greater than 10% |
|
|
7 |
|
|
|
3,366 |
|
|
|
(965 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
18 |
|
|
$ |
11,297 |
|
|
$ |
(1,241 |
) |
|
|
|
|
|
|
|
|
|
|
59
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following tables set forth the amount of gross unrealized losses 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 |
|
|
|
|
|
|
|
|
|
|
than |
|
at June 30, 2011: |
|
Losses |
|
|
Losses |
|
|
Less than 5% |
|
|
5% to 10% |
|
|
10% |
|
Less than or equal to: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months |
|
$ |
6,056 |
|
|
$ |
(166 |
) |
|
$ |
(166 |
) |
|
$ |
|
|
|
$ |
|
|
Six months |
|
|
173 |
|
|
|
(3 |
) |
|
|
(3 |
) |
|
|
|
|
|
|
|
|
Nine months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Greater than twelve months |
|
|
3,823 |
|
|
|
(430 |
) |
|
|
(57 |
) |
|
|
|
|
|
|
(373 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
10,052 |
|
|
$ |
(599 |
) |
|
$ |
(226 |
) |
|
$ |
|
|
|
$ |
(373 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value of |
|
|
|
|
|
|
|
|
|
|
Securities with |
|
|
|
|
|
|
Severity of Gross Unrealized Losses |
|
Length of |
|
Gross |
|
|
Gross |
|
|
|
|
|
|
|
|
|
|
Greater |
|
Gross Unrealized Losses |
|
Unrealized |
|
|
Unrealized |
|
|
|
|
|
|
|
|
|
|
than |
|
at June 30, 2010: |
|
Losses |
|
|
Losses |
|
|
Less than 5% |
|
|
5% to 10% |
|
|
10% |
|
Less than or equal to: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months |
|
$ |
11,291 |
|
|
$ |
(170 |
) |
|
$ |
(145 |
) |
|
$ |
(25 |
) |
|
$ |
|
|
Six months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months |
|
|
152 |
|
|
|
(2 |
) |
|
|
(2 |
) |
|
|
|
|
|
|
|
|
Twelve months |
|
|
505 |
|
|
|
(5 |
) |
|
|
(5 |
) |
|
|
|
|
|
|
|
|
Greater than twelve months |
|
|
11,297 |
|
|
|
(1,241 |
) |
|
|
(153 |
) |
|
|
(123 |
) |
|
|
(965 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
23,245 |
|
|
$ |
(1,418 |
) |
|
$ |
(305 |
) |
|
$ |
(148 |
) |
|
$ |
(965 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other-Than-Temporary Impairment
In accordance with FASB ASC 320-10-65, Recognition and Presentation of Other-Than-Temporary
Impairments (FASB ASC 320-10-65), the Company separates OTTI into the following two components:
(i) the amount related to credit losses, which is recognized in the consolidated statement of
operations and (ii) the amount related to all other factors, which is recorded in other
comprehensive income (loss). The credit-related portion of an OTTI is measured by comparing a
securitys amortized cost to the present value of its current expected cash flows discounted at its
effective yield prior to the impairment charge.
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 investment
portfolio for changes in fair value that might indicate potential impairments and performs detailed
reviews on such securities. Changes in fair value are evaluated to determine the extent to which
such changes are attributable to (i) fundamental factors specific to the issuer or (ii)
market-related factors such as interest rates or sector declines.
Securities with declines attributable to issuer-specific fundamentals are reviewed to identify
all available evidence to estimate the potential for impairment. Resources used include historical
financial data included in filings with the United States Securities and Exchange Commission
(SEC) for corporate bonds and performance data regarding the underlying loans for CMOs.
Securities with declines attributable solely to market or sector declines where the Company does
not intend to sell the security and it is more likely than not that the Company will not be
required to sell the security before the full recovery of its amortized cost basis are not deemed
to be other-than-temporarily impaired.
60
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 recognized OTTI charges in net
income (loss) are presented in the following tables (in thousands, except for the number of
securities).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
|
|
Number of |
|
|
|
|
|
|
Number of |
|
|
|
|
|
|
Number of |
|
|
|
|
|
|
Securities |
|
|
OTTI |
|
|
Securities |
|
|
OTTI |
|
|
Securities |
|
|
OTTI |
|
Corporate bonds |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
|
3 |
|
|
$ |
(871 |
) |
Collateralized mortgage obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-agency backed residential |
|
|
5 |
|
|
|
(119 |
) |
|
|
10 |
|
|
|
(1,723 |
) |
|
|
5 |
|
|
|
(1,564 |
) |
Non-agency backed commercial |
|
|
5 |
|
|
|
(296 |
) |
|
|
5 |
|
|
|
(214 |
) |
|
|
4 |
|
|
|
(1,205 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10 |
|
|
|
(415 |
) |
|
|
15 |
|
|
|
(1,937 |
) |
|
|
12 |
|
|
|
(3,640 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portion of loss recognized in
accumulated other comprehensive income
(loss) |
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
954 |
|
|
|
|
|
|
|
1,220 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net OTTI recognized in net income
(loss) |
|
|
|
|
|
$ |
(413 |
) |
|
|
|
|
|
$ |
(983 |
) |
|
|
|
|
|
$ |
(2,420 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 June 30, 2011 and 2010 (in thousands).
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
June 30, |
|
|
|
2011 |
|
|
2010 |
|
Beginning balance |
|
$ |
(3,301 |
) |
|
$ |
(2,870 |
) |
Additional credit impairments on: |
|
|
|
|
|
|
|
|
Previously impaired securities |
|
|
(413 |
) |
|
|
(491 |
) |
Securities without previous impairments |
|
|
|
|
|
|
(492 |
) |
|
|
|
|
|
|
|
|
|
|
(413 |
) |
|
|
(983 |
) |
Reductions for securities sold (realized) |
|
|
371 |
|
|
|
552 |
|
|
|
|
|
|
|
|
|
|
$ |
(3,343 |
) |
|
$ |
(3,301 |
) |
|
|
|
|
|
|
|
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 (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 reviews 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
61
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
unrealized losses on the remaining non-agency backed CMOs for which OTTI charges have not been
recorded 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 Company believes that the remaining securities having unrealized losses at June 30, 2011
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.
3. Reinsurance
Total premiums written and earned are summarized as follows (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
|
|
Written |
|
|
Earned |
|
|
Written |
|
|
Earned |
|
|
Written |
|
|
Earned |
|
Direct |
|
$ |
152,356 |
|
|
$ |
153,368 |
|
|
$ |
162,150 |
|
|
$ |
167,744 |
|
|
$ |
187,935 |
|
|
$ |
206,358 |
|
Assumed |
|
|
19,435 |
|
|
|
19,844 |
|
|
|
19,858 |
|
|
|
19,302 |
|
|
|
17,044 |
|
|
|
17,755 |
|
Ceded |
|
|
(171 |
) |
|
|
(171 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
171,620 |
|
|
$ |
173,041 |
|
|
$ |
182,008 |
|
|
$ |
187,046 |
|
|
$ |
204,979 |
|
|
$ |
224,113 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumed business represents private-passenger non-standard automobile insurance premiums
produced by a managing general agency subsidiary in Texas written through a program with a county
mutual insurance company and assumed by the Company through 100% quota-share reinsurance. The
percentages of premiums assumed to net premiums written for the years ended June 30, 2011, 2010 and
2009 were 11%, 11% and 8%, respectively.
