e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES
EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 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)
Not applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files).
Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer or a smaller reporting company. See definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
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Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer o
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Smaller Reporting Company þ |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act).
Yes o No þ
At May 9, 2011, there were 48,473,718 shares outstanding of the registrants common stock, par
value $0.01 per share.
FIRST ACCEPTANCE CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2011
INDEX
i
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
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March 31, |
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June 30, |
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2011 |
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2010 |
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(Unaudited) |
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ASSETS |
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Investments, available-for-sale at fair value (amortized cost
of $175,735 and $187,907, respectively) |
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$ |
184,281 |
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$ |
196,550 |
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Cash and cash equivalents |
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34,073 |
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26,184 |
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Premiums and fees receivable, net of allowance of $354 and $418 |
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49,369 |
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41,276 |
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Other assets |
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8,219 |
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8,733 |
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Property and equipment, net |
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2,636 |
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3,524 |
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Deferred acquisition costs |
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4,062 |
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3,623 |
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Goodwill |
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70,092 |
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70,092 |
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Identifiable intangible assets |
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6,360 |
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6,360 |
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TOTAL ASSETS |
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$ |
359,092 |
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$ |
356,342 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Loss and loss adjustment expense reserves |
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$ |
69,429 |
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$ |
73,198 |
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Unearned premiums and fees |
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61,064 |
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52,563 |
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Debentures payable |
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41,240 |
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41,240 |
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Other liabilities |
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12,728 |
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12,151 |
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Total liabilities |
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184,461 |
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179,152 |
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Stockholders equity: |
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Preferred stock, $.01 par value, 10,000 shares authorized |
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Common stock, $.01 par value, 75,000 shares authorized;
48,477 and 48,509 shares issued and outstanding,
respectively |
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485 |
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485 |
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Additional paid-in capital |
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466,675 |
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465,831 |
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Accumulated other comprehensive income |
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8,546 |
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8,643 |
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Accumulated deficit |
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(301,075 |
) |
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(297,769 |
) |
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Total stockholders equity |
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174,631 |
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177,190 |
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TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
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$ |
359,092 |
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$ |
356,342 |
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See notes to consolidated financial statements.
1
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(in thousands, except per share data)
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Three Months Ended |
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Nine Months Ended |
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March 31, |
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March 31, |
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2011 |
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2010 |
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2011 |
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2010 |
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Revenues: |
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Premiums earned |
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$ |
43,444 |
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$ |
46,651 |
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$ |
129,898 |
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$ |
140,317 |
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Commission and fee income |
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7,443 |
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7,471 |
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21,784 |
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21,391 |
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Investment income |
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1,991 |
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2,008 |
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6,252 |
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5,954 |
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Net realized losses on investments,
available-for-sale |
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(78 |
) |
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(14 |
) |
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(334 |
) |
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(459 |
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52,800 |
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56,116 |
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157,600 |
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167,203 |
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Costs and expenses: |
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Losses and loss adjustment expenses |
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31,586 |
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31,902 |
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96,981 |
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94,926 |
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Insurance operating expenses |
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20,963 |
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20,125 |
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57,864 |
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59,406 |
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Other operating expenses |
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307 |
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280 |
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985 |
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1,303 |
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Litigation settlement |
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(1 |
) |
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(35 |
) |
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(6 |
) |
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(314 |
) |
Stock-based compensation |
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549 |
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198 |
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914 |
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853 |
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Depreciation and amortization |
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338 |
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483 |
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1,279 |
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1,447 |
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Interest expense |
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968 |
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970 |
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2,950 |
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2,951 |
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54,710 |
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53,923 |
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160,967 |
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160,572 |
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Income (loss) before income taxes |
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(1,910 |
) |
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2,193 |
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(3,367 |
) |
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6,631 |
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Provision (benefit) for income taxes |
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(302 |
) |
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124 |
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(61 |
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327 |
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Net income (loss) |
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$ |
(1,608 |
) |
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$ |
2,069 |
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$ |
(3,306 |
) |
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$ |
6,304 |
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Net income (loss) per share: |
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Basic and diluted |
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$ |
(0.03 |
) |
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$ |
0.04 |
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$ |
(0.07 |
) |
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$ |
0.13 |
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Number of shares used to calculate net income (loss) per
share: |
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Basic |
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48,192 |
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47,994 |
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48,125 |
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47,943 |
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Diluted |
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48,192 |
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48,489 |
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48,125 |
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48,395 |
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Reconciliation of net income (loss) to comprehensive
income (loss): |
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Net income (loss) |
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$ |
(1,608 |
) |
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$ |
2,069 |
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$ |
(3,306 |
) |
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$ |
6,304 |
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Net unrealized change in investments |
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(379 |
) |
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2,123 |
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(97 |
) |
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5,670 |
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Comprehensive income (loss) |
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$ |
(1,987 |
) |
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$ |
4,192 |
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$ |
(3,403 |
) |
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$ |
11,974 |
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Detail of net realized losses on investments,
available-for-sale: |
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Net realized gains (losses) on sales |
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$ |
(1 |
) |
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$ |
(14 |
) |
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$ |
79 |
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$ |
300 |
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Unrealized losses on investments with
other-than-temporary impairment charges |
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(77 |
) |
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(415 |
) |
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(1,449 |
) |
Non-credit portion included in comprehensive income
(loss) |
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2 |
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(690 |
) |
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Other-than-temporary impairment charges recognized in
income (loss) |
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(77 |
) |
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(413 |
) |
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(759 |
) |
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Net realized losses on investments, available-for-sale |
|
$ |
(78 |
) |
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$ |
(14 |
) |
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$ |
(334 |
) |
|
$ |
(459 |
) |
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See notes to consolidated financial statements.
2
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in thousands)
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Nine Months Ended |
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March 31, |
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2011 |
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2010 |
|
Cash flows from operating activities: |
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Net income (loss) |
|
$ |
(3,306 |
) |
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$ |
6,304 |
|
Adjustments to reconcile net income (loss) to cash used
in operating activities: |
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Depreciation and amortization |
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1,279 |
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|
1,447 |
|
Stock-based compensation |
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|
914 |
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|
853 |
|
Other-than-temporary impairment on investment securities |
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413 |
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|
759 |
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Net realized losses on sales of investments |
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(79 |
) |
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(300 |
) |
Other |
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|
370 |
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|
432 |
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Change in: |
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Premiums and fees receivable |
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(8,157 |
) |
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(4,511 |
) |
Loss and loss adjustment expense reserves |
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(3,769 |
) |
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(7,790 |
) |
Unearned premiums and fees |
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|
8,501 |
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|
5,149 |
|
Litigation settlement |
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(42 |
) |
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|
91 |
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Other |
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|
755 |
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(2,865 |
) |
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Net cash used in operating activities |
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(3,121 |
) |
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(431 |
) |
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Cash flows from investing activities: |
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Purchases of investments, available-for-sale |
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(3,283 |
) |
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(64,439 |
) |
Maturities and paydowns of investments, available-for-sale |
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14,718 |
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|
9,867 |
|
Sales of investments, available-for-sale |
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11,566 |
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Capital expenditures |
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(396 |
) |
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(1,197 |
) |
Other |
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(2 |
) |
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(22 |
) |
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Net cash provided by (used in) investing activities |
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11,037 |
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(44,225 |
) |
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Cash flows from financing activities: |
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Payments on borrowings |
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(59 |
) |
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(47 |
) |
Net proceeds from issuance of common stock |
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32 |
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33 |
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Net cash used in financing activities |
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(27 |
) |
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(14 |
) |
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Net increase (decrease) in cash and cash equivalents |
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7,889 |
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(44,670 |
) |
Cash and cash equivalents, beginning of period |
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26,184 |
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|
77,201 |
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Cash and cash equivalents, end of period |
|
$ |
34,073 |
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$ |
32,531 |
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See notes to consolidated financial statements.
3
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. General
The consolidated financial statements of First Acceptance Corporation (the Company) included
herein have been prepared without audit pursuant to the rules and regulations of the Securities and
Exchange Commission (SEC). Accordingly, certain information and disclosures normally included in
financial statements prepared in accordance with U.S. generally accepted accounting principles have
been omitted. In the opinion of management, the consolidated financial statements reflect all
adjustments (consisting of normal recurring adjustments) necessary for a fair statement of the
interim periods. Certain reclassifications have been made to the prior years consolidated
financial statements to conform with the current year presentation.
The results of operations for the interim periods are not necessarily indicative of the
results of operations to be expected for the full year. These consolidated financial statements
should be read in conjunction with the Companys audited consolidated financial statements included
in its Annual Report on Form 10-K for the fiscal year ended June 30, 2010.
2. Investments
Fair Value
Fair value is the price that would be received upon the sale of an asset or paid to transfer a
liability in an orderly transaction between market participants at the measurement date. The
Company holds available-for-sale investments, which are carried at fair value.
