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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended June 30, 2010
Commission file number 001-12117
FIRST ACCEPTANCE CORPORATION
(Exact name of registrant as specified in its charter)
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Delaware
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75-1328153 |
(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer Identification No.) |
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3813 Green Hills Village Drive, Nashville, Tennessee
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37215 |
(Address of principal executive offices)
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(Zip Code) |
(615) 844-2800
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Title of Each Class
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Name of exchange on which registered |
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Common Stock, $.01 par value per share
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New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act.
Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section
13 or 15(d) of the Act.
Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate website, if any, every Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
Yes o No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
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Large accelerated filer o
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Accelerated 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 Act).
Yes o No þ
The aggregate market value of the voting and non-voting stock held
by non-affiliates of the registrant, based on the closing price of these shares on the New York
Stock Exchange on December 31, 2009, was $33,017,936. For the purposes of this disclosure only,
the registrant has assumed that its directors, executive officers and beneficial owners of 5% or
more of the registrants common stock are affiliates of the registrant.
As of August 31, 2010, there were 48,509,258 shares of the registrants common stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
All of the information called for by Part III of this report is incorporated by reference to
the Definitive Proxy Statement for our 2010 Annual Meeting of Shareholders, which will be held on
November 16, 2010.
FIRST ACCEPTANCE CORPORATION 10-K
Index to Annual Report on Form 10-K
i
FIRST ACCEPTANCE CORPORATION 10-K
PART I
Item 1. Business
General
First Acceptance Corporation (the Company, we or us) is a retailer, servicer and
underwriter of non-standard personal automobile insurance based in Nashville, Tennessee. We
currently write non-standard personal automobile insurance in 12 states and are licensed as an
insurer in 13 additional states. Non-standard personal automobile insurance is made available to
individuals who are categorized as non-standard because of their inability or unwillingness to
obtain standard insurance coverage due to various factors, including payment history, payment
preference, failure in the past to maintain continuous insurance coverage, driving record and/or
vehicle type, and in most instances who are required by law to buy a minimum amount of automobile
insurance. At August 31, 2010, we leased and operated 393 retail locations, staffed with
employee-agents. Our employee-agents primarily sell non-standard personal automobile insurance
products underwritten by us as well as certain commissionable ancillary products. In certain
states, our employee-agents also sell other complementary insurance products underwritten by us.
Our Business Strategy
As a provider of non-standard personal automobile insurance, we have adhered to a focused
business model and disciplined execution of our operating strategy. Our business model includes the
following core strategies:
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Integrated Operations. To meet the preference of our customers for convenient, personal
service, we have integrated the retail distribution, underwriting and service functions of
personal automobile insurance into one system. By doing so, we are able to provide prompt
and personal service to meet effectively the insurance needs of our customers, while
capturing revenue that would otherwise be shared with several participants under a
traditional, non-integrated insurance business model. Our integrated model is supported by
both point-of-sale agency and back office systems. |
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Extensive Office Network. We emphasize the use of employee-agents as the cornerstone of
our customer relationship. We believe our customers value face-to-face contact, speed of
service and convenient locations. Consequently, we train our employee-agents to cultivate
client relationships and utilize real-time service and information enabled by our
information systems. At August 31, 2010, we leased and operated 393 retail locations
staffed with our employee-agents and located strategically in geographic markets to reach
and service our customers. |
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Favorable Customer Payment Plans. Our customers can initiate insurance coverage with a
modest down payment. Any remaining premium is paid in monthly installments over the term
of the policy. We believe this modest initial payment and favorable payment plan is a
major factor in meeting the market demand for low monthly insurance payments. |
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Effective Sales and Marketing. We build brand recognition and generate valuable sales
leads through the use of local print advertising (including the Yellow Pages®), television
and radio advertising, direct mailings and our broad network of retail locations. |
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Efficient Information Systems. We have developed information systems that enable timely
and efficient communication and data sharing among the various segments of our integrated
operations. All of our retail locations transmit information directly to our central data
center where policy information, customer profiles, risk assessment and underwriting
criteria are maintained in our database. |
1
FIRST ACCEPTANCE CORPORATION 10-K
Our Business Model
We believe our operations benefit from our ability to identify and satisfy the needs of our
target customers and eliminate many of the inefficiencies associated with a traditional automobile
insurance model. We have developed our business model by drawing on significant experience in the
automobile insurance industry. We are a vertically integrated business that acts as the agency,
servicer and underwriter of non-standard personal automobile insurance. We own three insurance
company subsidiaries: First Acceptance Insurance Company, Inc. (FAIC), First Acceptance Insurance
Company of Georgia, Inc. (FAIC-GA) and First Acceptance Insurance Company of Tennessee, Inc.
(FAIC-TN). Our retail locations are staffed with employee-agents who 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. Our vertical integration, combined with our conveniently located
retail locations, enables us to control the point of sale and to retain significant revenue that
would otherwise be lost in a traditional, non-integrated insurance business model. We generate
additional revenue by fully servicing our book of business, which often allows us to collect
policy, billing and other fees.
Our strategy is to offer customers automobile insurance with low down payments, competitive
equal monthly payments, convenient locations and a high level of personal service. This strategy
makes it easier for our customers to obtain automobile insurance, which is legally mandated in the
states in which we currently operate. We accept customers seeking insurance who have previously
terminated coverage provided by us without imposing any additional requirements on such customers.
Currently, our policy renewal rate (the percentage of policies that are renewed after completion of
the full uninterrupted policy term) is approximately 40%, which, due to the payment patterns of our
customers, is lower than the average renewal rate of standard personal automobile insurance
providers. We are able to accept a low down payment because we process all business through our
centralized information systems. Our business model and systems allow us to issue policies
efficiently and, when necessary, cancel them to minimize the potential for credit loss while
adhering to regulatory cancellation notice requirements.
In addition to a low down payment and competitive monthly rates, we offer customers valuable
face-to-face contact and speed of service as many of our customers prefer not to purchase a new
automobile insurance policy via the internet or over the telephone. Substantially all of our
customers make their payments at our retail locations. For these consumers, our employee-agents are
not only the face of the Company, but also the preferred interface for buying insurance.
Our ability to process business quickly and accurately gives us an advantage over more
traditional insurance companies that produce business using independent agents. Our policies are
issued at the point of sale, and applications are processed in two business days, as opposed to the
much longer period that is often typical in the automobile insurance industry. The traditional
non-standard personal automobile insurance model typically involves interaction and paperwork
exchange between the insurance company, independent agent and premium finance provider. This
complicated interaction presents numerous opportunities for miscommunication, delays or lost
information. Accordingly, we believe that some of our competitors who rely on the traditional
independent agency model cannot match our efficiency in serving our customer base.
We believe that another distinct advantage of our model over the traditional independent
agency approach is that our employee-agents offer a single non-standard insurance product compared
with many products from multiple insurance companies. The typical independent agent selling
non-standard personal automobile insurance generally has multiple non-standard insurance companies
and premium finance sources from which to quote based on agent commission, price and other factors.
This means that insurance companies using the independent agent model must compete to provide the
most attractive agent commissions and absolute lowest prices to encourage the independent agent to
sell their product. Our employee-agents primarily sell our non-standard automobile insurance
products. Therefore, we do not have to compete for the attention of those distributing our product
on the basis of agent commissions, price or other factors.
2
FIRST ACCEPTANCE CORPORATION 10-K
New Pricing Program
We are currently in the process of implementing a new pricing program that is based on
multivariate analysis of our historical results and that will use insurance scoring as a variable.
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. We plan to implement the new pricing
program in all of the states in which we operate over the next 12 months.
Concurrent with the implementation of the new pricing program, we intend to sell automobile
insurance underwritten by other carriers (third party business) to customers for whom our rates
under the new pricing program will not be competitive. We will earn commission income on the third
party business, but will have no service obligations for these policies or any claims thereunder.
Personal Automobile Insurance Market
Personal automobile insurance is the largest line of property and casualty insurance in the
United States with, according to A.M. Best, an estimated market size of $164 billion in premiums
earned for the year ended December 31, 2009. Personal automobile insurance provides drivers with
coverage for liability to others for bodily injury and property damage and for physical damage to
the drivers vehicle from collision and other perils.
The market for personal automobile insurance is generally divided into three product segments:
non-standard, standard and preferred insurance. We believe that the premiums earned in the
non-standard automobile insurance market segment in the United States represent between 15% and 25%
of the total personal automobile insurance market. Non-standard personal automobile insurance is
designed to be attractive to drivers who prefer to purchase only the minimum amount of coverage
required by law or to minimize the required payment during each payment period.
Our Products
Our core business involves issuing automobile insurance policies to individuals who are
categorized as non-standard, based primarily on their inability or unwillingness to obtain
insurance coverage from standard carriers due to various factors, including their need for monthly
payment plans, failure to maintain continuous insurance coverage or driving record. We believe that
a majority of our customers seek non-standard insurance due to their failure to maintain continuous
coverage or their need for affordable monthly payments, rather than as a result of poor driving
records. The majority of our customers purchase the minimum amount of coverage required by law.
At June 30, 2010, the average premium on our policies in force was $591. We allow most
customers to pay for their insurance with an initial down payment and five equal monthly
installments, which include a monthly billing fee. We believe that our target customers prefer
lower down payments and level monthly payments over the payment options traditionally offered by
other non-standard providers. Because our centralized information systems enable us to control all
aspects of servicing our insurance policies, we can generally cancel the policy of a customer who
fails to make a payment without incurring a credit loss, while remaining within applicable
regulatory cancellation guidelines.
We use a single product template as the basis for our rates, rules and forms. Product
uniformity simplifies our business and allows speed to market when modifying an existing program,
introducing a new program, or entering a new state. In addition, our retail agents, underwriters
and claims adjusters only need to be trained in one basic set of underwriting guidelines and one
basic automobile policy. Programming and systems maintenance are also simplified because we have
one basic product.
In addition to non-standard personal automobile insurance, we also offer our customers
optional products that provide ancillary reimbursements and benefits in the event of an automobile
accident. Those products generally provide reimbursements for medical expenses and hospital stays
as a result of injuries sustained in an automobile accident, automobile towing and rental, bail
bond premiums and ambulance services.
3
FIRST ACCEPTANCE CORPORATION 10-K
Our Strategy
During the 2008, 2009 and 2010 fiscal years, our business and the non-standard personal
automobile insurance industry were negatively impacted by the difficult economic conditions that
adversely impacted our customers. We believe that many of our customers made the financial decision
to either (i) reduce their insurance coverage to include only the mandatory coverage required by
law or (ii) not purchase any insurance coverage despite the legal requirement to do so. As a
result, we did not enter into any new markets during these years and focused our strategy on
maintaining business in our existing markets. We sought to maintain or increase the number of
customers in our existing markets through advertising campaigns and retention marketing efforts. In
the future, we may explore growth opportunities by introducing additional insurance products and
expanding into new geographic markets through opening new retail locations, pursuing selective
acquisitions, including acquisitions of local agencies who write non-standard automobile insurance
for other insurance companies. We may also explore the use of additional distribution systems such
as sales made through the internet or through the use of independent agents in selected markets. We
anticipate that the current difficult economic conditions will continue to impact our customers and
our business during fiscal year 2011.
Competition
The non-standard personal automobile insurance business is highly competitive. We believe that
our primary competition comes not only from national companies or their subsidiaries, but also from
non-standard insurers and independent agents that operate in specific regions or states. We
compete against other vertically integrated insurance companies and independent agencies that
market insurance on behalf of a number of insurers. We compete with these other insurers on
factors such as initial down payment, availability of monthly payment plans, price, customer
service and claims service. We believe that our significant competitors are the Berkshire Hathaway
insurance group (which includes GEICO), the Bristol West insurance group, the Direct General
insurance group, the Infinity insurance group, the Affirmative insurance group, the Progressive
insurance group, the Safe Auto insurance group and the Permanent General insurance group.
Marketing and Distribution
Our marketing strategy is based on promoting brand recognition of our product and encouraging
prospective customers to visit one of our retail locations. Our primary advertising strategy
combines local print media advertising, such as the Yellow Pages®, with low-cost television and
radio advertising. We market our business under the name Acceptance Insurance in all areas
except in the Chicago-area, where we use the names Yale Insurance and Insurance Plus.
We primarily distribute our products through our retail locations. We believe the local office
concept is attractive to most of our customers, as they desire the face-to-face assistance they
cannot receive via the internet or over the telephone. Our advertisements promote local phone
numbers that are answered at either the local retail office or one of our regional customer service
centers, which are located in Nashville, Tennessee and Chicago, Illinois. We provide quotes over
the telephone highlighting our low down payment and monthly payments, and direct prospective
customers to the nearest local retail office to complete an application. The entire sales process
can be completed at the local retail office where the down payment is collected and a policy
issued. Future payments can be made either at the local office, by telephone, or mailed to our
Nashville customer service center.
Underwriting and Pricing
Our underwriting and rating systems are fully automated, including on-line driving records,
where available. We believe that our underwriting and pricing systems provide a competitive
advantage to us because they give us the ability to capture relevant pricing information, improve
efficiencies, increase the accuracy and consistency of underwriting decisions and reduce training
costs.
We currently set premium rates based on the specific type of vehicle and the drivers age,
gender, marital status, driving experience and location. We review loss trends in each of the
states in which we operate to identify changes in the frequency and severity of accidents and to
assess the adequacy of our rates and underwriting standards. We adjust rates periodically, as
necessary, and as permitted by applicable regulatory authorities, to maintain or improve
underwriting results in each market. We plan to implement a new pricing program in all of our
markets. See New Pricing Program above.
4
FIRST ACCEPTANCE CORPORATION 10-K
Claims Handling
Non-standard personal automobile insurance customers generally have a higher frequency of
claims than preferred and standard personal automobile insurance customers. We focus on controlling
the claims process and costs, thereby limiting losses, by internally managing the entire claims
process. We strive to promptly assess claims, manage against fraud, and identify loss trends and
capture information that is useful in establishing loss reserves and determining premium rates. Our
claims process is designed to promote expedient, fair and consistent claims handling, while
controlling loss adjustment expenses.
At June 30, 2010, our claims operation included adjusters, appraisers, re-inspectors, special
investigators and claims administrative personnel. We conduct our claims operations out of our
Nashville office and through regional claims offices in Tampa, Florida and Chicago, Illinois. Our
employees handle all claims from the initial report of the claim until the final settlement. We
believe that directly employing claims personnel, rather than using independent contractors,
results in improved customer service, lower loss payments and lower loss adjustment expenses. In
territories where we do not believe a staff appraiser would be cost-effective, we utilize the
services of independent appraisers to inspect physical damage to automobiles. The work of
independent appraisers is supervised by regional staff appraisal managers.
While we are strongly committed to settling promptly and fairly the meritorious claims of our
customers and claimants, we are equally committed to defending against non-meritorious claims.
Litigated claims and lawsuits are primarily managed by one of our specially trained litigation
adjusters. Suspicious claims are referred to a special investigation unit. When a dispute arises,
we seek to minimize our claims litigation defense costs by attempting to negotiate flat-fee
representation with outside counsel specializing in automobile insurance claim defense. We believe
that our efforts to obtain high quality claims defense litigation services at a fixed or carefully
controlled cost have helped us control claims losses and expenses.
Loss and Loss Adjustment Expense Reserves
Automobile accidents generally result in insurance companies making payments (referred to as
losses) to individuals or companies to compensate for physical damage to an automobile or other
property and/or an injury to a person. Months and sometimes years may elapse between the occurrence
of an accident, report of the accident to the insurer and payment of the claim. Insurers record a
liability for estimates of losses that will be paid for accidents reported to them, which are
referred to as case reserves. As accidents are not always reported promptly, insurers estimate
incurred but not reported, or IBNR, reserves to cover expected losses for accidents that have
occurred, but have not been reported to the insurer. Insurers also incur expenses in connection
with the handling and settling of claims that are referred to as loss adjustment expenses and
record a liability for the estimated costs to settle their expected unpaid losses.
We are directly liable for loss and loss adjustment expenses under the terms of the insurance
policies underwritten by our insurance company subsidiaries. Each of our insurance company
subsidiaries establishes a reserve for all of its unpaid losses, including case reserves and IBNR
reserves, and estimates for the cost to settle the claims. We estimate our IBNR reserves by
estimating our ultimate liability for loss and loss adjustment expense reserves first, and then
reducing that amount by the amount of the cumulative paid claims and by the amount of our case
reserves. We rely primarily on historical loss experience in determining reserve levels on the
assumption that historical loss experience provides a good indication of future loss experience. We
also consider other factors, such as inflation, claims settlement patterns, legislative activity
and litigation trends. We review our loss and loss adjustment expense reserve estimates on a
quarterly basis and adjust those reserves each quarter to reflect any favorable or unfavorable
development as historical loss experience develops or new information becomes known.
We experienced rapid and significant growth in fiscal years 2006 and 2007, primarily as a
result of expansion into new markets. Estimating our reserves for new markets was more difficult
relative to estimating our reserves in our larger, more mature markets. In new markets, we
initially established our reserves using our loss experience from other states that we perceived as
being similar. As our historical loss experience in new markets developed, we revised our estimates
accordingly. As a result, we experienced volatility in our incurred loss and loss adjustment
expense for certain of these markets, the effect of which significantly impacted our results of
operations and financial condition in fiscal year 2007.
5
FIRST ACCEPTANCE CORPORATION 10-K
We periodically review our methods of establishing case and IBNR reserves and update them if
necessary. Our actuarial staff, which includes a fully-credentialed actuary, reviews our reserves
and loss trends on a quarterly basis. We believe that the liabilities that we have recorded for
unpaid losses and loss adjustment expenses at June 30, 2010 are adequate to cover the final net
cost of losses and loss adjustment expenses incurred through that date.
The following table sets forth the year-end reserves since we began operations as an insurance
company following the 2004 acquisition of USAuto Holdings, Inc. (USAuto) and the subsequent
development of these reserves through June 30, 2010. The purpose of the table is to show a
cumulative deficiency or redundancy for each year which represents the aggregate amount by which
original estimates of reserves at that year-end have changed in subsequent years. The top line of
the table presents the net reserves at the balance sheet date for each of the years indicated. This
represents the estimated amounts of losses and loss adjustment expenses for claims arising in all
years that were unpaid at the balance sheet date, including the IBNR reserve at the end of each
successive year. The next portion of the table presents the re-estimated amount of the previously
recorded reserves based on experience at the end of each succeeding year, including cumulative
payments since the end of the respective year. As more information becomes known about the
payments and the frequency and severity of claims for individual years, the estimate changes
accordingly. Favorable loss development, shown as a cumulative redundancy in the table, exists
when the original reserve estimate is greater than the re-estimated reserves. Adverse loss
development, which would be shown as a cumulative deficiency in the table, exists when the original
reserve estimate is less than the re-estimated reserves. Information with respect to the cumulative
development of gross reserves, without adjustment for the effect of reinsurance, also appears at
the bottom portion of the table.
In evaluating the information in the table below, you should note that each amount entered
incorporates the cumulative effect of all changes in amounts entered for prior periods. Conditions
and trends that have affected the development of liability in the past may not necessarily recur in
the future.
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At June 30 (in thousands) |
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2004 |
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2005 |
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2006 |
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2007 |
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2008 |
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2009 |
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2010 |
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Net liability for loss and loss
adjustment expense reserves, originally
estimated |
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$ |
18,137 |
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$ |
39,289 |
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$ |
61,521 |
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$ |
91,137 |
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$ |
101,148 |
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$ |
83,895 |
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$ |
73,152 |
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Cumulative amounts paid at: |
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One year later |
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13,103 |
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28,024 |
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51,420 |
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68,196 |
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62,964 |
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50,641 |
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Two years later |
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16,579 |
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34,754 |
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61,627 |
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84,095 |
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78,232 |
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Three years later |
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17,795 |
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37,025 |
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64,986 |
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88,888 |
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Four years later |
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18,472 |
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37,802 |
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66,721 |
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Five years later |
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18,743 |
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38,068 |
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Six years later |
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18,894 |
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Liability re-estimated at: |
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One year later |
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17,781 |
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37,741 |
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65,386 |
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89,738 |
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89,766 |
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72,672 |
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Two years later |
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17,244 |
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38,226 |
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68,491 |
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92,860 |
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86,726 |
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Three years later |
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16,973 |
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37,484 |
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67,100 |
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91,864 |
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Four years later |
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17,978 |
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38,289 |
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67,599 |
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Five years later |
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18,900 |
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38,411 |
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Six years later |
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18,975 |
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Net cumulative redundancy (deficiency) |
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(838 |
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878 |
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(6,078 |
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(727 |
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14,422 |
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11,223 |
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|
|
|
|
|
|
|
|
Gross liability end of year |
|
$ |
30,434 |
|
|
$ |
42,897 |
|
|
$ |
62,822 |
|
|
$ |
91,446 |
|
|
$ |
101,407 |
|
|
$ |
83,973 |
|
|
$ |
73,198 |
|
Reinsurance receivables |
|
|
12,297 |
|
|
|
3,608 |
|
|
|
1,301 |
|
|
|
309 |
|
|
|
259 |
|
|
|
78 |
|
|
|
46 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net liability end of year |
|
$ |
18,137 |
|
|
$ |
39,289 |
|
|
$ |
61,521 |
|
|
$ |
91,137 |
|
|
$ |
101,148 |
|
|
$ |
83,895 |
|
|
$ |
73,152 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross re-estimated liability latest |
|
$ |
31,252 |
|
|
$ |
41,729 |
|
|
$ |
68,692 |
|
|
$ |
92,193 |
|
|
$ |
86,861 |
|
|
$ |
72,757 |
|
|
|
|
|
Re-estimated
reinsurance receivables latest |
|
|
12,277 |
|
|
|
3,318 |
|
|
|
1,093 |
|
|
|
329 |
|
|
|
135 |
|
|
|
85 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net re-estimated latest |
|
$ |
18,975 |
|
|
$ |
38,411 |
|
|
$ |
67,599 |
|
|
$ |
91,864 |
|
|
$ |
86,726 |
|
|
$ |
72,672 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross cumulative redundancy (deficiency) |
|
$ |
(818 |
) |
|
$ |
1,168 |
|
|
$ |
(5,870 |
) |
|
$ |
(747 |
) |
|
$ |
14,546 |
|
|
$ |
11,216 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6
FIRST ACCEPTANCE CORPORATION 10-K
At June 30, 2010, we had $73.2 million of loss and loss adjustment expense reserves,
which included $42.6 million in IBNR reserves and $30.6 million in case reserves. Through August
31, 2004, we maintained quota-share reinsurance, the run-off of which resulted in a reinsurance
receivable of $46 thousand that is offset against the gross reserves of $73.2 million at June 30,
2010 in the above table. For a reconciliation of net loss and loss adjustment expense reserves from
the beginning to the end of the year for the last three fiscal years, see Note 8 to our
consolidated financial statements.
As reflected in the table above, on reserves at June 30, 2009, we have experienced a favorable
net reserve development of $11.2 million, which decreased our loss and loss adjustment expense
reserves for prior accident years and increased our income before income taxes for the 2010 fiscal
year. We believe that the favorable development for the year ended June 30, 2010 was due to (i)
lower than anticipated severity of accidents occurring during the fiscal 2007 and 2008 accident
years, primarily in bodily injury coverage in Georgia and South Carolina, (ii) an improvement in
our claim handling practices and (iii) a shift in business mix toward renewal policies, which have
lower loss ratios than new policies. The favorable development for the year ended June 30, 2009 was
primarily due to both lower than anticipated severity and frequency of accidents, most notably in
our property and physical damage coverages.
Loss and loss adjustment expense reserve estimates were reviewed on a quarterly basis and
adjusted each quarter to reflect any favorable or adverse development. Development assumptions were
based upon historical accident quarters. We analyzed our reserves for each type of coverage, by
state and for loss and loss adjustment expense separately to determine our loss and loss adjustment
expense reserves. To determine the best estimate, we reviewed the results of five estimation
methods, including the incurred development method, the paid development method, the incurred
Bornhuetter-Ferguson method, the paid Bornhuetter-Ferguson method, and the counts/averages method
for each set of data. In each quarterly review, we develop a point estimate for a subset of our
business. We did not prepare separate point estimates for our entire business using each of the
estimation methods. In determining our loss and loss adjustment expense reserves, we selected
different estimation methods as appropriate for the various subsets of our business. The methods
selected varied by coverage and by state, and considerations included the number and value of the
case reserves for open claims, incurred and paid loss relativities, and suspected strengths and
weaknesses for each of the procedures. Other factors considered in establishing reserves include
assumptions regarding loss frequency and loss severity. We believe assumptions regarding loss
frequency are reliable because injured parties generally report their claims in a reasonably short
period of time after an accident. Loss severity is more difficult to estimate because severity is
affected by changes in underlying costs, including medical costs, settlements or judgments, and
regulatory changes.
Based upon the foregoing, we calculated a single point estimate of our net loss and loss
adjustment expense reserves at June 30, 2010. We believe that estimate is our best estimate of our
loss and loss adjustment expense reserves at June 30, 2010. The loss and loss adjustment expense
reserves in our consolidated financial statements for the fiscal year ended June 30, 2010 are equal
to the estimate determined by our actuarial staff.
We believe that our estimate regarding changes in loss severity is the most significant factor
that can potentially impact our IBNR reserve estimate. We believe that there is a reasonable
possibility of increases or decreases in our estimated claim severities, with the largest potential
changes occurring in the most recent accident years. An increase in loss severity of unpaid losses,
ranging from 0.5% to 3% dependent upon the accident year, would result in adverse development of
net loss and loss adjustment expense reserve levels at June 30, 2010 and a decrease in income
before income taxes of approximately $6.7 million. Conversely, a comparable decrease in loss
severity would result in favorable development of net loss and loss adjustment expense reserve
levels at June 30, 2010 and an increase in income before income taxes of approximately $6.7
million.
Reinsurance
Reinsurance is an arrangement in which a company called a reinsurer agrees in a contract to
assume specified risks written by an insurance company, known as a ceding company, by paying the
insurance company all or a portion of the insurance companys losses arising under specified
classes of insurance policies, in return for a reinsurance premium.
Through August 31, 2004, our insurance companies ceded approximately 50% of their non-standard
personal automobile insurance premiums and losses on a quota-share basis to unaffiliated
reinsurers. Commencing August 1, 2010, our insurance companies began utilizing excess-of-loss
reinsurance with an unaffiliated reinsurer to
7
FIRST ACCEPTANCE CORPORATION 10-K
limit our exposure to losses under liability coverages for policies issued with limits greater
than the minimum statutory requirements. Historically, the amount of such policies written by our
insurance companies has not been material.
Although FAIC is licensed in Texas, some of our business there is currently written by a
managing general agency subsidiary through a program with a county mutual insurance company and is
assumed by us through 100% quota-share reinsurance.
Technology
The effectiveness of our business model depends in part on the effectiveness of our
internally-developed information technology systems. Our information systems enable timely and
efficient communication and data-sharing among the various segments of our integrated operations,
including our retail locations, insurance underwriters and claims processors. We believe that this
sharing capability provides us with a competitive advantage over many of our competitors, who must
communicate with unaffiliated premium finance companies and with a large number of independent
agents, many of whom use different recordkeeping and information systems that may not be fully
compatible with the insurance companys systems.