Effective August 1, 2010, the Insurance Companies began utilizing excess-of-loss reinsurance
with an unaffiliated reinsurer to limit their exposure to losses under liability coverages for
policies issued with limits greater than the minimum statutory requirements. Although the
reinsurance agreements contractually obligate the reinsurer to reimburse the Company for their
share of losses, they do not discharge the primary liability of the Company, which remains
contingently liable in the event the reinsurer is unable to meet their contractual obligations.
At June 30, 2011, the Insurance Companies had unsecured aggregate reinsurance receivables of
$0.2 million. During the year ended June 30, 2011, ceded premiums earned and reinsurance recovered
on losses and loss adjustment expenses (LAE) were $0.2 million and $0.1 million, respectively.
4. Stock-Based Compensation Plans
Employee Stock-Based Incentive Plan
The Company has issued stock options (Stock Option Awards) and restricted common stock
(Restricted Stock Awards) to employees and directors under its Amended and Restated First
Acceptance Corporation 2002 Long Term Incentive Plan (the Plan) and accounts for such issuances
in accordance with FASB ASC 718-20, Compensation Stock Compensation. At June 30, 2011, there
were 2,841,216 shares remaining available for issuance under the Plan. Stock Option Awards are
generally granted with an exercise price equal to the market price of the Companys stock at the
date of grant. Stock Option Awards expire over ten years and generally vest equally in annual
installments over four or five years through fiscal year 2013, while the Restricted Stock Awards
vest in designated installments through fiscal year 2015. Certain awards provide for accelerated
vesting if there is a change in control (as defined in the Plan).
On November 17, 2009, the Companys stockholders approved a value-for-value option exchange
whereby certain outstanding stock options were exchanged for shares of restricted common stock (the
Exchange). As approved by the Companys stockholders, restricted common stock issued in the
Exchange vests in equal annual installments beginning on the first anniversary of the date of the
grant of the restricted stock, and no participant in the Exchange was permitted to receive
restricted stock having an aggregate value greater than $150,000.
62
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
On November 18, 2009, consistent with the terms of the Exchange, the Company entered into an
Option Cancellation and Restricted Stock Award Agreement (the Agreement) with certain employees
to surrender, and have the Company cancel, certain outstanding Stock Option Awards held by the
employees in exchange for shares of restricted common stock having a value equal to or less than
the surrendered Stock Option Awards. The Exchange included 605,000 shares of the Companys common
stock underlying Stock Option Awards that were surrendered and cancelled in exchange for 160,577
shares of restricted common stock.
Compensation expense related to Stock Option Awards is calculated under the fair value method
and is recorded on a straight-line basis over the vesting period. There were no Stock Option Awards
granted during the years ended June 30, 2011, 2010 and 2009. At June 30, 2011, the weighted average
remaining contractual life of options outstanding and exercisable/vested is approximately 2.4 years
and 2.2 years, respectively.
A summary of the activity for the Companys Stock Option Awards is presented below (in
thousands, except per share data).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Aggregate |
|
|
|
|
|
|
|
|
|
|
|
Exercise |
|
|
Intrinsic |
|
|
|
Options |
|
|
Exercise Price |
|
|
Price |
|
|
Value |
|
Options outstanding at June 30, 2008 |
|
|
5,456 |
|
|
$ |
3.00-$11.81 |
|
|
$ |
4.13 |
|
|
|
|
|
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(148 |
) |
|
$ |
3.00-$11.81 |
|
|
$ |
7.51 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at June 30, 2009 |
|
|
5,308 |
|
|
$ |
3.00-$11.81 |
|
|
$ |
4.04 |
|
|
|
|
|
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exchanged and Cancelled |
|
|
(605 |
) |
|
$ |
6.64-$11.81 |
|
|
$ |
10.69 |
|
|
|
|
|
Forfeited |
|
|
(142 |
) |
|
$ |
3.10-$11.81 |
|
|
$ |
6.91 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at June 30, 2010 |
|
|
4,561 |
|
|
$ |
3.00-$8.13 |
|
|
$ |
3.06 |
|
|
|
|
|
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(61 |
) |
|
$ |
3.04 |
|
|
$ |
3.04 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at June 30, 2011 |
|
|
4,500 |
|
|
|
|
|
|
$ |
3.06 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable/vested at June 30, 2011 |
|
|
4,319 |
|
|
|
|
|
|
$ |
3.06 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A summary of the activity for the Companys Restricted Stock Awards is presented below (in
thousands, except per share data).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
Restricted |
|
|
Average |
|
|
|
Stock |
|
|
Grant Date |
|
|
|
Awards |
|
|
Fair Value |
|
Restricted Stock Awards outstanding at June 30, 2008 |
|
|
400 |
|
|
$ |
3.04 |
|
Granted |
|
|
225 |
|
|
$ |
2.63 |
|
Vested |
|
|
|
|
|
|
|
|
Forfeited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock Awards outstanding at June 30, 2009 |
|
|
625 |
|
|
$ |
2.89 |
|
Granted |
|
|
160 |
|
|
$ |
1.97 |
|
Vested |
|
|
(309 |
) |
|
$ |
3.01 |
|
Forfeited |
|
|
(4 |
) |
|
$ |
2.50 |
|
|
|
|
|
|
|
|
Restricted Stock Awards outstanding at June 30, 2010 |
|
|
472 |
|
|
$ |
2.50 |
|
Granted |
|
|
|
|
|
|
|
|
Vested |
|
|
(307 |
) |
|
$ |
2.60 |
|
Forfeited |
|
|
(29 |
) |
|
$ |
2.51 |
|
|
|
|
|
|
|
|
Restricted Stock Awards outstanding at June 30, 2011 |
|
|
136 |
|
|
$ |
2.30 |
|
|
|
|
|
|
|
|
63
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
In the table above, the number of shares vested includes 59,061 shares surrendered by the
employees to the Company for payment of minimum tax withholding obligations. Shares of stock
withheld for purposes of satisfying minimum tax withholding obligations are again available for
issuance under the Plan.
There were no Restricted Stock Awards granted during the year ended June 30, 2011. The
aggregate fair values of Restricted Stock Awards vested during the years ended June 30, 2011 and
2010 were $0.8 million and $0.9 million, respectively, at the date of vesting. There were no
Restricted Stock Awards that vested during the year ended June 30, 2009. Expected future
compensation expense related to the issuance of Restricted Stock Awards is $0.4 million, which will
be amortized through fiscal year 2015.
Employee Stock Purchase Plan
The Companys Board of Directors adopted the First Acceptance Corporation Employee Stock
Purchase Plan (ESPP) whereby eligible employees may purchase shares of the Companys common stock
at a price equal to the lower of the closing market price on the first or last trading day of a
six-month period. ESPP participants can authorize payroll deductions, administered through an
independent plan custodian, of up to 15% of their salary to purchase semi-annually (June 30 and
December 31) up to $25,000 of the Companys common stock during each calendar year. The Company has
reserved 400,000 shares of common stock for issuance under the ESPP. Employees purchased
approximately 32,000, 37,000 and 27,000 shares during the years ended June 30, 2011, 2010 and 2009,
respectively. Compensation expense attributable to subscriptions to purchase shares under the ESPP
was $8,000, $16,000 and $17,000 for the years ended June 30, 2011, 2010 and 2009, respectively. At
June 30, 2011, 210,617 shares remain available for issuance under the ESPP.
5. Employee Benefit Plan
The Company sponsors a defined contribution retirement plan (401k Plan) under Section 401(k)
of the Internal Revenue Code. The 401k Plan covers substantially all employees who meet specified
service requirements. Under the 401k Plan, the Company may, at its discretion, match 100% of the
first 3% of an employees salary plus 50% of the next 2% up to the maximum allowed by the Internal
Revenue Code. The Companys contributions to the 401k Plan for the years ended June 30, 2011, 2010
and 2009 were $0.6 million, $0.5 million and $0.8 million, respectively.