Fair value measurements are generally based upon observable and unobservable inputs.
Observable inputs are based on market data from independent sources, while unobservable inputs
reflect the Companys view of market assumptions in the absence of observable market information.
All assets and liabilities that are carried at fair value are classified and disclosed in one of
the following categories:
|
Level 1 |
|
Quoted prices in active markets for identical assets or liabilities. |
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Level 2 |
|
Quoted market prices for similar assets or liabilities in active
markets; quoted prices by independent pricing services for identical or similar
assets or liabilities in markets that are not active; and valuations, using models
or other valuation techniques, that use observable market data. All significant
inputs are observable, or derived from observable information in the marketplace, or
are supported by observable levels at which transactions are executed in the market
place. |
|
|
Level 3 |
|
Instruments that use non-binding broker quotes or model driven
valuations that do not have observable market data. |
4
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
The following tables present the fair-value measurements for each major category of assets
that are measured on a recurring basis (in thousands).
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Fair Value Measurements Using |
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Quoted Prices |
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in Active |
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Significant |
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Markets for |
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Other |
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Significant |
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Identical |
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Observable |
|
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Unobservable |
|
|
|
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Assets |
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Inputs |
|
|
Inputs |
|
March 31, 2011 |
|
Total |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
Fixed maturities, available-for-sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agencies |
|
$ |
27,708 |
|
|
$ |
27,708 |
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|
$ |
|
|
|
$ |
|
|
State |
|
|
7,691 |
|
|
|
|
|
|
|
7,691 |
|
|
|
|
|
Political subdivisions |
|
|
1,808 |
|
|
|
|
|
|
|
1,808 |
|
|
|
|
|
Revenue and assessment |
|
|
26,942 |
|
|
|
|
|
|
|
26,942 |
|
|
|
|
|
Corporate bonds |
|
|
76,361 |
|
|
|
|
|
|
|
76,361 |
|
|
|
|
|
Collateralized mortgage obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency backed |
|
|
22,559 |
|
|
|
|
|
|
|
22,559 |
|
|
|
|
|
Non-agency backed residential |
|
|
5,918 |
|
|
|
|
|
|
|
5,918 |
|
|
|
|
|
Non-agency backed commercial |
|
|
7,061 |
|
|
|
|
|
|
|
7,061 |
|
|
|
|
|
Redeemable preferred stock |
|
|
172 |
|
|
|
172 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities, available-for-sale |
|
|
176,220 |
|
|
|
27,880 |
|
|
|
148,340 |
|
|
|
|
|
Investment in mutual fund,
available-for-sale |
|
|
8,061 |
|
|
|
8,061 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments, available-for-sale |
|
|
184,281 |
|
|
|
35,941 |
|
|
|
148,340 |
|
|
|
|
|
Cash and cash equivalents |
|
|
34,073 |
|
|
|
34,073 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
218,354 |
|
|
$ |
70,014 |
|
|
$ |
148,340 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
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 three and nine months ended March 31, 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 Level 2 independent
pricing service and believes that their policies adequately consider market activity, either based
on specific transactions for the security valued or based on modeling of securities with similar
credit quality, duration, yield and structure that were recently traded. The Company monitored
security-specific valuation trends and 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.
Based on the above categorization, there were no Level 3 classified security valuations at
March 31, 2011 and June 30, 2010. The following tables represent the quantitative disclosure for
those assets classified as Level 3 during the three and nine months ended March 31, 2010 (in
thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using |
|
|
|
Significant Unobservable Inputs (Level 3) |
|
|
|
| | | |
Collateralized mortgage obligations |
| | | |
|
|
|
|
|
|
|
Non-agency |
|
|
Non-agency |
|
|
|
|
|
|
Corporate |
|
|
backed |
|
|
backed |
|
|
|
|
Three Months Ended March 31, 2010: |
|
bonds |
|
|
residential |
|
|
commercial |
|
|
Total |
|
Balance at January 1, 2010 |
|
$ |
3,974 |
|
|
$ |
2,600 |
|
|
$ |
|
|
|
$ |
6,574 |
|
Total gains or losses (realized or
unrealized): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in net income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in other comprehensive
income (loss) |
|
|
(14 |
) |
|
|
82 |
|
|
|
|
|
|
|
68 |
|
Purchases, sales, issuances and settlements |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfers in to Level 3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfers out of Level 3 |
|
|
(3,960 |
) |
|
|
(2,682 |
) |
|
|
|
|
|
|
(6,642 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2010 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using |
|
|
|
Significant Unobservable Inputs (Level 3) |
|
|
| | | | |
Collateralized mortgage obligations |
| | | |
|
|
|
|
|
|
|
Non-agency |
|
|
Non-agency |
|
|
|
|
|
|
Corporate |
|
|
backed |
|
|
backed |
|
|
|
|
Nine Months Ended March 31, 2010: |
|
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
(loss) |
|
|
|
|
|
|
353 |
|
|
|
189 |
|
|
|
542 |
|
Purchases, sales, issuances and settlements |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfers in to Level 3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfers out of Level 3 |
|
|
|
|
|
|
(2,283 |
) |
|
|
(896 |
) |
|
|
(3,179 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2010 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Investment Income and Net Realized Gains and Losses
The major categories of investment income follow (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
March 31, |
|
|
March 31, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Fixed maturities, available-for-sale |
|
$ |
1,975 |
|
|
$ |
2,138 |
|
|
$ |
6,177 |
|
|
$ |
6,331 |
|
Investment in mutual fund, available-for-sale |
|
|
151 |
|
|
|
|
|
|
|
474 |
|
|
|
|
|
Cash and cash equivalents |
|
|
1 |
|
|
|
3 |
|
|
|
7 |
|
|
|
26 |
|
Other |
|
|
29 |
|
|
|
29 |
|
|
|
87 |
|
|
|
87 |
|
Investment expenses |
|
|
(165 |
) |
|
|
(162 |
) |
|
|
(493 |
) |
|
|
(490 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,991 |
|
|
$ |
2,008 |
|
|
$ |
6,252 |
|
|
$ |
5,954 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The components of net realized losses on investments, available-for-sale follow (in
thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
March 31, |
|
|
March 31, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Gains |
|
$ |
|
|
|
$ |
7 |
|
|
$ |
81 |
|
|
$ |
326 |
|
Losses |
|
|
(1 |
) |
|
|
(21 |
) |
|
|
(2 |
) |
|
|
(26 |
) |
Other-than-temporary impairment |
|
|
(77 |
) |
|
|
|
|
|
|
(413 |
) |
|
|
(759 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(78 |
) |
|
$ |
(14 |
) |
|
$ |
(334 |
) |
|
$ |
(459 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized gains and losses on sales of securities are computed based on specific
identification. The non-credit related portion of other-than-temporary impairment (OTTI) charges
is included in other comprehensive income (loss). At March 31, 2011, the amounts of such charges
taken for securities still owned was $0.1 million related to non-agency backed residential
collateralized mortgage obligations (CMOs). At June 30, 2010, the amount of such charges taken
for securities still owned was $0.6 million related to non-agency backed residential CMOs and $0.3
million related to non-agency backed commercial CMOs.