Sales Office Automation. We have emphasized standardization and integration of our systems
among our subsidiaries to facilitate the automated capture of information at the earliest point in
the sales cycle. All of our retail locations transmit information directly to our central office
where policy information is added to our systems. Our retail locations also have immediate access
to current information on policies through a common network interface or through a distributed
database downloaded from our central office. Our systems enable our retail locations to process new
business, renewals and endorsements and issue policies, declaration pages and identification cards.
Payment Processing. Most of our customers visit our retail locations at least once a month to
make a payment on their policies. System-generated receipts are required for all payments
collected in our retail locations. Our retail locations generate balancing reports at the end of
each day and bank deposits are made electronically through the use of check-imaging technology.
Typically, payments are automatically applied to the applicable policies during the night following
their collection in our retail locations. This results in fewer notices of intent to cancel being
generated and fewer policies being canceled that would be reinstated if a customers late payment
is processed after cancellation. We believe that our payment processing methods reduce mailing
costs and limit unwarranted policy cancellations.
Ratings
In January 2010, A.M. Best, which rates insurance companies based on factors of concern to
policyholders, upgraded its Rating Outlook on us from stable to positive and reaffirmed the
ratings of our insurance company subsidiaries at B (Fair). A positive outlook indicates a
possible rating upgrade due to favorable financial/market trends relative to the current rating
level. Publications of A.M. Best indicate that the B (Fair) rating, which is the seventh highest
rating amongst a scale of 15 ratings, is assigned to those companies that in A.M. Bests opinion
have a fair ability to meet their ongoing obligations to policyholders, but are financially
vulnerable to adverse changes in underwriting and economic conditions. A Rating Outlook is
assigned to a rating to indicate its potential direction over an intermediate term, generally
defined as 12 to 36 months.
In evaluating a companys financial and operating performance, A.M. Best reviews the companys
profitability, leverage and liquidity, as well as its book of business, the adequacy and soundness
of its reinsurance (if any), the quality and estimated market value of its assets, the adequacy of
its loss reserves, the adequacy of its surplus, its capital structure, the experience and
competence of its management and its market presence. A.M. Bests ratings reflect its opinion of an
insurance companys financial strength, operating performance and ability to meet its obligations
to policyholders, and are not recommendations to potential or current investors to buy, sell or
hold our common stock.
Financial institutions and reinsurance companies sometimes use the A.M. Best ratings to help
assess the financial strength and quality of insurance companies. The current ratings of our
insurance company subsidiaries or their failure to maintain such ratings may dissuade a financial
institution or reinsurance company from conducting business with us or increase our potential
interest or reinsurance costs, respectively. We do not believe that the majority of our customers
are motivated to purchase our products and services based on our A.M. Best rating.
8
FIRST ACCEPTANCE CORPORATION 10-K
Regulatory Environment
Insurance Company Regulation. We and our insurance company subsidiaries are regulated by
governmental agencies in the states in which we conduct business and by various federal statutes
and regulations. These state regulations vary by jurisdiction but, among other matters, usually
involve:
|
|
|
regulating premium rates and forms; |
|
|
|
|
setting minimum solvency standards; |
|
|
|
|
setting capital and surplus requirements; |
|
|
|
|
licensing companies, agents and, in some states, adjusters; |
|
|
|
|
setting requirements for and limiting the types and amounts of investments; |
|
|
|
|
establishing requirements for the filing of annual statements and other financial
reports; |
|
|
|
|
conducting periodic statutory examinations of the affairs of insurance companies; |
|
|
|
|
requiring prior approval of changes in control and of certain transactions with
affiliates; |
|
|
|
|
limiting the amount of dividends that may be paid without prior regulatory approval; and |
|
|
|
|
setting standards for advertising and other market conduct activities. |
Required Licensing. We operate under licenses issued by various state insurance authorities.
Such licenses may be of perpetual duration or periodically renewable, provided we continue to meet
applicable regulatory requirements. The licenses govern, among other things, the types of insurance
coverages and products that may be offered in the licensing state. Such licenses are typically
issued only after an appropriate application is filed and prescribed criteria are met. All of our
licenses are in good standing. Currently, we hold property and casualty insurance licenses in the
following 25 states:
|
|
|
|
|
|
|
|
|
Alabama
|
|
Kansas
|
|
Pennsylvania |
|
|
Arizona
|
|
Kentucky
|
|
South Carolina |
|
|
Arkansas
|
|
Louisiana
|
|
Tennessee |
|
|
Colorado
|
|
Mississippi
|
|
Texas |
|
|
Florida
|
|
Missouri
|
|
Utah |
|
|
Georgia
|
|
Nevada
|
|
Virginia |
|
|
Illinois
|
|
New Mexico
|
|
West Virginia |
|
|
Indiana
|
|
Ohio |
|
|
|
|
Iowa
|
|
Oklahoma |
|
|
As required by our current operations, we hold managing general agency licenses in Texas
and Florida and motor club licenses in Mississippi and Tennessee. To expand into a new state or
offer a new line of insurance or other new product, we must apply for and obtain the appropriate
licenses.
Insurance Holding Company Regulation. We operate as an insurance holding company system and
are subject to regulation in the jurisdictions in which our insurance company subsidiaries conduct
business. These regulations require that each insurance company in the holding company system
register with the insurance department of its state of domicile and furnish information concerning
the operations of companies in the holding company system which may materially affect the
operations, management or financial condition of the insurers in the holding company domiciled in
that state. We have insurance company subsidiaries that are organized and domiciled under the
insurance statutes of Texas, Georgia and Tennessee. The insurance laws in each of these states
similarly provide that all transactions among members of a holding company system be done at arms
length and be shown to be fair and reasonable to the regulated insurer. Transactions between
insurance company subsidiaries and their parents and affiliates typically must be disclosed to the
state regulators, and any material or extraordinary transaction requires prior approval of the
applicable state insurance regulator. A change of control of a domestic insurer or of any
controlling person requires the prior approval of the state insurance regulator. In general, any
person who acquires 10% or more of the outstanding voting securities of the insurer or its parent
company is presumed to have acquired control of the domestic insurer. To the best of our knowledge,
we are in compliance with the regulations discussed above.
9
FIRST ACCEPTANCE CORPORATION 10-K
Restrictions on Paying Dividends. We may at times rely on dividends from our insurance
company subsidiaries to meet corporate cash requirements. State insurance regulatory authorities
require insurance companies to maintain specified levels of statutory capital and surplus. The
amount of an insurers capital and surplus following payment of any dividends must be reasonable in
relation to the insurers outstanding liabilities and adequate to meet its financial needs. Prior
approval from state insurance regulatory authorities is generally required in order for an
insurance company to declare and pay extraordinary dividends. The payment of ordinary dividends is
limited by the amount of capital and surplus available to the insurer, as determined in accordance
with state statutory accounting practices and other applicable limitations. State insurance
regulatory authorities that have jurisdiction over the payment of dividends by our insurance
company subsidiaries may in the future adopt statutory provisions more restrictive than those
currently in effect. See Note 19 to our consolidated financial statements for a discussion of the
ability of our insurance company subsidiaries to pay dividends.
Regulation of Rates and Policy Forms. Most states in which our insurance company subsidiaries
operate have insurance laws that require insurance companies to file premium rate schedules and
policy or coverage forms for review and approval. In many cases, such rates and policy forms must
be approved prior to use. State insurance regulators have broad discretion in judging whether an
insurers rates are adequate, not excessive and not unfairly discriminatory. Generally, property
and casualty insurers are unable to implement rate increases until they show that the costs
associated with providing such coverage have increased. The speed at which an insurer can change
rates in response to competition or increasing costs depends, in part, on the method by which the
applicable states rating laws are administered. There are three basic rate administration systems:
(i) the insurer must file and obtain regulatory approval of the new rate before using it; (ii) the
insurer may begin using the new rate and immediately file it for regulatory review; or (iii) the
insurer may begin using the new rate and file it in a specified period of time for regulatory
review. Under all three rating systems, the state insurance regulators have the authority to
disapprove the rate subsequent to its filing. Thus, insurers who begin using new rates before the
rates are approved may be required to issue premium refunds or credits to policyholders if the new
rates are ultimately deemed excessive and disapproved by the applicable state insurance
authorities. In some states there has historically been pressure to reduce premium rates for
automobile and other personal insurance or to limit how often an insurer may request increases for
such rates. To the best of our knowledge, we are in compliance with all such applicable rate
regulations.
Guaranty Funds. Under state insurance guaranty fund laws, insurers doing business in a state
can be assessed for certain obligations of insolvent insurance companies to policyholders and
claimants. Maximum contributions required by law in any one year vary between 1% and 2% of annual
premiums written in that state. In most states, guaranty fund assessments are recoverable either
through future policy surcharges or offsets to state premium tax liabilities. To date, we have not
received any material unrecoverable assessments.
Investment Regulation. Our insurance company subsidiaries are subject to state laws and
regulations that require diversification of their investment portfolios and limitations on the
amount of investments in certain categories. Failure to comply with these laws and regulations
would cause non-conforming investments to be treated as non-admitted assets for purposes of
measuring statutory surplus and, in some instances, would require divestiture. If a non-conforming
asset is treated as a non-admitted asset, it would lower the affected subsidiarys surplus and
thus, its ability to write additional premiums and pay dividends. To the best of our knowledge, our
insurance company subsidiaries are in compliance with all such investment regulations.
Restrictions on Cancellation, Non-Renewal or Withdrawal. Many states have laws and
regulations that limit an insurers ability to exit a market. For example, certain states limit an
automobile insurers ability to cancel or not renew policies. Some states prohibit an insurer from
withdrawing one or more lines of business from the state, except pursuant to a plan approved by the
state insurance department. The state insurance department may disapprove a plan that may lead to
market disruption. Laws and regulations that limit cancellations and non-renewals and that subject
business withdrawals to prior approval requirements may restrict an insurers ability to exit
unprofitable markets. To the best of our knowledge, we are in compliance with all such laws and
regulations.
Privacy Regulations. In 1999, the United States Congress enacted the Gramm-Leach-Bliley Act,
which protects consumers from the unauthorized dissemination of certain nonpublic personal
information. Subsequently, the majority of states have implemented additional regulations to
address privacy issues. These laws and regulations apply to all financial institutions, including
insurance companies, and require us to maintain appropriate procedures for managing and protecting
certain nonpublic personal information of our customers and to fully disclose our privacy practices
to our customers. We may also be exposed to future privacy laws and regulations, which could
10
FIRST ACCEPTANCE CORPORATION 10-K
impose additional costs and impact our results of operations or financial condition. To the best of
our knowledge, we are in compliance with all applicable privacy laws and regulations.
Licensing of Our Employee-Agents and Adjusters. All of our employees who sell, solicit or
negotiate insurance are licensed, as required, by the state in which they work, for the applicable
line or lines of insurance they offer. Our employee-agents generally must renew their licenses
annually and adhere to minimum annual continuing education requirements. In certain states in which
we operate, our insurance claims adjusters are also required to be licensed and are subject to
annual continuing education requirements.
Unfair Claims Practices. Generally, insurance companies, adjusting companies and individual
claims adjusters are prohibited by state statutes from engaging in unfair claims practices which
could indicate a general business practice. Unfair claims practices include, but are not limited
to:
|
|
|
misrepresenting pertinent facts or insurance policy provisions relating to coverages at
issue; |
|
|
|
|
failing to acknowledge and act reasonably promptly upon communications regarding claims
arising under insurance policies; |
|
|
|
|
failing to affirm or deny coverage of claims in a reasonable time after proof of loss
statements have been completed; |
|
|
|
|
attempting to settle claims for less than the amount to which a reasonable person would
have believed such person was entitled; |
|
|
|
|
attempting to settle claims on the basis of an application that was altered without
notice to, knowledge or consent of the insured; |
|
|
|
|
making known to insureds or claimants a policy of appealing from arbitration awards in
favor of insureds or claimants for the purpose of compelling them to accept settlements or
compromises less than the amount awarded in arbitration; |
|
|
|
|
delaying the investigation or payment of claims by requiring an insured, claimant or the
physician of either to submit a preliminary claim report and then requiring the subsequent
submission of formal proof of loss forms, both of which submissions contain substantially
the same information; |
|
|
|
|
failing to settle claims promptly, where liability has become reasonably clear, under
one portion of the insurance policy coverage in order to influence settlements under other
portions of the insurance policy coverage; and |
|
|
|
|
not attempting in good faith to effectuate prompt, fair and equitable settlements of
claims in which liability has become reasonably clear. |
We set business conduct policies and conduct regular training to ensure that our
employee-adjusters and other claims personnel are aware of these prohibitions, and we require them
to conduct their activities in compliance with these statutes. To the best of our knowledge, we
have not engaged in any unfair claims practices.
Quarterly and Annual Financial Reporting. We are required to file quarterly and annual
financial reports with states utilizing statutory accounting practices that are different from U.S.
generally accepted accounting principles, which generally reflect our insurance company
subsidiaries on a going concern basis. The statutory accounting practices used by state regulators,
in keeping with the intent to assure policyholder protection, are generally based on a liquidation
concept. For statutory financial information on our insurance company subsidiaries, see Note 19 to
our consolidated financial statements included in this report.
Periodic Financial and Market Conduct Examinations. The state insurance departments that have
jurisdiction over our insurance company subsidiaries conduct on-site visits and examinations of the
insurers affairs, especially as to their financial condition, ability to fulfill their obligations
to policyholders, market conduct, claims practices and compliance with other laws and applicable
regulations. Generally, these examinations are conducted every three to five years. If
circumstances dictate, regulators are authorized to conduct special or target examinations of
insurers, insurance agencies and insurance adjusting companies to address particular concerns or
issues. The results of these examinations can give rise to regulatory orders requiring remedial,
injunctive or other corrective action on the part of the company that is the subject of the
examination. FAIC has been examined by the Texas Department of Insurance for financial condition
through December 31, 2007. FAIC-GA has been examined by the Georgia Department of Insurance for
financial condition through December 31, 2007. FAIC-TN received an organizational examination by
the Tennessee Department of Commerce and Insurance at December 4, 2006. During
11
FIRST ACCEPTANCE CORPORATION 10-K
the fiscal year ended June 30, 2010, FAIC was examined for market conduct by the states of Illinois
and Pennsylvania. None of our insurance company subsidiaries have ever been the subject of a target
examination.
Risk-Based Capital. In order to enhance the regulation of insurer solvency, the National
Association of Insurance Commissioners, or NAIC, has adopted a formula and model law to implement
risk-based capital, or RBC, requirements designed to assess the minimum amount of statutory
capital that an insurance company needs to support its overall business operations and to ensure
that it has an acceptably low expectation of becoming financially impaired. RBC is used to set
capital requirements based on the size and degree of risk taken by the insurer and taking into
account various risk factors such as asset risk, credit risk, underwriting risk, interest rate risk
and other relevant business risks. The NAIC model law provides for increasing levels of regulatory
intervention as the ratio of an insurers total adjusted capital decreases relative to its RBC,
culminating with mandatory control of the operations of the insurer by the domiciliary insurance
department at the so-called mandatory control level. This calculation is performed on a calendar
year basis, and at December 31, 2009, FAIC, FAIC-GA and FAIC-TN all maintained an RBC level that
was in excess of an amount that would require any corrective actions on their part.
RBC is a comprehensive financial analysis system affecting nearly all types of licensed
insurers, including our insurance company subsidiaries. It is designed to evaluate the relative
financial condition of the insurer by application of a weighting formula to the companys assets
and its policyholder obligations. The key RBC calculation is to recast total surplus, after
application of the RBC formula, in terms of an authorized control level RBC. The authorized control
level RBC is a number determined under the RBC formula in accordance with certain RBC instructions.
Once the authorized control level RBC is determined, it is contrasted against the companys total
adjusted capital. A high multiple generally indicates stronger capitalization and financial
strength, while a lower multiple reflects lesser capitalization and strength. Each states statutes
also create certain RBC multiples at which either the company or the regulator must take action.
For example, there are four defined RBC levels that trigger different regulatory events. The
minimum RBC level is called the company action level RBC and is generally defined as the product of
2.0 and the companys authorized control level RBC. Next is a regulatory action level RBC, which is
defined as the product of 1.5 and the companys authorized control level RBC. Below the regulatory
action level RBC is the authorized control level RBC. Finally, there is a mandatory control level
RBC, which means the product of 0.70 and the companys authorized control level RBC.
As long as the companys total adjusted capital stays above the company action level RBC
(i.e., at greater than 2.0 times the authorized control level RBC), regulators generally will not
take any corrective action. However, if an insurance companys total adjusted capital falls below
the company action level RBC, but remains above the regulatory action level RBC, the company is
required to submit an RBC plan to the applicable state regulator(s) that identifies the conditions
that contributed to the substandard RBC level and identifies a remediation plan to increase the
companys total adjusted capital above 2.0 times its authorized control level RBC. If a companys
total adjusted capital falls below its regulatory action level RBC but remains above its authorized
control level RBC, then the regulator may require the insurer to submit an RBC plan, perform a
financial examination or analysis on the companys assets and liabilities, and may issue an order
specifying corrective action for the company to take to improve its RBC number. In the event an
insurance companys total adjusted capital falls below its authorized control level RBC, the state
regulator may require the insurer to submit an RBC plan or may place the insurer under regulatory
supervision. If an insurance companys total adjusted capital were to fall below its mandatory
control level RBC, the regulator is obligated to place the insurer under regulatory control, which
could ultimately include, among other actions, administrative supervision, rehabilitation or
liquidation.
At December 31, 2009, FAICs total adjusted capital was 5.7 times its authorized control level
RBC, requiring no corrective action on FAICs part. Likewise, at December 31, 2009, FAIC-GA and
FAIC-TN had total adjusted capital of 3.5 and 4.1, respectively, times their authorized control
level RBC.
12
FIRST ACCEPTANCE CORPORATION 10-K
IRIS Ratios. The NAIC Insurance Regulatory Information System, or IRIS, is part of a
collection of analytical tools designed to provide state insurance regulators with an integrated
approach to screening and analyzing the financial condition of insurance companies operating in
their respective states. IRIS is intended to assist state insurance regulators in targeting
resources to those insurers in greatest need of regulatory attention. IRIS consists of two phases:
statistical and analytical. In the statistical phase, the NAIC database generates key financial
ratio results based on financial information obtained from insurers annual statutory statements.
The analytical phase is a review of the annual statements, financial ratios and other automated
solvency tools. The primary goal of the analytical phase is to identify companies that appear to
require immediate regulatory attention. A ratio result falling outside the defined range of IRIS
ratios is not considered a failing result; rather, unusual values are viewed as part of the
regulatory early monitoring system. Furthermore, in some years, it may not be unusual for
financially sound insurance companies to have several ratios with results outside the defined
ranges.
At December 31, 2009, FAIC-GA and FAIC-TN each had one IRIS ratio outside the defined range as
follows:
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FAIC-GA had a ratio above the defined threshold for the two-year overall operating
ratio as the calculated ratio was above 100%. FAIC-GAs ratio was 102% and was
primarily the result of the $9.2 million litigation settlement expense recognized in
2008. Without this expense, FAIC-GAs ratio would have been 94% which would have been
below the defined threshold. |
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FAIC-TN had a ratio right at the defined threshold for the change in net premiums
written which is 33%. FAIC-TNs decrease in net premiums written from 2008 to 2009
included approximately $3.5 million in net premiums written related to the transfer of
the beginning policy liabilities under an intercompany pooling agreement that was
effected at the beginning of 2008. Excluding the effect of this one-time transfer,
FAIC-TN would have had a change in net premiums written of 21% which would have been
below the defined threshold. |
These IRIS results were provided to regulators on February 26, 2010. Since that date, no
regulatory action has been taken, nor is any such action anticipated.
Employees
At June 30, 2010, we had approximately 1,055 employees. Our employees are not covered by any
collective bargaining agreements.
Available Information
We file reports with the United States Securities and Exchange Commission (SEC), including
Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, and other reports from time to time.
The public may read and copy any materials filed with the SEC at the SECs Public Reference Room at
100 F Street, N.E., Washington D.C. 20549. The public may obtain information about the operation of
the Public Reference Room by calling the SEC at 1-800-SEC-0330. We are an electronic filer, and the
SEC maintains an Internet site at www.sec.gov that contains our reports, proxy and information
statements, and other information filed electronically. These website addresses are provided as
inactive textual references only, and the information provided on those websites is not part of
this report and is therefore not incorporated by reference unless such information is otherwise
specifically referenced elsewhere in this report.
Internet Website
We maintain an internet website at the following address: www.firstacceptancecorp.com. The
information on the Companys website is not incorporated by reference in this report. We make
available on or through our website certain reports and amendments to those reports that we file
with, or furnish to, the SEC in accordance with the Securities Exchange Act of 1934, as amended.
These include our Annual Reports on Form 10-K, our Quarterly Reports on Form 10-Q, our current
reports on Form 8-K, and any amendments to these reports. We make this information available on our
website free of charge as soon as reasonably practicable after we electronically file the
information with, or furnish it to, the SEC.
13
FIRST ACCEPTANCE CORPORATION 10-K
Investing in the Company involves risk. You should carefully consider the following risk
factors, any of which could have a significant or material adverse effect on the Company. This
information should be considered together with the other information contained in this report and
in the other reports and materials filed by us with the SEC, as well as news releases and other
information publicly disseminated by us from time to time.
Our loss and loss adjustment expenses may exceed our reserves, which would adversely impact our
results of operations and financial condition.
We establish reserves for the estimated amount of claims under the terms of the insurance
policies underwritten by our insurance company subsidiaries. The amount of the reserves is
determined based on historical claims information, industry statistics and other factors. The
establishment of appropriate reserves is an inherently uncertain process due to a number of
factors, including the difficulty in predicting the frequency and severity of claims, the rate of
inflation, the rate and direction of changes in trends, ongoing interpretation of insurance policy
provisions by courts, inconsistent decisions in lawsuits regarding coverage and broader theories of
liability. Any changes in claims settlement practices can also lead to changes in loss payment
patterns, which are used to estimate reserve levels. Our ability to accurately estimate our loss
and loss adjustment expense reserves may be made more difficult by changes in our business,
including rapid growth or entry into new markets, or changes in our customers purchasing habits.
If our reserves prove to be inadequate, we will be required to increase our loss reserves and the
amount of any such increase would reduce our income in the period that the deficiency is
recognized. The historic development of reserves for loss and loss adjustment expenses may not
necessarily reflect future trends in the development of these amounts. Consequently, our actual
losses could materially exceed our loss reserves, which would have a material adverse effect on our
results of operations and financial condition.
Our results may fluctuate as a result of cyclical changes in the non-standard personal automobile
insurance industry.
The non-standard personal automobile insurance industry is cyclical in nature. Likewise,
adverse economic conditions impact our customers and many will choose to reduce their coverage or
go uninsured during a weak economy. Employment rates, sales of used vehicles, consumer confidence
and other factors affect our customers purchasing habits. In the past, the industry has also been
characterized by periods of price competition and excess capacity followed by periods of high
premium rates and shortages of underwriting capacity. If new competitors enter the market, existing
competitors may attempt to increase market share by lowering rates. Such conditions could lead to
reduced prices, which would negatively impact our revenues and profitability. Recently, competitive
pricing and the weak economic conditions have resulted in declines in premiums in most states.
Given the cyclical nature of the industry and the economy, these conditions may negatively impact
our revenues and profitability.
Our business may be adversely affected by negative developments in the non-standard personal
automobile insurance industry.
Substantially all of our gross premiums written are generated from sales of non-standard
personal automobile insurance policies. As a result of our concentration in this line of business,
negative developments in the economic, competitive or regulatory conditions affecting the
non-standard personal automobile insurance industry could reduce our revenues, increase our
expenses or otherwise have a material adverse effect on our results of operations and financial
condition. For example, the current weak economic conditions in the United States have resulted in
fewer customers purchasing and maintaining non-standard personal automobile insurance policies and
certain customers reducing their insurance coverage. Developments affecting the non-standard
personal automobile insurance industry could have a greater effect on us compared with more
diversified insurers that also sell other types of automobile insurance products or write other
additional lines of insurance.
Due to our largely fixed cost structure, our profitability may decline if our sales volume were to
decline significantly.
Our reliance on leased retail locations staffed by employee-agents results in a cost structure
that has a high proportion of fixed costs as compared with other more traditional insurers. In
times of increasing sales volume, our acquisition cost per policy decreases, improving our expense
ratio, which we believe is one of the significant advantages of our business model. However, in
times of declining sales volume, the opposite occurs.
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FIRST ACCEPTANCE CORPORATION 10-K
Our investment portfolio may suffer reduced returns or other-than-temporary losses, which could
reduce our profitability.
Our results of operations depend, in part, on the performance of our investment portfolio. At
June 30, 2010, substantially all of our investment portfolio was invested either directly or
indirectly in debt securities, primarily in marketable, investment-grade, U.S. government
securities, municipal bonds, corporate bonds and collateralized mortgage obligations. Fluctuations
in interest rates and economic decline affect our returns on, and the fair value of, debt
securities. Unrealized gains and losses on debt securities are recognized in other comprehensive
income (loss) and increase or decrease our stockholders equity. At June 30, 2010, the fair value
of our investment portfolio exceeded the amortized cost by $8.6 million. An increase in interest
rates could reduce the fair value of our investments in debt securities. At June 30, 2010, the
impact of an immediate 100 basis point increase in market interest rates on our fixed maturities
and cash equivalents portfolio would have resulted in an estimated decrease in fair value of 3.5%,
or approximately $6.7 million. Defaults by third parties who fail to pay or perform obligations
could reduce our investment income and could also result in investment losses to our portfolio. See
Critical Accounting Estimates Investments in Item 7 and Note 2 to our consolidated financial
statements regarding determination of other-than-temporary impairment losses on investment
securities.
Our business is highly competitive, which may make it difficult for us to market our core products
effectively and profitably.
The non-standard personal automobile insurance business is highly competitive. We believe that
our primary insurance company competition comes not only from national insurance companies or their
subsidiaries, but also from non-standard insurers and independent agents that operate in a specific
region or single state in which we also operate. We believe that our significant competitors are
the Berkshire Hathaway insurance group (which includes GEICO), the Bristol West insurance group,
the Direct General insurance group, the Infinity insurance group, the Affirmative insurance group,
the Progressive insurance group, the Safe Auto insurance group and the Permanent General insurance
group. Some of our competitors have substantially greater financial and other resources than us,
and they may offer a broader range of products or competing products at lower prices. Our revenues,
profitability and financial condition could be materially adversely affected if we are required to
decrease or are unable to increase prices to stay competitive or if we do not successfully retain
our current customers and attract new customers.
Our business may be adversely affected by negative developments in the states in which we operate.
We currently operate in 12 states located primarily in the Southeastern and Midwestern United
States. For the year ended June 30, 2010, approximately 69% of our premiums earned were generated
from insurance policies written in five states. Our revenues and profitability are affected by
prevailing economic, demographic, regulatory, competitive and other conditions in the states in
which we operate. Changes in any of these conditions could make it more costly or difficult for us
to conduct business. Adverse regulatory developments, which could include reductions in the maximum
rates permitted to be charged, restrictions on rate increases, fundamental changes to the design or
implementation of the automobile insurance regulatory framework, or economic conditions that result
in fewer customers purchasing or maintaining insurance, could reduce our revenues, increase our
expenses or otherwise have a material adverse effect on our results of operations and financial
condition. These developments could have a greater effect on us, as compared with more diversified
insurers that also sell other types of automobile insurance products, write other additional lines
of insurance coverages or whose premiums are not concentrated in a single line of insurance.
Our ability to attract, develop, and retain talented employees, managers, and executives, and to
maintain appropriate staffing levels, is critical to our success.