6. Property and Equipment
The components of property and equipment are as follows (in thousands).
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
2011 |
|
|
2010 |
|
Furniture and equipment |
|
$ |
7,949 |
|
|
$ |
7,693 |
|
Leasehold improvements |
|
|
2,961 |
|
|
|
2,879 |
|
Capitalized leases |
|
|
826 |
|
|
|
826 |
|
Aircraft |
|
|
190 |
|
|
|
190 |
|
|
|
|
|
|
|
|
|
|
|
11,926 |
|
|
|
11,588 |
|
Less: Accumulated depreciation |
|
|
(9,393 |
) |
|
|
(8,064 |
) |
|
|
|
|
|
|
|
Property and equipment, net |
|
$ |
2,533 |
|
|
$ |
3,524 |
|
|
|
|
|
|
|
|
Depreciation and amortization expense related to property and equipment was $1.6 million, $2.0
million and $1.9 million for the years ended June 30, 2011, 2010 and 2009, respectively.
64
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
7. Lease Commitments
Operating Leases
The Company is committed under various lease agreements for office space and equipment.
Certain lease agreements contain renewal options and rent escalation clauses. Rental expense for
2011, 2010 and 2009 was $9.9 million, $10.9 million and $10.7 million, respectively. Future minimum
lease payments under these agreements follow (in thousands).
|
|
|
|
|
Year Ending June 30, |
|
Amount |
|
2012 |
|
$ |
7,389 |
|
2013 |
|
|
4,778 |
|
2014 |
|
|
2,895 |
|
2015 |
|
|
1,618 |
|
2016 |
|
|
896 |
|
Thereafter |
|
|
929 |
|
|
|
|
|
Total |
|
$ |
18,505 |
|
|
|
|
|
Capital Leases
The maturities of the capitalized lease obligations secured by equipment at June 30, 2011 are
as follows (in thousands).
|
|
|
|
|
|
|
Capitalized Lease |
|
Year Ending June 30, |
|
Obligations |
|
2012 |
|
$ |
63 |
|
2013 |
|
|
12 |
|
|
|
|
|
|
|
|
75 |
|
Less: Amount representing executory costs |
|
|
(5 |
) |
|
|
|
|
Net minimum lease payments |
|
|
70 |
|
Less: Amount representing interest |
|
|
(2 |
) |
|
|
|
|
Present value of net minimum lease payments |
|
$ |
68 |
|
|
|
|
|
65
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
8. Losses and Loss Adjustment Expenses Incurred and Paid
Information regarding the reserve for unpaid losses and LAE is as follows (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
Liability for unpaid losses and LAE at beginning of year,
gross |
|
$ |
73,198 |
|
|
$ |
83,973 |
|
|
$ |
101,407 |
|
Reinsurance balances receivable |
|
|
(46 |
) |
|
|
(78 |
) |
|
|
(259 |
) |
|
|
|
|
|
|
|
|
|
|
Liability for unpaid losses and LAE at beginning of year, net |
|
|
73,152 |
|
|
|
83,895 |
|
|
|
101,148 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Add: Provision for losses and LAE: |
|
|
|
|
|
|
|
|
|
|
|
|
Current year |
|
|
130,888 |
|
|
|
138,218 |
|
|
|
160,659 |
|
Prior years |
|
|
(1,721 |
) |
|
|
(11,223 |
) |
|
|
(11,382 |
) |
|
|
|
|
|
|
|
|
|
|
Net losses and LAE incurred |
|
|
129,167 |
|
|
|
126,995 |
|
|
|
149,277 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Losses and LAE paid: |
|
|
|
|
|
|
|
|
|
|
|
|
Current year |
|
|
84,736 |
|
|
|
87,097 |
|
|
|
103,566 |
|
Prior years |
|
|
49,292 |
|
|
|
50,641 |
|
|
|
62,964 |
|
|
|
|
|
|
|
|
|
|
|
Net losses and LAE paid |
|
|
134,028 |
|
|
|
137,738 |
|
|
|
166,530 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability for unpaid losses and LAE at end of year, net |
|
|
68,291 |
|
|
|
73,152 |
|
|
|
83,895 |
|
Reinsurance balances receivable |
|
|
133 |
|
|
|
46 |
|
|
|
78 |
|
|
|
|
|
|
|
|
|
|
|
Liability for unpaid losses and LAE at end of year, gross |
|
$ |
68,424 |
|
|
$ |
73,198 |
|
|
$ |
83,973 |
|
|
|
|
|
|
|
|
|
|
|
The favorable change in the estimate of unpaid losses and loss adjustment expenses of $1.7
million for the year ended June 30, 2011 was due to lower than anticipated severity of accidents
occurring during the fiscal 2009 and 2010 accident years, specifically in bodily injury coverage in
Texas, Tennessee and South Carolina and physical damage coverages in Georgia, partially offset by
higher loss adjustment expenses specific to bodily injury and Florida no-fault coverages. The
favorable change in the estimate of unpaid losses and loss adjustment expenses of $11.2 million for
the year ended June 30, 2010 was due to lower than anticipated severity of accidents occurring
during the fiscal 2007 and 2008 accident years, primarily in bodily injury coverage in Georgia and
South Carolina, an improvement in the Companys claim handling practices and a shift in business
mix toward renewal policies, which have lower loss ratios than new policies. The favorable
development of $11.4 million for the year ended June 30, 2009 was primarily due to both lower than
anticipated severity and frequency of accidents, most notably in the Companys property and
physical damage coverages.
9. Debentures Payable
In June 2007, First Acceptance Statutory Trust I (FAST I), a wholly-owned unconsolidated
subsidiary trust of the Company, issued 40,000 shares of preferred securities at $1,000 per share
to outside investors and 1,240 shares of common securities to the Company, also at $1,000 per
share. FAST I used the proceeds from the sale of the preferred securities to purchase $41.2 million
of junior subordinated debentures from the Company. The sole assets of FAST I are $41.2 million of
junior subordinated debentures issued by the Company. The debentures will mature on July 30, 2037
and are redeemable by the Company in whole or in part beginning on July 30, 2012, at which time the
preferred securities are callable. The debentures pay a fixed rate of 9.277% until July 30, 2012,
after which the rate becomes variable (LIBOR plus 375 basis points).
The obligations of the Company under the junior subordinated debentures represent full and
unconditional guarantees by the Company of FAST Is obligations for the preferred securities.
Dividends on the preferred securities are cumulative, payable quarterly in arrears and are
deferrable at the Companys option for up to five years. The dividends on these securities, which
have not been deferred, are the same as the interest on the debentures. The Company cannot pay
dividends on its common stock during such deferments.
The debentures are classified as debentures payable in the Companys consolidated balance
sheets and the interest paid on these debentures is classified as interest expense in the
consolidated statements of operations.