Investments, Available-for-Sale
The following tables summarize the Companys investment securities (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
March 31, 2011 |
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
U.S. government and agencies |
|
$ |
26,686 |
|
|
$ |
1,022 |
|
|
$ |
|
|
|
$ |
27,708 |
|
State |
|
|
7,410 |
|
|
|
281 |
|
|
|
|
|
|
|
7,691 |
|
Political subdivisions |
|
|
1,797 |
|
|
|
26 |
|
|
|
(15 |
) |
|
|
1,808 |
|
Revenue and assessment |
|
|
26,203 |
|
|
|
967 |
|
|
|
(228 |
) |
|
|
26,942 |
|
Corporate bonds |
|
|
72,456 |
|
|
|
4,202 |
|
|
|
(297 |
) |
|
|
76,361 |
|
Collateralized mortgage obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency backed |
|
|
21,132 |
|
|
|
1,427 |
|
|
|
|
|
|
|
22,559 |
|
Non-agency backed residential |
|
|
5,819 |
|
|
|
239 |
|
|
|
(140 |
) |
|
|
5,918 |
|
Non-agency backed commercial |
|
|
6,555 |
|
|
|
506 |
|
|
|
|
|
|
|
7,061 |
|
Redeemable preferred stock |
|
|
176 |
|
|
|
|
|
|
|
(4 |
) |
|
|
172 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities, available-for-sale |
|
|
168,234 |
|
|
|
8,670 |
|
|
|
(684 |
) |
|
|
176,220 |
|
Investment in mutual fund,
available-for-sale |
|
|
7,501 |
|
|
|
560 |
|
|
|
|
|
|
|
8,061 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
175,735 |
|
|
$ |
9,230 |
|
|
$ |
(684 |
) |
|
$ |
184,281 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
|
|
|
Securities |
|
|
Securities |
|
|
with No |
|
|
All |
|
|
|
with |
|
|
with |
|
|
Unrealized |
|
|
Fixed |
|
|
|
Unrealized |
|
|
Unrealized |
|
|
Gains or |
|
|
Maturity |
|
March 31, 2011 |
|
Gains |
|
|
Losses |
|
|
Losses |
|
|
Securities |
|
One year or less |
|
$ |
16,201 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
16,201 |
|
After one through five years |
|
|
72,948 |
|
|
|
|
|
|
|
|
|
|
|
72,948 |
|
After five through ten years |
|
|
34,744 |
|
|
|
|
|
|
|
|
|
|
|
34,744 |
|
After ten years |
|
|
10,733 |
|
|
|
6,056 |
|
|
|
|
|
|
|
16,789 |
|
No single maturity date |
|
|
33,852 |
|
|
|
1,686 |
|
|
|
|
|
|
|
35,538 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
168,478 |
|
|
$ |
7,742 |
|
|
$ |
|
|
|
$ |
176,220 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities |
|
|
|
|
|
|
Securities |
|
|
Securities |
|
|
with No |
|
|
All |
|
|
|
with |
|
|
with |
|
|
Unrealized |
|
|
Fixed |
|
|
|
Unrealized |
|
|
Unrealized |
|
|
Gains or |
|
|
Maturity |
|
June 30, 2010 |
|
Gains |
|
|
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 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 |
|
March 31, 2011 |
|
|
4 |
|
|
|
4 |
|
|
|
160 |
|
June 30, 2010 |
|
|
6 |
|
|
|
18 |
|
|
|
153 |
|
8
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
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 March 31, 2011: |
|
Securities |
|
|
Value |
|
|
Losses |
|
Less than or equal to 10% |
|
|
2 |
|
|
$ |
1,469 |
|
|
$ |
(78 |
) |
Greater than 10% |
|
|
2 |
|
|
|
1,839 |
|
|
|
(413 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
4 |
|
|
$ |
3,308 |
|
|
$ |
(491 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
) |
|
|
|
|
|
|
|
|
|
|
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 |
|
|
Less |
|
|
5% to |
|
|
than |
|
at March 31, 2011: |
|
Losses |
|
|
Losses |
|
|
than 5% |
|
|
10% |
|
|
10% |
|
Less than or equal to: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months |
|
$ |
3,022 |
|
|
$ |
(154 |
) |
|
$ |
(4 |
) |
|
$ |
(150 |
) |
|
$ |
|
|
Six months |
|
|
1,412 |
|
|
|
(39 |
) |
|
|
(39 |
) |
|
|
|
|
|
|
|
|
Nine months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Greater than twelve months |
|
|
3,308 |
|
|
|
(491 |
) |
|
|
|
|
|
|
(78 |
) |
|
|
(413 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
7,742 |
|
|
$ |
(684 |
) |
|
$ |
(43 |
) |
|
$ |
(228 |
) |
|
$ |
(413 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value of |
|
|
|
|
|
|
|
|
|
|
Securities with |
|
|
|
|
|
|
Severity of Gross Unrealized Losses |
|
Length of |
|
Gross |
|
|
Gross |
|
|
|
|
|
|
|
|
|
|
Greater |
|
Gross Unrealized Losses |
|
Unrealized |
|
|
Unrealized |
|
|
Less |
|
|
5% to |
|
|
than |
|
at June 30, 2010: |
|
Losses |
|
|
Losses |
|
|
than 5% |
|
|
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 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
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
(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 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-temporary.
The issuer-specific factors considered in reaching the conclusion that securities with
declines are not other-than-temporary include (i) the extent and duration of the decline in fair
value, including the duration of any significant decline in value, (ii) whether the security is
current as to payments of principal and interest, (iii) a valuation of any underlying collateral,
(iv) current and future conditions and trends for both the business and its industry, (v) changes
in cash flow assumptions for CMOs and (vi) rating agency actions. Based on these factors, the
Company 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).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2011 |
|
|
2010 |
|
|
|
Number |
|
|
|
|
|
|
Number |
|
|
|
|
|
|
of |
|
|
|
|
|
|
of |
|
|
|
|
|
|
Securities |
|
|
OTTI |
|
|
Securities |
|
|
OTTI |
|
Collateralized mortgage obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-agency backed residential |
|
|
3 |
|
|
$ |
(77 |
) |
|
|
|
|
|
$ |
|
|
Non-agency backed commercial |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3 |
|
|
|
(77 |
) |
|
|
|
|
|
|
|
|
Portion of loss recognized in accumulated other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net OTTI recognized in net income (loss) |
|
|
|
|
|
$ |
(77 |
) |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended March 31, |
|
|
|
2011 |
|
|
2010 |
|
|
|
Number of |
|
|
|
|
|
|
Number of |
|
|
|
|
|
|
Securities |
|
|
OTTI |
|
|
Securities |
|
|
OTTI |
|
Collateralized mortgage obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-agency backed residential |
|
|
5 |
|
|
$ |
(119 |
) |
|
|
8 |
|
|
$ |
(1,449 |
) |
Non-agency backed commercial |
|
|
5 |
|
|
|
(296 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10 |
|
|
|
(415 |
) |
|
|
8 |
|
|
|
(1,449 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portion of loss recognized in accumulated
other comprehensive income |
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
690 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net OTTI recognized in net income (loss) |
|
|
|
|
|
$ |
(413 |
) |
|
|
|
|
|
$ |
(759 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Since the adoption of FASB ASC 320-10-65, the following is a progression of the credit-related
portion of OTTI on investments owned at March 31, 2011 and 2010 (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
March 31, |
|
|
March 31, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Beginning balance |
|
$ |
(3,590 |
) |
|
$ |
(3,077 |
) |
|
$ |
(3,301 |
) |
|
$ |
(2,870 |
) |
Additional credit impairments on: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Previously impaired securities |
|
|
(77 |
) |
|
|
|
|
|
|
(413 |
) |
|
|
(270 |
) |
Securities without previous impairments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(489 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(77 |
) |
|
|
|
|
|
|
(413 |
) |
|
|
(759 |
) |
Reductions for securities sold (realized) |
|
|
192 |
|
|
|
|
|
|
|
239 |
|
|
|
552 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(3,475 |
) |
|
$ |
(3,077 |
) |
|
$ |
(3,475 |
) |
|
$ |
(3,077 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
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 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 March 31, 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.
11
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
3. Net Income (Loss) Per Share
The following table sets forth the computation of basic and diluted net income (loss) per
share (in thousands, except per share data).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
March 31, |
|
|
March 31, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Net income (loss) |
|
$ |
(1,608 |
) |
|
$ |
2,069 |
|
|
$ |
(3,306 |
) |
|
$ |
6,304 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common basic shares |
|
|
48,192 |
|
|
|
47,994 |
|
|
|
48,125 |
|
|
|
47,943 |
|
Effect of dilutive securities |
|
|
|
|
|
|
495 |
|
|
|
|
|
|
|
452 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common dilutive shares |
|
|
48,192 |
|
|
|
48,489 |
|
|
|
48,125 |
|
|
|
48,395 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net income (loss)
per share |
|
$ |
(0.03 |
) |
|
$ |
0.04 |
|
|
$ |
(0.07 |
) |
|
$ |
0.13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For both the three and nine months ended March 31, 2011, the computation of diluted net loss
per share did not include 0.2 million shares of unvested restricted common stock as their inclusion
would have been anti-dilutive. For both the three and nine months ended March 31, 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 and 4.6 million shares for both the three and nine
months ended March 31, 2011 and 2010, 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.
