EX-99.2 3 g11654exv99w2.htm EX-99.2 PRESS RELEASE DATED FEBRUARY 8, 2008. EX-99.2 PRESS RELEASE DATED FEBRUARY 8, 2008.
 

Exhibit 99.2
Press Release   Source: First Acceptance Corporation
    Contact: Michael Bodayle (615) 844-2885
First Acceptance Corporation Reports Operating Results for the Quarter and Six Months Ended December 31, 2007
NASHVILLE, TN, February 8, 2008/Businesswire-FirstCall/ — First Acceptance Corporation (NYSE: FAC) today reported its financial results for the second quarter and six months ended December 31, 2007.
Operating Results
     Revenues for the three months ended December 31, 2007 were $82.3 million compared with $84.3 million in the same period last year. Net loss for the three months ended December 31, 2007 was $11.7 million, or $(0.25) per share on a diluted basis, compared with net income of $2.7 million, or $0.05 per share on a diluted basis, for the three months ended December 31, 2006. Revenues for the six months ended December 31, 2007 were $169.5 million, compared with $163.4 million for the six months ended December 31, 2006. Net loss for the six months ended December 31, 2007 was $9.8 million, or $(0.21) per share on a diluted basis, compared with net income of $4.2 million, or $0.08 per share on a diluted basis, for the six months ended December 31, 2006.
     The results for the three and six months ended December 31, 2007 include an increase in our valuation allowance for the deferred tax asset of $11.6 million, or $0.24 per share on a diluted basis. After considering the recent declines in premiums written, premiums earned and policies in force, we assessed the realization of our net operating loss (“NOL”) carryforwards, which comprises the majority of our deferred tax asset. We concluded that it was appropriate to increase our valuation allowance for the deferred tax asset related to the NOL carryforwards that expire in fiscal years 2008 and 2009. As in our prior assessments, we considered our historical and expected taxable income to determine the sufficiency of our valuation allowance. We remain optimistic about the Company’s future outlook and expect to generate taxable income sufficient to realize our remaining net deferred tax asset. However, our evaluation includes multiple assumptions and estimates that may change over time. If future taxable income is less than current projections, an additional valuation allowance may become necessary that could have a materially adverse impact on our results of operations and financial position. At December 31, 2007, the total gross deferred tax asset was $55.5 million, and the valuation allowance was $37.7 million.
     Premiums earned decreased by $2.4 million, or 3%, to $70.5 million for the three months ended December 31, 2007 from $72.9 million for the three months ended December 31, 2006. The decrease in premiums earned resulted primarily from (1) the closure of 36 underperforming retail locations (or “stores”) during the twelve months ended December 31, 2007, (2) continued soft economic conditions in our markets coupled with a competitive pricing environment, and (3) a decrease in our average premium per policy in Florida as a result of the October 1, 2007 through December 31, 2007 temporary expiration of the No-Fault Motor Vehicle Law (Personal Injury Protection, or PIP) coverage. These declines were partially offset by premium growth in our South Carolina, Pennsylvania, Texas and Illinois markets.

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     Premiums earned increased by $4.5 million, or 3%, to $145.3 million for the six months ended December 31, 2007 from $140.8 million for the same period last year. This increase was the result of premium growth in our South Carolina, Pennsylvania, Texas and Illinois markets. At December 31, 2007, we operated 440 stores compared with 467 stores at December 31, 2006. Our total number of insured policies in force at December 31, 2007 decreased 7% to 203,008 from 217,560 at December 31, 2006.
     Loss and Loss Adjustment Expense Ratio. Our loss and loss adjustment expense ratio was 77.1% for the three months ended December 31, 2007 and 75.3% for the three months ended December 31, 2006. The loss and loss adjustment expense ratio was 77.1% for the six months ended December 31, 2007 and 76.2% for the six months ended December 31, 2006. These increases are primarily the result of increased severity attributable to Bodily Injury and Property Damage losses in several states.
     For the three and six months ended December 31, 2007, we did not experience any significant adverse development for prior accident periods. We had previously reported that the three months ended September 30, 2006 included approximately $3.7 million (5.5% of the ratio) of adverse development related primarily to the estimation of the severity of losses in Florida and Texas, where we had significant growth during 2006, and Georgia, where we reduced our physical damage premium rates effective January 2006.
     New rates were approved October 1, 2007 for Bodily Injury, Medical Payments, and Uninsured Motorists Coverage in Florida in conjunction with the change in coverage resulting from the expiration of PIP. Effective January 1, 2008, the State of Florida reinstated PIP, which coincided with new higher rates for most of our coverages.
     Expense Ratio. Our expense ratio for the three months ended December 31, 2007 increased to 23.0% from 19.4% for the same period in the prior fiscal year. Our expense ratio was 21.3% for the six months ended December 31, 2007 compared with 19.3% for the six months ended December 31, 2006. These increases were primarily the result of (i) costs associated with the closure of underperforming stores during the twelve months ended December 31, 2007, (ii) an increased investment in our product, actuarial and finance functions, (iii) severance and related benefit charges of $0.7 million incurred in connection with our separation with an executive officer, (iv) the expenses (such as variable compensation costs and premium taxes) that vary along with the increase in premiums earned during the six months ended December 31, 2007, and (v) the positive impact on the prior year expense ratio from the transaction service fee of $0.3 million, or 0.4%, and $0.9 million, or 0.6%, respectively, earned through December 31, 2006 in connection with our Chicago acquisition.
     Overall, the combined ratio increased to 100.1% for the three months ended December 31, 2007 from 94.7% for the three months ended December 31, 2006. For the six months ended December 31, 2007, the combined ratio increased to 98.4% from 95.5% for the six months ended December 31, 2006. These increases were primarily the result of the increased expense ratio.