66
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
10. Income Taxes
The provision for income taxes consisted of the following (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
Federal: |
|
|
|
|
|
|
|
|
|
|
|
|
Current |
|
$ |
|
|
|
$ |
|
|
|
$ |
295 |
|
Deferred |
|
|
|
|
|
|
|
|
|
|
17,440 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,735 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State: |
|
|
|
|
|
|
|
|
|
|
|
|
Current |
|
|
296 |
|
|
|
441 |
|
|
|
508 |
|
Deferred |
|
|
(98 |
) |
|
|
|
|
|
|
153 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
198 |
|
|
|
441 |
|
|
|
661 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
198 |
|
|
$ |
441 |
|
|
$ |
18,396 |
|
|
|
|
|
|
|
|
|
|
|
The provision for income taxes differs from the amounts computed by applying the statutory
federal corporate tax rate of 35% to income (loss) before income taxes as a result of the following
(in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
Provision (benefit) for income taxes at
statutory rate |
|
$ |
(19,804 |
) |
|
$ |
2,618 |
|
|
$ |
(17,466 |
) |
Tax effect of: |
|
|
|
|
|
|
|
|
|
|
|
|
Tax-exempt investment income |
|
|
(15 |
) |
|
|
(16 |
) |
|
|
(16 |
) |
Change in the beginning of the year
balance of the valuation allowance for
deferred tax assets allocated to income
taxes |
|
|
4,761 |
|
|
|
(5,278 |
) |
|
|
(6,291 |
) |
Net operating loss carryforward expirations |
|
|
735 |
|
|
|
2,483 |
|
|
|
24,534 |
|
Goodwill and identifiable intangible assets |
|
|
14,084 |
|
|
|
|
|
|
|
16,724 |
|
Restricted stock |
|
|
248 |
|
|
|
240 |
|
|
|
|
|
State income taxes, net of federal income
tax benefit and valuation allowance |
|
|
198 |
|
|
|
441 |
|
|
|
661 |
|
Other |
|
|
(9 |
) |
|
|
(47 |
) |
|
|
250 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
198 |
|
|
$ |
441 |
|
|
$ |
18,396 |
|
|
|
|
|
|
|
|
|
|
|
The tax effects of temporary differences that give rise to the net deferred tax assets and
liabilities are presented below (in thousands).
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
2011 |
|
|
2010 |
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Net operating loss carryforwards |
|
$ |
5,272 |
|
|
$ |
3,613 |
|
Stock option compensation |
|
|
3,871 |
|
|
|
3,965 |
|
Unearned premiums and loss and loss adjustment
expense reserves |
|
|
4,798 |
|
|
|
5,099 |
|
Goodwill and identifiable intangible assets |
|
|
6,193 |
|
|
|
2,886 |
|
Alternative minimum tax (AMT) credit carryforwards |
|
|
1,612 |
|
|
|
1,612 |
|
Accrued expenses and other nondeductible items |
|
|
994 |
|
|
|
934 |
|
Other |
|
|
3,946 |
|
|
|
3,089 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,686 |
|
|
|
21,198 |
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Deferred acquisition costs |
|
|
(1,157 |
) |
|
|
(1,268 |
) |
Identifiable intangible assets |
|
|
(1,872 |
) |
|
|
|
|
Net unrealized change on investments |
|
|
(3,330 |
) |
|
|
(3,025 |
) |
|
|
|
|
|
|
|
|
|
|
(6,359 |
) |
|
|
(4,293 |
) |
|
|
|
|
|
|
|
|
|
Total net deferred tax asset |
|
|
20,327 |
|
|
|
16,905 |
|
Less: Valuation allowance |
|
|
(22,101 |
) |
|
|
(16,905 |
) |
|
|
|
|
|
|
|
Net deferred tax liability |
|
$ |
(1,774 |
) |
|
$ |
|
|
|
|
|
|
|
|
|
67
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The Company had a valuation allowance of $22.1 million and $16.9 million at June 30, 2011 and
2010, respectively, to reduce deferred tax assets to the amount that is more likely than not to be
realized. The change in the total valuation allowance for the year ended June 30, 2011 was an
increase of $5.2 million. For the year ended June 30, 2011, the change in the valuation allowance
included reductions of $0.3 million related to the unrealized change on investments included in
other comprehensive income (loss) and increases of $0.8 million related to deferred state income
taxes.
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 net 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 considered both positive and negative evidence. The Company placed
greater weight on historical results than on the Companys outlook for future profitability and
established a deferred tax valuation allowance at June 30, 2011 and 2010. The deferred tax
valuation allowance may be adjusted in future periods if management determines 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 adjustment.
The change in the total valuation allowance for the year ended June 30, 2010 was a decrease of
$8.0 million. For the year ended June 30, 2010, the change in the valuation allowance primarily
included the unrealized change on investments of $3.2 million included in other comprehensive
income. The change in the total valuation allowance for the year ended June 30, 2009 was a decrease
of $5.2 million. The fiscal year 2009 provision was increased by a net charge of $10.2 million
resulting from the $15.3 million tax effect of the goodwill impairment charge and the establishment
of a full valuation allowance on the remaining net deferred tax assets offset by a tax benefit of
$5.1 million related to the utilization of federal net operating loss (NOL) carryforwards that
were to expire on June 30, 2009 that had been previously reserved for through a valuation
allowance.
At June 30, 2011, the Company had gross state NOL carryforwards of $26.6 million that begin to
expire in 2019 and AMT credit carryforwards of $1.6 million that have no expiration date. At June
30, 2011, the Company had gross NOL carryforwards for federal income tax purposes of $15.1 million,
which are available to offset future federal taxable income. As discussed previously, on a
tax-affected basis, all remaining federal and substantially all state NOL carryforwards at June 30,
2011 have been fully reserved for through a valuation allowance.
The gross federal NOL carryforwards will expire in 2013 through 2031, as shown in the
following table (in thousands).
|
|
|
|
|
Expiration Year Ended June 30, |
|
Amount |
|
2012 |
|
$ |
|
|
2013 |
|
|
2 |
|
2014 |
|
|
|
|
2015 |
|
|
|
|
Thereafter |
|
|
15,061 |
|
|
|
|
|
Total NOL carryforwards |
|
$ |
15,063 |
|
|
|
|
|
68
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
11. Net Income (Loss) Per Share
FASB ASC 260-10, Earnings Per share, specifies the computation, presentation and disclosure
requirements for earnings per share (EPS). Basic EPS are computed using the weighted average
number of shares outstanding. Diluted EPS are computed using the weighted average number of shares
outstanding adjusted for the incremental shares attributed to outstanding securities with a right
to purchase or convert into common stock.
The following table sets forth the computation of basic and diluted net income (loss) per
share (in thousands, except per share data).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
Net income (loss) |
|
$ |
(56,780 |
) |
|
$ |
7,040 |
|
|
$ |
(68,300 |
) |
|
|
|
|
|
|
|
|
|
|
Weighted average common basic shares |
|
|
48,171 |
|
|
|
47,961 |
|
|
|
47,664 |
|
Effect of dilutive securities |
|
|
|
|
|
|
457 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common dilutive shares |
|
|
48,171 |
|
|
|
48,418 |
|
|
|
47,664 |
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share |
|
$ |
(1.18 |
) |
|
$ |
0.15 |
|
|
$ |
(1.43 |
) |
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share |
|
$ |
(1.18 |
) |
|
$ |
0.15 |
|
|
$ |
(1.43 |
) |
|
|
|
|
|
|
|
|
|
|
For the years ended June 30, 2011 and 2009, the computation of diluted net loss per share did
not include 0.1 million and 0.6 million shares, respectively, of unvested restricted common stock
as their inclusion would have been anti-dilutive. For the year ended June 30, 2010, the computation
of diluted net income per share included 0.5 million shares of unvested restricted common stock.
Options to purchase 4.5 million, 4.6 million and 5.3 million shares for the years ended June 30,
2011, 2010 and 2009, respectively, were not included in the computation of diluted net income
(loss) per share as their exercise prices were in excess of the average stock prices for the
periods presented.