4. Income Taxes
The provision (benefit) for income taxes consisted of the following (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
March 31, |
|
|
March 31, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Federal: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Deferred |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current |
|
|
(204 |
) |
|
|
124 |
|
|
|
37 |
|
|
|
327 |
|
Deferred |
|
|
(98 |
) |
|
|
|
|
|
|
(98 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(302 |
) |
|
|
124 |
|
|
|
(61 |
) |
|
|
327 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(302 |
) |
|
$ |
124 |
|
|
$ |
(61 |
) |
|
$ |
327 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
The provision (benefit) 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).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
March 31, |
|
|
March 31, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Provision (benefit) for income taxes at statutory rate |
|
$ |
(669 |
) |
|
$ |
768 |
|
|
$ |
(1,178 |
) |
|
$ |
2,321 |
|
Tax effect of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax-exempt investment income |
|
|
(4 |
) |
|
|
(4 |
) |
|
|
(12 |
) |
|
|
(12 |
) |
Change in the beginning of the period balance of
the valuation allowance for deferred tax assets
allocated to income taxes |
|
|
556 |
|
|
|
(602 |
) |
|
|
985 |
|
|
|
(2,031 |
) |
Restricted stock |
|
|
136 |
|
|
|
|
|
|
|
217 |
|
|
|
|
|
State income taxes, net of federal income tax
benefit |
|
|
(302 |
) |
|
|
(67 |
) |
|
|
(61 |
) |
|
|
11 |
|
Other |
|
|
(19 |
) |
|
|
29 |
|
|
|
(12 |
) |
|
|
38 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(302 |
) |
|
$ |
124 |
|
|
$ |
(61 |
) |
|
$ |
327 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company had a valuation allowance of $18.0 million and $16.9 million at March 31, 2011 and
June 30, 2010, respectively, to reduce deferred tax assets to the amount that is more likely than
not to be realized, which included all federal and substantially all state net deferred tax assets
at March 31, 2011 and June 30, 2010. The change in the total valuation allowance for the nine
months ended March 31, 2011 was an increase of $1.1 million. For the nine months ended March 31,
2011, the change in the valuation allowance included a reduction of $0.2 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 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 against all federal and substantially all state net
deferred tax assets at March 31, 2011 and June 30, 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.
5. Goodwill and Identifiable Intangible Assets
Goodwill and other identifiable intangible assets are attributable to the Companys insurance
operations and were initially recorded at their estimated fair values at the date of acquisition.
Goodwill and other intangible assets, 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 during 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.
The goodwill impairment test is a two-step process that requires management to make judgments
in determining what assumptions to use in the calculation. The first step of the process consists
of estimating the fair value of each reporting unit based on valuation techniques, including a
discounted cash flow model using revenue and profit forecasts, and comparing those estimated fair
values with the carrying values of those assets and liabilities, which includes the allocated
goodwill. If the estimated fair value is less than the carrying value, a second step is performed
to compute the amount of the impairment, if any, by determining an implied fair value of
goodwill. The determination of the implied fair value of goodwill of a reporting unit requires
the Company to allocate the estimated fair value of the reporting unit to the assets and
liabilities of the reporting unit. Any unallocated fair value represents the implied fair value of goodwill, which is compared to its
corresponding carrying value.
13
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
The Companys evaluation includes multiple assumptions, including estimated discounted cash
flows and other estimates that may change over time. If future discounted cash flows become less
than those projected by the Company, impairment charges may become necessary that could have a
materially adverse impact on the Companys results of operations and financial condition. As quoted
market prices in active stock markets are relevant evidence of fair value, a significant decline in
the Companys common stock trading price may indicate an impairment of goodwill.
6. Fair Value of Financial Instruments
The carrying values and fair values of certain of the Companys financial instruments at March
31, 2011 and June 30, 2010 were as follows (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2011 |
|
|
June 30, 2010 |
|
|
|
Carrying |
|
|
Fair |
|
|
Carrying |
|
|
Fair |
|
|
|
Value |
|
|
Value |
|
|
Value |
|
|
Value |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments, available-for-sale |
|
$ |
184,281 |
|
|
$ |
184,281 |
|
|
$ |
196,550 |
|
|
$ |
196,550 |
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debentures payable |
|
|
41,240 |
|
|
|
18,323 |
|
|
|
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.
7. Severance
During March 2011, certain executive officers resigned from the Company. Under the terms of
their employment agreements, the former officers will receive severance and related benefits for
the period from March 2011 through March 2012, as well as accelerated vesting of certain
outstanding stock options and all restricted common stock held by the former officers. Accordingly,
the Company incurred a charge of $1.7 million, comprised of $1.3 million in accrued severance and
benefits and a $0.4 million non-cash charge related to the vesting of certain unvested stock
options and all unvested restricted common stock. The severance and benefit accrual is classified
within other liabilities on the Companys consolidated balance sheet. The severance and benefits
charge is included in insurance operating expenses and the non-cash charge related to the vesting
of certain unvested stock options and all unvested restricted common stock is included within
stock-based compensation expense in the consolidated statements of operations. The insurance
operations segment includes the accrued severance and benefits charge, and the real estate and
corporate segment includes the accelerated vesting charge.
8. Segment Information
The Company operates in two business segments with its primary focus being the selling,
servicing and underwriting of non-standard personal automobile insurance. The real estate and
corporate segment consists of the activities related to the disposition of foreclosed real estate
held for sale, interest expense associated with all debt and other general corporate overhead
expenses.
14
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
The following table presents selected financial data by business segment (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
March 31, |
|
|
March 31, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance |
|
$ |
52,771 |
|
|
$ |
56,087 |
|
|
$ |
157,512 |
|
|
$ |
167,114 |
|
Real estate and corporate |
|
|
29 |
|
|
|
29 |
|
|
|
88 |
|
|
|
89 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated total |
|
$ |
52,800 |
|
|
$ |
56,116 |
|
|
$ |
157,600 |
|
|
$ |
167,203 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance |
|
$ |
(115 |
) |
|
$ |
3,609 |
|
|
$ |
1,389 |
|
|
$ |
11,645 |
|
Real estate and corporate |
|
|
(1,795 |
) |
|
|
(1,416 |
) |
|
|
(4,756 |
) |
|
|
(5,014 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated total |
|
$ |
(1,910 |
) |
|
$ |
2,193 |
|
|
$ |
(3,367 |
) |
|
$ |
6,631 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
June 30, |
|
|
|
2011 |
|
|
2010 |
|
Total assets: |
|
|
|
|
|
|
|
|
Insurance |
|
$ |
345,703 |
|
|
$ |
343,499 |
|
Real estate and corporate |
|
|
13,389 |
|
|
|
12,843 |
|
|
|
|
|
|
|
|
Consolidated total |
|
$ |
359,092 |
|
|
$ |
356,342 |
|
|
|
|
|
|
|
|
9. 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.
15
FIRST ACCEPTANCE CORPORATION 10-Q
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Managements Discussion and Analysis of Financial Condition and Results of Operations contains
forward-looking statements which involve risks and uncertainties. Our actual results may differ
significantly from the results discussed in the forward-looking statements. Factors that might
cause such a difference include those discussed in Item 1A. Risk Factors in our Annual Report on
Form 10-K for the fiscal year ended June 30, 2010. The following discussion should be read in
conjunction with our consolidated financial statements included with this report and our
consolidated financial statements and related Managements Discussion and Analysis of Financial
Condition and Results of Operations for the fiscal year ended June 30, 2010 included in our Annual
Report on Form 10-K.
General
At March 31, 2011, we leased and operated 385 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 certain states, our employee-agents
also sell other complementary insurance products underwritten by us. At March 31, 2011, we wrote
non-standard personal automobile insurance in 12 states and were licensed in 13 additional states.
See the discussion in Item 1. Business General in our Annual Report on Form 10-K for the fiscal
year ended June 30, 2010 for additional information with respect to our business.
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
March 31, |
|
|
March 31, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Retail locations beginning of period |
|
|
393 |
|
|
|
409 |
|
|
|
394 |
|
|
|
418 |
|
Opened |
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
|
|
Closed |
|
|
(8 |
) |
|
|
(4 |
) |
|
|
(10 |
) |
|
|
(13 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail locations end of period |
|
|
385 |
|
|
|
405 |
|
|
|
385 |
|
|
|
405 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following tables show the number of our retail locations by state.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
December 31, |
|
June 30, |
|
|
2011 |
|
2010 |
|
2010 |
|
2009 |
|
2010 |
|
2009 |
Alabama |
|
24 |
|
25 |
|
25 |
|
25 |
|
25 |
|
25 |
Florida |
|
31 |
|
34 |
|
31 |
|
34 |
|
31 |
|
39 |
Georgia |
|
60 |
|
61 |
|
60 |
|
61 |
|
60 |
|
61 |
Illinois |
|
68 |
|
75 |
|
73 |
|
76 |
|
74 |
|
78 |
Indiana |
|
17 |
|
18 |
|
17 |
|
18 |
|
17 |
|
18 |
Mississippi |
|
8 |
|
8 |
|
8 |
|
8 |
|
8 |
|
8 |
Missouri |
|
12 |
|
12 |
|
12 |
|
12 |
|
12 |
|
12 |
Ohio |
|
27 |
|
27 |
|
27 |
|
27 |
|
27 |
|
27 |
Pennsylvania |
|
16 |
|
17 |
|
16 |
|
17 |
|
16 |
|
17 |
South Carolina |
|
26 |
|
26 |
|
26 |
|
27 |
|
26 |
|
27 |
Tennessee |
|
20 |
|
19 |
|
20 |
|
19 |
|
19 |
|
20 |
Texas |
|
76 |
|
83 |
|
78 |
|
85 |
|
79 |
|
86 |
Total |
|
385 |
|
405 |
|
393 |
|
409 |
|
394 |
|
418 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Developments during the Quarter
On March 1, 2011, we announced the resignation of Edward L. Pierce as President and Kevin
P. Cohn as 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. For a more detailed description of these
management changes, see the Current Report on Form 8-K and Current Report on Form 8-K/A (Amendment No. 1) filed with
the Securities and Exchange Commission (SEC) on March 2, 2011 and April 1, 2011, respectively.