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Credit Agreement
     At December 31, 2007, we were not in compliance with financial covenants in our credit agreement regarding a minimum fixed charge coverage ratio and a minimum net income requirement. In January 2008, we made a principal prepayment of $5.0 million, which reduced the unpaid balance under the credit agreement to $4.8 million. We obtained waivers of our non-compliance under the credit agreement from our lenders as of December 31, 2007 and entered into an amendment to the credit agreement, dated February 6, 2008, that contains less restrictive financial covenants for future periods.
About First Acceptance Corporation
     First Acceptance Corporation provides non-standard private passenger automobile insurance, primarily through employee-agents. At December 31, 2007, we leased and operated 440 retail offices in 12 states. Our insurance company subsidiaries are licensed to do business in 25 states. Additional information about First Acceptance Corporation can be found online at www.firstacceptancecorp.com.
     This press release contains forward-looking statements. These statements, which have been included in reliance on the “safe harbor” provisions of the federal securities laws, involve risks and uncertainties. Investors are hereby cautioned that these statements may be affected by important factors, including, among others, the factors set forth under the caption “Risk Factors” in our Annual Report on Form 10-K and in our other filings with the Securities and Exchange Commission. Actual operations and results may differ materially from the results discussed in the forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future developments or otherwise.

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FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(in thousands, except per share data)
(Unaudited)
                                 
    Three Months Ended     Six Months Ended  
    December 31,     December 31,  
    2007     2006     2007     2006  
Revenues:
                                
Premiums earned
   $ 70,484     $ 72,911     $ 145,287     $ 140,788  
Fee income
     8,987       9,067       18,285       17,823  
Investment income
     2,859       2,098       5,886       4,045  
Other
     11       245       41       767  
 
                        
 
     82,341       84,321       169,499       163,423  
 
                        
 
                                
Costs and expenses:
                                
Losses and loss adjustment expenses
     54,346       54,886       112,017       107,306  
Insurance operating expenses
     25,180       23,509       49,166       45,839  
Other operating expenses
     759       514       1,264       1,622  
Stock-based compensation
     354       354       678       458  
Depreciation and amortization
     380       399       748       791  
Interest expense
     1,289       418       2,630       830  
 
                        
 
     82,308       80,080       166,503       156,846  
 
                        
 
                                
Income before income taxes
     33       4,241       2,996       6,577  
Provision for income taxes
     11,764       1,540       12,835       2,383  
 
                        
Net income (loss)
   $ (11,731 )   $ 2,701     $ (9,839 )   $ 4,194  
 
                        
 
                                
Net income (loss) per share:
                                
Basic
   $ (0.25 )   $ 0.06     $ (0.21 )   $ 0.09  
 
                        
Diluted
   $ (0.25 )   $ 0.05     $ (0.21 )   $ 0.08  
 
                        
 
                                
Number of shares used to calculate net income (loss) per share:
                                
Basic
     47,618       47,588       47,617       47,566  
 
                        
Diluted
     47,618       49,694       47,617       49,672  
 
                        

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FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(in thousands, except per share data)
                 
    December 31,     June 30,  
    2007     2007  
    (Unaudited)          
ASSETS
                
Fixed maturities, available-for-sale at fair value
   $ 185,078     $ 176,555  
Cash and cash equivalents
     41,106       34,161  
Premiums and fees receivable, net
     61,712       71,771  
Receivable for securities
     —       19,973  
Deferred tax asset
     17,757       30,936  
Other assets
     15,534       15,838  
Deferred acquisition costs
     4,797       5,166  
Goodwill and identifiable intangible assets
     144,467       144,492  
 