12. Concentrations of Credit Risk
At June 30, 2011, the Company had certain concentrations of credit risk with several financial
institutions in the form of cash and cash equivalents, which amounted to $29.3 million. For
purposes of evaluating credit risk, the stability of financial institutions conducting business
with the Company and the amount of available Federal Deposit Insurance Corporation insurance is
periodically reviewed. If the financial institutions failed to completely perform under terms of
the financial instruments, the exposure for credit loss would be the amount of the financial
instruments less amounts covered by regulatory insurance.
The Company primarily transacts business either directly with its policyholders or through
independently-owned insurance agencies in Tennessee who exclusively write non-standard personal
automobile insurance policies on behalf of the Company. Direct policyholders make payments directly
to the Company. Balances due from policyholders are generally secured by the related unearned
premium. The Company requires a down payment at the time the policy is originated and subsequent
scheduled payments are monitored in order to prevent the Company from providing coverage beyond the
date for which payment has been received. If subsequent payments are not made timely, the policy is
generally canceled at no loss to the Company. Policyholders whose premiums are written through the
independent agencies make their payments to these agencies that in turn remit these payments to the
Company. Balances due to the Company resulting from premium payments made to these agencies are
unsecured.
69
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
13. Related Party Transactions
Certain of the Companys executives are covered by employment agreements covering, among other
items, base compensation, incentive-bonus determinations and payments in the event of termination
or a change in control of the Company.
14. Severance
During the years ended June 30, 2011, 2010 and 2009, the Company incurred charges of $1.7
million, $0.2 million and $0.2 million, respectively, for severance for former employees of the
Company. The fiscal year 2011 charge was comprised of $1.3 million in accrued severance and
benefits and $0.4 million in non-cash charges related to the vesting of certain unvested stock
options and restricted common stock. At June 30, 2011, a severance and benefit accrual of $1.0
million was classified in other liabilities in the Companys consolidated balance sheet. Severance
and benefits charges are included in insurance operating expenses and the non-cash charges related
to the vesting of stock options and restricted common stock are included within stock-based
compensation expense in the consolidated statements of operations. The insurance operations segment
includes the accrued severance and benefits charges, and the real estate and corporate segment
includes the accelerated vesting charges.
15. 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 from time to time 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 (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 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 ancillary motor club memberships
sold in those states. Pursuant to the terms of the settlements, eligible class members were
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. Premium credits
issued to class members as described above were prorated over a twelve-month term not to extend
beyond August 2011, and the class members were entitled to the prorated premium credit only so long
as their insurance premiums remained current during the twelve-month term.
70
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
At December 31, 2008, the Company accrued $5.2 million for premium credits available to class
members who were actively insured by the Company. The following is a progression of the activity
associated with the estimated premium credit liability (in thousands).
|
|
|
|
|
Balance at December 31, 2008 |
|
$ |
5,227 |
|
Credits utilized |
|
|
(1,338 |
) |
Credits forfeited |
|
|
(904 |
) |
|
|
|
|
Balance at June 30, 2009 |
|
|
2,985 |
|
Credits utilized |
|
|
(2,622 |
) |
Credits forfeited |
|
|
(317 |
) |
|
|
|
|
Balance at June 30, 2010 |
|
|
46 |
|
Credits utilized |
|
|
(39 |
) |
Credits forfeited |
|
|
(7 |
) |
|
|
|
|
Balance at June 30, 2011 |
|
$ |
|
|
|
|
|
|
The Company did not incur any significant costs associated with the reimbursement
certificates. 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 premium credits was
classified in other liabilities in the Companys consolidated balance sheets. Based on the terms of
the settlements and remaining available premium credits at June 30, 2011, management does not
expect any further activity associated with this litigation during future periods.
The Company received $2.95 million in July 2009 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. The insurance recovery was accrued in fiscal year 2009 and is included in
litigation settlement expenses in the Companys consolidated statement of operations.
16. Fair Value of Financial Instruments
The carrying values and fair values of certain of the Companys financial instruments were as
follows (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2011 |
|
|
June 30, 2010 |
|
|
|
|
|
|
|
Fair |
|
|
|
|
|
|
Fair |
|
|
|
Carrying Value |
|
|
Value |
|
|
Carrying Value |
|
|
Value |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments, available-for-sale |
|
$ |
186,815 |
|
|
$ |
186,815 |
|
|
$ |
196,550 |
|
|
$ |
196,550 |
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debentures payable |
|
|
41,240 |
|
|
|
17,841 |
|
|
|
41,240 |
|
|
|
19,701 |
|
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. Carrying values
of certain financial instruments, such as cash and cash equivalents and premiums and fees
receivable, approximate fair value due to the short-term nature of the instruments and are not
required to be disclosed. Therefore, the aggregate of the fair values presented in the table does
not purport to represent the Companys underlying value.
71
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
17. Segment Information
The Company operates in two business segments with its primary focus being the selling,
servicing and underwriting of non-standard personal automobile insurance. The real estate and
corporate segment consists of the activities related to the disposition of foreclosed real estate
held for sale, interest expense associated with all debt and other general corporate overhead
expenses.
The following table presents selected financial data by business segment (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Insurance |
|
$ |
210,618 |
|
|
$ |
223,054 |
|
|
$ |
265,341 |
|
Real estate and corporate |
|
|
116 |
|
|
|
119 |
|
|
|
124 |
|
|
|
|
|
|
|
|
|
|
|
Consolidated total |
|
$ |
210,734 |
|
|
$ |
223,173 |
|
|
$ |
265,465 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes: |
|
|
|
|
|
|
|
|
|
|
|
|
Insurance |
|
$ |
(50,407 |
) |
|
$ |
14,568 |
|
|
$ |
(42,536 |
) |
Real estate and corporate |
|
|
(6,175 |
) |
|
|
(7,087 |
) |
|
|
(7,368 |
) |
|
|
|
|
|
|
|
|
|
|
Consolidated total |
|
$ |
(56,582 |
) |
|
$ |
7,481 |
|
|
$ |
(49,904 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
2011 |
|
|
2010 |
|
Total assets: |
|
|
|
|
|
|
|
|
Insurance |
|
$ |
281,399 |
|
|
$ |
343,499 |
|
Real estate and corporate |
|
|
14,895 |
|
|
|
12,843 |
|
|
|
|
|
|
|
|
Consolidated total |
|
$ |
296,294 |
|
|
$ |
356,342 |
|
|
|
|
|
|
|
|
18. Statutory Financial Information and Accounting Policies
The statutory-basis financial statements of the Insurance Companies are prepared in accordance
with accounting practices prescribed or permitted by the Department of Insurance in each respective
state of domicile. Each state of domicile requires that insurance companies domiciled in the state
prepare their statutory-basis financial statements in accordance with the National Association of
Insurance Commissioners Accounting Practices and Procedures Manual subject to any deviations
prescribed or permitted by the insurance commissioner in each state of domicile. The Insurance
Companies are required to report their risk-based capital (RBC) each December 31. Failure to
maintain an adequate RBC could subject the Insurance Companies to regulatory action and could
restrict the payment of dividends. At December 31, 2010, the RBC levels of the Insurance Companies
did not subject them to any regulatory action.
At June 30, 2011 and 2010, on an unaudited consolidated statutory basis, the capital and
surplus of the Insurance Companies was $115.3 million and $120.3 million, respectively. For the
fiscal years ended June 30, 2011, 2010 and 2009, unaudited consolidated statutory net income (loss)
of the Insurance Companies was $(5.9) million, $5.2 million and $7.3 million, respectively.
The maximum amount of dividends which can be paid by First Acceptance Insurance Company, Inc.