16
FIRST ACCEPTANCE CORPORATION 10-Q
Consolidated Results of Operations
Overview
Our primary focus is the selling, servicing and underwriting of non-standard personal
automobile insurance. Our real estate and corporate segment consists of activities related to
interest expense associated with debt, general corporate overhead expenses and the disposition of
real estate held for sale. Our insurance operations generate revenues from selling, servicing and
underwriting non-standard personal automobile insurance policies in 12 states. We conduct our
underwriting operations through three insurance company subsidiaries: First Acceptance Insurance
Company, Inc., First Acceptance Insurance Company of Georgia, Inc. and First Acceptance Insurance
Company of Tennessee, Inc. Our insurance revenues are primarily generated from:
|
|
|
premiums earned, including policy and renewal fees, from sales of policies
written and assumed by our insurance company subsidiaries; |
|
|
|
|
commission and fee income, including installment billing fees on policies
written, agency fees and commissions and fees for other ancillary products and
services; and |
|
|
|
|
investment income earned on the invested assets of the insurance company
subsidiaries. |
The following table presents premiums earned by state (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
March 31, |
|
|
March 31, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Premiums earned: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Georgia |
|
$ |
9,440 |
|
|
$ |
9,918 |
|
|
$ |
28,376 |
|
|
$ |
30,780 |
|
Texas |
|
|
5,891 |
|
|
|
6,233 |
|
|
|
17,508 |
|
|
|
17,858 |
|
Illinois |
|
|
5,707 |
|
|
|
6,076 |
|
|
|
17,287 |
|
|
|
18,482 |
|
Florida |
|
|
4,824 |
|
|
|
5,307 |
|
|
|
14,270 |
|
|
|
15,502 |
|
Alabama |
|
|
4,174 |
|
|
|
4,727 |
|
|
|
12,686 |
|
|
|
14,645 |
|
Ohio |
|
|
3,472 |
|
|
|
3,223 |
|
|
|
9,962 |
|
|
|
9,085 |
|
Tennessee |
|
|
2,700 |
|
|
|
2,925 |
|
|
|
7,994 |
|
|
|
8,883 |
|
South Carolina |
|
|
2,469 |
|
|
|
2,847 |
|
|
|
7,320 |
|
|
|
8,712 |
|
Pennsylvania |
|
|
2,248 |
|
|
|
2,569 |
|
|
|
6,967 |
|
|
|
7,998 |
|
Indiana |
|
|
1,144 |
|
|
|
1,266 |
|
|
|
3,410 |
|
|
|
3,699 |
|
Missouri |
|
|
724 |
|
|
|
834 |
|
|
|
2,146 |
|
|
|
2,443 |
|
Mississippi |
|
|
651 |
|
|
|
726 |
|
|
|
1,972 |
|
|
|
2,230 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total premiums earned |
|
$ |
43,444 |
|
|
$ |
46,651 |
|
|
$ |
129,898 |
|
|
$ |
140,317 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
March 31, |
|
|
March 31, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Policies in force
beginning of period |
|
|
144,582 |
|
|
|
147,090 |
|
|
|
154,655 |
|
|
|
158,222 |
|
Net increase during period |
|
|
16,006 |
|
|
|
22,513 |
|
|
|
5,933 |
|
|
|
11,381 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policies in force end of period |
|
|
160,588 |
|
|
|
169,603 |
|
|
|
160,588 |
|
|
|
169,603 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
FIRST ACCEPTANCE CORPORATION 10-Q
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 as of March 31, 2011.
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
|
2011 |
|
|
2010 |
|
Retail locations: |
|
|
|
|
|
|
|
|
Open retail locations: |
|
|
|
|
|
|
|
|
New |
|
|
78,931 |
|
|
|
83,074 |
|
Renewal |
|
|
77,704 |
|
|
|
77,222 |
|
|
|
|
|
|
|
|
|
|
|
156,635 |
|
|
|
160,296 |
|
|
|
|
|
|
|
|
|
|
Closed retail locations: |
|
|
|
|
|
|
|
|
New |
|
|
404 |
|
|
|
2,845 |
|
Renewal |
|
|
2,388 |
|
|
|
4,015 |
|
|
|
|
|
|
|
|
|
|
|
2,792 |
|
|
|
6,860 |
|
|
|
|
|
|
|
|
|
|
Independent agents |
|
|
1,161 |
|
|
|
2,447 |
|
|
|
|
|
|
|
|
Total policies in force |
|
|
160,588 |
|
|
|
169,603 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
|
2011 |
|
|
2010 |
|
Retail locations: |
|
|
|
|
|
|
|
|
Open retail locations: |
|
|
|
|
|
|
|
|
Liability-only |
|
|
95,408 |
|
|
|
96,828 |
|
Full coverage |
|
|
61,227 |
|
|
|
63,468 |
|
|
|
|
|
|
|
|
|
|
|
156,635 |
|
|
|
160,296 |
|
|
|
|
|
|
|
|
|
|
Closed retail locations: |
|
|
|
|
|
|
|
|
Liability-only |
|
|
1,674 |
|
|
|
4,368 |
|
Full coverage |
|
|
1,118 |
|
|
|
2,492 |
|
|
|
|
|
|
|
|
|
|
|
2,792 |
|
|
|
6,860 |
|
|
|
|
|
|
|
|
|
|
Independent agents |
|
|
1,161 |
|
|
|
2,447 |
|
|
|
|
|
|
|
|
Total policies in force |
|
|
160,588 |
|
|
|
169,603 |
|
|
|
|
|
|
|
|
Insurance companies present a combined ratio as a measure of their overall underwriting
profitability. The components of the combined ratio are as follows.
Loss Ratio Loss ratio is the ratio (expressed as a percentage) of losses and loss adjustment
expenses incurred to premiums earned and is a basic element of underwriting profitability. We
calculate this ratio based on all direct and assumed premiums earned.
Expense Ratio Expense ratio is the ratio (expressed as a percentage) of insurance operating
expenses to premiums earned. Insurance operating expenses are reduced by commission and fee income
from insureds. This is a measurement that illustrates relative management efficiency in
administering our operations.
Combined Ratio Combined ratio is the sum of the loss ratio and the expense ratio. If the
combined ratio is at or above 100%, an insurance company cannot be profitable without sufficient
investment income.
18
FIRST ACCEPTANCE CORPORATION 10-Q
The following table presents the loss, expense and combined ratios for our insurance
operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
March 31, |
|
|
March 31, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Loss and loss adjustment expense |
|
|
72.7 |
% |
|
|
68.4 |
% |
|
|
74.6 |
% |
|
|
67.6 |
% |
Expense |
|
|
31.1 |
% |
|
|
27.1 |
% |
|
|
27.8 |
% |
|
|
27.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined |
|
|
103.8 |
% |
|
|
95.5 |
% |
|
|
102.4 |
% |
|
|
94.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
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 ratios for
the three and nine months ended March 31, 2011 were 28.0% and 26.8%, respectively, and the combined
ratios for the three and nine months ended March 31, 2011 were 100.7% and 101.4%, respectively.
The non-standard personal automobile insurance industry is cyclical in nature. Accordingly,
adverse economic conditions impact our customers and many will choose to reduce their coverage or
go uninsured during a weak economy.
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). We also invest a portion of the portfolio in certain securities
issued by political subdivisions, which enable our insurance company subsidiaries to obtain premium
tax credits. Investment income is comprised primarily of interest earned on these securities, net
of related investment expenses. Realized gains and losses may occur from time to time as changes
are made to our holdings based upon changes in interest rates or the credit quality of specific
securities.
Our consolidated investment portfolio was $184.3 million at March 31, 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 March 31,
2011, we had gross unrealized gains of $9.2 million and gross unrealized losses of $0.7 million.
At March 31, 2011, 94.8% 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 March 31, 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 $35.5 million at March 31, 2011 and represented 20% of
our fixed maturity portfolio. At March 31, 2011, 85% of our CMOs were considered investment grade
by nationally recognized rating agencies. In addition, 78% of our CMOs were rated AAA and 64% of
our CMOs were backed by agencies of the United States government. Of the non-agency backed CMOs,
38% were rated AAA.