Our success depends on our ability to attract, develop, and retain talented employees,
including executives, other key managers and employee-agents. Our loss of certain key officers and
employees, or the failure to attract and develop talented new executives and managers, could have a
materially adverse effect on our business.
In addition, we must forecast volume and other factors in changing business environments with
reasonable accuracy and adjust our hiring and training programs and employment levels accordingly.
Our failure to recognize the need for such adjustments, or our failure or inability to react
appropriately on a timely basis, could lead either to over-staffing (which would adversely affect
our cost structure) or under-staffing (impairing our ability to service our
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FIRST ACCEPTANCE CORPORATION 10-K
ongoing and new business) in one or more locations. In either such event, our financial
results, customer relationships, and brand could be materially adversely affected.
We may have difficulties in managing any expansion into new markets.
Any future growth plans may include expanding into new states by opening new retail locations,
acquiring the business and assets of other companies, and possibly introducing additional insurance
products or distribution methods. In order to grow our business successfully, we must apply for
and maintain necessary licenses, properly design and price our products and identify, hire and
train new claims, underwriting and sales employees. Our expansion will also place significant
demands on our management, operations, systems, accounting, internal controls and financial
resources. If we fail to do any one of these well, we may not be able to expand our business
successfully. Even if we successfully complete an acquisition, we face the risk that we may acquire
business in states in which market and other conditions may not be favorable to us. Any failure by
us to manage growth and to respond to changes in our business could have a material adverse effect
on our business, financial condition and results of operations.
We may not be successful in identifying acquisition candidates or integrating their operations,
which could harm our financial results.
In order to grow our business by acquisition, we must identify acquisition candidates and
integrate the acquired operations. If we do acquire additional companies or businesses, we could
face increased costs, or, if we are unable to successfully integrate the operations of the acquired
business into our operations, we could experience disruption of our business and distraction of our
management, which may not be offset by corresponding increases in revenues. The integration of
operations after an acquisition is subject to risks, including, among others, loss of key personnel
of the acquired company, difficulty associated with assimilating the personnel and operations of
the acquired company, potential disruption of ongoing business, maintenance of uniform standards,
controls, procedures and policies and impairment of the acquired companys reputation and
relationships with its employees and clients. Any of these may result in the loss of customers. It
is also possible that we may not realize, either at all or in a timely manner, any or all benefits
from recent and future acquisitions and may incur significant costs in connection with these
acquisitions. Failure to successfully integrate future acquisitions could materially adversely
affect the results of our operations.
New pricing, claim and coverage issues and class action litigation are continually emerging in the
automobile insurance industry, and these new issues could adversely impact our revenues,
profitability, or our methods of doing business.
As automobile insurance industry practices and regulatory, judicial and consumer conditions
change, litigation and unexpected and unintended issues related to claims, coverages and business
practices may emerge. These issues can have an adverse effect on our business by subjecting us to
liability, changing the way we price and market our products, extending coverage beyond our
underwriting intent, requiring us to obtain additional licenses or increasing the size of claims.
Recent examples of some emerging issues include:
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concerns over the use of an applicants credit score or zip code as a factor in making
risk selections and pricing decisions; |
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a growing trend of plaintiffs targeting automobile insurers in purported class action
litigation relating to sales and marketing practices and claims-handling practices, such as
total loss evaluation methodology, the use of aftermarket (non-original equipment
manufacturer) parts and the alleged diminution in value to insureds vehicles involved in
accidents; and |
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consumer groups lobbying state legislatures to regulate and require separate licenses
for individuals and companies engaged in the sale of ancillary products or services. |
The effects of these and other unforeseen emerging issues could subject us to liability or
negatively affect our revenues, profitability, or our methods of doing business.
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FIRST ACCEPTANCE CORPORATION 10-K
We may have difficulties successfully implementing our new pricing program.
We are currently implementing a new pricing program that is based on multivariate analysis of
our historical results and that will use insurance scoring as a variable. Concurrent with the new
pricing program, we intend to begin selling automobile insurance underwritten by other carriers
where our rates are not competitive with the market. The success of our new pricing program will
depend on our ability to properly design and accurately set rates in each of the states in which we
currently operate. There are no assurances that this new pricing program will be approved by all of
the insurance departments in these states. In addition, our success is also dependent upon our
ability to develop and maintain information systems to effectively support the administration of
this program. Our failure to properly design and price this new program could cause us to
underprice risks which would negatively affect our loss ratio, or we could overprice risks, which
could make our rates uncompetitive and reduce our number of policies in force. There are also no
assurances that we will be able to maintain contracts to write insurance with other carriers. Our
failure to maintain such contracts would adversely impact the new pricing program. The inability to
successfully implement this new program could adversely affect our operating results and financial
condition.
Our business may be adversely affected if we do not underwrite risks accurately and charge adequate
rates to policyholders.
Our financial condition, cash flows, and results of operations depend on our ability to
underwrite and set rates accurately for a full spectrum of risks. The role of the pricing function
is to ensure that rates are adequate to generate sufficient premium to pay losses, loss adjustment
expenses, and underwriting expenses, and to earn a profit. Pricing involves the acquisition and
analysis of historical accident and loss data, and the projection of future accident trends, loss
costs and expenses, and inflation trends, among other factors, for each of our products in multiple
risk tiers and many different markets. As a result, our ability to price accurately is subject to a
number of risks and uncertainties, including, without limitation:
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the availability of sufficient reliable data; |
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uncertainties inherent in estimates and assumptions, generally; |
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our ability to conduct a complete and accurate analysis of available data; |
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our ability to timely recognize changes in trends and to predict both the severity and
frequency of future losses with reasonable accuracy; |
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our ability to predict changes in certain operating expenses with reasonable accuracy; |
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the development, selection, and application of appropriate rating formulae or other
pricing methodologies; |
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our ability to innovate with new pricing strategies, and the success of those
innovations; |
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our ability to implement rate changes and obtain any required regulatory approvals on a
timely basis; |
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our ability to predict policyholder retention accurately; |
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unanticipated court decisions, legislation, or regulatory action; |
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the occurrence and severity of catastrophic events, such as hurricanes, hail storms,
other severe weather, and terrorist events; |
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understanding the impact of ongoing changes in our claim settlement practices; and |
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changing driving patterns. |
The realization of one or more of such risks may result in our pricing being based on
inadequate or inaccurate data or inappropriate analyses, assumptions, or methodologies, and may
cause us to estimate incorrectly future changes in the frequency or severity of claims. As a
result, we could underprice risks, which would negatively affect our underwriting profit margins,
or we could overprice risks, which could reduce our volume and competitiveness. In either event,
our operating results, financial condition, and cash flows could be materially adversely affected.
In addition, underpricing insurance policies over time could erode the capital position of one or
more of our insurance subsidiaries, constraining our ability to write new business.
17
FIRST ACCEPTANCE CORPORATION 10-K
Our
results are dependent on our ability to adjust claims accurately.
We must accurately evaluate and pay claims that are made under our insurance policies. Many
factors can affect our ability to pay claims accurately, including the training, experience, and
skill of our claims representatives, the extent of and our ability to recognize fraudulent or
inflated claims, the effectiveness of our management, and our ability to develop or select and
implement appropriate procedures, technologies, and systems to support our claims functions. Our
failure to pay claims fairly, accurately, and in a timely manner, or to deploy claims resources
appropriately, could result in unanticipated costs to us, lead to material litigation, undermine
customer goodwill and our reputation in the marketplace, and impair our brand image and, as a
result, materially adversely affect our competitiveness, financial results, prospects, and
liquidity.
We may write-off intangible assets, such as goodwill.
As a result of purchase accounting for our business combination transactions, our consolidated
balance sheet at June 30, 2010 contained intangible assets designated as goodwill and other
identifiable intangible assets totaling $76.5 million. On an ongoing basis, we evaluate whether
facts and circumstances indicate any impairment of value of intangible assets. As circumstances
change, we cannot assure you that the value of these intangible assets will be realized by us. If
we determine that a material impairment has occurred, we will be required to write-off the impaired
portion of intangible assets, which could have a material adverse effect on our results of
operations in the period in which the write-off occurs.
Our insurance company subsidiaries are subject to regulatory restrictions on paying dividends to
us.
Our holding company relies, in part, on receiving dividends from the insurance company
subsidiaries to pay its obligations. State insurance laws limit the ability of our insurance
company subsidiaries to pay dividends and require our insurance company subsidiaries to maintain
specified minimum levels of statutory capital and surplus. These restrictions affect the ability of
our insurance company subsidiaries to pay dividends to our holding company and may require our
subsidiaries to obtain the prior approval of regulatory authorities, which could slow the timing of
such payments to us or reduce the amount that can be paid. The limits on the amount of dividends
that can be paid by our insurance company subsidiaries may affect the ability of our holding
company to pay those obligations. The dividend-paying ability of the insurance company subsidiaries
is discussed in Note 19 to our consolidated financial statements.
Our ability to use net operating loss carryforwards to reduce future tax payments may be limited by
applicable law.
Based on our calculations and in accordance with the rules stated in the Internal Revenue Code
of 1986, as amended (the Code), we do not believe that any ownership change, as described in
the following paragraph and as defined in Section 382 of the Code, has occurred with respect to our
net operating losses (NOLs) and accordingly we believe that there is no existing annual
limitation under Section 382 of the Code on our ability to use NOLs to reduce our past and future
taxable income. We did not obtain, and currently do not plan to obtain, an Internal Revenue Service
(IRS) ruling or opinion of counsel regarding either of these conclusions.
Generally, an ownership change occurs if certain persons or groups increase their aggregate
ownership of our total capital stock by more than 50 percentage points in any three-year period. If
an ownership change occurs, our ability to use our NOLs to reduce income taxes is limited to an
annual amount (the Section 382 limitation) equal to the fair market value of our stock
immediately prior to the ownership change multiplied by the long term tax-exempt interest rate,
which is published monthly by the IRS. In the event of an ownership change, NOLs that exceed the
Section 382 limitation in any year will continue to be allowed as carryforwards for the remainder
of the carryforward period and such excess NOLs can be used to offset taxable income for years in
the carryforward period subject to the Section 382 limitation in each year. Regardless of whether
an ownership change occurs, the carryforward period for NOLs is either 15 or 20 years from the year
in which the losses giving rise to the NOLs were incurred, depending on when those losses were
incurred. The earliest losses that gave rise to our Section 382 limitation were incurred in 1996
and will expire in 2011. The most recent losses that gave rise to our NOLs were incurred in 2010
and will expire in 2030. If the carryforward period for any NOL were to expire before that NOL had
been fully utilized, the use of the unutilized portion of that NOL would be permanently prohibited.
Our use of new NOLs arising after the date of an ownership change would not be affected by the
Section 382 limitation, unless there were another ownership change after those new NOLs arose.
18
FIRST ACCEPTANCE CORPORATION 10-K
It is impossible for us to state that an ownership change will not occur in the future.
Limitations imposed by Code Section 382 and the restrictions contained in our certificate of
incorporation may limit our ability to issue additional stock to raise capital or acquire
businesses. To the extent not prohibited by our certificate of incorporation, we may decide in the
future that it is necessary or in our interest to take certain actions that could result in an
ownership change.
Code Section 269 permits the IRS to disallow any deduction, credit or allowance, including the
utilization of NOLs, that otherwise would not be available but for the acquisition of control of a
corporation, including acquisition by merger, for the principal purpose of avoiding federal income
taxes, including avoidance through the use of NOLs. If the IRS were to assert that the principal
purpose of the April 2004 acquisition of USAuto was the avoidance of federal income tax, we would
have the burden of proving that this was not the principal purpose. The determination of the
principal purpose of a transaction is purely a question of fact and requires an analysis of all the
facts and circumstances surrounding the transaction. Courts generally have been reluctant to apply
Code Section 269 where a reasonable business purpose existed for the timing and form of the
transaction, even if the availability of tax benefits was also an acknowledged consideration in the
transaction. We think that Code Section 269 should not apply to the acquisition of USAuto because
we can show that genuine business purposes existed for the USAuto acquisition and that tax
avoidance was not the principal purpose for the merger. Our primary objective of the merger was to
seek long-term growth for our stockholders through an acquisition. To that end, we redeployed a
significant amount of our existing capital and offered our existing stockholders the right to make
a substantial additional investment in the Company to facilitate the acquisition of USAuto. If,
nevertheless, the IRS were to assert that Code Section 269 applied and if such assertion were
sustained, our ability to utilize our past and existing NOLs would be severely limited or
extinguished. Due to the fact that the application of Code Section 269 is ultimately a question of
fact, there can be no assurance that the IRS would not prevail if it were to assert the application
of Code Section 269.
Our insurance company subsidiaries are subject to statutory capital and surplus requirements and
other standards, and their failure to meet these requirements or standards could subject them to
regulatory actions.
Our insurance company subsidiaries are subject to RBC standards and other minimum statutory
capital and surplus requirements imposed under the laws of their respective states of domicile. The
RBC standards, which are based upon the RBC Model Act adopted by the NAIC, require our insurance
company subsidiaries to annually report their results of RBC calculations to the state departments
of insurance and the NAIC.
Failure to meet applicable RBC requirements or minimum statutory capital and surplus
requirements could subject our insurance company subsidiaries to further examination or corrective
action imposed by state regulators, including limitations on their writing of additional business,
state supervision or even liquidation. Any changes in existing RBC standards or minimum statutory
capital and surplus requirements may require our insurance company subsidiaries to increase their
statutory capital and surplus levels, which they may be unable to do. This calculation is performed
on a calendar year basis, and at December 31, 2009, our insurance company subsidiaries maintained
RBC levels in excess of an amount that would require any corrective actions on their part.
State regulators also screen and analyze the financial condition of insurance companies using
the NAIC IRIS system. As part of IRIS, the NAIC database generates key financial ratio results
obtained from an insurers annual statutory statements. A ratio result falling outside the defined
range of IRIS ratios may result in further examination by a state regulator to determine if
corrective action is necessary. At December 31, 2009, two of our three insurance company
subsidiaries had IRIS ratios outside the defined ranges that were reported to the appropriate
regulatory authorities, but no regulatory authority has informed our insurance company subsidiaries
that it intends to conduct a further examination of their financial condition. We cannot assure
you that regulatory authorities will not conduct any such examination of the financial condition of
our insurance company subsidiaries, or of the outcome of any such investigation. See Item 1.
Business Regulatory Environment.
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FIRST ACCEPTANCE CORPORATION 10-K
We rely on our information technology and communication systems, and the failure of these systems
could materially adversely affect our business.
Our business is highly dependent on the proprietary integrated technology systems that enable
timely and efficient communication and data sharing among the various segments of our integrated
operations. These systems are used in all our operations, including quotation, policy issuance,
customer service, underwriting, claims, accounting, and communications. We have a technical staff
that develops, maintains and supports all elements of our technology infrastructure. However,
disruption of power systems or communication systems or any failure of our systems could result in
deterioration in our ability to respond to customers requests, write and service new business, and
process claims in a timely manner. We believe we have appropriate types and levels of insurance to
protect our real property, systems, and other assets. However, insurance does not provide full
reimbursement for all losses, both direct and indirect, that may result from an event affecting our
information technology and communication systems.
Severe weather conditions and other catastrophes may result in an increase in the number and amount
of claims filed against us.
Our business is exposed to the risk of severe weather conditions and other catastrophes.
Catastrophes can be caused by various events, including natural events, such as severe winter
weather, hurricanes, tornados, windstorms, earthquakes, hailstorms, thunderstorms and fires, and
other events, such as explosions, terrorist attacks and riots. The incidence and severity of
catastrophes and severe weather conditions are inherently unpredictable. Severe weather conditions
generally result in more automobile accidents, leading to an increase in the number of claims filed
and/or the amount of compensation sought by claimants.
In the event that a severe weather condition or other major catastrophe were to occur
resulting in property losses to us, we would have to cover such losses using additional resources,
which could increase our losses incurred, cause our statutory capital and surplus to fall below
required levels or otherwise have a material adverse effect on our results of operations and
financial condition.
A few of our stockholders have significant control over us, and their interests may differ from
yours.
Three of our stockholders, Gerald J. Ford, our Chairman of the Board; Stephen J. Harrison, our
Chief Executive Officer and a current director; and Thomas M. Harrison, Jr., a current director, in
the aggregate, control approximately 62% of our outstanding common stock. If these stockholders
acted or voted together, they would have the power to control the election and removal of our
directors. They would also have significant control over other matters requiring stockholder
approval, including the approval of major corporate transactions and proposed amendments to our
certificate of incorporation. This concentration of ownership may delay or prevent a change in
control of the Company, as well as frustrate attempts to replace or remove current management, even
when a change may be in the best interests of our other stockholders. Furthermore, the interests of
these stockholders may not always coincide with the interests of the Company or other stockholders.
We and our subsidiaries are subject to comprehensive regulation and supervision that may restrict
our ability to earn profits.
We and our subsidiaries are subject to comprehensive regulation and supervision by the
insurance departments in the states where our subsidiaries are domiciled and where our subsidiaries
sell insurance and ancillary products, issue policies and handle claims. Certain regulatory
restrictions and prior approval requirements may affect our subsidiaries ability to operate,
change their operations or obtain necessary rate adjustments in a timely manner or may increase our
costs and reduce profitability.
Among other things, regulation and supervision of us and our subsidiaries extends to:
Required Licensing. We and our subsidiaries operate under licenses issued by various state
insurance authorities. These licenses govern, among other things, the types of insurance coverages,
agency and claims services and motor club products that we and our subsidiaries may offer consumers
in the particular state. If a regulatory authority denies or delays granting any such license, our
ability to enter new markets or offer new products could be substantially impaired.
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FIRST ACCEPTANCE CORPORATION 10-K
Transactions Between Insurance Companies and Their Affiliates. Our insurance company
subsidiaries are organized and domiciled under the insurance statutes of Texas, Georgia and
Tennessee. The insurance laws in these states provide that all transactions among members of an
insurance holding company system must be done at arms length and shown to be fair and reasonable
to the regulated insurer. Transactions between our insurance company subsidiaries and other
subsidiaries generally must be disclosed to the state regulators, and prior approval of the
applicable regulator generally is required before any material or extraordinary transaction may be
consummated. State regulators may refuse to approve or delay approval of such a transaction, which
may impact our ability to innovate or operate efficiently.
Regulation of Rates and Policy Forms. The insurance laws of most states in which our
insurance company subsidiaries operate require insurance companies to file premium rate schedules
and policy forms for review and approval. State insurance regulators have broad discretion in
judging whether our rates are adequate, not excessive and not unfairly discriminatory. The speed at
which we can change our rates in response to market conditions or increasing costs depends, in
part, on the method by which the applicable states rating laws are administered. Generally, state
insurance regulators have the authority to disapprove our requested rates. If as permitted in some
states, we begin using new rates before they are approved, we may be required to issue premium
refunds or credits to our policyholders if the new rates are ultimately disapproved by the
applicable state regulator. In some states, there has been pressure in past years to reduce premium
rates for automobile and other personal insurance or to limit how often an insurer may request
increases for such rates. In states where such pressure is applied, our ability to respond to
market developments or increased costs in that state may be adversely affected.
Investment Restrictions. Our insurance company subsidiaries are subject to state laws and
regulations that require diversification of their investment portfolios and that limit the amount
of investments in certain categories. Failure to comply with these laws and regulations would cause
non-conforming investments to be treated as non-admitted assets for purposes of measuring statutory
capital and surplus and, in some instances, would require divestiture. If a non-conforming asset is
treated as a non-admitted asset, it would lower the affected subsidiarys capital and surplus and
thus, its ability to write additional premiums and pay dividends.
Restrictions on Cancellation, Non-Renewal or Withdrawal. Many states have laws and
regulations that limit an insurers ability to exit a market. For example, certain states limit an
automobile insurers ability to cancel or not renew policies. Some states prohibit an insurer from
withdrawing from one or more lines of business in the state, except pursuant to a plan approved by
the state insurance department. The state insurance department may disapprove a plan that may lead
to market disruption. These laws and regulations that limit cancellations and non-renewals and that
subject business withdrawals to prior approval restrictions could limit our ability to exit
unprofitable markets or discontinue unprofitable products in the future.
Provisions in our certificate of incorporation and bylaws may prevent a takeover or a change in
management that you may deem favorable.
Our certificate of incorporation contains prohibitions on the transfer of our common stock to
avoid limitations on the use of the NOL carryforwards and other federal income tax attributes that
we inherited from our predecessor. These restrictions could prevent or inhibit a third party from
acquiring us. Our certificate of incorporation generally prohibits, without the prior approval of
our board of directors, any transfer of common stock, any subsequent issue of voting stock or stock
that participates in our earnings or growth, and certain options with respect to such stock, if the
transfer of such stock or options would (i) cause any group or person to own 4.9% or more, by
aggregate value, of the outstanding shares of our common stock, (ii) increase the ownership
position of any person or group that already owns 4.9% or more, by aggregate value, of the
outstanding shares of our common stock, or (iii) cause any person or group to be treated like the
owner of 4.9% or more, by aggregate value, of our outstanding shares of common stock for tax
purposes.
Our certificate of incorporation and bylaws also contain the following provisions that could
prevent or inhibit a third party from acquiring us:
|
|
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the requirement that only stockholders owning at least one-third of the outstanding shares of our common stock may call a special stockholders meeting; and |
|
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|
|
the requirement that stockholders owning at least two-thirds of the outstanding shares
of our common stock must approve any amendment to our certificate of incorporation
provisions concerning the transfer restrictions and the ability to call special
stockholders meetings. |
21
FIRST ACCEPTANCE CORPORATION 10-K
Under our certificate of incorporation, we may issue shares of preferred stock on terms that
are unfavorable to the holders of our common stock. The issuance of shares of preferred stock could
also prevent or inhibit a third party from acquiring us. The existence of these provisions could
depress the price of our common stock, could delay or prevent a takeover attempt or could prevent
attempts to replace or remove incumbent management.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
We lease office space in Nashville, Tennessee for our corporate offices, claims, customer
service and data center (approximately 53,000 square feet). We also lease office space for our
regional claims offices in Chicago, Illinois and Tampa, Florida and for our regional customer
service center in Chicago, Illinois. Our retail locations are all leased and typically are located
in storefronts in retail shopping centers, and each location typically contains less than 1,000
square feet of space. See Note 7 to our consolidated financial statements for further information
about our leases.
Item 3. Legal Proceedings
We and our subsidiaries are named from time to time as defendants in various legal actions
that are incidental to our business, including those which arise out of or are related to the
handling of claims made in connection with our insurance policies and claims handling. The
plaintiffs in some of these lawsuits have alleged bad faith or extracontractual damages, and some
have sought punitive damages or class action status. We believe that the resolution of these legal
actions will not have a material adverse effect on our financial condition or results of
operations. However, the ultimate outcome of these matters is uncertain.
Item 4. (Removed and Reserved)
22
FIRST ACCEPTANCE CORPORATION 10-K
PART II
Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Our common stock is currently quoted on the New York Stock Exchange under the symbol FAC.
The following table sets forth quarterly high and low sales prices for our common stock for the
periods indicated. All price quotations represent prices between dealers, without accounting for
retail mark-ups, mark-downs or commissions, and may not represent actual transactions.
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|
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|
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Price Range |
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|
High |
|
|
Low |
|
Year Ended June 30, 2009 |
|
|
|
|
|
|
|
|
First Quarter |
|
$ |
4.70 |
|
|
$ |
2.76 |
|
Second Quarter |
|
|
3.80 |
|
|
|
2.18 |
|
Third Quarter |
|
|
3.45 |
|
|
|
1.66 |
|
Fourth Quarter |
|
|
3.20 |
|
|
|
1.81 |
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, 2010 |
|
|
|
|
|
|
|
|
First Quarter |
|
$ |
3.12 |
|
|
$ |
1.92 |
|
Second Quarter |
|
|
2.80 |
|
|
|
1.68 |
|
Third Quarter |
|
|
2.63 |
|
|
|
1.78 |
|
Fourth Quarter |
|
|
2.28 |
|
|
|
1.55 |
|
The
closing price of our common stock on August 30, 2010 was $1.70.
Holders
According to the records of our transfer agent, there were 480 holders of record of our common
stock on August 30, 2010, including record holders such as banks and brokerage firms who hold
shares for beneficial holders, and 48,509,258 shares of our common stock were outstanding.
Dividends
We paid no dividends during the two most recent fiscal years. We do not anticipate paying cash
dividends in the future. Any future determination to pay dividends will be at the discretion of our
Board of Directors and will depend upon, among other factors, our results of operations, financial
condition, capital requirements and contractual restrictions.
Stock Transfer Restrictions
Our certificate of incorporation (the Charter) contains prohibitions on the transfer of our
common stock to avoid limitations on the use of our NOL carryforwards and other federal income tax
attributes that we inherited from our predecessor. The Charter generally prohibits, without the
prior approval of our Board of Directors, any transfer of common stock, any subsequent issue of
voting stock or stock that participates in our earnings or growth, and certain options with respect
to such stock, if the transfer of such stock would cause any group or person to own 4.9% or more
(by aggregate value) of our outstanding shares or cause any person to be treated like the owner of
4.9% or more (by aggregate value) of our outstanding shares for tax purposes. Transfers in
violation of this prohibition will be void, unless our Board of Directors consents to the transfer.
If void, upon our demand, the purported transferee must return the shares to our agent to be sold,
or if already sold, the purported transferee must forfeit some, or possibly all, of the sale
proceeds. In connection with certain changes in the ownership of the holders of our shares, we may
require the holder to dispose of some or all of such shares. For this purpose, person is defined
broadly to mean any individual, corporation, estate, debtor, association, company, partnership,
joint venture, or similar organization.
23
FIRST ACCEPTANCE CORPORATION 10-K
Performance Graph
The following graph compares the total cumulative shareholder return for $100 invested in our
common shares against the cumulative total return of the Russell 3000 Index and the S&P Property &
Casualty Insurance Index on June 30, 2005 to the end of the most recently completed fiscal year.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among First Acceptance Corporation, the Russell 3000 Index
and the S&P Property & Casualty Insurance Index
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
2005 |
|
|
2006 |
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
2010 |
|
First Acceptance Corporation |
|
|
100.00 |
|
|
|
124.52 |
|
|
|
107.40 |
|
|
|
33.83 |
|
|
|
22.52 |
|
|
|
18.08 |
|
Russell 3000 |
|
|
100.00 |
|
|
|
109.56 |
|
|
|
131.55 |
|
|
|
114.86 |
|
|
|
84.35 |
|
|
|
97.61 |
|
S&P Property & Casualty Insurance |
|
|
100.00 |
|
|
|
105.84 |
|
|
|
121.07 |
|
|
|
84.77 |
|
|
|
65.96 |
|
|
|
83.59 |
|
Item 6. Selected Financial Data
The following tables provide selected historical consolidated financial and operating data of
the Company at the dates and for the periods indicated. In conjunction with the data provided in
the following tables and in order to more fully understand our historical consolidated financial
and operating data, you should also read our Managements Discussion and Analysis of Financial
Condition and Results of Operations and our consolidated financial statements and the accompanying
notes included in this report. We derived our selected historical consolidated financial data at
June 30, 2010 and 2009 and for the years ended June 30, 2010, 2009 and 2008 from our consolidated
financial statements included in this report. We derived our selected historical consolidated
financial data at June 30, 2008, 2007 and 2006 and for the years ended June 30, 2007 and 2006 from
our consolidated financial statements, which are not included in this report. The results for past
periods are not necessarily indicative of the results to be expected for any future period.