(FAIC) to the Company, without the prior approval of the Texas insurance commissioner, is limited
to the greater of 10% of statutory capital and surplus at December 31 of the next preceding year or
net income for the year. Accordingly, at December 31, 2010, the maximum amount of dividends
available to be paid to the Company from FAIC without prior approval in any preceding twelve-month
period is approximately $12 million. Based on FAICs earned surplus at June 30, 2011, the Company
believes that it has extraordinary dividend capacity, of an additional $3 million, subject to
regulatory approval.
72
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
19. Selected Quarterly Financial Data (unaudited)
Interim results are not necessarily indicative of fiscal year performance because of the impact of
seasonal and short-term variations. Selected quarterly financial data for the years ended June 30,
2011 and 2010 is summarized as follows (in thousands, except per share data).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended |
|
|
|
September 30, |
|
|
December 31, |
|
|
March 31, |
|
|
June 30, |
|
Year Ended June 30, 2011: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
53,123 |
|
|
$ |
51,677 |
|
|
$ |
52,800 |
|
|
$ |
53,134 |
|
Income (loss) before income taxes |
|
$ |
512 |
|
|
$ |
(1,969 |
) |
|
$ |
(1,910 |
) |
|
$ |
(53,215 |
) |
Net income (loss) |
|
$ |
392 |
|
|
$ |
(2,090 |
) |
|
$ |
(1,608 |
) |
|
$ |
(53,474 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net income (loss)
per share |
|
$ |
0.01 |
|
|
$ |
(0.04 |
) |
|
$ |
(0.03 |
) |
|
$ |
(1.11 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, 2010: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
57,312 |
|
|
$ |
53,775 |
|
|
$ |
56,116 |
|
|
$ |
55,970 |
|
Income before income taxes |
|
$ |
2,861 |
|
|
$ |
1,577 |
|
|
$ |
2,193 |
|
|
$ |
850 |
|
Net income |
|
$ |
2,760 |
|
|
$ |
1,475 |
|
|
$ |
2,069 |
|
|
$ |
736 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net income per share |
|
$ |
0.06 |
|
|
$ |
0.03 |
|
|
$ |
0.04 |
|
|
$ |
0.02 |
|
Loss before income taxes for the quarter ended June 30, 2011 of $50.8 million included a
goodwill and intangible assets impairment charge of $52.4 million (see Note 1) and $2.1 million of
favorable development in the Companys estimate of unpaid loss and loss adjustment expenses.
Income before income taxes for the quarter ended June 30, 2010 of $0.9 million included $1.0
million of favorable development in the Companys estimate of unpaid loss and loss adjustment
expenses.
73
FIRST ACCEPTANCE CORPORATION 10-K
|
|
|
Item 9. |
|
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure |
None.
|
|
|
Item 9A. |
|
Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management team, including our
Chief Executive Officer and Principal Financial Officer, we conducted an evaluation of our
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities
Exchange Act of 1934, as amended, or the Exchange Act) at June 30, 2011. Based on that
evaluation, our Chief Executive Officer (principal executive officer) and Senior Vice President of
Finance (principal financial officer) concluded that our disclosure controls and procedures were
effective at June 30, 2011 to ensure that information required to be disclosed by us in the reports
that we file or submit under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the SECs rules and forms.
Managements Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining effective internal control over
financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our
internal control over financial reporting is designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles.
Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of our management, including our Chief
Executive Officer and Principal Financial Officer, we conducted an assessment of the effectiveness
of our internal control over financial reporting based on the framework in Internal Control
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on our assessment under the Internal Control Integrated Framework, our
management concluded that our internal control over financial reporting was effective at June 30,
2011.
Our independent registered public accounting firm, Ernst & Young LLP has issued an attestation
report on our internal control over financial reporting, which such report appears herein.
Changes in Internal Control over Financial Reporting
During the fourth fiscal quarter of the period covered by this report, there has been no
change in our internal control over financial reporting that has materially affected, or is
reasonably likely to materially affect, our internal control over financial reporting.
|
|
|
Item 9B. |
|
Other Information |
None.
74
FIRST ACCEPTANCE CORPORATION 10-K
PART III
|
|
|
Item 10. |
|
Directors, Executive Officers and Corporate Governance |
Information with respect to our directors and executive officers, set forth in our Definitive
Proxy Statement for the Annual Meeting of Stockholders to be held November 15, 2011, is
incorporated herein by reference.
Information with respect to compliance with Section 16(a) of the Securities Exchange Act of
1934, as amended, set forth in our Definitive Proxy Statement for the Annual Meeting of
Stockholders to be held November 15, 2011, is incorporated herein by reference.
Information with respect to our code of business conduct and ethics, set forth in our
Definitive Proxy Statement for the Annual Meeting of Stockholders to be held November 15, 2011, is
incorporated herein by reference.
Information with respect to our corporate governance disclosures, set forth in our Definitive
Proxy Statement for the Annual Meeting of Stockholders to be held November 15, 2011, is
incorporated herein by reference.
|
|
|
Item 11. |
|
Executive Compensation |
Information with respect to the compensation of our executive officers, set forth in our
Definitive Proxy Statement for the Annual Meeting of Stockholders to be held November 15, 2011, is
incorporated herein by reference.
|
|
|
Item 12. |
|
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters |
Information with respect to security ownership of certain beneficial owners and management and
related stockholder matters, set forth in our Definitive Proxy Statement for the Annual Meeting of
Stockholders to be held November 15, 2011, is incorporated herein by reference.
|
|
|
Item 13. |
|
Certain Relationships and Related Transactions, and Director Independence |
Information with respect to certain relationships and related transactions, and director
independence, set forth in our Definitive Proxy Statement for the Annual Meeting of Stockholders to
be held November 15, 2011, is incorporated herein by reference.
|
|
|
Item 14. |
|
Principal Accountant Fees and Services |
Information with respect to the fees paid to and services provided by our principal
accountants, set forth in our Definitive Proxy Statement for the Annual Meeting of Stockholders to
be held November 15, 2011, is incorporated herein by reference.