19
FIRST ACCEPTANCE CORPORATION 10-Q
The following table summarizes our investment securities at March 31, 2011 (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized |
|
|
Gross Unrealized |
|
|
Gross Unrealized |
|
|
Fair |
|
March 31, 2011 |
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
U.S. government and agencies |
|
$ |
26,686 |
|
|
$ |
1,022 |
|
|
$ |
|
|
|
$ |
27,708 |
|
State |
|
|
7,410 |
|
|
|
281 |
|
|
|
|
|
|
|
7,691 |
|
Political subdivisions |
|
|
1,797 |
|
|
|
26 |
|
|
|
(15 |
) |
|
|
1,808 |
|
Revenue and assessment |
|
|
26,203 |
|
|
|
967 |
|
|
|
(228 |
) |
|
|
26,942 |
|
Corporate bonds |
|
|
72,456 |
|
|
|
4,202 |
|
|
|
(297 |
) |
|
|
76,361 |
|
Collateralized mortgage obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency backed |
|
|
21,132 |
|
|
|
1,427 |
|
|
|
|
|
|
|
22,559 |
|
Non-agency backed residential |
|
|
5,819 |
|
|
|
239 |
|
|
|
(140 |
) |
|
|
5,918 |
|
Non-agency backed commercial |
|
|
6,555 |
|
|
|
506 |
|
|
|
|
|
|
|
7,061 |
|
Redeemable preferred stock |
|
|
176 |
|
|
|
|
|
|
|
(4 |
) |
|
|
172 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities, available-for-sale |
|
|
168,234 |
|
|
|
8,670 |
|
|
|
(684 |
) |
|
|
176,220 |
|
Investment in mutual fund,
available-for-sale |
|
|
7,501 |
|
|
|
560 |
|
|
|
|
|
|
|
8,061 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
175,735 |
|
|
$ |
9,230 |
|
|
$ |
(684 |
) |
|
$ |
184,281 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth the scheduled maturities of our fixed maturity securities at
March 31, 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 |
|
March 31, 2011 |
|
Unrealized Gains |
|
|
Unrealized Losses |
|
|
Losses |
|
|
Securities |
|
One year or less |
|
$ |
16,201 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
16,201 |
|
After one through five years |
|
|
72,948 |
|
|
|
|
|
|
|
|
|
|
|
72,948 |
|
After five through ten years |
|
|
34,744 |
|
|
|
|
|
|
|
|
|
|
|
34,744 |
|
After ten years |
|
|
10,733 |
|
|
|
6,056 |
|
|
|
|
|
|
|
16,789 |
|
No single maturity date |
|
|
33,852 |
|
|
|
1,686 |
|
|
|
|
|
|
|
35,538 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
168,478 |
|
|
$ |
7,742 |
|
|
$ |
|
|
|
$ |
176,220 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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-temporary.
20
FIRST ACCEPTANCE CORPORATION 10-Q
The issuer-specific factors considered in reaching the conclusion that securities with
declines are not other-than-temporary include (i) the extent and duration of the decline in fair
value, including the duration of any
significant decline in value, (ii) whether the security is current as to payments of principal and
interest, (iii) a valuation of any underlying collateral, (iv) current and future conditions and
trends for both the business and its industry, (v) changes in cash flow assumptions for CMOs and
(vi) rating agency actions. Based on these factors, we make a determination as to the probability
of recovering principal and interest on the security.
On a quarterly basis, we review cash flow estimates for certain non-agency backed CMOs of
lesser credit quality following the guidance of FASB ASC 325-40-65, Amendments to the Impairment
Guidance of EITF Issue No. 99-20 (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 of $0.4 million and $0.8 million for the nine months ended March 31, 2011 and 2010,
respectively. We believe that the unrealized losses on the remaining non-agency backed CMOs 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 March 31, 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.
Three and Nine Months Ended March 31, 2011 Compared with the Three and Nine Months Ended March 31,
2010
Consolidated Results
Revenues for the three months ended March 31, 2011 decreased 6% to $52.8 million from $56.1
million in the same period in the prior year. Loss before income taxes for the three months ended
March 31, 2011 was $1.9 million, compared with income before income taxes of $2.2 million for the
three months ended March 31, 2010. Net loss for the three months ended March 31, 2011 was $1.6
million, compared with net income of $2.1 million for the three months ended March 31, 2010. Basic
and diluted net loss per share was $0.03 for the three months ended March 31, 2011, compared with
basic and diluted net income per share of $0.04 for the three months ended March 31, 2010.
Revenues for the nine months ended March 31, 2011 decreased 6% to $157.6 million from $167.2
million in the same period in the prior year. Loss before income taxes for the nine months ended
March 31, 2011 was $3.4 million, compared with income before income taxes of $6.6 million for the
nine months ended March 31, 2010. Net loss for the nine months ended March 31, 2011 was $3.3
million, compared with net income of $6.3 million for the nine months ended March 31, 2010. Basic
and diluted net loss per share was $0.07 for the nine months ended March 31, 2011, compared with
basic and diluted net income per share of $0.13 for the nine months ended March 31, 2010.
21
FIRST ACCEPTANCE CORPORATION 10-Q
Insurance Operations
Revenues from insurance operations were $52.8 million for the three months ended March 31,
2011, compared with $56.1 million for the three months ended March 31, 2010. Revenues from
insurance operations were $157.5 million for the nine months ended March 31, 2011, compared with
$167.1 million for the nine months ended March 31, 2010.
Loss before income taxes from insurance operations for the three months ended March 31, 2011
was $0.1 million, compared with income before income taxes from insurance operations of $3.6
million for the three months ended March 31, 2010. Income before income taxes from insurance
operations for the nine months ended March 31, 2011 was $1.4 million, compared with $11.6 million
for the nine months ended March 31, 2010.
Premiums Earned
Premiums earned decreased by $3.2 million, or 7%, to $43.4 million for the three months ended
March 31, 2011, from $46.7 million for the three months ended March 31, 2010. For the nine months
ended March 31, 2011, premiums earned decreased by $10.4 million, or 7%, to $129.9 million from
$140.3 million for the nine months ended March 31, 2010. The decreases in premiums earned were
primarily due to a decline in the number of PIF from 169,603 at March 31, 2010 to 160,588 at March
31, 2011, which was impacted by the closure of underperforming stores. At March 31, 2011, we
operated 385 stores, compared with 405 stores at March 31, 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 160,296 at March 31, 2010 to 156,635
at March 31, 2011, for those policies quoted, we have experienced a higher close ratio for the
three and nine months ended March 31, 2011 compared with the same periods in the prior year.
Commission and Fee Income
Commission and fee income decreased to $7.4 million for the three months ended March 31, 2011,
from $7.5 million for the three months ended March 31, 2010. For the nine months ended March 31,
2011, commission and fee income increased 2% to $21.8 million from $21.4 million for the nine
months ended March 31, 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 was $2.0 million for both the three months ended March 31, 2011 and 2010.
For the nine months ended March 31, 2011, investment income increased to $6.3 million from $6.0
million during the nine months ended March 31, 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
March 31, 2011 and 2010, the tax-equivalent book yields for our fixed maturities portfolio were
4.6% and 4.2%, respectively, with effective durations of 3.01 and 3.36 years, respectively.
Net realized losses on investments, available-for-sale
Net realized losses on investments, available-for-sale during the three months ended March 31,
2011 included $0.1 million of charges related to OTTI on certain non-agency backed CMOs. Net
realized losses on investments, available-for-sale during the three months ended March 31, 2010
consisted of net realized losses on sales of securities.
For the nine months ended March 31, 2011, net realized losses on investments,
available-for-sale included $0.1 million in net realized gains on sales 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 nine months ended March 31, 2010 included $0.3 million in net
realized gains on sales and $0.8 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 Note 2 to our consolidated financial statements.
22
FIRST ACCEPTANCE CORPORATION 10-Q
Loss and Loss Adjustment Expenses
The loss and loss adjustment expense ratio was 72.7% for the three months ended March 31,
2011, compared with 68.4% for the three months ended March 31, 2010. The loss and loss adjustment
expense ratio was 74.6% for the nine months ended March 31, 2011, compared with 67.6% for the nine
months ended March 31, 2010. We experienced favorable development related to prior periods of $0.6
million for the three months ended March 31, 2011, compared with $4.1 million for the three months
ended March 31, 2010. For the nine months ended March 31, 2011, we experienced unfavorable
development related to prior periods of $0.4 million, compared with favorable development of $10.2
million for the nine months ended March 31, 2010. The favorable development for the three months
ended March 31, 2011 was primarily due to lower than anticipated paid severity on accidents
occurring during the first six months of calendar year 2010. The lower than anticipated paid
severity was primarily related to bodily injury and physical damage coverages in Georgia.
Excluding the development related to prior periods, the loss and loss adjustment expense
ratios for the three months ended March 31, 2011 and 2010 were 74.1% and 77.2%, respectively.