24
FIRST ACCEPTANCE CORPORATION 10-K
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
(in thousands, except per share data) |
|
Statement of Operations Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned |
|
$ |
187,046 |
|
|
$ |
224,113 |
|
|
$ |
285,914 |
|
|
$ |
300,661 |
|
|
$ |
208,771 |
|
Commission and fee income |
|
|
28,852 |
|
|
|
31,759 |
|
|
|
36,479 |
|
|
|
37,324 |
|
|
|
26,757 |
|
Investment income |
|
|
7,958 |
|
|
|
9,504 |
|
|
|
11,250 |
|
|
|
8,863 |
|
|
|
5,762 |
|
Net realized gains (losses) on investments,
available-for-sale |
|
|
(683 |
) |
|
|
89 |
|
|
|
(1,244 |
) |
|
|
(61 |
) |
|
|
3,562 |
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
850 |
|
|
|
4,150 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
223,173 |
|
|
|
265,465 |
|
|
|
332,399 |
|
|
|
347,637 |
|
|
|
249,002 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and loss adjustment expenses |
|
|
126,995 |
|
|
|
149,277 |
|
|
|
219,943 |
|
|
|
241,908 |
|
|
|
140,845 |
|
Insurance operating expenses |
|
|
79,833 |
|
|
|
87,124 |
|
|
|
98,433 |
|
|
|
97,629 |
|
|
|
75,773 |
|
Other operating expenses |
|
|
2,233 |
|
|
|
1,307 |
|
|
|
2,415 |
|
|
|
2,623 |
|
|
|
2,494 |
|
Litigation settlement |
|
|
(361 |
) |
|
|
1,570 |
|
|
|
7,468 |
|
|
|
|
|
|
|
|
|
Stock-based compensation |
|
|
1,048 |
|
|
|
2,053 |
|
|
|
1,507 |
|
|
|
1,063 |
|
|
|
500 |
|
Depreciation and amortization |
|
|
2,013 |
|
|
|
1,910 |
|
|
|
1,679 |
|
|
|
1,624 |
|
|
|
1,463 |
|
Interest expense |
|
|
3,931 |
|
|
|
4,138 |
|
|
|
4,977 |
|
|
|
1,874 |
|
|
|
898 |
|
Goodwill impairment(1) |
|
|
|
|
|
|
67,990 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
215,692 |
|
|
|
315,369 |
|
|
|
336,422 |
|
|
|
346,721 |
|
|
|
221,973 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
7,481 |
|
|
|
(49,904 |
) |
|
|
(4,023 |
) |
|
|
916 |
|
|
|
27,029 |
|
Provision (benefit) for income taxes(1) |
|
|
441 |
|
|
|
18,396 |
|
|
|
13,822 |
|
|
|
17,586 |
|
|
|
(1,039 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
7,040 |
|
|
$ |
(68,300 |
) |
|
$ |
(17,845 |
) |
|
$ |
(16,670 |
) |
|
$ |
28,068 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Share Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.15 |
|
|
$ |
(1.43 |
) |
|
$ |
(0.37 |
) |
|
$ |
(0.35 |
) |
|
$ |
0.59 |
|
Diluted |
|
$ |
0.14 |
|
|
$ |
(1.43 |
) |
|
$ |
(0.37 |
) |
|
$ |
(0.35 |
) |
|
$ |
0.57 |
|
Number of shares used to calculate net income (loss)
per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
47,961 |
|
|
|
47,664 |
|
|
|
47,628 |
|
|
|
47,584 |
|
|
|
47,487 |
|
Diluted |
|
|
48,638 |
|
|
|
47,664 |
|
|
|
47,628 |
|
|
|
47,584 |
|
|
|
49,576 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
(in thousands, except per share data) |
|
Balance Sheet Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash
equivalents and total investments |
|
$ |
222,734 |
|
|
$ |
217,512 |
|
|
$ |
228,216 |
|
|
$ |
210,716 |
|
|
$ |
159,362 |
|
Total assets |
|
|
356,342 |
|
|
|
358,956 |
|
|
|
473,230 |
|
|
|
498,892 |
|
|
|
435,327 |
|
Loss and loss adjustment expense reserves |
|
|
73,198 |
|
|
|
83,973 |
|
|
|
101,407 |
|
|
|
91,446 |
|
|
|
62,822 |
|
Notes and debentures payable |
|
|
41,240 |
|
|
|
41,240 |
|
|
|
45,153 |
|
|
|
64,300 |
|
|
|
23,612 |
|
Total liabilities |
|
|
179,152 |
|
|
|
199,100 |
|
|
|
247,771 |
|
|
|
259,408 |
|
|
|
181,904 |
|
Total stockholders equity |
|
|
177,190 |
|
|
|
159,856 |
|
|
|
225,459 |
|
|
|
239,484 |
|
|
|
253,423 |
|
Book value per common share |
|
$ |
3.65 |
|
|
$ |
3.31 |
|
|
$ |
4.69 |
|
|
$ |
5.03 |
|
|
$ |
5.33 |
|
|
|
|
(1) |
|
The year ended June 30, 2009 includes a goodwill impairment charge of $68.0
million, a related increase in the tax provision of $15.3 million, and a tax benefit of $5.1
million related to the utilization of federal net operating loss (NOL) carryforwards that
were previously reserved for through a valuation allowance. The provision for income taxes for
the year ended June 30, 2008 includes a charge of $11.4 million related to the expiration of
certain federal NOL carryforwards as well as an increase in the valuation allowance of $3.6
million for the deferred tax asset for certain federal NOL carryforwards resulting in a charge
totaling $15.0 million. The provision for income taxes for the year ended June 30, 2007
includes an increase in the valuation allowance for the deferred tax asset of $6.9 million as
well as $10.0 million related to the expiration of certain federal NOL carryforwards resulting
in a charge totaling $16.9 million. The benefit from income taxes for the year ended June 30,
2006 includes a decrease in the valuation allowance for the deferred tax asset of $10.5
million. |
25
FIRST ACCEPTANCE CORPORATION 10-K
Item 7. Managements Discussion and Analysis of Financial Condition and Results of
Operations
The following discussion should be read in conjunction with our consolidated financial
statements and accompanying notes included in this report. This discussion contains forward-looking
statements that involve risks and uncertainties. Our actual results could differ materially from
those anticipated in these forward-looking statements as a result of various factors, including
those discussed below and elsewhere in this report, particularly under the caption Item 1A. Risk
Factors.
Forward-Looking Statements
This report contains forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. All statements made in this report, other than statements of historical fact, are
forward-looking statements. You can identify these statements from our use of the words may,
should, could, potential, continue, plan, forecast, estimate, project, believe,
intent, anticipate, expect, target, is likely, will, or the negative of these terms and
similar expressions. These statements are made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. These forward-looking statements may include,
among other things statements and assumptions relating to:
|
|
|
our future growth, income, income per share and other financial performance
measures; |
|
|
|
|
the anticipated effects on our results of operations or financial condition from
recent and expected developments or events; |
|
|
|
|
the financial condition of, and other issues relating to the strength of and
liquidity available to, issuers of securities held in our investment portfolio; |
|
|
|
|
the accuracy and adequacy of our loss reserving methodologies; and |
|
|
|
|
our business and growth strategies. |
We believe that our expectations are based on reasonable assumptions. However, these
forward-looking statements involve known and unknown risks, uncertainties and other important
factors that could cause our actual results, performance or achievements, or industry results to
differ materially from our expectations of future results, performance or achievements expressed or
implied by these forward-looking statements. In addition, our past results of operations do not
necessarily indicate our future results. We discuss these and other uncertainties in Item 1A. Risk
Factors, as well as other sections, of this report.
You should not place undue reliance on any forward-looking statements. These statements speak
only as of the date of this report. Except as otherwise required by applicable laws, we undertake
no obligation to publicly update or revise any forward-looking statements or the risk factors
described in this report, whether as a result of new information, future events, changed
circumstances or any other reason after the date of this report.
26
FIRST ACCEPTANCE CORPORATION 10-K
General
We are principally a retailer, servicer and underwriter of non-standard personal automobile
insurance. We also own two tracts of land in San Antonio, Texas that are held for sale.
Non-standard personal automobile insurance is made available to individuals who are categorized as
non-standard because of their inability or unwillingness to obtain standard insurance coverage
due to various factors, including payment history, payment preference, failure in the past to
maintain continuous insurance coverage, driving record and/or vehicle type. Generally, our
customers are required by law to buy a minimum amount of automobile insurance.
At August 31, 2010, we leased and operated 393 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 August 31, 2010, we wrote
non-standard personal automobile insurance in 12 states and were licensed in 13 additional states.
The following table shows the number of our retail locations. Retail location counts are based
upon the date that a location commenced or ceased writing business.
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
|
2010 |
|
|
2009 |
|
Retail locations beginning of period |
|
|
418 |
|
|
|
431 |
|
Opened |
|
|
1 |
|
|
|
1 |
|
Closed |
|
|
(25 |
) |
|
|
(14 |
) |
|
|
|
|
|
|
|
Retail locations end of period |
|
|
394 |
|
|
|
418 |
|
|
|
|
|
|
|
|
The following table shows the number of our retail locations by state.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Alabama |
|
|
25 |
|
|
|
25 |
|
|
|
25 |
|
Florida |
|
|
31 |
|
|
|
39 |
|
|
|
40 |
|
Georgia |
|
|
60 |
|
|
|
61 |
|
|
|
61 |
|
Illinois |
|
|
74 |
|
|
|
78 |
|
|
|
80 |
|
Indiana |
|
|
17 |
|
|
|
18 |
|
|
|
19 |
|
Mississippi |
|
|
8 |
|
|
|
8 |
|
|
|
8 |
|
Missouri |
|
|
12 |
|
|
|
12 |
|
|
|
14 |
|
Ohio |
|
|
27 |
|
|
|
27 |
|
|
|
29 |
|
Pennsylvania |
|
|
16 |
|
|
|
17 |
|
|
|
19 |
|
South Carolina |
|
|
26 |
|
|
|
27 |
|
|
|
28 |
|
Tennessee |
|
|
19 |
|
|
|
20 |
|
|
|
20 |
|
Texas |
|
|
79 |
|
|
|
86 |
|
|
|
88 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
394 |
|
|
|
418 |
|
|
|
431 |
|
|
|
|
|
|
|
|
|
|
|
27
FIRST ACCEPTANCE CORPORATION 10-K
Consolidated Results of Operations
Overview
Our primary focus is the selling, servicing and underwriting of non-standard personal
automobile insurance. Our real estate and corporate segment consists of activities related to the
disposition of real estate held for sale, interest expense associated with debt, and other general
corporate overhead expenses.
The following table presents selected financial data for our insurance operations and real
estate and corporate segments (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Insurance |
|
$ |
223,054 |
|
|
$ |
265,341 |
|
|
$ |
332,219 |
|
Real estate and corporate |
|
|
119 |
|
|
|
124 |
|
|
|
180 |
|
|
|
|
|
|
|
|
|
|
|
Consolidated total |
|
$ |
223,173 |
|
|
$ |
265,465 |
|
|
$ |
332,399 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes: |
|
|
|
|
|
|
|
|
|
|
|
|
Insurance |
|
$ |
14,568 |
|
|
$ |
(42,536 |
) |
|
$ |
4,685 |
|
Real estate and corporate |
|
|
(7,087 |
) |
|
|
(7,368 |
) |
|
|
(8,708 |
) |
|
|
|
|
|
|
|
|
|
|
Consolidated total |
|
$ |
7,481 |
|
|
$ |
(49,904 |
) |
|
$ |
(4,023 |
) |
|
|
|
|
|
|
|
|
|
|
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 and assumed, agency fees and commissions and fees for other ancillary products
and services; and |
|
|
|
|
investment income earned on the invested assets of the insurance company
subsidiaries. |
The following table presents premiums earned by state (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Premiums earned: |
|
|
|
|
|
|
|
|
|
|
|
|
Georgia |
|
$ |
40,712 |
|
|
$ |
49,762 |
|
|
$ |
60,928 |
|
Illinois |
|
|
24,550 |
|
|
|
27,583 |
|
|
|
32,009 |
|
Texas |
|
|
24,243 |
|
|
|
25,971 |
|
|
|
33,769 |
|
Florida |
|
|
20,808 |
|
|
|
26,113 |
|
|
|
43,017 |
|
Alabama |
|
|
19,338 |
|
|
|
23,948 |
|
|
|
28,780 |
|
Ohio |
|
|
12,452 |
|
|
|
12,914 |
|
|
|
15,416 |
|
Tennessee |
|
|
11,764 |
|
|
|
15,269 |
|
|
|
20,772 |
|
South Carolina |
|
|
11,424 |
|
|
|
17,887 |
|
|
|
23,634 |
|
Pennsylvania |
|
|
10,566 |
|
|
|
11,437 |
|
|
|
10,041 |
|
Indiana |
|
|
4,962 |
|
|
|
5,537 |
|
|
|
7,131 |
|
Missouri |
|
|
3,261 |
|
|
|
3,907 |
|
|
|
5,630 |
|
Mississippi |
|
|
2,966 |
|
|
|
3,785 |
|
|
|
4,787 |
|
|
|
|
|
|
|
|
|
|
|
Total premiums earned |
|
$ |
187,046 |
|
|
$ |
224,113 |
|
|
$ |
285,914 |
|
|
|
|
|
|
|
|
|
|
|
28
FIRST ACCEPTANCE CORPORATION 10-K
The following table presents the change in the total number of policies in force for the
insurance operations. Policies in force increase as a result of new policies issued and decrease as
a result of policies that are canceled or expire and are not renewed.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Policies in force beginning of period |
|
|
158,222 |
|
|
|
194,079 |
|
|
|
226,974 |
|
Net decrease during period |
|
|
(3,567 |
) |
|
|
(35,857 |
) |
|
|
(32,895 |
) |
|
|
|
|
|
|
|
|
|
|
Policies in force end of period |
|
|
154,655 |
|
|
|
158,222 |
|
|
|
194,079 |
|
|
|
|
|
|
|
|
|
|
|
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.
The following table presents the loss, expense and combined ratios for our insurance
operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Loss and loss adjustment expense |
|
|
67.9 |
% |
|
|
66.6 |
% |
|
|
76.9 |
% |
Expense |
|
|
27.3 |
% |
|
|
24.7 |
% |
|
|
21.7 |
% |
|
|
|
|
|
|
|
|
|
|
Combined |
|
|
95.2 |
% |
|
|
91.3 |
% |
|
|
98.6 |
% |
|
|
|
|
|
|
|
|
|
|
The non-standard personal automobile insurance industry is cyclical in nature. Likewise,
adverse economic conditions impact our customers and many will choose to reduce their coverage or
go uninsured during a weak economy.
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.
29
FIRST ACCEPTANCE CORPORATION 10-K
The value of our consolidated investment portfolio was $196.6 million at June 30, 2010 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 on
an after-tax basis. At June 30, 2010, we had gross unrealized gains of $10.1 million and gross
unrealized losses of $1.4 million.
At June 30, 2010, 95.3% of the fair value of our fixed maturity portfolio was rated
investment grade (a credit rating of AAA to BBB) by nationally recognized rating organizations.
The average credit rating of our fixed maturity portfolio was AA- at June 30, 2010. 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 $41.8 million at June 30, 2010 and represented 22% of
our fixed maturity portfolio. At June 30, 2010, 89% of our CMOs were considered investment grade by
nationally recognized rating agencies. In addition, 83% of our CMOs were rated AAA and 67% of our
CMOs were backed by agencies of the United States government. Of the non-agency backed CMOs, 47%
were rated AAA.
The following table summarizes our investment securities at June 30, 2010 (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized |
|
|
Gross Unrealized |
|
|
Gross Unrealized |
|
|
Fair |
|
|
|
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 table sets forth the scheduled maturities of our fixed maturity securities at
June 30, 2010 based on their fair values (in thousands). Actual maturities may differ from
contractual maturities because certain securities may be called or prepaid by the issuers.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities with No |
|
|
All |
|
|
|
Securities with |
|
|
Securities with |
|
|
Unrealized Gains or |
|
|
Fixed Maturity |
|
|
|
Unrealized Gains |
|
|
Unrealized Losses |
|
|
Losses |
|
|
Securities |
|
One year or less |
|
$ |
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30
FIRST ACCEPTANCE CORPORATION 10-K
Other-Than-Temporary Impairment
Effective April 1, 2009, we adopted the provisions of Financial Accounting Standards Board
(FASB) Accounting Standards Codification (ASC) 320-10-65, Recognition and Presentation of
Other-Than-Temporary Impairments (Prior authoritative literature: FASB Staff Position No. FAS
115-2). Under this guidance, we separate other-than-temporary impairment (OTTI) into the
following two components: (i) the amount related to credit losses, which is recognized in the
consolidated statement of operations and (ii) the amount related to all other factors, which is
recorded in other comprehensive income (loss). The credit-related portion of an OTTI is measured by
comparing a securitys amortized cost to the present value of its current expected cash flows
discounted at its effective yield 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 fixed maturity portfolio
for changes in fair value that might indicate potential impairments and perform detailed reviews on
such securities. Changes in fair value are evaluated to determine the extent to which such changes
are attributable to (i) fundamental factors specific to the issuer or (ii) market-related factors
such as interest rates or sector declines.
Securities with declines attributable to issuer-specific fundamentals are reviewed to identify
all available evidence to estimate the potential for impairment. Resources used include historical
financial data included in filings with the 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.
The issuer-specific factors considered in reaching the conclusion that securities with
declines are not other-than-temporary include (i) the extent and duration of the decline in fair
value, including the duration of any significant decline in value, (ii) whether the security is
current as to payments of principal and interest, (iii) a valuation of any underlying collateral,
(iv) current and future conditions and trends for both the business and its industry, (v) changes
in cash flow assumptions for CMOs and (vi) rating agency actions. Based on these factors, we make a
determination as to the probability of recovering principal and interest on the security.
On a quarterly basis, we review cash flow estimates for certain non-agency backed CMOs of
lesser credit quality following the guidance of FASB ASC 325-40-65, Amendments to the Impairment
Guidance of EITF Issue No. 99-20 (Prior authoritative literature: FSP EITF 99-20-1) (FASB ASC
325-40-65). Accordingly, when changes in estimated cash flows from the cash flows previously
estimated occur due to actual or estimated prepayment or credit loss experience, and the present
value of the revised cash flows is less than the present value previously estimated, OTTI is deemed
to have occurred. For non-agency backed CMOs not subject to FASB ASC 325-40-65, we 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 $1.0 million for the year ended June 30, 2010. We believe that the unrealized losses on
these securities are not necessarily predictive of the ultimate performance of the underlying
collateral. We do not intend to sell these securities and it is more likely than not that we will
not be required to sell these securities before the recovery of their amortized cost basis.
The OTTI charges on corporate bonds during the year ended June 30, 2009 were recorded as these
bonds were considered to be impaired based on the extent and duration of the declines in their fair
values and issuer-specific fundamentals relating to (i) poor operating results and weakened
financial conditions, (ii) negative industry trends further impacted by the recent economic decline
and (iii) a series of downgrades to their credit ratings. Based
31
FIRST ACCEPTANCE CORPORATION 10-K
on the factors that existed at the time of impairment, we did not believe that these bonds would
recover their unrealized losses in the near future.
We believe that the remaining securities having unrealized losses at June 30, 2010 were not
other-than-temporarily impaired. We also do not intend to sell any of these securities and it is
more likely than not that we will not be required to sell any of these securities before the
recovery of their amortized cost basis.
Year Ended June 30, 2010 Compared with the Year Ended June 30, 2009
Consolidated Results
Revenues for the year ended June 30, 2010 decreased 16% to $223.2 million from $265.5 million
in the prior year. Income before income taxes for the year ended June 30, 2010 was $7.5 million,
compared with a loss before income taxes of $49.9 million for the year ended June 30, 2009. The
loss before income taxes for the year ended June 30, 2009 included a goodwill impairment charge of
$68.0 million. Net income for the year ended June 30, 2010 was $7.0 million, compared with a net
loss of $68.3 million for the year ended June 30, 2009. The net loss for the year ended June 30,
2009 included the goodwill impairment charge and an additional net charge of $10.2 million
resulting from the $15.3 million tax effect of the goodwill impairment charge and the establishment
of a full valuation allowance on the remaining deferred tax assets offset by a tax benefit of $5.1
million related to the utilization of federal NOL carryforwards that were to expire on June 30,
2009 that had been previously reserved for through a valuation allowance. Basic and diluted net
income per share was $0.15 and $0.14, respectively, for the year ended June 30, 2010, compared with
basic and diluted net loss per share of $1.43 for the year ended June 30, 2009.
Insurance Operations
Revenues from insurance operations were $223.1 million for the year ended June 30, 2010,
compared with $265.3 million for the year ended June 30, 2009. Income before income taxes from
insurance operations for the year ended June 30, 2010 was $14.6 million, compared with loss before
income taxes from insurance operations of $42.5 million for the year ended June 30, 2009.
Premiums Earned
Premiums earned decreased by $37.1 million, or 16.5%, to $187.0 million for the year ended
June 30, 2010, from $224.1 million for the year ended June 30, 2009. The decrease in premiums
earned was primarily due to the weak economic conditions, which have caused both a decline in the
number of policies written, as well as an increase in the percentage of our customers purchasing
liability-only coverage. The closure of underperforming stores also contributed toward the decrease
in premiums earned. Approximately 69% of the $37.1 million decline in premiums earned for the year
ended June 30, 2010 was in our Alabama, Florida, Georgia, South Carolina and Texas markets.
The number of policies in force at June 30, 2010 decreased 2.3% over the same date in 2009
from 158,222 to 154,655, due to the factors noted above. At June 30, 2010, we operated 394 stores,
compared with 418 stores at June 30, 2009.
Commission and Fee Income
Commission and fee income decreased 9% to $28.9 million for the year ended June 30, 2010, from
$31.8 million for the year ended June 30, 2009. The decrease in commission and fee income was a
result of the decrease in the number of policies in force, partially offset by higher fee income
related to commissionable ancillary products sold through our retail locations.
Investment Income
Investment income decreased to $8.0 million during the year ended June 30, 2010 from $9.5
million during the year ended June 30, 2009. The decrease in investment income was
primarily a result of the sale of fixed maturity investments in fiscal year 2009 to generate
taxable income to utilize expiring NOLs and the reduced yields obtained
32
FIRST ACCEPTANCE CORPORATION 10-K
on reinvestment. At June 30, 2010 and 2009, the tax-equivalent book yield for our portfolio
was 4.3% and 3.5%, respectively, with effective durations of 3.16 and 2.26 years, respectively.
Net realized gains (losses) on investments, available-for-sale
Net realized losses on investments, available-for-sale during the year ended June 30, 2010
included $0.3 million in net realized gains on sales of securities and $1.0 million of charges
related to OTTI on certain non-agency backed CMOs. Net realized gains on investments,
available-for-sale during the year ended June 30, 2009 included $2.5 million in net realized gains
from the sales of securities and $2.4 million of charges related to OTTI on investments, which was
comprised of $1.5 million related to certain non-agency backed CMOs and $0.9 million related to
three corporate bonds. For additional information with respect to the determination of OTTI losses
on investment securities, see Critical Accounting Estimates Investments below and Note 2 to
our consolidated financial statements.
Loss and Loss Adjustment Expenses
The loss and loss adjustment expense ratio was 67.9% for the year ended June 30, 2010,
compared with 66.6% for the year ended June 30, 2009. We experienced favorable development related
to prior periods of $11.2 million for the year ended June 30, 2010, compared with $11.4 million for
the year ended June 30, 2009. The favorable development for the year ended June 30, 2010 was due to
(i) lower than anticipated severity of accidents occurring during the fiscal 2007 and 2008 accident
years, primarily in bodily injury coverage in Georgia and South Carolina, (ii) an improvement in
our claim handling practices and (iii) a shift in business mix toward renewal policies, which have
lower loss ratios than new policies. The favorable development for the year ended June 30, 2009 was
primarily due to both lower than anticipated severity and frequency of accidents, most notably in
our property and physical damage coverages.
Excluding the favorable development related to prior periods, the loss and loss adjustment
expense ratios for the years ended June 30, 2010 and 2009 were 74.0% and 71.7%, respectively. The
year-over-year increase in the loss and loss adjustment expense ratio was due to higher frequency
of accidents experienced during the first half of calendar year 2010.
Operating Expenses
Insurance operating expenses decreased 8% to $79.8 million for the year ended June 30, 2010
from $87.1 million for the year ended June 30, 2009. The decrease was primarily a result of a
reduction in costs (such as employee-agent commissions and premium taxes) that varied along with
the decrease in premiums earned as well as savings realized from the closure of underperforming
stores.
The expense ratio increased from 24.7% for the year ended June 30, 2009 to 27.3% for fiscal
year 2010. The year-over-year increase in the expense ratio was due to the decrease in premiums
earned, which resulted in a higher percentage of fixed expenses in our retail operations (such as
rent and base salary).
Overall, the combined ratio increased to 95.2% for the year ended June 30, 2010 from 91.3% for
the year ended June 30, 2009.
Litigation Settlement
Litigation settlement costs for the year ended June 30, 2010 were $(0.4) million, compared
with $1.6 million for fiscal year 2009. The reduction in expense during the year ended June 30,
2010 related primarily to the forfeiture of premium credits by Georgia and Alabama class members.
The year ended June 30, 2009 included costs incurred in connection with our settlement and defense
of the litigation as described further in Note 16 to our consolidated financial statements, a $2.95
million insurance recovery from our insurance carrier regarding coverage for the costs and expenses
we incurred relating to the settlement, and reductions in expense related to the forfeiture of
premium credits by Georgia and Alabama class members.
Pursuant to the terms of the settlements, eligible class members are entitled to certain
premium credits towards a future automobile insurance policy with the Company or a reimbursement
certificate for future rental or towing expenses. Benefits to the Georgia and Alabama class members
commenced January 1, 2009 and March 7,
33
FIRST ACCEPTANCE CORPORATION 10-K
2009, respectively. Any premium credits issued to class members as described above will be
prorated over a twelve-month term not to extend beyond August 2011, and the class members will be
entitled to the prorated premium credit only so long as their insurance premiums remain current
during the twelve-month term.
At December 31, 2008, we accrued $5.2 million for premium credits available to class members
who were actively insured by the Company. The following is a progression of the activity associated
with the estimated premium credit liability (in thousands).
|
|
|
|
|
Balance at December 31, 2008 |
|
$ |
5,227 |
|
Credits utilized |
|
|
(1,338 |
) |
Credits forfeited |
|
|
(904 |
) |
|
|
|
|
Balance at June 30, 2009 |
|
|
2,985 |
|
Credits utilized |
|
|
(2,622 |
) |
Credits forfeited |
|
|
(317 |
) |
|
|
|
|
Balance at June 30, 2010 |
|
$ |
46 |
|
|
|
|
|
We have not established an accrual for $0.1 million in potential premium credits available to
class members who were not actively insured by the Company upon commencement of the settlement due
to the uncertainty associated with this group having to purchase a new automobile insurance policy.
We did not incur any significant costs associated with the reimbursement certificates. The final
costs of the settlements will depend on, among other factors, the rate of redemption and forfeiture
of the premium credits and reimbursement certificates.