75
FIRST ACCEPTANCE CORPORATION 10-K
PART IV
|
|
|
Item 15. |
|
Exhibits, Financial Statement Schedules |
(a) Financial Statements, Financial Statement Schedules and Exhibits
|
(1) |
|
Consolidated Financial Statements: See Index to Consolidated Financial
Statements in Part II, Item 8 of this Form 10-K. |
|
|
(2) |
|
Financial Statement Schedules: |
|
|
|
|
Schedule I Financial Information of Registrant (Parent Company) |
|
|
(3) |
|
Exhibits: See the exhibit listing set forth below. |
Exhibit
Number
3.1 |
|
Restated Certificate of Incorporation of First Acceptance Corporation (incorporated by
reference to Exhibit 3.1 of the Companys Current Report on Form 8-K dated May 3, 2004). |
|
3.2 |
|
Second Amended and Restated Bylaws of First Acceptance Corporation (incorporated by reference
to Exhibit 3 of the Companys Current Report on Form 8-K dated November 9, 2007). |
|
4.1 |
|
Registration Rights Agreement, dated as of July 1, 2002, by and between the Company and
Donald J. Edwards (incorporated by reference to Exhibit 4.1 of the Companys Current Report on
Form 8-K dated July 11, 2002). |
|
4.2 |
|
Form of certificate representing shares of common stock, par value $0.01 per share
(incorporated by reference to Exhibit 4.1 of the Companys Registration Statement on Form S-8
filed December 26, 2002). |
|
10.1 |
|
Amended and Restated First Acceptance Corporation 2002 Long Term Incentive Plan (incorporated
by reference to Exhibit 99.1 of the Companys Current Report on Form 8-K dated November 23,
2009).* |
|
10.2 |
|
Nonqualified Stock Option Agreement, dated as of July 9, 2002, by and between the Company and
Donald J. Edwards (incorporated by reference to Exhibit 10.3 of the Companys Current Report
on Form 8-K dated July 11, 2002).* |
|
10.3 |
|
Nonqualified Stock Option Agreement, dated as of April 30, 2004, by and between First
Acceptance Corporation and Stephen J. Harrison (incorporated by reference to Exhibit 10.5 of
the Companys Current Report on Form 8-K dated May 3, 2004).* |
|
10.4 |
|
Registration Rights Agreement, dated as of April 30, 2004, by and among First Acceptance
Corporation, Stephen J. Harrison and Thomas M. Harrison, Jr. (incorporated by reference to
Exhibit 10.7 of the Companys Current Report on Form 8-K dated May 3, 2004). |
|
10.5 |
|
Form of Restricted Stock Award Agreement under the Companys 2002 Long Term Incentive Plan
(incorporated by reference to Exhibit 10.1 of the Companys Current Report on Form 8-K dated
November 3, 2004).* |
|
10.6 |
|
Form of Nonqualified Stock Option Agreement under the Companys 2002 Long Term Incentive Plan
(incorporated by reference to Exhibit 10.2 of the Companys Current Report on Form 8-K dated
November 3, 2004).* |
|
10.7 |
|
Amended and Restated First Acceptance Corporation Employee Stock Purchase Plan (incorporated
by reference to Exhibit 10.1 of the Companys Current Report on Form 8-K dated November 17,
2010). |
76
FIRST ACCEPTANCE CORPORATION 10-K
10.8 |
|
Summary of Compensation for Non- Employee Directors and Named Executive Officers. |
|
10.9 |
|
Stock Purchase Agreement, dated as of September 13, 2006, by and between First Acceptance
Corporation and Edward Pierce (incorporated by reference to Exhibit 99.2 of the Companys
Current Report on Form 8-K dated September 19, 2006).* |
|
10.10 |
|
Nonqualified Stock Option Agreement, dated as of September 13, 2006, by and between First
Acceptance Corporation and Edward Pierce (incorporated by reference to Exhibit 99.3 of the
Companys Current Report on Form 8-K dated September 19, 2006).* |
|
10.11 |
|
Nonqualified Stock Option Agreement, dated as of October 9, 2006, by and between First
Acceptance Corporation and Kevin P. Cohn (incorporated by reference to Exhibit 99.2 of the
Companys Current Report on Form 8-K dated October 12, 2006).* |
|
10.12 |
|
Form of Restricted Stock Award Agreement of Outside Directors under the Companys 2002 Long
Term Incentive Plan (incorporated by reference to Exhibit 10.2 of the Companys Current Report
on Form 10-Q dated May 10, 2007).* |
|
10.13 |
|
Form of Indemnification Agreement between the Company and each of the Companys directors
and executive officers (incorporated by reference to Exhibit 10.3 of the Companys Current
Report on Form 10-Q dated May 10, 2007).* |
|
10.14 |
|
Junior Subordinated Indenture, dated June 15, 2007, between First Acceptance Corporation and
Wilmington Trust Company (incorporated by reference to Exhibit 99.2 of the Companys Current
Report on Form 8-K dated June 18, 2007). |
|
10.15 |
|
Guarantee Agreement, dated June 15, 2007, between First Acceptance Corporation and
Wilmington Trust Company (incorporated by reference to Exhibit 99.3 of the Companys Current
Report on Form 8-K dated June 18, 2007). |
|
10.16 |
|
Amended and Restated Trust Agreement, dated June 15, 2007, among First Acceptance
Corporation, Wilmington Trust Company and the Administrative Trustees Named Therein
(incorporated by reference to Exhibit 99.4 of the Companys Current Report on Form 8-K dated
June 18, 2007). |
|
10.17 |
|
Amended and Restated Employment Agreement, made as of February 8, 2008, to be effective
January 1, 2008, by and between First Acceptance Corporation and Stephen J. Harrison
(incorporated by reference to Exhibit 99.3 of the Companys Current Report on Form 8-K dated
February 11, 2008).* |
|
10.18 |
|
Amended and Restated Employment Agreement, made as of February 8, 2008, to be effective
January 1, 2008, by and between First Acceptance Corporation and Edward Pierce (incorporated
by reference to Exhibit 99.4 of the Companys Current Report on Form 8-K dated February 11,
2008).* |
|
10.19 |
|
Amended and Restated Employment Agreement, made as of February 8, 2008, to be effective
January 1, 2008, by and between First Acceptance Corporation and Kevin P. Cohn (incorporated
by reference to Exhibit 99.5 of the Companys Current Report on Form 8-K dated February 11,
2008).* |
|
10.20 |
|
First Amendment to First Acceptance Corporation Employee Stock Purchase Plan (incorporated
by reference to Exhibit 10.1 of the Companys Quarterly Report on Form 10-Q dated February 11,
2008). |
|
10.21 |
|
Restricted Stock Award Agreement, dated as of March 18, 2008, between First Acceptance
Corporation and Edward Pierce (incorporated by reference to Exhibit 99.1 of the Companys
Current Report on Form 8-K dated March 21, 2008).* |
77
FIRST ACCEPTANCE CORPORATION 10-K
10.22 |
|
Form of Restricted Stock Award Agreement between First Acceptance Corporation and Stephen J.