Excluding the development related to prior periods, the loss and loss adjustment expense ratios for
the nine months ended March 31, 2011 and 2010 were 74.4% and 74.9%, respectively. The decrease for
the three months ended March 31, 2011 compared with the same period in the prior year was primarily
due to lower than anticipated frequency of accidents in our property and physical damage coverages.
The three and nine months ended March 31, 2011 were both impacted by higher loss adjustment expense
resulting from (i) the increase in the percentage of claims related to liability-only coverage
policies and (ii) increased investigative efforts with regards to no-fault claims in Florida.
As previously disclosed in our Annual Report on Form 10-K for the fiscal year ended June 30,
2010, we are in the process of implementing a new multivariate pricing program in all states in
which we operate. We believe that this new pricing program will provide us with greater pricing
segmentation and improve our pricing relative to the risk we are insuring. As of March 31, 2011,
approximately 16% of our PIF have been underwritten using this new pricing program, which has been
implemented in six of the twelve states in which we operate.
Operating Expenses
Insurance operating expenses increased 4% to $21.0 million for the three months ended March
31, 2011 from $20.1 million for the three months ended March 31, 2010. The increase was primarily a
result of severance and related benefits charges of $1.3 million incurred in connection with the
separation of certain executive officers during March 2011 offset by 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. For the nine months
ended March 31, 2011, insurance operating expenses decreased 3% to $57.9 million from $59.4 million
for the nine months ended March 31, 2010. The decrease was primarily a result of the reduction in
costs offset by severance and related benefits charges noted above.
The expense ratio was 31.1% for the three months ended March 31, 2011, compared with 27.1% for
the three months ended March 31, 2010. The expense ratio was 27.8% for the nine months ended March
31, 2011, compared with 27.1% for the same period in the prior fiscal year. Excluding the severance
and related benefits charges noted above, the expense ratios for the three and nine months ended
March 31, 2011 were 28.0% and 26.8%, respectively, compared to 27.1% for both periods in the prior
fiscal year. This increase for the three months ended March 31, 2011 compared with the same period
in the prior year was primarily due to the decrease in premiums earned noted above.
Overall, the combined ratio increased to 103.8% for the three months ended March 31, 2011 from
95.5% for the three months ended March 31, 2010. For the nine months ended March 31, 2011, the
combined ratio increased to 102.4% from 94.7% for the nine months ended March 31, 2010. Excluding
the severance and related benefits charges noted above, the combined ratios for the three and nine
months ended March 31, 2011 were 100.7% and 101.4%, respectively.
Provision (Benefit) for Income Taxes
The benefit for income taxes was $0.3 million for the three months ended March 31, 2011
compared with the provision for income taxes of $0.1 million for the same period in the prior
fiscal year. For the nine months ended March 31, 2011, the benefit for income taxes was $0.1
million compared with the provision for income taxes of $0.3 million for the same period in the
prior fiscal year. The provision (benefit) for income taxes relates to current state income taxes
for certain subsidiaries with taxable income. The current fiscal year includes an adjustment that
reduced
23
FIRST ACCEPTANCE CORPORATION 10-Q
certain accrued state income taxes. At March 31, 2011 and 2010, we established a full
valuation allowance against all federal and substantially all state net deferred tax assets.
Real Estate and Corporate
Loss before income taxes from real estate and corporate operations for the three months ended
March 31, 2011 was $1.8 million, compared with a loss before income taxes from real estate and
corporate operations of $1.4 million for the three months ended March 31, 2010. Loss before income
taxes from real estate and corporate operations for the nine months ended March 31, 2011 was $4.8
million, compared with a loss before income taxes from real estate and corporate operations of $5.0
million for the nine months ended March 31, 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 $1.0 million and
$2.9 million, respectively, of interest expense during the three and nine months ended March 31,
2011 and 2010 related to the debentures issued in June 2007.
Liquidity and Capital Resources
Our primary sources of funds are premiums, fees and investment income from our insurance
company subsidiaries and commissions and fee income from our non-insurance company subsidiaries.
Our primary uses of funds are the payment of claims and operating expenses. Net cash used in
operating activities for the nine months ended March 31, 2011 was $3.1 million compared with $0.4
million for the same period in the prior fiscal year. Net cash used in operating activities for the
nine months ended March 31, 2011 and 2010 was primarily the result of a decrease in cash collected
from premiums written. Net cash provided by investing activities for the nine months ended March
31, 2011 was $11.0 million compared with net cash used in investing activities of $44.2 million for
the same period in the prior fiscal year. The nine months ended March 31, 2011 included net
reductions in our investment portfolio of $11.4 million, while the same period in the prior fiscal
year included net additions to our investment portfolio of $43.0 million. The net reductions in the
current fiscal year were a result of maturities and paydowns. 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 March 31, 2011, we had $10.4 million available in unrestricted cash and
investments outside of the insurance company subsidiaries. These funds and the additional
unrestricted cash from the sources noted above will be used to pay our future cash requirements
outside of the insurance company subsidiaries.
The holding company has debt service requirements related to the debentures payable. The
debentures are interest-only and mature in full in July 2037. Interest is fixed annually through
July 2012 at $3.9 million. The debentures pay a fixed rate of 9.277% until July 30, 2012, after
which time the rate becomes variable (LIBOR plus 375 basis points).
State insurance laws limit the amount of dividends that may be paid from our insurance company
subsidiaries. Based on our earned surplus, we believe that we have total dividend capacity for the
next twelve months of $18.2 million, of which $6.3 million is 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 1.5-to-1 at March 31, 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.
24
FIRST ACCEPTANCE CORPORATION 10-Q
We believe that existing cash and investment balances, when combined with anticipated cash
flows as noted above, will be adequate to meet our expected liquidity needs, for both the holding
company and our insurance company subsidiaries, in both the short-term and the reasonably
foreseeable future. Any future growth strategy may require external financing, and we may from time
to time seek to obtain external financing. We cannot assure that additional sources of financing
will be available to us on favorable terms, or at all, or that any such financing would not
negatively impact our results of operations.
Critical Accounting Policies
There have been no significant changes to our critical accounting policies and estimates
during the three months ended March 31, 2011 compared with those disclosed in Item 7. Managements
Discussion and Analysis of Financial Condition and Results of Operations Critical Accounting
Estimates included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2010.
Off-Balance Sheet Arrangements
We have not entered into any new off-balance sheet arrangements since June 30, 2010. For
information with respect to our off-balance sheet arrangements at June 30, 2010, see Item 7.
Managements Discussion and Analysis of Financial Condition and Results of Operations
Off-Balance Sheet Arrangements included in our Annual Report on Form 10-K for the fiscal year
ended June 30, 2010.
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:
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|
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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; |
|
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|
|
the accuracy and adequacy of our loss reserving methodologies; and |
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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 of our Annual Report on Form 10-K for the fiscal year ended June 30, 2010.
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.
25
FIRST ACCEPTANCE CORPORATION 10-Q
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market risk represents the potential economic loss arising from adverse changes in the fair
value of financial instruments. Our exposures to market risk relate primarily to our investment
portfolio, which is exposed primarily to interest rate risk and credit risk. The fair value of our
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.
Interest Rate Risk
The fair values of our fixed maturity investments fluctuate in response to changes in market
interest rates. Increases and decreases in prevailing interest rates generally translate into
decreases and increases, respectively, in the fair values of those instruments. Additionally, the
fair values of interest rate sensitive instruments may be affected by the creditworthiness of the
issuer, prepayment options, relative values of alternative investments, the liquidity of the
instrument and other general market conditions.