The litigation settlement costs are classified in the litigation settlement expenses line item
in our consolidated statements of operations. The litigation settlement accrual for those currently
estimable costs associated with the utilization of premium credits is classified in other
liabilities in our consolidated balance sheets. Based on the maximum remaining available premium
credits, we do not expect any material adjustments during future periods. For additional
information with respect to the litigation settlements, see Note 16 to our consolidated financial
statements.
Goodwill Impairment
We recorded a non-cash, pre-tax goodwill impairment charge in fiscal year 2009 of $68.0
million. The goodwill impairment test is a two-step process that requires us to make judgments in
determining what assumptions to use in the calculation. The first step of the process consists of
estimating the fair value of each reporting unit based on valuation techniques, including a
discounted cash flow model using revenue and profit forecasts, and comparing those estimated fair
values with the carrying values of those assets and liabilities, which includes the allocated
goodwill. If the estimated fair value is less than the carrying value, a second step is performed
to compute the amount of the impairment, if any, by determining an implied fair value of
goodwill. The determination of the implied fair value of goodwill of a reporting unit requires us
to allocate the estimated fair value of the reporting unit to the assets and liabilities of the
reporting unit. Any unallocated fair value represents the implied fair value of goodwill, which
is compared to its corresponding carrying value.
As a result of the adverse impact of difficult economic conditions on our customers and
business and the resulting decline in the Companys share price during the fourth quarter of fiscal
year 2009, we estimated that a goodwill impairment charge at June 30, 2009 was probable.
Accordingly, we recognized an estimated non-cash, pre-tax goodwill impairment charge of $68.0
million in the fourth quarter of fiscal year 2009. Due to the complexity of the fair value
calculations involved, the analysis of the goodwill impairment charge recognized during the fourth
quarter of fiscal year 2009 was finalized during the first quarter of fiscal year 2010 and the
amount of the impairment did not differ from the initial estimate. The goodwill impairment charge
did not have a materially adverse impact on the continuing operations, liquidity, or statutory
surplus of the Company.
As a part of the Companys annual impairment test to evaluate the recoverability of such
assets at June 30, 2010, the key assumptions used to determine the fair value of the Companys
reporting unit, from a market participants perspective, included (i) long-term revenue growth
rates ranging from 5% to 10%, (ii) discount rates between 12.5% and 14.0%, which were based on an
estimated weighted average cost of capital adjusted for the risks associated with its operations
and (iii) recent industry transaction trends in price to tangible book multiples and related
returns on tangible equity. Based on this evaluation, the Company concluded that goodwill and other
identifiable intangible assets were fully realizable as of June 30, 2010. Our evaluation includes
multiple
34
FIRST ACCEPTANCE CORPORATION 10-K
assumptions, including estimated discounted cash flows and other estimates that may change
over time. If future discounted cash flows become less than those projected by us, further
impairment charges may become necessary that could have a materially adverse impact on our results
of operations and financial condition. As quoted market prices in active stock markets are relevant
evidence of fair value, a significant decline in our common stock trading price may indicate an
impairment of goodwill.
Provision for Income Taxes
The provision for income taxes for the year ended June 30, 2010 was $0.4 million, compared
with $18.4 million for fiscal year 2009. The provision for income taxes for the year ended June 30,
2010 related to current state income taxes for certain subsidiaries with taxable income. At June
30, 2010 and 2009, we established a full valuation allowance against all net deferred tax assets.
In assessing our ability to support the realizability of our deferred tax assets, we considered
both positive and negative evidence. We placed greater weight on historical results than on our
outlook for future profitability. The deferred tax valuation allowance may be adjusted in future
periods if we determine that it is more likely than not that some portion or all of the deferred
tax assets will be realized. In the event the deferred tax valuation allowance is adjusted, we
would record an income tax benefit for the adjustment.
The provision for income taxes for the year ended June 30, 2009 included the establishment of
a full valuation allowance against our net deferred tax assets which, in combination with the tax
effect of the goodwill impairment charge, resulted in a net increase in the tax provision of $15.3
million during the three months ended June 30, 2009. This charge was partially offset by a $5.1
million tax benefit related to the utilization of tax NOL carryforwards expiring in 2009 that had
been previously reserved for through a valuation allowance resulting in a net increase in the tax
provision for the year of $10.2 million.
Real Estate and Corporate
Loss before income taxes from real estate and corporate operations for the year ended June 30,
2010 was $7.1 million, compared with a loss from real estate and corporate operations before income
taxes of $7.4 million for the year ended June 30, 2009. Segment losses consist of other operating
expenses not directly related to our insurance operations, interest expense and stock-based
compensation offset by investment income on corporate invested assets.
We incurred $3.9 million of interest expense during both the year ended June 30, 2010 and 2009
related to the debentures issued in June 2007. During the year ended June 30, 2009, we incurred
$0.1 million of interest expense in connection with borrowings under our former credit facility.
The credit facility was repaid in full and terminated on October 31, 2008.
Year Ended June 30, 2009 Compared with the Year Ended June 30, 2008
Consolidated Results
Revenues for the year ended June 30, 2009 decreased 20% to $265.5 million from $332.4 million
in the prior year. Loss before income taxes for the year ended June 30, 2009 was $49.9 million,
compared with a loss before income taxes of $4.0 million for the year ended June 30, 2008. The loss
before income taxes for the year ended June 30, 2009 included a goodwill impairment charge of $68.0
million. Net loss for the year ended June 30, 2009 was $68.3 million, compared with a net loss of
$17.8 million for the year ended June 30, 2008. The net loss for the year ended June 30, 2009
included the goodwill impairment charge and an additional net charge of $10.2 million resulting
from the $15.3 million tax effect of the goodwill impairment charge and the establishment of a full
valuation allowance on the remaining deferred tax assets offset by a tax benefit of $5.1 million
related to the utilization of federal NOL carryforwards that were to expire on June 30, 2009 that
had been previously reserved for through a valuation allowance. Basic and diluted net loss per
share was $1.43 for the year ended June 30, 2009, compared with basic and diluted net loss per
share of $0.37 for the year ended June 30, 2008.
35
FIRST ACCEPTANCE CORPORATION 10-K
Insurance Operations
Revenues from insurance operations were $265.3 million for the year ended June 30, 2009,
compared with $332.2 million for the year ended June 30, 2008. Loss before income taxes from
insurance operations for the year ended June 30, 2009 was $42.5 million, compared with income
before income taxes from insurance operations of $4.7 million for the year ended June 30, 2008.
Premiums Earned
Premiums earned decreased by $61.8 million, or 22%, to $224.1 million for the year ended June
30, 2009, from $285.9 million for the year ended June 30, 2008. The decrease in premiums earned was
primarily due to the weak economic conditions, which caused both a decline in the number of
policies written, as well as an increase in the percentage of our customers purchasing liability
only coverage. Rate actions taken in a number of states to improve underwriting profitability and
the closure of underperforming stores also contributed toward the decrease in policies written and
premiums earned. Approximately 67% of the $61.8 million decline in premiums earned for the year
ended June 30, 2009 was in our Florida, Georgia, South Carolina and Texas markets.
The total number of policies in force at June 30, 2009 decreased 18% over the same date in
2008 from 194,079 to 158,222, primarily due to the factors noted above. At June 30, 2009, we
operated 418 stores, compared with 431 stores at June 30, 2008.
Commission and Fee Income
Commission and fee income decreased 13% to $31.8 million for the year ended June 30, 2009,
from $36.5 million for the year ended June 30, 2008. The decrease in commission and fee income was
a result of the decrease in the number of policies in force, partially offset by higher fee income
related to commissionable ancillary products sold through our retail locations.
Investment Income
Investment income decreased to $9.5 million during the year ended June 30, 2009 from $11.3
million during the year ended June 30, 2008. The decrease in investment income was primarily a
result of an increase in cash and cash equivalents, a decrease in the amount of assets invested in
fixed maturities, and the significant decline during fiscal year 2009 in yields on cash
equivalents. Cash and cash equivalents increased from $38.6 million at June 30, 2008 to $77.2
million at June 30, 2009 primarily as a result of the sale of fixed maturity investments in fiscal
year 2009 to generate taxable income in order to utilize expiring NOLs. At June 30, 2009 and 2008,
the tax-equivalent book yield for our portfolio was 3.5% and 5.1%, respectively, with effective
durations of 2.26 and 3.69 years, respectively, which both declined as a result of the increase in
cash equivalents previously discussed.
Net realized gains (losses) on investments, available-for-sale
Net realized gains on investments, available-for-sale during the year ended June 30, 2009
included $2.5 million in net realized gains from the sales of securities as previously noted. Net
realized gains on investments, available-for-sale during the year ended June 30, 2009 also included
$2.4 million of charges related to OTTI on investments, which was comprised of $1.5 million related
to certain non-agency backed CMOs and $0.9 million related to three corporate bonds. Net realized
losses on investments, available-for-sale during the year ended June 30, 2008 included $1.4 million
of charges related to OTTI on certain non-agency backed CMOs.
Loss and Loss Adjustment Expenses
The loss and loss adjustment expense ratio was 66.6% for the year ended June 30, 2009,
compared with 76.9% for the year ended June 30, 2008. For the year ended June 30, 2009, we
experienced favorable development of $11.4 million for losses occurring prior to June 30, 2008.
The favorable development for the year ended June 30, 2009 was due to lower than anticipated
severity and frequency of accidents. Excluding the development noted above, the loss and loss
adjustment expense ratio for the year ended June 30, 2009 was 71.7%. The year-over-year improvement
reflects among other things, favorable severity trends in property and physical damage coverages, rate actions taken in a number of
states to improve
36
FIRST ACCEPTANCE CORPORATION 10-K
underwriting profitability, improvement in our underwriting and claim handling
practices, and the shift in business mix toward renewal policies, which have lower loss ratios than
new policies.
Operating Expenses
Insurance operating expenses decreased 12% to $87.1 million for the year ended June 30, 2009
from $98.4 million for the year ended June 30, 2008. The decrease was primarily a result of a
reduction in costs (such as employee-agent commissions and premium taxes) that varied along with
the decrease in premiums earned as well as savings realized from the closure of underperforming
stores.
The expense ratio increased from 21.7% for the year ended June 30, 2008 to 24.7% for fiscal
year 2009. The year-over-year increase in the expense ratio was due to the drop in revenues, which
resulted in a higher percentage of fixed expenses (such as rent and base salary).
Overall, the combined ratio decreased to 91.3% for the year ended June 30, 2009 from 98.6% for
the year ended June 30, 2008.
Litigation Settlement
Litigation settlement costs for the year ended June 30, 2009 were $1.6 million, compared with
$7.5 million for fiscal year 2008. The costs during the years ended June 30, 2009 and 2008 were
incurred in connection with our settlement and defense of the litigation as described further in
Note 16 to our consolidated financial statements. The year ended June 30, 2009 also included a
$2.95 million insurance recovery from our insurance carrier regarding coverage for the costs and
expenses we incurred relating to the settlement and reductions in expense related to the forfeiture
of premium credits by Georgia and Alabama class members.
At December 31, 2008, we accrued $5.2 million for premium credits available to class members
who were actively insured by the Company.
Goodwill Impairment
We recorded a non-cash, pre-tax goodwill impairment charge in fiscal year 2009 of $68.0
million. As a result of the adverse impact of difficult economic conditions on our customers and
business and the resulting decline in its share price during the fourth quarter of fiscal year
2009, we estimated that a goodwill impairment charge at June 30, 2009 was probable. Accordingly, we
recognized an estimated non-cash, pre-tax goodwill impairment charge of $68.0 million in the fourth
quarter of fiscal year 2009. Due to the complexity of the fair value calculations involved, the
analysis of the goodwill impairment charge recognized during the fourth quarter of fiscal year 2009
was finalized during the first quarter of fiscal year 2010 and the amount of the impairment did not
differ from the initial estimate. The key assumptions used to determine the fair value of our
reporting unit, from a market participants perspective, included (i) long-term revenue growth
rates ranging from 5% to 10%, (ii) a discount rate of 14.5%, which was based on an estimated
weighted average cost of capital adjusted for the risks associated with our operations and (iii)
recent industry transaction trends in price to tangible book multiples and related returns on
tangible equity. The estimated goodwill impairment charge did not have a materially adverse impact
on the continuing operations, liquidity, or statutory surplus of the Company.
A variance in the discount rate could have had a significant effect on the amount of the
estimated goodwill impairment charge recognized. A one percent (1%) increase or decrease in the
discount rate would have caused an increase or decrease in the estimated goodwill impairment charge
of approximately $20.0 million.
Provision for Income Taxes
The provision for income taxes for the year ended June 30, 2009 was $18.4 million, compared
with $13.8 million for the same period in fiscal year 2008. At June 30, 2009, we established a full
valuation allowance against our net deferred tax assets which, in combination with the tax effect
of the goodwill impairment charge, resulted in a net increase in the tax provision of $15.3 million
during the three months ended June 30, 2009. This charge was partially offset by a $5.1 million tax
benefit related to the utilization of tax NOL carryforwards expiring in 2009 that had been
previously reserved for through a valuation allowance resulting in a net increase in the tax
provision for the year of $10.2 million.
37
FIRST ACCEPTANCE CORPORATION 10-K
The provision for income taxes for the year ended June 30, 2008 included a charge of $11.4
million related to the expiration of certain federal NOL carryforwards as well as an increase in
the valuation allowance of $3.6 million for the deferred tax asset for certain federal NOL
carryforwards resulting in a charge totaling $15.0 million. The changes during the year ended June
30, 2008 related to the valuation allowance were due to (i) revisions in estimates for our future
taxable income based on the most recent fiscal year results and (ii) taxable income for the most
recent fiscal year being less than our prior estimates.
Real Estate and Corporate
Loss before income taxes from real estate and corporate operations for the year ended June 30,
2009 was $7.4 million, compared with a loss from real estate and corporate operations before income
taxes of $8.7 million for the year ended June 30, 2008. During the year ended June 30, 2009, we
incurred $0.1 million of interest expense in connection with credit facility borrowings, compared
with $0.7 million for the year ended June 30, 2008. The credit facility was repaid in full and
terminated on October 31, 2008. We incurred $3.9 million of interest expense during both the year
ended June 30, 2009 and 2008 related to the debentures issued in June 2007.
Liquidity and Capital Resources
Our primary sources of funds are premiums, fees and investment income from our insurance
company subsidiaries and commissions and fee income from our non-insurance company subsidiaries.
Our primary uses of funds are the payment of claims and operating expenses. Net cash used in
operating activities for the year ended June 30, 2010 and 2009 was $1.1 million and $5.3 million,
respectively. Net cash used in operating activities for both periods was primarily the result of a
decrease in cash collected from premiums written. Net cash used in investing activities for the
year ended June 30, 2010 was $49.9 million, compared with net cash provided by investment
activities of $47.7 million for the same period in the prior fiscal year. The year ended June 30,
2010 included net additions in our investment portfolio of $48.3 million, while the same period in
the prior fiscal year included net reductions in our investment portfolio of $49.9 million. The net
additions in the current fiscal year were primarily the result of the reinvestment of the proceeds
from the prior fiscal year sales of fixed maturity investments to generate taxable income to
utilize expiring NOLs. Financing activities for the year ended June 30, 2009 included principal
prepayments on our former credit facility of $3.9 million.
Our holding company requires cash for general corporate overhead expenses and for debt service
related to our debentures payable. The holding companys primary sources of unrestricted cash to
meet its obligations are dividends from our insurance company subsidiaries and the sale of
ancillary products to our insureds. The holding company also receives cash from operating
activities as a result of investment income. Through an intercompany tax allocation arrangement,
taxable losses of the holding company provide cash to the holding company to the extent that
taxable income is generated by the insurance company subsidiaries. At June 30, 2010, we had $9.8
million available in unrestricted cash and investments outside of the insurance company
subsidiaries. These funds and the additional unrestricted cash from the sources noted above will be
used to pay our future cash requirements outside of the insurance company subsidiaries.
The holding company has debt service requirements related to the debentures payable. The
debentures are interest-only and mature in full in July 2037. Interest is fixed annually through
July 2012 at $3.9 million. The debentures pay a fixed rate of 9.277% until July 30, 2012, after
which time the rate becomes variable (LIBOR plus 375 basis points).
State insurance laws limit the amount of dividends that may be paid from our insurance company
subsidiaries. Based on our statutory capital and surplus, we believe our ordinary dividend capacity
for the next twelve months will be approximately $12 million. Based on our earned surplus, we
believe that we have extraordinary dividend capacity, of an additional $7 million, subject to
regulatory approval.
The NAIC Model Act for RBC provides formulas to determine the amount of statutory capital and
surplus that an insurance company needs to ensure that it has an acceptable expectation of not
becoming financially impaired. There are statutory guidelines that suggest that on an annual
calendar year basis, the insurance company subsidiaries should not exceed a ratio of net premiums
written to statutory capital and surplus of 3-to-1. Based on our current forecast of statutory
capital and surplus and net premiums written, we anticipate our ratio will be approximately 2-to-1
for the reasonably foreseeable future.
38
FIRST ACCEPTANCE CORPORATION 10-K
We believe that existing cash and investment balances, when combined with anticipated cash
flows as noted above, will be adequate to meet our expected liquidity needs, for both the holding
company and our insurance company subsidiaries, in both the short-term and the reasonably
foreseeable future. Any future growth strategy may require external financing, and we may from time
to time seek to obtain external financing. We cannot assure that additional sources of financing
will be available to us on favorable terms, or at all, or that any such financing would not
negatively impact our results of operations.
Contractual Obligations
The following table summarizes all of our contractual obligations by period at June 30, 2010
(in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due By Period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
More than 5 |
|
|
|
Total |
|
|
Less than 1 year |
|
|
1-3 Years |
|
|
3-5 Years |
|
|
years |
|
Loss and loss adjustment expense
reserves (1) |
|
$ |
73,198 |
|
|
$ |
26,571 |
|
|
$ |
32,134 |
|
|
$ |
9,369 |
|
|
$ |
5,124 |
|
Debentures payable (2) |
|
|
93,378 |
|
|
|
3,826 |
|
|
|
5,764 |
|
|
|
3,533 |
|
|
|
80,255 |
|
Capitalized lease obligations |
|
|
155 |
|
|
|
79 |
|
|
|
76 |
|
|
|
|
|
|
|
|
|
Operating leases (3) |
|
|
21,172 |
|
|
|
7,837 |
|
|
|
8,276 |
|
|
|
3,301 |
|
|
|
1,758 |
|
Litigation settlement (4) |
|
|
46 |
|
|
|
46 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
358 |
|
|
|
231 |
|
|
|
127 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual cash obligations |
|
$ |
188,307 |
|
|
$ |
38,590 |
|
|
$ |
46,377 |
|
|
$ |
16,203 |
|
|
$ |
87,137 |
|
|
|
|
(1) |
|
Loss and loss adjustment expense reserves do not have contractual maturity
dates; however, based on historical payment patterns, the amount presented is our estimate of
the expected timing of these payments. The timing of these payments is subject to significant
uncertainty. We maintain a portfolio of marketable investments with varying maturities and a
substantial amount of cash and cash equivalents intended to provide adequate cash flows for
such payments. |
|
(2) |
|
Payments due by period assume a contractual fixed interest rate of 9.277% until
July 30, 2012, after which the rate becomes variable (LIBOR plus 375 basis points, or 4.284%
at June 30, 2010). |
|
(3) |
|
Consists primarily of rental obligations under real estate leases related to our
retail locations and corporate offices. |
|
(4) |
|
Consists primarily of the provision associated with the estimated utilization of
premium credits for Georgia and Alabama litigation settlement class members who were insured
by the Company at June 30, 2010 and received the premium credits. For additional information
with respect to the litigation settlements, see Note 16 to our consolidated financial
statements. |
Trust Preferred Securities
On June 15, 2007, First Acceptance Statutory Trust I (FAST I), our wholly-owned
unconsolidated subsidiary trust entity, completed a private placement whereby FAST I issued 40,000
shares of preferred securities at $1,000 per share to outside investors and 1,240 shares of common
securities to us, also at $1,000 per share. FAST I used the proceeds from the sale of the preferred
securities to purchase $41.2 million of junior subordinated debentures from us. The debentures will
mature on July 30, 2037 and are redeemable by the Company in whole or in part beginning on July 30,
2012, at which time the preferred securities are callable. The debentures pay a fixed rate of
9.277% until July 30, 2012, after which the rate becomes variable (LIBOR plus 375 basis points).
The obligations of the Company under the junior subordinated debentures represent full and
unconditional guarantees by the Company of FAST Is obligations for the preferred securities.
Dividends on the preferred securities are cumulative, payable quarterly in arrears and are
deferrable at the Companys option for up to five years. The dividends on these securities are the
same as the interest on the debentures. The Company cannot pay dividends on its common stock during
any such deferments. FAST I does not meet the requirements for consolidation of FASB ASC 810-10,
Variable Interest Entities (Prior authoritative literature: FASB Statement of Financial Accounting
Standards (SFAS) No. 167).
Off-Balance Sheet Arrangements
We use off-balance sheet arrangements (e.g., operating leases) where the economics and sound
business principles warrant their use. For additional information with respect to our operating
leases, see Contractual Obligations above and Note 7 to our consolidated financial statements.
39
FIRST ACCEPTANCE CORPORATION 10-K
Critical Accounting Estimates
The preparation of consolidated financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that affect amounts
reported in the consolidated financial statements. As more information becomes known, these
estimates and assumptions could change, thus having an impact on the amounts reported in the
future. The following are considered to be our critical accounting estimates.
Valuation of deferred tax asset
We maintain income taxes in accordance with FASB ASC 740-10, Income Taxes (Prior authoritative
literature: FASB SFAS No. 109), whereby deferred income tax assets and liabilities result from
temporary differences. Temporary differences are differences between the tax basis of assets and
liabilities and operating loss and tax credit carryforwards and their reported amounts in the
consolidated financial statements that will result in taxable or deductible amounts in future
years. Valuation of the deferred tax asset is considered a critical accounting estimate because the
determination of our ability to utilize the asset involves a number of management assumptions
relating to future operations that could materially affect the determination of the ultimate value
and, therefore, the carrying amount of our deferred tax asset.
Goodwill and identifiable intangible assets
Goodwill and other identifiable intangible assets are attributable to our insurance operations
and were initially recorded at their estimated fair values at the date of acquisition. Goodwill and
other intangible assets having an indefinite useful life are not amortized for financial statement
purposes. We are required to perform annual impairment tests of our goodwill and intangible assets.
We perform our annual impairment tests as of the last day of the fourth quarter of each fiscal
year. In the event that facts and circumstances indicate that the goodwill and other identifiable
intangible assets may be impaired, an interim impairment test would be required. Intangible assets
with finite lives have been fully amortized over their useful lives.
The goodwill impairment test is a two-step process that requires us to make judgments in
determining what assumptions to use in the calculation. The first step of the process consists of
estimating the fair value of each reporting unit based on valuation techniques, including a
discounted cash flow model using revenue and profit forecasts, and comparing those estimated fair
values with the carrying values of those assets and liabilities, which includes the allocated
goodwill. If the estimated fair value is less than the carrying value, a second step is performed
to compute the amount of the impairment, if any, by determining an implied fair value of
goodwill. The determination of the implied fair value of goodwill of a reporting unit requires us
to allocate the estimated fair value of the reporting unit to the assets and liabilities of the
reporting unit. Any unallocated fair value represents the implied fair value of goodwill, which
is compared to its corresponding carrying value.
Our evaluation includes multiple assumptions, including estimated discounted cash flows and
other estimates that may change over time. If future discounted cash flows become less than those
projected by us, further impairment charges may become necessary that could have a materially
adverse impact on our results of operations and financial condition. As quoted market prices in
active stock markets are relevant evidence of fair value, a significant decline in our common stock
trading price may indicate an impairment of goodwill.
Investments
Our investments are recorded at fair value, which is typically based on publicly available
quoted prices. From time to time, the carrying value of our investments may be temporarily impaired
because of the inherent volatility of publicly-traded investments. Management reviews investments
for impairment on a quarterly basis. A decline in the fair value of any available-for-sale security
below cost that is deemed to be other-than-temporary would result in a charge against income for
the credit-related portion of any such impairment.
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
40
FIRST ACCEPTANCE CORPORATION 10-K
evaluated to determine the extent to which such changes are attributable to (i) fundamental factors
specific to the issuer or (ii) market-related factors such as interest rates or sector declines.
Securities with declines attributable to issuer-specific fundamentals are reviewed to identify
all available evidence to estimate the potential for impairment. Resources used include historical
financial data included in SEC filings for corporate bonds and performance data regarding the
underlying loans for CMOs. Securities with declines attributable solely to market or sector
declines where we do not intend to sell the security and it is more likely than not that we will
not be required to sell the security before the recovery of its amortized cost basis are not deemed
to be other-than-temporary.
Losses and loss adjustment expense reserves
Loss and loss adjustment expense reserves represent our best estimate of our ultimate
liability for losses and loss adjustment expenses relating to events that occurred prior to the end
of any given accounting period but have not been paid. Months and potentially years may elapse
between the occurrence of an automobile accident covered by one of our insurance policies, the
reporting of the accident and the payment of the claim. We record a liability for estimates of
losses that will be paid for accidents that have been reported, which is referred to as case
reserves. As accidents are not always reported when they occur, we estimate liabilities for
accidents that have occurred but have not been reported.
We are directly liable for loss and loss adjustment expenses under the terms of the insurance
policies that our insurance company subsidiaries underwrite. Each of our insurance company
subsidiaries establishes a reserve for all of its unpaid losses,
including case reserves
and IBNR reserves, and estimates for the cost to settle the claims. We estimate our IBNR reserves
by estimating our ultimate liability for loss and loss adjustment expense reserves first, and then
reducing that amount by the amount of cumulative paid claims and by the amount of our case
reserves. We rely primarily on historical loss experience in determining reserve levels, on the
assumption that historical loss experience provides a good indication of future loss experience. We
also consider various other factors, such as inflation, claims settlement patterns, legislative
activity and litigation trends. Our actuarial staff continually monitors these estimates on a state
and coverage level. We utilize our actuarial staff to determine appropriate reserve levels. As
experience develops or new information becomes known, we increase or decrease the level of our
reserves in the period in which changes to the estimates are determined. Accordingly, the actual
losses and loss adjustment expenses may differ materially from the estimates we have recorded. See
Item 1. Business Loss and Loss Adjustment Expense Reserves for additional information.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Market risk represents the potential economic loss arising from adverse changes in the fair
value of financial instruments. Our exposures to market risk relate primarily to our investment
portfolio, which is exposed primarily to interest rate risk and credit risk. The fair value of our
investment portfolio is directly impacted by changes in market interest rates; generally, the fair
value of fixed-income investments moves inversely with movements in market interest rates. Our
fixed maturity portfolio is comprised of substantially all fixed rate investments with primarily
short-term and intermediate-term maturities. Likewise, the underlying investments of our current
mutual fund investment are also fixed-income investments. This portfolio composition allows
flexibility in reacting to fluctuations of interest rates. The portfolios of our insurance company
subsidiaries are managed to achieve an adequate risk-adjusted return while maintaining sufficient
liquidity to meet policyholder obligations.
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.
41
FIRST ACCEPTANCE CORPORATION 10-K
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 |
|
$ |
195,683 |
|
|
$ |
192,412 |
|
|
$ |
189,094 |
|
|
$ |
185,741 |
|
|
$ |
182,400 |
|
|
$ |
175,871 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table provides information about our fixed maturity investments at June 30, 2010
which are sensitive to interest rate risk. The table shows expected principal cash flows (at par
value, which differs from amortized cost as a result of premiums or discounts at the time of
purchase and OTTI) by expected maturity date for each of the five fiscal years and collectively for
all fiscal years thereafter (in thousands). Callable bonds and notes are included based on call
date or maturity date depending upon which date produces the most conservative yield. CMOs and
sinking fund issues are included based on maturity year adjusted for expected payment patterns.