Harrison and Edward Pierce (incorporated by reference to Exhibit 99 of the Companys Current
Report on Form 8-K dated October 6, 2008).* |
|
10.23 |
|
Stipulation and Agreement of Settlement, made and entered into as of September 10, 2008, by
First Acceptance Insurance Company of Georgia, Inc., and its predecessors and affiliates,
Village Auto Insurance Company, U.S. Auto Insurance Company, and Transit Auto Club, Inc., and
Annette Rush and all other persons similarly situated by and through their undersigned
attorneys of record (incorporated by reference to Exhibit 10 of the Companys Quarterly Report
on Form 10-Q dated November 10, 2008). |
|
10.24 |
|
Stipulation and Agreement of Settlement, dated as of December 5, 2008, by First Acceptance
Insurance Company, Inc., and its predecessors and affiliates, USAuto Insurance Company, and
Transit Automobile Club, Inc., by and through their attorneys of record, and Margaret Franklin
and all other persons similarly situated, by and through their attorneys of record
(incorporated by reference to Exhibit 99 of the Companys Current Report on Form 8-K dated
December 11, 2008). |
|
10.25 |
|
Employment Agreement, made as of February 8, 2008, to be effective January 1, 2008, between
First Acceptance Corporation and Daniel L. Walker (incorporated by reference to Exhibit 10.1
of the Companys Quarterly Report on Form 10-Q dated May 11, 2009).* |
|
10.26 |
|
Amended and Restated Employment Agreement, made as of February 8, 2008, to be effective
January 1, 2008, between First Acceptance Corporation and Keith E. Bornemann (incorporated by
reference to Exhibit 10.2 of the Companys Quarterly Report on Form 10-Q dated May 11, 2009).* |
|
10.27 |
|
Option Cancellation and Restricted Award Agreement, made as of November 18, 2009, between
First Acceptance Corporation and Keith E. Bornemann (incorporated by reference to Exhibit 99.2
of the Companys Current Report on Form 8-K dated November 23, 2009).* |
|
10.28 |
|
Option Cancellation and Restricted Award Agreement, made as of November 18, 2009, between
First Acceptance Corporation and Kevin P. Cohn (incorporated by reference to Exhibit 99.3 of
the Companys Current Report on Form 8-K dated November 23, 2009).* |
|
10.29 |
|
Option Cancellation and Restricted Award Agreement, made as of November 18, 2009, between
First Acceptance Corporation and Stephen J. Harrison (incorporated by reference to Exhibit
99.4 of the Companys Current Report on Form 8-K dated November 23, 2009).* |
|
10.30 |
|
Option Cancellation and Restricted Award Agreement, made as of November 18, 2009, between
First Acceptance Corporation and Edward L. Pierce (incorporated by reference to Exhibit 99.5
of the Companys Current Report on Form 8-K dated November 23, 2009).* |
|
10.31 |
|
Compensation Arrangement, made as of March 30, 2011, between First Acceptance Corporation
and Mark A. Kelly (incorporated by reference to Exhibit 10.35 of the Companys Amendment No. 1
to Current Report on Form 8-K dated April 1, 2011).* |
|
10.32 |
|
Employment Agreement, made as of May 15, 2007, as amended March 3, 2009, between First
Acceptance Corporation and John Barnett (incorporated by reference to Exhibit 99 of the
Companys Current Report on Form 8-K dated May 23, 2011).* |
|
14 |
|
First Acceptance Corporation Code of Business Conduct and Ethics (incorporated by reference
to Exhibit 14 of the Companys Annual Report on Form 10-K dated September 28, 2004). |
|
21 |
|
Subsidiaries of First Acceptance Corporation. |
|
23.1 |
|
Consent of Ernst & Young LLP. |
|
31.1 |
|
Certification of Principal Executive Officer pursuant to Rule 13a-14(a). |
78
FIRST ACCEPTANCE CORPORATION 10-K
31.2 |
|
Certification of Principal Financial Officer pursuant to Rule 13a-14(a). |
|
32.1 |
|
Principal 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 |
|
Principal Financial Officers Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
* |
|
Management contract or compensatory plan or arrangement. |
79
FIRST ACCEPTANCE CORPORATION 10-K
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
|
|
|
|
|
FIRST ACCEPTANCE CORPORATION
|
|
Date: August 31, 2011 |
By |
/s/ Stephen J. Harrison
|
|
|
|
Stephen J. Harrison |
|
|
|
Chief Executive Officer |
|
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the capacities and on the
dates indicated.
|
|
|
|
|
Signature |
|
Title |
|
Date |
|
|
|
|
|
/s/ Stephen J. Harrison
Stephen J. Harrison
|
|
Chief Executive Officer and
Director (Principal Executive
Officer)
|
|
August 31, 2011 |
|
|
|
|
|
/s/ John R. Barnett
John R. Barnett
|
|
Senior Vice President of Finance
(Principal Financial Officer and
Principal Accounting Officer)
|
|
August 31, 2011 |
|
|
|
|
|
/s/ Gerald J. Ford
Gerald J. Ford
|
|
Chairman of the Board of Directors
|
|
August 31, 2011 |
|
|
|
|
|
/s/ Thomas M. Harrison, Jr.
Thomas M. Harrison, Jr.
|
|
Director
|
|
August 31, 2011 |
|
|
|
|
|
|
|
Director
|
|
August 31, 2011 |
Rhodes R. Bobbitt |
|
|
|
|
|
|
|
|
|
|
|
Director
|
|
August 31, 2011 |
Harvey B. Cash |
|
|
|
|
|
|
|
|
|
|
|
Director
|
|
August 31, 2011 |
Donald J. Edwards |
|
|
|
|
|
|
|
|
|
|
|
Director
|
|
August 31, 2011 |
Tom C. Nichols |
|
|
|
|
|
|
|
|
|
|
|
Director
|
|
August 31, 2011 |
Lyndon L. Olson |
|
|
|
|
|
|
|
|
|
/s/ William A. Shipp, Jr.
|
|
Director
|
|
August 31, 2011 |
William A. Shipp, Jr. |
|
|
|
|
80
FIRST ACCEPTANCE CORPORATION 10-K
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
SCHEDULE I. FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY)
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
2011 |
|
|
2010 |
|
Balance Sheets |
|
|
|
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
Investment in subsidiaries, at equity in net assets |
|
$ |
150,132 |
|
|
$ |
206,265 |
|
Cash and cash equivalents |
|
|
11,674 |
|
|
|
9,534 |
|
Other assets |
|
|
3,252 |
|
|
|
3,309 |
|
|
|
|
|
|
|
|
|
|
$ |
165,058 |
|
|
$ |
219,108 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
Debentures payable |
|
$ |
41,240 |
|
|
$ |
41,240 |
|
Other liabilities |
|
|
1,590 |
|
|
|
678 |
|
Stockholders equity |
|
|
122,228 |
|
|
|
177,190 |
|
|
|
|
|
|
|
|
|
|
$ |
165,058 |
|
|
$ |
219,108 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
Statements of Operations |
|
|
|
|
|
|
|
|
|
|
|
|
Investment income |
|
$ |
116 |
|
|
$ |
119 |
|
|
$ |
124 |
|
Equity in income (loss) of subsidiaries, net of tax |
|
|
(49,926 |
) |
|
|
13,813 |
|
|
|
(58,650 |
) |
Expenses |
|
|
(6,005 |
) |
|
|
(7,206 |
) |
|
|
(7,492 |
) |
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
(55,815 |
) |
|
|
6,726 |
|
|
|
(66,018 |
) |
Provision (benefit) for income taxes |
|
|
965 |
|
|
|
(314 |
) |
|
|
2,282 |
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(56,780 |
) |
|
$ |
7,040 |
|
|
$ |
(68,300 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
Statements of Cash Flows |
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(56,780 |
) |
|
$ |
7,040 |
|
|
$ |
(68,300 |
) |
Equity in income (loss) of subsidiaries, net of tax |
|
|
49,926 |
|
|
|
(13,813 |
) |
|
|
58,650 |
|
Stock-based compensation |
|
|
998 |
|
|
|
1,048 |
|
|
|
2,053 |
|
Deferred income taxes |
|
|
|
|
|
|
|
|
|
|
8,927 |
|
Other |
|
|
(108 |
) |
|
|
(2 |
) |
|
|
|
|
Change in assets and liabilities |
|
|
971 |
|
|
|
4,488 |
|
|
|
(5,044 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities |
|
|
(4,993 |
) |
|
|
(1,239 |
) |
|
|
(3,714 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Investment in subsidiary |
|
|
|
|
|
|
|
|
|
|
(2,685 |
) |
Dividends from subsidiary |
|
|
7,079 |
|
|
|
7,670 |
|
|
|
10,975 |
|
Improvements to foreclosed real estate |
|
|
(2 |
) |
|
|
(22 |
) |
|
|
(138 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by investing activities |
|
|
7,077 |
|
|
|
7,648 |
|
|
|
8,152 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Payments on borrowings |
|
|
|
|
|
|
|
|
|
|
(3,913 |
) |
Net proceeds from issuance of common stock |
|
|
56 |
|
|
|
67 |
|
|
|
68 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
56 |
|
|
|
67 |
|
|
|
(3,845 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents |
|
|
2,140 |
|
|
|
6,476 |
|
|
|
593 |
|
Cash and cash equivalents, beginning of year |
|
|
9,534 |
|
|
|
3,058 |
|
|
|
2,465 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year |
|
$ |
11,674 |
|
|
$ |
9,534 |
|
|
$ |
3,058 |
|
|
|
|
|
|
|
|
|
|
|
81