The following table summarizes the estimated effects of hypothetical increases and decreases
in interest rates resulting from parallel shifts in market yield curves on our fixed maturity
portfolio (in thousands). It is assumed that the effects are realized immediately upon the change
in interest rates. The hypothetical changes in market interest rates do not reflect what could be
deemed best or worst case scenarios. Variations in market interest rates could produce significant
changes in the timing of repayments due to prepayment options available. For these reasons, actual
results might differ from those reflected in the table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sensitivity to Instantaneous Interest Rate Changes (basis points) |
|
|
|
(100) |
|
|
(50) |
|
|
0 |
|
|
50 |
|
|
100 |
|
|
200 |
|
Fair value of fixed
maturity portfolio |
|
$ |
182,420 |
|
|
$ |
179,284 |
|
|
$ |
176,220 |
|
|
$ |
173,242 |
|
|
$ |
170,352 |
|
|
$ |
164,819 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table provides information about our fixed maturity investments at March 31,
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 next 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 are included based on maturity year adjusted for expected payment patterns. Actual cash flows
may differ from those expected.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities |
|
|
|
|
|
|
Securities |
|
|
Securities |
|
|
with No |
|
|
|
|
|
|
with |
|
|
with |
|
|
Unrealized |
|
|
|
|
|
|
Unrealized |
|
|
Unrealized |
|
|
Gains or |
|
|
|
|
Year Ended June 30, |
|
Gains |
|
|
Losses |
|
|
Losses |
|
|
Amount |
|
2011 |
|
$ |
3,175 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
3,175 |
|
2012 |
|
|
16,210 |
|
|
|
|
|
|
|
|
|
|
|
16,210 |
|
2013 |
|
|
24,210 |
|
|
|
|
|
|
|
|
|
|
|
24,210 |
|
2014 |
|
|
20,365 |
|
|
|
|
|
|
|
|
|
|
|
20,365 |
|
2015 |
|
|
19,393 |
|
|
|
|
|
|
|
|
|
|
|
19,393 |
|
Thereafter |
|
|
76,169 |
|
|
|
7,765 |
|
|
|
|
|
|
|
83,934 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
159,522 |
|
|
$ |
7,765 |
|
|
$ |
|
|
|
$ |
167,287 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value |
|
$ |
168,478 |
|
|
$ |
7,742 |
|
|
$ |
|
|
|
$ |
176,220 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On June 15, 2007, our trust entity, First Acceptance Statutory Trust I, used the proceeds from
its sale of trust preferred securities to purchase $41.2 million of junior subordinated debentures.
The debentures pay a fixed rate of 9.277% until July 30, 2012, after which the rate becomes
variable (LIBOR plus 375 basis points).
26
FIRST ACCEPTANCE CORPORATION 10-Q
Credit Risk
Credit risk is managed by diversifying the portfolio to avoid concentrations in any single
industry group or issuer and by limiting investments in securities with lower credit ratings. The
largest investment in any one investment, excluding U.S. government and agency securities, is the
$8.1 million investment in a single mutual fund, or 4% of the investment portfolio. The top five
investments make up 13% of the investment portfolio. The average credit quality rating for our
fixed maturity portfolio was AA- at March 31, 2011.
The following table presents the underlying ratings of our fixed maturity portfolio by
nationally recognized securities rating organizations at March 31, 2011 (in thousands).
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
Amortized |
|
|
Amortized |
|
|
Fair |
|
|
Fair |
|
Comparable Rating |
|
Cost |
|
|
Cost |
|
|
Value |
|
|
Value |
|
AAA |
|
$ |
65,990 |
|
|
|
39.2 |
% |
|
$ |
69,100 |
|
|
|
39.2 |
% |
AA+, AA, AA- |
|
|
35,172 |
|
|
|
20.9 |
% |
|
|
37,075 |
|
|
|
21.1 |
% |
A+, A, A- |
|
|
46,062 |
|
|
|
27.4 |
% |
|
|
47,934 |
|
|
|
27.2 |
% |
BBB+, BBB, BBB- |
|
|
12,247 |
|
|
|
7.3 |
% |
|
|
12,924 |
|
|
|
7.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment grade |
|
|
159,471 |
|
|
|
94.8 |
% |
|
|
167,033 |
|
|
|
94.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Not rated |
|
|
3,725 |
|
|
|
2.2 |
% |
|
|
3,742 |
|
|
|
2.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BB+, BB, BB- |
|
|
1,664 |
|
|
|
1.0 |
% |
|
|
1,704 |
|
|
|
1.0 |
% |
B+, B, B- |
|
|
1,119 |
|
|
|
0.7 |
% |
|
|
1,331 |
|
|
|
0.7 |
% |
CCC+, CCC, CCC- |
|
|
1,005 |
|
|
|
0.6 |
% |
|
|
1,116 |
|
|
|
0.6 |
% |
CC+, CC, CC- |
|
|
921 |
|
|
|
0.5 |
% |
|
|
840 |
|
|
|
0.5 |
% |
C+, C, C- |
|
|
329 |
|
|
|
0.2 |
% |
|
|
454 |
|
|
|
0.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-investment grade |
|
|
5,038 |
|
|
|
3.0 |
% |
|
|
5,445 |
|
|
|
3.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
168,234 |
|
|
|
100.0 |
% |
|
$ |
176,220 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
The mortgage industry has experienced a rise in mortgage delinquencies and foreclosures,
particularly among lower quality exposures (sub-prime and Alt-A). As a result of these
increasing delinquencies and foreclosures, many CMOs with underlying sub-prime and Alt-A mortgages
as collateral experienced significant declines in fair value. At March 31, 2011, our fixed maturity
portfolio included three CMOs having sub-prime exposure with a fair value of $1.0 million and no
exposure to Alt-A investments.
Our investment portfolio consists of $36.4 million of municipal bonds, of which $22.5 million
are insured. Of the insured bonds, 68% are insured with MBIA, 14% with AMBAC and 18% with XL
Capital. These securities are paying their principal and periodic interest timely.
The following table presents the underlying ratings at March 31, 2011, represented by the
lower of either Standard and Poors, Fitchs, or Moodys ratings, of the municipal bond portfolio
(in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insured |
|
|
Uninsured |
|
|
Total |
|
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
Fair |
|
|
Fair |
|
|
Fair |
|
|
Fair |
|
|
Fair |
|
|
Fair |
|
|
|
Value |
|
|
Value |
|
|
Value |
|
|
Value |
|
|
Value |
|
|
Value |
|
AAA |
|
$ |
|
|
|
|
|
|
|
$ |
4,661 |
|
|
|
34 |
% |
|
$ |
4,661 |
|
|
|
13 |
% |
AA+, AA, AA- |
|
|
11,870 |
|
|
|
53 |
% |
|
|
5,350 |
|
|
|
38 |
% |
|
|
17,220 |
|
|
|
47 |
% |
A+, A, A- |
|
|
9,080 |
|
|
|
40 |
% |
|
|
3,881 |
|
|
|
28 |
% |
|
|
12,961 |
|
|
|
36 |
% |
BBB+, BBB, BBB- |
|
|
1,599 |
|
|
|
7 |
% |
|
|
|
|
|
|
|
|
|
|
1,599 |
|
|
|
4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
22,549 |
|
|
|
100 |
% |
|
$ |
13,892 |
|
|
|
100 |
% |
|
$ |
36,441 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27
FIRST ACCEPTANCE CORPORATION 10-Q
Item 4. 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 Interim Chief Financial Officer, we conducted an evaluation of our disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act
of 1934, as amended, or the Exchange Act) as of March 31, 2011. Based on that evaluation, our
Chief Executive Officer (principal executive officer) and Interim Chief Financial Officer
(principal financial officer) concluded that our disclosure controls and procedures were effective
as of March 31, 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.
Changes in Internal Control Over Financial Reporting
During the period covered by this report, there has been no change in our internal control
over financial reporting that has materially affected or is reasonably likely to materially affect
our internal control over financial reporting.
28
FIRST ACCEPTANCE CORPORATION 10-Q
PART II OTHER INFORMATION
Item 2. 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 (in thousands, except per share data). We repurchased 54,965 shares
from employees during the three months ended March 31, 2011 to cover payroll withholding taxes in
connection with the vesting of restricted common stock.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of |
|
|
Dollar Value of |
|
|
|
|
|
|
|
Total |
|
|
Average |
|
|
Shares Purchased |
|
|
Shares that May |
|
|
|
|
|
|
|
Number |
|
|
Price |
|
|
as Part of Publicly |
|
|
Yet Be Purchased |
|
|
|
Period |
|
|
of Shares |
|
|
Paid per |
|
|
Announced Plans |
|
|
Under the Plans or |
|
Period Beginning |
|
Ending |
|
|
Purchased |
|
|
Share |
|
|
or Programs |
|
|
Programs |
|
January 1, 2011 |
|
January 31, 2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 1, 2011 |
|
February 28, 2011 |
|
|
1,754 |
|
|
$ |
1.83 |
|
|
|
|
|
|
|
|
|
March 1, 2011 |
|
March 31, 2011 |
|
|
53,211 |
|
|
$ |
1.83 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
54,965 |
|
|
$ |
1.83 |
|
|
|
|
|
|
|
|
|
Item 6. Exhibits
The following exhibits are attached to this report:
|
|
|
31.1
|
|
Certification of Chief Executive Officer pursuant to Rule 13a-14(a). |
|
|
|
31.2
|
|
Certification of Interim Chief Financial Officer pursuant to Rule 13a-14(a). |
|
|
|
32.1
|
|
Chief Executive Officers Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.2
|
|
Interim Chief Financial Officers Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
29
FIRST ACCEPTANCE CORPORATION 10-Q
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
FIRST ACCEPTANCE CORPORATION
|
|
May 9, 2011 |
By: |
/s/ Michael J. Bodayle
|
|
|
|
Michael J. Bodayle |
|
|
|
Vice President, Treasurer and Interim Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) |
|
30