Actual cash flows may differ from those expected.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities with No |
|
|
All |
|
|
|
Securities with |
|
|
Securities with |
|
|
Unrealized Gains or |
|
|
Fixed Maturity |
|
Year Ended June 30, |
|
Unrealized Gains |
|
|
Unrealized Losses |
|
|
Losses |
|
|
Securities |
|
2011 |
|
$ |
13,393 |
|
|
$ |
1,234 |
|
|
$ |
1 |
|
|
$ |
14,628 |
|
2012 |
|
|
20,832 |
|
|
|
582 |
|
|
|
|
|
|
|
21,414 |
|
2013 |
|
|
26,074 |
|
|
|
1,115 |
|
|
|
|
|
|
|
27,189 |
|
2014 |
|
|
25,454 |
|
|
|
797 |
|
|
|
|
|
|
|
26,251 |
|
2015 |
|
|
20,868 |
|
|
|
798 |
|
|
|
|
|
|
|
21,666 |
|
Thereafter |
|
|
55,684 |
|
|
|
11,802 |
|
|
|
|
|
|
|
67,486 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
162,305 |
|
|
$ |
16,328 |
|
|
$ |
1 |
|
|
$ |
178,634 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value |
|
$ |
173,237 |
|
|
$ |
15,790 |
|
|
$ |
67 |
|
|
$ |
189,094 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On June 15, 2007, our wholly-owned unconsolidated trust entity, FAST I, used the proceeds from
its sale of trust preferred securities to purchase $41.2 million of junior subordinated debentures.
The debentures pay a fixed rate of 9.277% until July 30, 2012, after which the rate becomes
variable (LIBOR plus 375 basis points).
Credit Risk
Credit risk is managed by diversifying the portfolio to avoid concentrations in any single
industry group or issuer and by limiting investments in securities with lower credit ratings. The
largest investment in any one investment, excluding U.S. government and agency securities, is the
$7.5 million investment in a single mutual fund, or 4% of the investment portfolio. The top five
investments make up 15% of the investment portfolio. The average credit quality rating for our
fixed maturity portfolio was AA- at June 30, 2010. There are no fixed maturities in the portfolio
that have not produced investment income during the previous twelve months.
42
FIRST ACCEPTANCE CORPORATION 10-K
The following table presents the underlying ratings of our fixed maturity portfolio by
nationally recognized securities rating organizations at June 30, 2010 (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized |
|
|
|
|
|
|
Fair |
|
|
|
|
Comparable Rating |
|
Cost |
|
|
% of Amortized Cost |
|
|
Value |
|
|
% of Fair Value |
|
AAA |
|
$ |
73,167 |
|
|
|
40.5 |
% |
|
$ |
77,016 |
|
|
|
40.7 |
% |
AA+, AA, AA- |
|
|
37,169 |
|
|
|
20.6 |
% |
|
|
39,484 |
|
|
|
20.9 |
% |
A+, A, A- |
|
|
49,525 |
|
|
|
27.5 |
% |
|
|
52,243 |
|
|
|
27.6 |
% |
BBB+, BBB, BBB- |
|
|
11,307 |
|
|
|
6.3 |
% |
|
|
11,467 |
|
|
|
6.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment grade |
|
|
171,168 |
|
|
|
94.9 |
% |
|
|
180,210 |
|
|
|
95.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Not rated |
|
|
3,949 |
|
|
|
2.2 |
% |
|
|
4,059 |
|
|
|
2.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BB+, BB, BB- |
|
|
1,874 |
|
|
|
1.0 |
% |
|
|
1,821 |
|
|
|
1.0 |
% |
B+, B, B- |
|
|
1,142 |
|
|
|
0.6 |
% |
|
|
1,089 |
|
|
|
0.6 |
% |
CCC+, CCC, CCC- |
|
|
1,606 |
|
|
|
0.9 |
% |
|
|
1,439 |
|
|
|
0.8 |
% |
CC+, CC, CC- |
|
|
505 |
|
|
|
0.3 |
% |
|
|
286 |
|
|
|
0.1 |
% |
C+, C, C- |
|
|
163 |
|
|
|
0.1 |
% |
|
|
190 |
|
|
|
0.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-investment grade |
|
|
5,290 |
|
|
|
2.9 |
% |
|
|
4,825 |
|
|
|
2.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
180,407 |
|
|
|
100.0 |
% |
|
$ |
189,094 |
|
|
|
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 June 30, 2010, our fixed maturity
portfolio included three CMOs having sub-prime exposure with a fair value of $0.8 million and no
exposure to Alt-A investments.
Our investment portfolio consists of $39.0 million of municipal bonds, of which $24.7 million
are insured. Of the insured bonds, 69% are insured with MBIA, 14% with AMBAC and 17% with XL
Capital. These securities are paying their principal and periodic interest timely.
The following table presents the underlying ratings at June 30, 2010, represented by the lower
of either Standard and Poors, Fitchs, or Moodys ratings, of the municipal bond portfolio (in
thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insured |
|
|
Uninsured |
|
|
Total |
|
|
|
Fair |
|
|
|
|
|
|
Fair |
|
|
|
|
|
|
Fair |
|
|
% of |
|
|
|
Value |
|
|
% of Fair Value |
|
|
Value |
|
|
% of Fair Value |
|
|
Value |
|
|
Fair Value |
|
AAA |
|
$ |
|
|
|
|
|
|
|
$ |
4,776 |
|
|
|
33 |
% |
|
$ |
4,776 |
|
|
|
12 |
% |
AA+, AA, AA- |
|
|
11,772 |
|
|
|
48 |
% |
|
|
5,565 |
|
|
|
39 |
% |
|
|
17,337 |
|
|
|
45 |
% |
A+, A, A- |
|
|
11,287 |
|
|
|
46 |
% |
|
|
3,951 |
|
|
|
28 |
% |
|
|
15,238 |
|
|
|
39 |
% |
BBB+, BBB, BBB- |
|
|
1,613 |
|
|
|
6 |
% |
|
|
|
|
|
|
|
|
|
|
1,613 |
|
|
|
4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
24,672 |
|
|
|
100 |
% |
|
$ |
14,292 |
|
|
|
100 |
% |
|
$ |
38,964 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43
FIRST ACCEPTANCE CORPORATION 10-K
Item 8. Financial Statements and Supplementary Data
44
FIRST ACCEPTANCE CORPORATION 10-K
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
First Acceptance Corporation
We have audited the accompanying consolidated balance sheets of First Acceptance Corporation and
subsidiaries (the Company) as of June 30, 2010 and 2009, and the related consolidated statements
of operations, stockholders equity, and cash flows for each of the three years in the period ended
June 30, 2010. Our audits also included the financial statement schedule listed in the index at
Item 15(a). These financial statements and schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on these consolidated financial statements
and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of First Acceptance Corporation and subsidiaries at
June 30, 2010 and 2009, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended June 30, 2010, in conformity with U.S. generally
accepted accounting principles. Also, in our opinion, the related financial statement schedule,
when considered in relation to the basic financial statements taken as a whole, presents fairly, in
all material respects, the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), First Acceptance Corporation and subsidiaries internal control over
financial reporting as of June 30, 2010, based on criteria established in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated August 31, 2010 expressed an unqualified opinion thereon.
Nashville, Tennessee
August 31, 2010
45
FIRST ACCEPTANCE CORPORATION 10-K
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
First Acceptance Corporation
We have audited First Acceptance Corporation and subsidiaries (the Company) internal control
over financial reporting as of June 30, 2010, based on criteria established in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (the COSO criteria). The Companys management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting included in the accompanying Managements Annual Report on
Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the
Companys internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk,
and performing such other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, First Acceptance Corporation and subsidiaries maintained, in all material respects,
effective internal control over financial reporting as of June 30, 2010, based on the COSO
criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheets of First Acceptance Corporation and
subsidiaries as of June 30, 2010 and 2009, and the related consolidated statements of operations,
stockholders equity, and cash flows for each of the three years in the period ended June 30, 2010,
and our report dated August 31, 2010 expressed an unqualified opinion thereon.
Nashville, Tennessee
August 31, 2010
46
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
2010 |
|
|
2009 |
|
ASSETS |
|
|
|
|
|
|
|
|
Investments, available-for-sale at fair value (amortized cost
of $187,907 and $140,849, respectively) |
|
$ |
196,550 |
|
|
$ |
140,311 |
|
Cash and cash equivalents |
|
|
26,184 |
|
|
|
77,201 |
|
Premiums and fees receivable, net of allowance of $418 and $419 |
|
|
41,276 |
|
|
|
45,309 |
|
Other assets |
|
|
8,733 |
|
|
|
11,866 |
|
Property and equipment, net |
|
|
3,524 |
|
|
|
3,921 |
|
Deferred acquisition costs |
|
|
3,623 |
|
|
|
3,896 |
|
Goodwill |
|
|
70,092 |
|
|
|
70,092 |
|
Identifiable intangible assets |
|
|
6,360 |
|
|
|
6,360 |
|
|
|
|
|
|
|
|
TOTAL ASSETS |
|
$ |
356,342 |
|
|
$ |
358,956 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
Loss and loss adjustment expense reserves |
|
$ |
73,198 |
|
|
$ |
83,973 |
|
Unearned premiums and fees |
|
|
52,563 |
|
|
|
57,350 |
|
Debentures payable |
|
|
41,240 |
|
|
|
41,240 |
|
Other liabilities |
|
|
12,151 |
|
|
|
16,537 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
179,152 |
|
|
|
199,100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity: |
|
|
|
|
|
|
|
|
Preferred stock, $.01 par value, 10,000 shares authorized |
|
|
|
|
|
|
|
|
Common stock, $.01 par value, 75,000 shares authorized;
48,509 and 48,312 shares issued and outstanding,
respectively |
|
|
485 |
|
|
|
483 |
|
Additional paid-in capital |
|
|
465,831 |
|
|
|
464,720 |
|
Accumulated other comprehensive income (loss) |
|
|
8,643 |
|
|
|
(538 |
) |
Accumulated deficit |
|
|
(297,769 |
) |
|
|
(304,809 |
) |
|
|
|
|
|
|
|
Total stockholders equity |
|
|
177,190 |
|
|
|
159,856 |
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
|
$ |
356,342 |
|
|
$ |
358,956 |
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
47
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned |
|
$ |
187,046 |
|
|
$ |
224,113 |
|
|
$ |
285,914 |
|
Commission and fee income |
|
|
28,852 |
|
|
|
31,759 |
|
|
|
36,479 |
|
Investment income |
|
|
7,958 |
|
|
|
9,504 |
|
|
|
11,250 |
|
Net realized gains (losses) on investments,
available-for-sale |
|
|
(683 |
) |
|
|
89 |
|
|
|
(1,244 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
223,173 |
|
|
|
265,465 |
|
|
|
332,399 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Losses and loss adjustment expenses |
|
|
126,995 |
|
|
|
149,277 |
|
|
|
219,943 |
|
Insurance operating expenses |
|
|
79,833 |
|
|
|
87,124 |
|
|
|
98,433 |
|
Other operating expenses |
|
|
2,233 |
|
|
|
1,307 |
|
|
|
2,415 |
|
Litigation settlement |
|
|
(361 |
) |
|
|
1,570 |
|
|
|
7,468 |
|
Stock-based compensation |
|
|
1,048 |
|
|
|
2,053 |
|
|
|
1,507 |
|
Depreciation and amortization |
|
|
2,013 |
|
|
|
1,910 |
|
|
|
1,679 |
|
Interest expense |
|
|
3,931 |
|
|
|
4,138 |
|
|
|
4,977 |
|
Goodwill impairment |
|
|
|
|
|
|
67,990 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
215,692 |
|
|
|
315,369 |
|
|
|
336,422 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
7,481 |
|
|
|
(49,904 |
) |
|
|
(4,023 |
) |
Provision for income taxes |
|
|
441 |
|
|
|
18,396 |
|
|
|
13,822 |
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
7,040 |
|
|
$ |
(68,300 |
) |
|
$ |
(17,845 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.15 |
|
|
$ |
(1.43 |
) |
|
$ |
(0.37 |
) |
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.14 |
|
|
$ |
(1.43 |
) |
|
$ |
(0.37 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares used to calculate net income
(loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
47,961 |
|
|
|
47,664 |
|
|
|
47,628 |
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
48,638 |
|
|
|
47,664 |
|
|
|
47,628 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of net income (loss) to
comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
7,040 |
|
|
$ |
(68,300 |
) |
|
$ |
(17,845 |
) |
Unrealized change in investments |
|
|
9,181 |
|
|
|
(68 |
) |
|
|
2,303 |
|
Other |
|
|
|
|
|
|
|
|
|
|
(121 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
16,221 |
|
|
|
(68,368 |
) |
|
|
(15,663 |
) |
Applicable provision for income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) |
|
$ |
16,221 |
|
|
$ |
(68,368 |
) |
|
$ |
(15,663 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Detail of net realized gains (losses) on
investments, available-for-sale: |
|
|
|
|
|
|
|
|
|
|
|
|
Net realized gains on sales |
|
$ |
300 |
|
|
$ |
2,509 |
|
|
$ |
170 |
|
Unrealized losses on investments with
other-than-temporary impairment charges |
|
|
(1,937 |
) |
|
|
(3,640 |
) |
|
|
(1,414 |
) |
Non-credit portion included in
comprehensive income (loss) |
|
|
954 |
|
|
|
1,220 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other-than-temporary impairment charges
recognized in net income (loss) |
|
|
(983 |
) |
|
|
(2,420 |
) |
|
|
(1,414 |
) |
|
|
|
|
|
|
|
|
|
|
Net realized gains (losses) on
investments, available-for-sale |
|
$ |
(683 |
) |
|
$ |
89 |
|
|
$ |
(1,244 |
) |
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
48
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
other |
|
|
|
|
|
|
Total |
|
|
|
Common Stock |
|
|
paid-in |
|
|
comprehensive |
|
|
Accumulated |
|
|
stockholders |
|
|
|
Shares |
|
|
Amount |
|
|
capital |
|
|
income (loss) |
|
|
deficit |
|
|
equity |
|
Balances at June 30, 2007 |
|
|
47,615 |
|
|
$ |
476 |
|
|
$ |
460,968 |
|
|
$ |
(2,652 |
) |
|
$ |
(219,308 |
) |
|
$ |
239,484 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17,845 |
) |
|
|
(17,845 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized change on investments
(net of tax of $0) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,303 |
|
|
|
|
|
|
|
2,303 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized change on interest rate
swap agreement |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(121 |
) |
|
|
|
|
|
|
(121 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of restricted common stock |
|
|
400 |
|
|
|
4 |
|
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation |
|
|
5 |
|
|
|
1 |
|
|
|
1,506 |
|
|
|
|
|
|
|
|
|
|
|
1,507 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of shares under Employee
Stock Purchase Plan |
|
|
35 |
|
|
|
|
|
|
|
131 |
|
|
|
|
|
|
|
|
|
|
|
131 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at June 30, 2008 |
|
|
48,055 |
|
|
|
481 |
|
|
|
462,601 |
|
|
|
(470 |
) |
|
|
(237,153 |
) |
|
|
225,459 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect of accounting change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(644 |
) |
|
|
644 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(68,300 |
) |
|
|
(68,300 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized change on investments
(net of tax of $0) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
576 |
|
|
|
|
|
|
|
576 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of restricted common stock |
|
|
225 |
|
|
|
2 |
|
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation |
|
|
5 |
|
|
|
|
|
|
|
2,053 |
|
|
|
|
|
|
|
|
|
|
|
2,053 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of shares under Employee
Stock Purchase Plan |
|
|
27 |
|
|
|
|
|
|
|
68 |
|
|
|
|
|
|
|
|
|
|
|
68 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at June 30, 2009 |
|
|
48,312 |
|
|
|
483 |
|
|
|
464,720 |
|
|
|
(538 |
) |
|
|
(304,809 |
) |
|
|
159,856 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,040 |
|
|
|
7,040 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized change on investments
(net of tax of $0) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,181 |
|
|
|
|
|
|
|
9,181 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of restricted common stock |
|
|
160 |
|
|
|
2 |
|
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeiture of restricted common stock |
|
|
(5 |
) |
|
|
|
|
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation |
|
|
5 |
|
|
|
|
|
|
|
1,048 |
|
|
|
|
|
|
|
|
|
|
|
1,048 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of shares under Employee
Stock Purchase Plan |
|
|
37 |
|
|
|
|
|
|
|
67 |
|
|
|
|
|
|
|
|
|
|
|
67 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at June 30, 2010 |
|
|
48,509 |
|
|
$ |
485 |
|
|
$ |
465,831 |
|
|
$ |
8,643 |
|
|
$ |
(297,769 |
) |
|
$ |
177,190 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
49
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
7,040 |
|
|
$ |
(68,300 |
) |
|
$ |
(17,845 |
) |
Adjustments to reconcile net income (loss) to cash provided
by (used in) operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
2,013 |
|
|
|
1,910 |
|
|
|
1,679 |
|
Stock-based compensation |
|
|
1,048 |
|
|
|
2,053 |
|
|
|
1,507 |
|
Deferred income taxes |
|
|
|
|
|
|
17,593 |
|
|
|
13,343 |
|
Goodwill impairment |
|
|
|
|
|
|
67,990 |
|
|
|
|
|
Other-than-temporary impairment on investment securities |
|
|
983 |
|
|
|
2,420 |
|
|
|
1,414 |
|
Net realized gains on sales of investments |
|
|
(300 |
) |
|
|
(2,509 |
) |
|
|
(170 |
) |
Other |
|
|
521 |
|
|
|
129 |
|
|
|
113 |
|
Change in: |
|
|
|
|
|
|
|
|
|
|
|
|
Premiums and fees receivable |
|
|
4,032 |
|
|
|
18,023 |
|
|
|
8,349 |
|
Loss and loss adjustment expense reserves |
|
|
(10,775 |
) |
|
|
(17,434 |
) |
|
|
9,961 |
|
Unearned premiums and fees |
|
|
(4,787 |
) |
|
|
(19,887 |
) |
|
|
(11,594 |
) |
Litigation settlement |
|
|
(97 |
) |
|
|
(3,975 |
) |
|
|
6,721 |
|
Other |
|
|
(795 |
) |
|
|
(3,328 |
) |
|
|
4,890 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities |
|
|
(1,117 |
) |
|
|
(5,315 |
) |
|
|
18,368 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of investments, available-for-sale |
|
|
(71,939 |
) |
|
|
(16,228 |
) |
|
|
(44,408 |
) |
Maturities and paydowns of investments, available-for-sale |
|
|
11,326 |
|
|
|
19,980 |
|
|
|
13,697 |
|
Sales of investments, available-for-sale |
|
|
12,362 |
|
|
|
46,128 |
|
|
|
18,719 |
|
Net change in receivable/payable for securities |
|
|
|
|
|
|
(1,045 |
) |
|
|
20,019 |
|
Capital expenditures |
|
|
(1,628 |
) |
|
|
(1,003 |
) |
|
|
(2,422 |
) |
Other |
|
|
(22 |
) |
|
|
(130 |
) |
|
|
(253 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
(49,901 |
) |
|
|
47,702 |
|
|
|
5,352 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Payments on borrowings |
|
|
|
|
|
|
(3,913 |
) |
|
|
(19,147 |
) |
Net proceeds from issuance of common stock |
|
|
67 |
|
|
|
68 |
|
|
|
131 |
|
Other |
|
|
(66 |
) |
|
|
13 |
|
|
|
(219 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
1 |
|
|
|
(3,832 |
) |
|
|
(19,235 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
(51,017 |
) |
|
|
38,555 |
|
|
|
4,485 |
|
Cash and cash equivalents, beginning of year |
|
|
77,201 |
|
|
|
38,646 |
|
|
|
34,161 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year |
|
$ |
26,184 |
|
|
$ |
77,201 |
|
|
$ |
38,646 |
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
50
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
General
First Acceptance Corporation (the Company) is a holding company based in Nashville,
Tennessee with operating subsidiaries whose primary operations include the selling, servicing and
underwriting of non-standard personal automobile insurance. The Company writes non-standard
personal automobile insurance in 12 states and is licensed as an insurer in 13 additional states.
The Company issues policies of insurance through three wholly-owned subsidiaries: First Acceptance
Insurance Company, Inc., First Acceptance Insurance Company of Georgia, Inc. and First Acceptance
Insurance Company of Tennessee, Inc. (the Insurance Companies).
Basis of Consolidation and Reporting
The accompanying consolidated financial statements include the accounts of the Company and its
subsidiaries which are all wholly owned. These financial statements have been prepared in
conformity with U.S. generally accepted accounting principles. All intercompany accounts and
transactions have been eliminated in consolidation.
Reclassifications
Certain reclassifications have been made to the prior years consolidated financial statements
to conform with the current year presentation.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting
principles requires management to make estimates and assumptions that affect the amounts reported
in the financial statements and accompanying notes. It also requires disclosure of contingent
assets and liabilities at the date of the consolidated financial statements and the reported
revenues and expenses during the period. Actual results could differ from those estimates.
Investments
Investments, available-for-sale, include bonds with fixed principal payment schedules and
mortgage-backed securities which are amortized using the retrospective method. These securities
and the investment in the mutual fund are carried at fair value with the corresponding unrealized
appreciation or depreciation, net of deferred income taxes, reported in other comprehensive income
(loss).
Premiums and discounts on collateralized mortgage obligations (CMOs) are amortized over a
period based on estimated future principal payments, including prepayments. Prepayment assumptions
are reviewed periodically and adjusted to reflect actual prepayments and changes in expectations.
The most significant determinants of prepayments are the difference between interest rates on the
underlying mortgages and the current mortgage loan rates and the structure of the security. Other
factors affecting prepayments include the size, type and age of underlying mortgages, the
geographic location of the mortgaged properties and the credit worthiness of the borrowers.
Variations from anticipated prepayments will affect the life and yield of these securities.
Investment securities are exposed to various risks such as interest rate, market and credit
risk. Fair values of securities fluctuate based on changing market conditions. Significant changes
in market conditions could materially affect portfolio value in the near term. Management reviews
investments for impairment on a quarterly basis. Fair values of investments are based on prices
quoted in the most active market for each security. If quoted prices are not available, fair value
is estimated based on the fair value of comparable securities, discounted cash flow models
51
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
or similar methods. Any decline in the fair value of any available-for-sale security below
cost that is deemed to be other-than-temporary would result in a reduction in the amortized cost of
the security.
Effective April 1, 2009, the Company adopted the provisions of Financial Accounting Standards
Board (FASB) Accounting Standards Codification (ASC) 320-10-65, Recognition and Presentation of
Other-Than-Temporary Impairments (Prior authoritative literature: FASB Staff Position No. FAS
115-2) (FASB ASC 320-10-65). Under this guidance, if management can assert that it does not
intend to sell an impaired fixed maturity security and it is more likely than not that it will not
have to sell the security before recovery of its amortized cost basis, then an entity must separate
other-than-temporary impairments (OTTI) into the following two components: (i) the amount related
to credit losses (charged against income) and (ii) the amount related to all other factors
(recorded in other comprehensive income (loss)). The credit-related portion of an OTTI is measured
by comparing a securitys amortized cost to the present value of its current expected cash flows
discounted at its effective yield prior to the impairment charge. If management intends to sell an
impaired security, or it is more likely than not that it will be required to sell the security
before recovery, an impairment charge is required to reduce the amortized cost of that security to
fair value. As a result of the adoption of this pronouncement, the cumulative effect resulted in an
adjustment in fiscal year 2009 of $0.6 million to reclassify the non-credit component of previously
recognized impairments from accumulated deficit to accumulated other comprehensive loss.
Realized gains and losses on sales of securities are computed based on specific
identification.
Cash and Cash Equivalents
Cash and cash equivalents consist of bank demand deposits and highly-liquid investments. All
investments with original maturities of three months or less are considered cash equivalents.
Revenue Recognition
Insurance premiums earned include policy and renewal fees and are recognized on a pro-rata
basis over the respective terms of the policies. Written premiums are recorded as of the effective
date of the policies for the full policy premium, although most policyholders elect to pay on a
monthly installment basis. Premiums and fees are generally collected in advance of providing risk
coverage, minimizing the Companys exposure to credit risk. Premiums receivable are recorded net of
an estimated allowance for uncollectible amounts. Commission and fee income includes installment
fees recognized when billed and commissions and fees from ancillary products recognized on a
pro-rata basis over the respective terms of the contracts.
Income Taxes
Income taxes are accounted for under the liability method. Deferred tax assets and liabilities
are recognized for the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized
in income in the period that includes the enactment date.
A valuation allowance for the deferred tax asset is established based upon managements
estimate of whether it is more likely than not that the Company would not realize tax benefits in
future periods to the full extent available. Changes in the valuation allowance are recognized in
income during the period in which the circumstances that cause such a change in managements
estimate occur.
The Company accounts for income tax uncertainties under the provisions of FASB ASC 740-10,
Income Taxes (Prior authoritative literature: FASB SFAS No. 109) (FASB ASC 740-10). The Company
has recognized no additional liability or reduction in deferred tax asset for unrecognized tax
benefits and the Company had no FASB ASC 740-10 tax liabilities at June 30, 2010 and 2009. Any
interest and penalties incurred in connection with
income taxes are recorded as a component of the provision for income taxes. The Company is
generally not subject to U.S. federal, state or local income tax examinations by tax authorities
for taxable years prior to June 30, 2005.
52
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Advertising Costs
Advertising costs are expensed when incurred. Advertising expense for the years ended June 30,
2010, 2009 and 2008 was $8.3 million, $9.6 million and $11.9 million, respectively. At June 30,
2010 and 2009, prepaid advertising costs, which are included in other assets in the accompanying
consolidated balance sheets, were $1.2 million and $2.2 million, respectively.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is provided over the estimated
useful lives of the assets (generally ranging from three to seven years) using the straight-line
method. Leasehold improvements are amortized over the shorter of the lives of the respective leases
or the service lives of the improvements. Repairs and maintenance are charged to expense as
incurred. Equipment under capitalized lease obligations is stated at the present value of the
minimum lease payments at the beginning of the lease term.
Foreclosed Real Estate Held for Sale
Foreclosed real estate held for sale is recorded at the lower of cost or fair value less
estimated costs to sell. The Company periodically reviews its portfolio of foreclosed real estate
held for sale using current information including (i) independent appraisals, (ii) general economic
factors affecting the area where the property is located, (iii) recent sales activity and asking
prices for comparable properties and (iv) costs to sell and/or develop that would serve to lower
the expected proceeds from the disposal of the real estate. Gains (losses) realized on liquidation
are recorded directly to operations and included in revenues. Foreclosed real estate held for sale
assets at June 30, 2010 and 2009 of $0.8 million and $0.7 million, respectively, are included in
other assets.
Deferred Acquisition Costs
Deferred acquisition costs include premium taxes and other variable underwriting and direct
sales costs incurred in connection with writing business. These costs are deferred and amortized
over the policy period in which the related premiums are earned, to the extent that such costs are
deemed recoverable from future unearned premiums and anticipated investment income. Amortization
expense for the years ended June 30, 2010, 2009 and 2008 was $13.8 million, $15.8 million and $18.2
million, respectively.