            
TOTAL
   $ 470,451     $ 498,892  
 
            
 
                
LIABILITIES AND STOCKHOLDERS’ EQUITY
                
Loss and loss adjustment expense reserves
     95,357       91,446  
Unearned premiums and fees
     75,639       88,831  
Notes payable and capitalized lease obligations
     10,104       23,490  
Debentures payable
     41,240       41,240  
Other liabilities
     14,088       14,401  
 
            
Total liabilities
     236,428       259,408  
Total stockholders’ equity
     234,023       239,484  
 
            
TOTAL
   $ 470,451     $ 498,892  
 
            
 
                
Book value per share
   $ 4.91     $ 5.03  
 
            

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FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
Supplemental Data
(Unaudited)
GROSS PREMIUMS EARNED BY STATE
                                                 
    Three Months Ended             Six Months Ended        
    December 31,             December 31,        
    2007     2006     Change     2007     2006     Change  
                    (in thousands)                  
Premiums earned:
                                                
Georgia
   $ 15,135     $ 17,581     $ (2,446 )   $ 31,238     $ 34,771     $ (3,533 )
Florida
     10,820       13,612       (2,792 )     23,181       25,841       (2,660 )
Texas
     8,217       7,780       437       16,743       14,897       1,846  
Illinois
     7,931       7,638       293       16,100       14,275       1,825  
Alabama
     7,034       7,282       (248 )     14,538       14,571       (33 )
South Carolina
     5,650       3,019       2,631       11,290       4,841       6,449  
Tennessee
     5,168       5,837       (669 )     10,690       11,784       (1,094 )
Ohio
     3,814       3,981       (167 )     7,814       7,843       (29 )
Pennsylvania
     2,360       1,571       789       4,661       2,757       1,904  
Indiana
     1,806       1,991       (185 )     3,774       3,928       (154 )
Missouri
     1,382       1,457       (75 )     2,852       2,887       (35 )
Mississippi
     1,167       1,162       5       2,406       2,393       13  
 
                                    
Total premiums earned
   $ 70,484     $ 72,911     $ (2,427 )   $ 145,287     $ 140,788     $ 4,499  
 
                                    
COMBINED RATIOS (INSURANCE COMPANIES)
                                 
    Three Months Ended     Six Months Ended  
    December 31,     December 31,  
    2007     2006     2007     2006  
Loss and loss adjustment expense
     77.1 %     75.3 %     77.1 %     76.2 %
Expense (1)
     23.0 %     19.4 %     21.3 %     19.3 %
 
                        
Combined
     100.1 %     94.7 %     98.4 %     95.5 %
 
                        
 
(1)   Insurance operating expenses are reduced by fee income from insureds and, through December 31, 2006, the transaction service fee received from the Chicago agencies whose business we acquired.
POLICIES IN FORCE
                                 
    Three Months Ended     Six Months Ended  
    December 31,     December 31,  
    2007     2006     2007     2006  
Policies in force — beginning of period
     212,511       217,308       226,974       200,401  
Net increase (decrease) during period
     (9,503 )     252       (23,966 )     17,159  
 
                        
Policies in force — end of period
     203,008       217,560       203,008       217,560  
 
                        

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FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
Supplemental Data (continued)
(Unaudited)
NUMBER OF RETAIL LOCATIONS
     Retail location counts are based upon the date that a location commenced writing business.
                                 
    Three Months Ended     Six Months Ended  
    December 31,     December 31,  
    2007     2006     2007     2006  
 
                                
Retail locations — beginning of period
     458        466       462       460  
Opened
     1       4       2       13  
Closed
     (19 )     (3 )     (24 )     (6 )
 
                        
Retail locations — end of period
     440       467       440       467  
 
                        
RETAIL LOCATIONS BY STATE
                                 
    December 31,     September 30,  
    2007     2006     2007     2006  
 
                                
Alabama
     25       25       25       25  
Florida
     40       41       41       40  
Georgia
     61       63       62       63  
Illinois
     80       85       81       85  
Indiana
     22       26       23       26  
Mississippi
     8       8       8       8  
Missouri
     16       15       16       17  
Ohio
     29       30       30       30  
Pennsylvania
     19       26       24       25  
South Carolina
     28       26       28       26  
Tennessee
     20       20       20       21  
Texas
     92       102       100       100  
 
                        
Total
     440       467       458       466  
 
                        

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