Goodwill and Other Identifiable Intangible Assets
Goodwill and other identifiable intangible assets are attributable to the Companys insurance
operations and were initially recorded at their estimated fair values at the date of acquisition.
Goodwill and other intangible assets, primarily comprised of trade names, having an indefinite
useful life are not amortized for financial statement purposes. The Company performs required
annual impairment tests of its goodwill and intangible assets as of the last day of the fourth
quarter of each fiscal year. In the event that facts and circumstances indicate that the goodwill
and other identifiable intangible assets may be impaired, an interim impairment test would be
required. Intangible assets with finite lives have been fully amortized over their useful lives.
The goodwill impairment test is a two-step process that requires management to make judgments
in determining what assumptions to use in the calculation. The first step of the process consists
of estimating the fair value of each reporting unit based on valuation techniques, including a
discounted cash flow model using revenue and profit forecasts, and comparing those estimated fair
values with the carrying values of those assets and liabilities, which includes the allocated
goodwill. If the estimated fair value is less than the carrying value, a second step is performed
to compute the amount of the impairment, if any, by determining an implied fair value of
goodwill. The determination of the implied fair value of goodwill of a reporting unit requires
the Company to allocate the estimated fair value of the reporting unit to the assets and
liabilities of the reporting unit. Any unallocated fair value represents the implied fair value
of goodwill, which is compared to its corresponding carrying value.
As a result of the adverse impact of the difficult economic conditions on the Companys
customers and business and the resulting decline in the Companys share price during the fourth
quarter of fiscal year 2009, the Company estimated that a goodwill impairment charge at June 30,
2009 was probable. Accordingly, the Company
53
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
recognized an estimated non-cash, pre-tax goodwill impairment charge of $68.0 million in the fourth
quarter of fiscal year 2009. Due to the complexity of the fair value calculations involved, the
analysis of the goodwill impairment charge recognized during the fourth quarter of fiscal year 2009
was finalized during the first quarter of fiscal year 2010 and the amount of the impairment did not
differ from the initial estimate. The goodwill impairment charge did not have a materially adverse
impact on the continuing operations, liquidity, or statutory surplus of the Company.
As a part of the Companys annual impairment test to evaluate the recoverability of such
assets at June 30, 2010, the key assumptions used to determine the fair value of the Companys
reporting unit, from a market participants perspective, included (i) long-term revenue growth
rates ranging from 5% to 10%, (ii) discount rates between 12.5% and 14.0%, which were based on an
estimated weighted average cost of capital adjusted for the risks associated with its operations
and (iii) recent industry transaction trends in price to tangible book multiples and related
returns on tangible equity. Based on this evaluation, the Company concluded that goodwill and other
identifiable intangible assets were fully realizable as of June 30, 2010. The Companys evaluation
includes multiple assumptions, including estimated discounted cash flows and other estimates that
may change over time. If future discounted cash flows become less than those projected by the
Company, further impairment charges may become necessary that could have a materially adverse
impact on the Companys results of operations and financial condition. As quoted market prices in
active stock markets are relevant evidence of fair value, a significant decline in the Companys
common stock trading price may indicate an impairment of goodwill.
Loss and Loss Adjustment Expense Reserves
Loss and loss adjustment expense reserves are undiscounted and represent case-basis estimates
of reported losses and estimates based on certain actuarial assumptions regarding the past
experience of reported losses, including an estimate of losses incurred but not reported.
Management believes that the loss and loss adjustment reserves are adequate to cover the ultimate
associated liability. However, such estimate may be more or less than the amount ultimately paid
when the claims are finally settled.
Recent Accounting Pronouncements
In June 2009, the FASB issued Accounting Standards Update (ASU) No. 2009-01, Generally
Accepted Accounting Principles (Topic 105) (FASB ASU No. 2009-01), which established the FASB ASC
as the single source of authoritative accounting principles recognized by the FASB. This
codification did not create new accounting and reporting standards but organized their structure
and required the Company to update all existing U.S. generally accepted accounting principles
references to the new codification references for all future filings. The Company adopted the
provisions of FASB ASU No. 2009-01 in the quarter ended September 30, 2009.
In August 2009, the FASB issued ASU No. 2009-05, Measuring Liabilities at Fair Value (Topic
820) (FASB ASU No. 2009-05), which amends FASB ASC 820, Fair Value Measurements and Disclosures
(Prior authoritative literature: FASB SFAS No. 157) (FASB ASC 820), by clarifying that in
circumstances in which a quoted price in an active market for the identical liability is not
available, a reporting entity is required to measure fair value using a valuation technique that
uses either the quoted price of the identical liability when traded as an asset or quoted prices
for similar liabilities when traded as assets. The Company adopted the provisions of FASB ASU No.
2009-05 upon issuance. The adoption did not have an impact on the Companys results of operations
or financial condition.
In December 2009, the FASB issued 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 (Prior authoritative literature: FASB SFAS 167).
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. FASB ASU No. 2009-17 is effective for fiscal years
beginning after November 15, 2009 and interim periods within those fiscal years. The Company is
currently evaluating the impact that the adoption of FASB ASU No. 2009-17 will have on
future consolidated financial statements.
54
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
In January 2010, the FASB issued ASU No. 2010-06, Improving Disclosures about Fair Value
Measurements (Topic 820) (FASB ASU No. 2010-06), which amends FASB ASC 820, to require additional
disclosures regarding fair value measurements. The Company adopted the provisions of FASB ASU No.
2010-06 in the quarter ended March 31, 2010. The adoption did not have an impact on the Companys
results of operations or financial condition.
Supplemental Cash Flow Information
During the years ended June 30, 2010, 2009 and 2008, the Company paid $0.7 million, $0.5
million and $0.5 million, respectively, in income taxes and $3.9 million, $4.0 million and $4.3
million, respectively, in interest.
Basic and Diluted Net Income (Loss) Per Share
Basic net income (loss) per share is computed by dividing net income (loss) available to
common shareholders by the weighted average number of common shares, while diluted net income
(loss) per share is computed by dividing net income (loss) available to common shareholders by the
weighted average number of such common shares and dilutive share equivalents. Dilutive share
equivalents result from the assumed exercise of employee stock options and vesting of restricted
common stock and are calculated using the treasury stock method.
2. Investments
Restrictions
At June 30, 2010, fixed maturities and cash equivalents with a fair value of $6.9 million
(amortized cost of $6.6 million) were on deposit with various insurance departments as a
requirement of doing business in those states. Fixed maturities and cash equivalents with a fair
value of $8.0 million were on deposit with another insurance company as collateral for an assumed
reinsurance contract.
Fair Value
Fair value is the price that would be received upon the sale of an asset or paid to transfer a
liability in an orderly transaction between market participants at the measurement date. The
Company holds available-for-sale fixed maturity investments, which are carried at fair value.
Fair value measurements are generally based upon observable and unobservable inputs.
Observable inputs are based on market data from independent sources, while unobservable inputs
reflect the Companys view of market assumptions in the absence of observable market information.
All assets and liabilities that are carried at fair value are classified and disclosed in one of
the following categories:
|
Level 1 |
|
Quoted prices in active markets for identical assets or liabilities. |
|
|
Level 2 |
|
Quoted market prices for similar assets or liabilities in active
markets; quoted prices by independent pricing services for identical or similar
assets or liabilities in markets that are not active; and valuations, using models
or other valuation techniques, that use observable market data. All significant
inputs are observable, or derived from observable information in the marketplace, or
are supported by observable levels at which transactions are executed in the market
place. |
|
|
Level 3 |
|
Instruments that use non-binding broker quotes or model driven
valuations that do not have observable market data. |
55
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following tables present the fair-value measurements for each major category of assets
that are measured on a recurring basis (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using |
|
|
|
|
|
|
|
Quoted Prices |
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active |
|
|
Significant |
|
|
|
|
|
|
|
|
|
|
Markets for |
|
|
Other |
|
|
Significant |
|
|
|
|
|
|
|
Identical |
|
|
Observable |
|
|
Unobservable |
|
|
|
|
|
|
|
Assets |
|
|
Inputs |
|
|
Inputs |
|
June 30, 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 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using |
|
|
|
|
|
|
|
Quoted Prices |
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active |
|
|
Significant |
|
|
|
|
|
|
|
|
|
|
Markets for |
|
|
Other |
|
|
Significant |
|
|
|
|
|
|
|
Identical |
|
|
Observable |
|
|
Unobservable |
|
|
|
|
|
|
|
Assets |
|
|
Inputs |
|
|
Inputs |
|
June 30, 2009 |
|
Total |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
Fixed maturities, available-for-sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agencies |
|
$ |
11,180 |
|
|
$ |
11,180 |
|
|
$ |
|
|
|
$ |
|
|
State |
|
|
8,563 |
|
|
|
|
|
|
|
8,563 |
|
|
|
|
|
Political subdivisions |
|
|
1,854 |
|
|
|
|
|
|
|
1,854 |
|
|
|
|
|
Revenue and assessment |
|
|
28,481 |
|
|
|
|
|
|
|
28,481 |
|
|
|
|
|
Corporate bonds |
|
|
46,726 |
|
|
|
|
|
|
|
46,726 |
|
|
|
|
|
Collateralized mortgage obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency backed |
|
|
31,926 |
|
|
|
|
|
|
|
31,926 |
|
|
|
|
|
Non-agency backed
residential |
|
|
5,618 |
|
|
|
|
|
|
|
3,688 |
|
|
|
1,930 |
|
Non-agency backed
commercial |
|
|
5,963 |
|
|
|
|
|
|
|
5,256 |
|
|
|
707 |
|
|
|
|
|
|
|
Total fixed maturities,
available-for-sale |
|
|
140,311 |
|
|
|
11,180 |
|
|
|
126,494 |
|
|
|
2,637 |
|
Cash and cash equivalents |
|
|
77,201 |
|
|
|
77,201 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
217,512 |
|
|
$ |
88,381 |
|
|
$ |
126,494 |
|
|
$ |
2,637 |
|
|
|
|
|
|
|
The fair values of the Companys 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 table are priced exclusively by utilizing the services of independent pricing sources using
observable market data. The Level 2 classified security valuations are obtained from a single
independent pricing service. There were no
56
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
transfers between Level 1 and Level 2 for the years ended June 30, 2010 and 2009. The Companys
policy is to recognize transfers between levels at the end of the reporting period. The Company has
not made any adjustments to the prices obtained from the independent pricing sources.
The Company has reviewed the pricing techniques and methodologies of the independent pricing
sources and believes that their policies adequately consider market activity, either based on
specific transactions for the security valued or based on modeling of securities with similar
credit quality, duration, yield and structure that were recently traded. The Company monitored
security-specific valuation trends and discussed material changes or the absence of expected
changes with the pricing sources to understand the underlying factors and inputs and to validate
the reasonableness of the pricing.
Based on the above categorization, the following table represents the quantitative disclosure
for those assets included in category Level 3 during the period presented (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using |
|
|
|
|
|
|
|
Significant Unobservable Inputs (Level 3) |
|
|
|
|
|
|
|
Collateralized mortgage obligations |
|
|
|
|
|
|
|
|
|
|
Non-agency |
|
|
Non-agency |
|
|
|
|
|
|
Corporate |
|
|
backed - |
|
|
backed |
|
|
|
|
|
|
bonds |
|
|
residential |
|
|
commercial |
|
|
Total |
|
Balance at July 1,
2008 |
|
$ |
|
|
|
$ |
167 |
|
|
$ |
|
|
|
$ |
167 |
|
Total gains or losses
(realized or unrealized): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in net
income
(loss) |
|
|
|
|
|
|
(66 |
) |
|
|
3 |
|
|
|
(63 |
) |
Included in other
comprehensive
income
(loss) |
|
|
|
|
|
|
(21 |
) |
|
|
(3 |
) |
|
|
(24 |
) |
Sales |
|
|
|
|
|
|
(25 |
) |
|
|
|
|
|
|
(25 |
) |
Transfers into Level
3 |
|
|
|
|
|
|
1,875 |
|
|
|
707 |
|
|
|
2,582 |
|
Transfers out of Level
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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) |
|
|
|
|
|
|
421 |
|
|
|
242 |
|
|
|
663 |
|
Transfers into Level
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfers out of Level
3(a) |
|
|
|
|
|
|
(2,351 |
) |
|
|
(949 |
) |
|
|
(3,300 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30,
2010 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Transferred from Level 3 to Level 2 as observable market data became available during
the period presented due to the increase in market activity for these securities. |
Investment Income and Net Realized Gains and Losses
The major categories of investment income follow (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Fixed maturities, available-for-sale |
|
$ |
8,467 |
|
|
$ |
9,588 |
|
|
$ |
9,747 |
|
Cash and cash equivalents |
|
|
30 |
|
|
|
383 |
|
|
|
1,824 |
|
Other |
|
|
117 |
|
|
|
116 |
|
|
|
117 |
|
Investment expenses |
|
|
(656 |
) |
|
|
(583 |
) |
|
|
(438 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
7,958 |
|
|
$ |
9,504 |
|
|
$ |
11,250 |
|
|
|
|
|
|
|
|
|
|
|
57
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The components of net realized gains (losses) on investments, available-for-sale are as
follows (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Gains |
|
$ |
326 |
|
|
$ |
2,662 |
|
|
$ |
424 |
|
Losses |
|
|
(26 |
) |
|
|
(153 |
) |
|
|
(254 |
) |
Other-than-temporary impairment |
|
|
(983 |
) |
|
|
(2,420 |
) |
|
|
(1,414 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(683 |
) |
|
$ |
89 |
|
|
$ |
(1,244 |
) |
|
|
|
|
|
|
|
|
|
|
Realized gains and losses on sales of securities are computed based on specific
identification. The non-credit related portion of OTTI charges is included in other comprehensive
income (loss). The amounts of such charges taken for securities still owned were $0.6 million for
non-agency backed residential CMOs and $0.3 million for non-agency backed commercial CMOs during
the year ended June 30, 2010 and $0.6 million for non-agency backed residential CMOs and $0.6
million for non-agency backed commercial CMOs during the year ended June 30, 2009.
Investments, Available-for-Sale
The following tables summarize the Companys investment securities (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
June 30, 2009 |
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
U.S. government and agencies |
|
$ |
10,744 |
|
|
$ |
473 |
|
|
$ |
(37 |
) |
|
$ |
11,180 |
|
State |
|
|
8,238 |
|
|
|
344 |
|
|
|
(19 |
) |
|
|
8,563 |
|
Political subdivisions |
|
|
1,834 |
|
|
|
52 |
|
|
|
(32 |
) |
|
|
1,854 |
|
Revenue and assessment |
|
|
27,816 |
|
|
|
831 |
|
|
|
(166 |
) |
|
|
28,481 |
|
Corporate bonds |
|
|
45,737 |
|
|
|
1,654 |
|
|
|
(665 |
) |
|
|
46,726 |
|
Collateralized mortgage obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency backed |
|
|
30,656 |
|
|
|
1,270 |
|
|
|
|
|
|
|
31,926 |
|
Non-agency backed residential |
|
|
8,178 |
|
|
|
1 |
|
|
|
(2,561 |
) |
|
|
5,618 |
|
Non-agency backed commercial |
|
|
7,646 |
|
|
|
|
|
|
|
(1,683 |
) |
|
|
5,963 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
140,849 |
|
|
$ |
4,625 |
|
|
$ |
(5,163 |
) |
|
$ |
140,311 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
58
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table sets forth the scheduled maturities of the Companys fixed maturity
securities at June 30, 2010 based on their fair values (in thousands). Actual maturities may differ
from contractual maturities because certain securities may be called or prepaid by the issuers.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities |
|
|
|
|
|
|
Securities |
|
|
Securities |
|
|
with No |
|
|
All |
|
|
|
with |
|
|
with |
|
|
Unrealized |
|
|
Fixed |
|
|
|
Unrealized |
|
|
Unrealized |
|
|
Gains or |
|
|
Maturity |
|
|
|
Gains |
|
|
Losses |
|
|
Losses |
|
|
Securities |
|
One year or less |
|
$ |
9,137 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
9,137 |
|
After one through five years |
|
|
82,250 |
|
|
|
642 |
|
|
|
|
|
|
|
82,892 |
|
After five through ten years |
|
|
39,567 |
|
|
|
|
|
|
|
|
|
|
|
39,567 |
|
After ten years |
|
|
8,607 |
|
|
|
7,063 |
|
|
|
|
|
|
|
15,670 |
|
No single maturity date |
|
|
33,676 |
|
|
|
8,085 |
|
|
|
67 |
|
|
|
41,828 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
173,237 |
|
|
$ |
15,790 |
|
|
$ |
67 |
|
|
$ |
189,094 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair value and gross unrealized losses of investments, available-for-sale, by the length
of time that individual securities have been in a continuous unrealized loss position follows (in
thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 months |
|
|
12 months or longer |
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Gross |
|
|
Total Gross |
|
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
|
Unrealized |
|
June 30, 2010 |
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
|
Losses |
|
U.S. government and agencies |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
State |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Political subdivisions |
|
|
|
|
|
|
|
|
|
|
488 |
|
|
|
(14 |
) |
|
|
(14 |
) |
Revenue and assessment |
|
|
3,057 |
|
|
|
(96 |
) |
|
|
1,490 |
|
|
|
(44 |
) |
|
|
(140 |
) |
Corporate bonds |
|
|
930 |
|
|
|
(32 |
) |
|
|
1,739 |
|
|
|
(214 |
) |
|
|
(246 |
) |
Collateralized mortgage obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency backed |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-agency backed residential |
|
|
505 |
|
|
|
(5 |
) |
|
|
5,848 |
|
|
|
(628 |
) |
|
|
(633 |
) |
Non-agency backed commercial |
|
|
|
|
|
|
|
|
|
|
1,732 |
|
|
|
(341 |
) |
|
|
(341 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities, available-for-sale |
|
|
4,492 |
|
|
|
(133 |
) |
|
|
11,297 |
|
|
|
(1,241 |
) |
|
|
(1,374 |
) |
Investment in mutual fund,
available-for-sale |
|
|
7,456 |
|
|
|
(44 |
) |
|
|
|
|
|
|
|
|
|
|
(44 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
11,948 |
|
|
$ |
(177 |
) |
|
$ |
11,297 |
|
|
$ |
(1,241 |
) |
|
$ |
(1,418 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 months |
|
|
12 months or longer |
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Gross |
|
|
Total Gross |
|
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
|
Unrealized |
|
June 30, 2009 |
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
|
Losses |
|
U.S. government and agencies |
|
$ |
963 |
|
|
$ |
(37 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
(37 |
) |
State |
|
|
|
|
|
|
|
|
|
|
678 |
|
|
|
(19 |
) |
|
|
(19 |
) |
Political subdivisions |
|
|
48 |
|
|
|
(1 |
) |
|
|
471 |
|
|
|
(31 |
) |
|
|
(32 |
) |
Revenue and assessment |
|
|
533 |
|
|
|
(11 |
) |
|
|
4,305 |
|
|
|
(155 |
) |
|
|
(166 |
) |
Corporate bonds |
|
|
|
|
|
|
|
|
|
|
8,022 |
|
|
|
(665 |
) |
|
|
(665 |
) |
Collateralized mortgage obligations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency backed |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-agency backed
residential |
|
|
|
|
|
|
|
|
|
|
4,898 |
|
|
|
(2,561 |
) |
|
|
(2,561 |
) |
Non-agency backed
commercial |
|
|
|
|
|
|
|
|
|
|
5,964 |
|
|
|
(1,683 |
) |
|
|
(1,683 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,544 |
|
|
$ |
(49 |
) |
|
$ |
24,338 |
|
|
$ |
(5,114 |
) |
|
$ |
(5,163 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
59
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table reflects the number of securities with gross unrealized gains and losses.
Gross unrealized losses are further segregated by the length of time that individual securities
have been in a continuous unrealized loss position.
|
|
|
|
|
|
|
|
|
Gross Unrealized Losses |
|
|
|
|
Less than |
|
Greater |
|
Gross |
|
|
or equal to |
|
than 12 |
|
Unrealized |
At: |
|
12 months |
|
months |
|
Gains |
June 30, 2010 |
|
6 |
|
18 |
|
153 |
June 30, 2009 |
|
3 |
|
37 |
|
133 |
The following tables reflect the fair value and gross unrealized losses of those securities in
a continuous unrealized loss position for greater than 12 months. Gross unrealized losses are
further segregated by the percentage of amortized cost (in thousands, except number of securities).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number |
|
|
|
|
|
|
Gross |
|
Gross Unrealized Losses |
|
of |
|
|
Fair |
|
|
Unrealized |
|
at June 30, 2010: |
|
Securities |
|
|
Value |
|
|
Losses |
|
Less than 10% |
|
|
11 |
|
|
$ |
7,931 |
|
|
$ |
(276 |
) |
Greater than 10% |
|
|
7 |
|
|
|
3,366 |
|
|
|
(965 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
18 |
|
|
$ |
11,297 |
|
|
$ |
(1,241 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number |
|
|
|
|
|
|
Gross |
|
Gross Unrealized Losses |
|
of |
|
|
Fair |
|
|
Unrealized |
|
at June 30, 2009: |
|
Securities |
|
|
Value |
|
|
Losses |
|
Less than 10% |
|
|
17 |
|
|
$ |
15,368 |
|
|
$ |
(766 |
) |
Greater than 10% |
|
|
20 |
|
|
|
8,970 |
|
|
|
(4,348 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
37 |
|
|
$ |
24,338 |
|
|
$ |
(5,114 |
) |
|
|
|
|
|
|
|
|
|
|
The following tables set forth the amount of gross unrealized 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 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 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value of |
|
|
|
|
|
|
|
|
|
|
Securities with |
|
|
|
|
|
|
Severity of Gross Unrealized Losses |
|
Length of |
|
Gross |
|
|
Gross |
|
|
|
|
|
|
|
|
|
|
Greater |
|
Gross Unrealized Losses |
|
Unrealized |
|
|
Unrealized |
|
|
Less |
|
|
5% to |
|
|
than |
|
at June 30, 2009: |
|
Losses |
|
|
Losses |
|
|
than 5% |
|
|
10% |
|
|
10% |
|
Less than or equal to: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
months |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Six
months |
|
|
1,011 |
|
|
|
(38 |
) |
|
|
(38 |
) |
|
|
|
|
|
|
|
|
Nine
months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve
months |
|
|
533 |
|
|
|
(11 |
) |
|
|
(11 |
) |
|
|
|
|
|
|
|
|
Greater than twelve
months |
|
|
24,338 |
|
|
|
(5,114 |
) |
|
|
(249 |
) |
|
|
(517 |
) |
|
|
(4,348 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
25,882 |
|
|
$ |
(5,163 |
) |
|
$ |
(298 |
) |
|
$ |
(517 |
) |
|
$ |
(4,348 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other-Than-Temporary Impairment
Effective April 1, 2009, the Company adopted the provisions of FASB ASC 320-10-65. Under this
guidance, the Company separates OTTI into the following two components: (i) the amount related to
credit losses, which is recognized in the consolidated statement of operations and (ii) the amount
related to all other factors, which is recorded in other comprehensive income (loss). The
credit-related portion of an OTTI is measured by comparing a securitys amortized cost to the
present value of its current expected cash flows discounted at its effective yield 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 Securities and Exchange Commission for corporate bonds
and performance data regarding the underlying loans for CMOs. Securities with declines attributable
solely to market or sector declines where 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.
61
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The number and amount of securities for which the Company has recognized OTTI charges in
net income (loss) are presented in the following tables (in thousands, except for the number of
securities).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
|
Number of Securities |
|
|
OTTI |
|
|
Number of Securities |
|
|
OTTI |
|
Corporate bonds |
|
|
|
|
|
$ |
|
|
|
|
3 |
|
|
$ |
(871 |
) |
Collateralized mortgage obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-agency backed
residential |
|
|
10 |
|
|
|
(1,723 |
) |
|
|
5 |
|
|
|
(1,564 |
) |
Non-agency backed commercial |
|
|
5 |
|
|
|
(214 |
) |
|
|
4 |
|
|
|
(1,205 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15 |
|
|
|
(1,937 |
) |
|
|
12 |
|
|
|
(3,640 |
) |
Portion of loss recognized in accumulated
other comprehensive income
(loss) |
|
|
|
|
|
|
954 |
|
|
|
|
|
|
|
1,220 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net OTTI recognized in net income
(loss) |
|
|
|
|
|
$ |
(983 |
) |
|
|
|
|
|
$ |
(2,420 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Since the adoption of FASB ASC 320-10-65, the following is a progression of the credit-related
portion of OTTI on fixed maturity securities owned at June 30, 2010 (in thousands).
|
|
|
|
|
Recognized in net loss: |
|
|
|
|
Year ended June 30, 2008 |
|
$ |
(1,414 |
) |
Nine months ended March 31, 2009 |
|
|
(1,987 |
) |
|
|
|
|
|
|
|
(3,401 |
) |
Cumulative effect of accounting change |
|
|
644 |
|
|
|
|
|
Balance at April 1, 2009 |
|
|
(2,757 |
) |
Additional credit impairments on: |
|
|
|
|
Previously impaired securities |
|
|
(148 |
) |
Securities without previous impairments |
|
|
(285 |
) |
|
|
|
|
|
|
|
(433 |
) |
Reductions for securities sold |
|
|
320 |
|
|
|
|
|
Balance at July 1, 2009 |
|
|
(2,870 |
) |
Additional credit impairments on: |
|
|
|
|
Previously impaired securities |
|
|
(491 |
) |
Securities without previous impairments |
|
|
(492 |
) |
|
|
|
|
|
|
|
(983 |
) |
Reductions for securities sold |
|
|
552 |
|
|
|
|
|
Balance at June 30, 2010 |
|
$ |
(3,301 |
) |
|
|
|
|
On a quarterly basis, the Company reviews cash flow estimates for certain non-agency backed
CMOs of lesser credit quality following the guidance of FASB ASC 325-40-65, Amendments to the
Impairment Guidance of EITF Issue No. 99-20 (Prior authoritative literature: FSP EITF 99-20-1)
(FASB ASC 325-40-65). Accordingly, when changes in estimated cash flows from the cash flows
previously estimated occur due to actual or estimated prepayment or credit loss experience, and the
present value of the revised cash flows is less than the present value previously estimated, OTTI
is deemed to have occurred. For non-agency backed CMOs not subject to FASB ASC 325-40-65, the
Company 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
62
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 securities 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 OTTI charges on corporate bonds for the year ended June 30, 2009 were recorded as these
bonds were considered to be impaired based on the extent and duration of the declines in their fair
values and issuer-specific fundamentals relating to (i) poor operating results and weakened
financial conditions, (ii) negative industry trends further impacted by the recent economic decline
and (iii) a series of downgrades to their credit ratings. Based on the factors that existed at the
time of impairment, the Company did not believe that these bonds would recover their unrealized
losses in the near future.
The Company believes that the remaining securities having unrealized losses at June 30, 2010
were not other-than-temporarily impaired. The Company also does not intend to sell any of these
securities and it is more likely than not that the Company will not be required to sell any of
these securities before the recovery of their amortized cost basis.
3. Reinsurance
Total premiums written and earned are summarized as follows (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
|
Written |
|
|
Earned |
|
|
Written |
|
|
Earned |
|
|
Written |
|
|
Earned |
|
Direct |
|
$ |
162,150 |
|
|
$ |
167,744 |
|
|
$ |
187,935 |
|
|
$ |
206,358 |
|
|
$ |
253,807 |
|
|
$ |
265,630 |
|
Assumed |
|
|
19,858 |
|
|
|
19,302 |
|
|
|
17,044 |
|
|
|
17,755 |
|
|
|
20,167 |
|
|
|
20,284 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
182,008 |
|
|
$ |
187,046 |
|
|
$ |
204,979 |
|
|
$ |
224,113 |
|
|
$ |
273,974 |
|
|
$ |
285,914 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumed business represents private-passenger non-standard automobile insurance premiums
produced by a managing general agency subsidiary in Texas written through a program with a county
mutual insurance company and assumed by the Company through 100% quota-share reinsurance.
The percentages of premiums assumed to net premiums written for the years ended June 30, 2010,
2009 and 2008 were 11%, 8% and 7%, respectively.
4. Stock-Based Compensation Plans
Employee Stock-Based Incentive Plan
The Company has issued stock options (Stock Option Awards) and restricted common stock
(Restricted Stock Awards) to employees under its Amended and Restated First Acceptance
Corporation 2002 Long Term Incentive Plan (the Plan) and accounts for such issuances in
accordance with FASB ASC 718-20, Compensation Stock Compensation (Prior authoritative literature:
FASB SFAS No. 123 (Revised)). At June 30, 2010, there were 2,697,264 shares remaining available for
issuance under the Plan. Stock Option Awards are generally granted with an exercise price equal to
the market price of the Companys stock at the date of grant. Stock Option Awards expire over ten
years and generally vest equally in annual installments over four or five years through fiscal year
2013, while the Restricted Stock Awards vest in designated installments through fiscal year 2015.
Certain awards provide for accelerated vesting if there is a change in control (as defined in the
Plan).
63
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
On November 17, 2009, the Companys stockholders approved a value-for-value option exchange
whereby certain outstanding stock options were exchanged for shares of restricted common stock (the
Exchange). As approved by the Companys stockholders, restricted common stock issued in the
Exchange vests in equal annual installments beginning on the first anniversary of the date of the
grant of the restricted stock, and no participant in the Exchange was permitted to receive
restricted stock having an aggregate value greater than $150,000.
On November 18, 2009, consistent with the terms of the Exchange, the Company entered into an
Option Cancellation and Restricted Stock Award Agreement (the Agreement) with certain employees
to surrender, and have the Company cancel, certain outstanding Stock Option Awards held by the
employees in exchange for shares of restricted common stock having a value equal to or less than
the surrendered Stock Option Awards. The Exchange included 605,000 shares of the Companys common
stock underlying Stock Option Awards that were surrendered and cancelled in exchange for 160,577
shares of restricted common stock.
Compensation expense related to Stock Option Awards is calculated under the fair value method
and is recorded on a straight-line basis over the vesting period. Fair value of the Stock Option
Awards was estimated at the grant dates using the Black-Scholes option pricing model based on the
following assumptions.
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
2010 |
|
2009 |
|
2008 |
Expected option term |
|
|
|
|
|
10 years |
Annualized volatility rate |
|
|
|
|
|
31 to 43% |
Risk-free rate of return |
|
|
|
|
|
3.48 to 5.02% |
Dividend yield |
|
|
|
|
|
0% |
A summary of the activity for the Companys Stock Option Awards is presented below (in
thousands, except per share data).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Aggregate |
|
|
|
|
|
|
|
Exercise |
|
|
Exercise |
|
|
Intrinsic |
|
|
|
Options |
|
|
Price |
|
|
Price |
|
|
Value |
|
Options outstanding at June 30, 2007 |
|
|
4,716 |
|
|
$ |
3.00-$11.81 |
|
|
$ |
4.48 |
|
|
|
|
|
Granted |
|
|
955 |
|
|
$ |
3.04-$10.08 |
|
|
$ |
3.26 |
|
|
|
|
|
Exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(215 |
) |
|
$ |
3.04-$11.81 |
|
|
$ |
7.89 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at June 30, 2008 |
|
|
5,456 |
|
|
$ |
3.00-$11.81 |
|
|
$ |
4.13 |
|
|
|
|
|
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(148 |
) |
|
$ |
3.00-$11.81 |
|
|
$ |
7.51 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at June 30, 2009 |
|
|
5,308 |
|
|
$ |
3.00-$11.81 |
|
|
$ |
4.04 |
|
|
|
|
|
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exchanged and Cancelled |
|
|
(605 |
) |
|
$ |
6.64-$11.81 |
|
|
$ |
10.69 |
|
|
|
|
|
Forfeited |
|
|
(142 |
) |
|
$ |
3.10-$11.81 |
|
|
$ |
6.91 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at June 30, 2010 |
|
|
4,561 |
|
|
|
|
|
|
$ |
3.06 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable/vested at June 30, 2010 |
|
|
4,128 |
|
|
|
|
|
|
$ |
3.07 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average estimated fair value of Stock Option Awards granted during the year ended
June 30, 2008 was $1.90. There were no Stock Option Awards granted during the years ended June 30,
2010 and 2009. At June 30, 2010, the weighted average remaining contractual life of options
outstanding and exercisable/vested is approximately 3.5 years and 3.0 years, respectively.
64
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
A summary of the activity for the Companys Restricted Stock Awards is presented below (in
thousands, except per share data).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
Restricted |
|
|
Average |
|
|
|
Stock |
|
|
Grant Date |
|
|
|
Awards |
|
|
Fair Value |
|
Restricted Stock Awards outstanding at June 30, 2007 |
|
|
|
|
|
|
|
|
Granted |
|
|
400 |
|
|
$ |
3.04 |
|
Vested |
|
|
|
|
|
|
|
|
Forfeited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock Awards outstanding at June 30, 2008 |
|
|
400 |
|
|
$ |
3.04 |
|
Granted |
|
|
225 |
|
|
$ |
2.63 |
|
Vested |
|
|
|
|
|
|
|
|
Forfeited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock Awards outstanding at June 30, 2009 |
|
|
625 |
|
|
$ |
2.89 |
|
Granted |
|
|
160 |
|
|
$ |
1.97 |
|
Vested |
|
|
(309 |
) |
|
$ |
3.01 |
|
Forfeited |
|
|
(4 |
) |
|
$ |
2.50 |
|
|
|
|
|
|
|
|
Restricted Stock Awards outstanding at June 30, 2010 |
|
|
472 |
|
|
$ |
2.50 |
|
|
|
|
|
|
|
|
In the table above, the number of shares vested includes 933 shares surrendered by the
employees to the Company for payment of minimum tax withholding obligations. Shares of stock
withheld for purposes of satisfying minimum tax withholding obligations are again available for
issuance under the Plan.
The aggregate fair value of Restricted Stock Awards vested during the year ended June 30, 2010
was $0.9 million at the date of vesting. There were no Restricted Stock Awards that vested during
the years ended June 30, 2009 and 2008. Expected compensation expense related to the issuance of
Restricted Stock Awards is $1.2 million, which will be amortized through fiscal year 2015.
Employee Stock Purchase Plan
The Companys Board of Directors adopted the First Acceptance Corporation Employee Stock
Purchase Plan (ESPP) whereby eligible employees may purchase shares of the Companys common stock
at a price equal to the lower of the closing market price on the first or last trading day of a
six-month period. ESPP participants can authorize payroll deductions, administered through an
independent plan custodian, of up to 15% of their salary to purchase semi-annually (June 30 and
December 31) up to $25,000 of the Companys common stock during each calendar year. The Company has
reserved 200,000 shares of common stock for issuance under the ESPP. Employees purchased
approximately 37,000, 27,000 and 35,000 shares during the years ended June 30, 2010, 2009 and 2008,
respectively. Compensation expense attributable to subscriptions to purchase shares under the ESPP
was $16,000, $17,000 and $27,000 for the years ended June 30, 2010, 2009 and 2008. At June 30,
2010, 42,237 shares remain available for issuance under the ESPP.
5. Employee Benefit Plan
The Company sponsors a defined contribution retirement plan (401k Plan) under Section 401(k)
of the Internal Revenue Code. The 401k Plan covers substantially all employees who meet specified
service requirements. Under the 401k Plan, the Company may, at its discretion, match 100% of the
first 3% of an employees salary plus 50% of the next 2% up to the maximum allowed by the Internal
Revenue Code. The Companys contributions to the 401k Plan for the years ended June 30, 2010, 2009
and 2008 were $0.5 million, $0.8 million and $0.7 million, respectively.
65
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
6. Property and Equipment
The components of property and equipment are as follows (in thousands).
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
2010 |
|
|
2009 |
|
Furniture and equipment |
|
$ |
7,693 |
|
|
$ |
8,027 |
|
Leasehold improvements |
|
|
2,879 |
|
|
|
2,105 |
|
Capitalized leases |
|
|
826 |
|
|
|
826 |
|
Aircraft |
|
|
190 |
|
|
|
190 |
|
|
|
|
|
|
|
|
|
|
|
11,588 |
|
|
|
11,148 |
|
Less: Accumulated depreciation |
|
|
(8,064 |
) |
|
|
(7,227 |
) |
|
|
|
|
|
|
|
Property and equipment, net |
|
$ |
3,524 |
|
|
$ |
3,921 |
|
|
|
|
|
|
|
|
Depreciation and amortization expense related to property and equipment was $2.0 million, $1.9
million and $1.6 million for the years ended June 30, 2010, 2009 and 2008, respectively.
7. Lease Commitments
Operating Leases
The Company is committed under various lease agreements for office space and equipment.
Certain lease agreements contain renewal options and rent escalation clauses. Rental expense for
2010, 2009 and 2008 was $10.9 million, $10.7 million and $12.2 million, respectively. Future
minimum lease payments under these agreements follow (in thousands).
|
|
|
|
|
Year Ending June 30, |
|
Amount |
|
2011 |
|
$ |
7,837 |
|
2012 |
|
|
5,178 |
|
2013 |
|
|
3,098 |
|
2014 |
|
|
1,839 |
|
2015 |
|
|
1,462 |
|
Thereafter |
|
|
1,758 |
|
|
|
|
|
Total |
|
$ |
21,172 |
|
|
|
|
|
Capital Leases
The maturities of the capitalized lease obligations secured by equipment at June 30, 2010 are
as follows (in thousands).
|
|
|
|
|
|
|
Capitalized |
|
|
|
Lease |
|
Year Ending June 30, |
|
Obligations |
|
2011 |
|
$ |
79 |
|
2012 |
|
|
64 |
|
2013 |
|
|
12 |
|
|
|
|
|
|
|
$ |
155 |
|
Less: Amount representing executory costs |
|
|
(11 |
) |
|
|
|
|
Net minimum lease payments |
|
|
144 |
|
Less: Amount representing interest |
|
|
(8 |
) |
|
|
|
|
Present value of net minimum lease payments |
|
$ |
136 |
|
|
|
|
|
66
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
8. Losses and Loss Adjustment Expenses Incurred and Paid
Information regarding the reserve for unpaid losses and loss adjustment expenses (LAE) is as
follows (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Liability for unpaid losses and LAE at beginning of year, gross |
|
$ |
83,973 |
|
|
$ |
101,407 |
|
|
$ |
91,446 |
|
Reinsurance balances receivable |
|
|
(78 |
) |
|
|
(259 |
) |
|
|
(309 |
) |
|
|
|
|
|
|
|
|
|
|
Liability for unpaid losses and LAE at beginning of year, net |
|
|
83,895 |
|
|
|
101,148 |
|
|
|
91,137 |
|
|
|
|
|
|
|
|
|
|
|
Add: Provision for losses and LAE: |
|
|
|
|
|
|
|
|
|
|
|
|
Current year |
|
|
138,218 |
|
|
|
160,659 |
|
|
|
221,342 |
|
Prior years |
|
|
(11,223 |
) |
|
|
(11,382 |
) |
|
|
(1,399 |
) |
|
|
|
|
|
|
|
|
|
|
Net losses and LAE incurred |
|
|
126,995 |
|
|
|
149,277 |
|
|
|
219,943 |
|
|
|
|
|
|
|
|
|
|
|
Less: Losses and LAE paid: |
|
|
|
|
|
|
|
|
|
|
|
|
Current year |
|
|
87,097 |
|
|
|
103,566 |
|
|
|
141,736 |
|
Prior years |
|
|
50,641 |
|
|
|
62,964 |
|
|
|
68,196 |
|
|
|
|
|
|
|
|
|
|
|
Net losses and LAE paid |
|
|
137,738 |
|
|
|
166,530 |
|
|
|
209,932 |
|
|
|
|
|
|
|
|
|
|
|
Liability for unpaid losses and LAE at end of year, net |
|
|
73,152 |
|
|
|
83,895 |
|
|
|
101,148 |
|
Reinsurance balances receivable |
|
|
46 |
|
|
|
78 |
|
|
|
259 |
|
|
|
|
|
|
|
|
|
|
|
Liability for unpaid losses and LAE at end of year, gross |
|
$ |
73,198 |
|
|
$ |
83,973 |
|
|
$ |
101,407 |
|
|
|
|
|
|
|
|
|
|
|
The favorable change in the estimate of unpaid losses and loss adjustment expenses of $11.2
million for the year ended June 30, 2010 was due to (i) lower than anticipated severity of
accidents occurring during the fiscal 2007 and 2008 accident years, primarily in bodily injury
coverage in Georgia and South Carolina, (ii) an improvement in the Companys claim handling
practices and (iii) a shift in business mix toward renewal policies, which have lower loss ratios
than new policies. The favorable development of $11.4 million for the year ended June 30, 2009 was
primarily due to both lower than anticipated severity and frequency of accidents, most notably in
the Companys property and physical damage coverages.
The favorable change in the estimate of unpaid losses and loss adjustment expenses of $1.4
million for the year ended June 30, 2008 was primarily the result of both lower than anticipated
severity and frequency of accidents. There were no individual factors that had a material impact in
this favorable change.
9. Notes Payable
The Company entered into an amendment to its credit agreement effective September 10, 2008.
The amended terms (i) accelerated the maturity date of the term loan facility to October 31, 2008,
(ii) eliminated the revolving credit facility and (iii) removed all financial covenants for the
remaining term. The unpaid balance under the Companys credit agreement was paid in full on October
31, 2008. The Company entered into an interest rate swap agreement in January 2006 that fixed the
interest rate on the term loan facility at 6.63%. Effective September 30, 2008, the Company
cancelled the interest rate swap agreement for $0.1 million.
67
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
10. Debentures Payable
In June 2007, First Acceptance Statutory Trust I (FAST I), a wholly-owned unconsolidated
subsidiary trust of the Company, issued 40,000 shares of preferred securities at $1,000 per share
to outside investors and 1,240 shares of common securities to the Company, also at $1,000 per
share. FAST I used the proceeds from the sale of the preferred securities to purchase $41.2 million
of junior subordinated debentures from the Company. The sole assets of FAST I are $41.2 million of
junior subordinated debentures issued by the Company. The debentures will mature on July 30, 2037
and are redeemable by the Company in whole or in part beginning on July 30, 2012, at which time the
preferred securities are callable. The debentures pay a fixed rate of 9.277% until July 30, 2012,
after which the rate becomes variable (LIBOR plus 375 basis points).
The obligations of the Company under the junior subordinated debentures represent full and
unconditional guarantees by the Company of FAST Is obligations for the preferred securities.
Dividends on the preferred securities are cumulative, payable quarterly in arrears and are
deferrable at the Companys option for up to five years. The dividends on these securities are the
same as the interest on the debentures. The Company cannot pay dividends on its common stock during
such deferments.
The debentures are classified as debentures payable in the Companys consolidated balance
sheets and the interest paid on these debentures is classified as interest expense in the
consolidated statements of operations.
11. Income Taxes
The provision for income taxes consisted of the following (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Federal: |
|
|
|
|
|
|
|
|
|
|
|
|
Current |
|
$ |
|
|
|
$ |
295 |
|
|
$ |
31 |
|
Deferred |
|
|
|
|
|
|
17,440 |
|
|
|
13,496 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,735 |
|
|
|
13,527 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State: |
|
|
|
|
|
|
|
|
|
|
|
|
Current |
|
|
441 |
|
|
|
508 |
|
|
|
448 |
|
Deferred |
|
|
|
|
|
|
153 |
|
|
|
(153 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
441 |
|
|
|
661 |
|
|
|
295 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
441 |
|
|
$ |
18,396 |
|
|
$ |
13,822 |
|
|
|
|
|
|
|
|
|
|
|
The provision for income taxes differs from the amounts computed by applying the statutory
federal corporate tax rate of 35% to income (loss) before income taxes as a result of the following
(in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Provision (benefit) for income taxes at
statutory rate |
|
$ |
2,618 |
|
|
$ |
(17,466 |
) |
|
$ |
(1,408 |
) |
Tax effect of: |
|
|
|
|
|
|
|
|
|
|
|
|
Tax-exempt investment income |
|
|
(16 |
) |
|
|
(16 |
) |
|
|
(32 |
) |
Change in the beginning of the year
balance of the valuation allowance for
deferred tax asset allocated to income
taxes |
|
|
(5,278 |
) |
|
|
(6,291 |
) |
|
|
3,571 |
|
Net operating loss carryforward expirations |
|
|
2,483 |
|
|
|
24,534 |
|
|
|
11,380 |
|
Goodwill |
|
|
|
|
|
|
16,724 |
|
|
|
|
|
Restricted stock |
|
|
240 |
|
|
|
|
|
|
|
|
|
State income taxes, net of federal income
tax benefit and valuation allowance |
|
|
441 |
|
|
|
661 |
|
|
|
139 |
|
Other |
|
|
(47 |
) |
|
|
250 |
|
|
|
172 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
441 |
|
|
$ |
18,396 |
|
|
$ |
13,822 |
|
|
|
|
|
|
|
|
|
|
|
68
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The tax effects of temporary differences that give rise to the net deferred tax assets and
liabilities are presented below (in thousands).
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
2010 |
|
|
2009 |
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Net operating loss carryforwards |
|
$ |
3,613 |
|
|
$ |
4,207 |
|
Stock option compensation |
|
|
3,965 |
|
|
|
4,089 |
|
Unearned premiums and loss and loss adjustment
expense reserves |
|
|
5,099 |
|
|
|
5,524 |
|
Goodwill |
|
|
2,886 |
|
|
|
3,847 |
|
Net unrealized change on investments |
|
|
|
|
|
|
188 |
|
Alternative minimum tax (AMT) credit carryforwards |
|
|
1,612 |
|
|
|
1,609 |
|
Accrued expenses and other nondeductible items |
|
|
934 |
|
|
|
4,290 |
|
Other |
|
|
3,089 |
|
|
|
2,532 |
|
|
|
|
|
|
|
|
|
|
|
21,198 |
|
|
|
26,286 |
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Deferred acquisition costs |
|
|
(1,268 |
) |
|
|
(1,364 |
) |
Net unrealized change on investments |
|
|
(3,025 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,293 |
) |
|
|
(1,364 |
) |
|
|
|
|
|
|
|
|
|
Total net deferred tax asset |
|
|
16,905 |
|
|
|
24,922 |
|
Less: Valuation allowance |
|
|
(16,905 |
) |
|
|
(24,922 |
) |
|
|
|
|
|
|
|
Net deferred tax asset |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
The Company had a valuation allowance of $16.9 million and $24.9 million at June 30, 2010 and
2009, respectively, to reduce net deferred tax assets to the amount that is more likely than not to
be realized, which included all net deferred tax assets at June 30, 2010 and 2009. The change in
the total valuation allowance for the year ended June 30, 2010 was a decrease of $8.0 million. For
the year ended June 30, 2010, the change in the valuation allowance primarily included the
unrealized change on investments of $3.2 million included in other comprehensive income (loss).
In assessing the realization of deferred tax assets, management considered whether it was more
likely than not that some portion or all of the deferred tax assets will not be realized. The
Company is required to assess whether a valuation allowance should be established against the
Companys net deferred tax assets based on the consideration of all available evidence using a more
likely than not standard. In making such judgments, significant weight is given to evidence that
can be objectively verified. In assessing the Companys ability to support the realizability of its
deferred tax assets, management considered both positive and negative evidence. The Company placed
greater weight on historical results than on the Companys outlook for future profitability and
established a deferred tax valuation allowance against all net deferred tax assets at June 30, 2010
and 2009. The deferred tax valuation allowance may be adjusted in future periods if management
determines that it is more likely than not that some portion or all of the deferred tax assets will
be realized. In the event the deferred tax valuation allowance is adjusted, the Company would
record an income tax benefit for the adjustment.
The net change in the total valuation allowance for the year ended June 30, 2009 was a
decrease of $5.2 million. The fiscal year 2009 provision was increased by a net charge of $10.2
million resulting from the $15.3 million tax effect of the goodwill impairment charge and the
establishment of a full valuation allowance on the remaining net deferred tax assets offset by a
tax benefit of $5.1 million related to the utilization of federal net operating loss (NOL)
carryforwards that were to expire on June 30, 2009 that had been previously reserved for through a
valuation allowance. The net change in the total valuation allowance for the year ended June 30,
2008 was an increase of $3.0 million. The increase during fiscal year 2008 included a charge of
$11.4 million related to the expiration of certain federal NOL carryforwards due to taxable income
being less than the Companys previous estimates of taxable income.
69
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
At June 30, 2010, the Company had gross state NOL carryforwards of $19.1 million that begin to
expire in 2019 and AMT credit carryforwards of $1.6 million that have no expiration date. At June
30, 2010, the Company had gross NOL carryforwards for federal income tax purposes of $10.3 million,
which are available to offset future federal taxable income. As discussed previously, on a
tax-affected basis, all remaining federal and state NOL carryforwards at June 30, 2010 have been
fully reserved for through a valuation allowance.
The gross federal NOL carryforwards will expire in 2011 through 2030, as shown in the
following table (in thousands).
|
|
|
|
|
Expiration Year Ended June 30, |
|
Amount |
|
2011 |
|
$ |
2,099 |
|
2012 |
|
|
|
|
2013 |
|
|
2 |
|
2014 |
|
|
|
|
Thereafter |
|
|
8,223 |
|
|
|
|
|
Total NOL carryforwards |
|
$ |
10,324 |
|
|
|
|
|
12. Net Income (Loss) Per Share
FASB ASC 260-10, Earnings Per share (Prior authoritative literature: FASB SFAS No. 128),
specifies the computation, presentation and disclosure requirements for earnings per share (EPS).
Basic EPS are computed using the weighted average number of shares outstanding. Diluted EPS are
computed using the weighted average number of shares outstanding adjusted for the incremental
shares attributed to outstanding securities with a right to purchase or convert into common stock.
The following table sets forth the computation of basic and diluted net income (loss) per
share (in thousands, except per share data).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Net income (loss) |
|
$ |
7,040 |
|
|
$ |
(68,300 |
) |
|
$ |
(17,845 |
) |
|
|
|
|
|
|
|
|
|
|
Weighted average common basic shares |
|
|
47,961 |
|
|
|
47,664 |
|
|
|
47,628 |
|
Effect of dilutive securities |
|
|
677 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common dilutive shares |
|
|
48,638 |
|
|
|
47,664 |
|
|
|
47,628 |
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share |
|
$ |
0.15 |
|
|
$ |
(1.43 |
) |
|
$ |
(0.37 |
) |
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share |
|
$ |
0.14 |
|
|
$ |
(1.43 |
) |
|
$ |
(0.37 |
) |
|
|
|
|
|
|
|
|
|
|
For the year ended June 30, 2010, options to purchase approximately 4.6 million shares of
common stock, a dilutive effect of approximately 0.2 million shares, and 0.5 million shares of
unvested restricted common stock were included in the computation of diluted net income per share.
For the year ended June 30, 2009, options to purchase approximately 5.3 million shares of
common stock, a dilutive effect of approximately 0.8 million shares, and 0.6 million shares of
unvested restricted common stock were not included in the computation of diluted net income per
share as their inclusion would have been anti-dilutive.
For the year ended June 30, 2008, options to purchase approximately 5.5 million shares of
common stock, a dilutive effect of approximately 1.5 million shares, and 0.4 million shares of
unvested restricted common stock were not included in the computation of diluted net loss per share
as their inclusion would have been anti-dilutive.
70
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
13. Concentrations of Credit Risk
At June 30, 2010, the Company had certain concentrations of credit risk with several financial
institutions in the form of cash and cash equivalents, which amounted to $26.2 million. For
purposes of evaluating credit risk, the stability of financial institutions conducting business
with the Company and the amount of available Federal Deposit Insurance Corporation insurance is
periodically reviewed. If the financial institutions failed to completely perform under terms of
the financial instruments, the exposure for credit loss would be the amount of the financial
instruments less amounts covered by regulatory insurance.
The Company primarily transacts business either directly with its policyholders or through
independently-owned insurance agencies in Tennessee who exclusively write non-standard personal
automobile insurance policies on behalf of the Company. Direct policyholders make payments
directly to the Company. Balances due from policyholders are generally secured by the related
unearned premium. The Company requires a down payment at the time the policy is originated and
subsequent scheduled payments are monitored in order to prevent the Company from providing coverage
beyond the date for which payment has been received. If subsequent payments are not made timely,
the policy is generally canceled at no loss to the Company. Policyholders whose premiums are
written through the independent agencies make their payments to these agencies that in turn remit
these payments to the Company. Balances due to the Company resulting from premium payments made to
these agencies are unsecured.
14. Related Party Transactions
Certain of the Companys executives are covered by employment agreements covering, among other
things, base compensation, incentive-bonus determinations and payments in the event of termination,
or a change in control of the Company.
Effective May 2004, the Company entered into an advisory services agreement with an entity
controlled by a current director of the Company to render advisory services in connection with
financings, mergers and acquisitions and other related matters involving the Company. In
consideration for the advisory services provided, the Company paid the advisor a quarterly fee of
$62,500 for a four-year period through April 2008. There are no further amounts due related to the
advisory services agreement.
15. Severance
During the years ended June 30, 2010, 2009 and 2008, the Company entered into separation
agreements with certain officers and employees. Accordingly, the Company incurred charges during
the years ended June 30, 2010, 2009 and 2008 of approximately $0.2 million, $0.2 million and $1.1
million, respectively. Fiscal year 2008 includes a $0.1 million non-cash charge related to the
vesting of remaining unvested stock options. At June 30, 2009, a severance and benefit accrual of
$0.2 million was classified in other liabilities in the Companys consolidated balance sheet.
Severance and benefits charges are included in insurance operating expenses, and the non-cash
charge related to the vesting of remaining unvested stock options is included in stock-based
compensation expense in the consolidated statements of operations. The insurance operations segment
includes the accrued severance and benefits charge, and the real estate and corporate segment
includes the accelerated vesting charge.
16. Litigation
The Company is named as a defendant in various lawsuits, arising in the ordinary course of
business, generally relating to its insurance operations. All legal actions relating to claims made
under insurance policies are considered by the Company in establishing its loss and loss adjustment
expense reserves. The Company also faces lawsuits that seek damages beyond policy limits, commonly
known as bad faith claims, as well as class action and individual lawsuits that involve issues
arising in the course of the Companys business. The Company continually evaluates potential
liabilities and reserves for litigation of these types using the criteria established by FASB ASC
450-20, Loss Contingencies (Prior authoritative literature: FASB Statement No. 5) (FASB ASC
450-20). Pursuant to FASB ASC 450-20, reserves for a loss may only be recognized if the likelihood
of occurrence is probable and the amount can be reasonably estimated. If a loss, while not
probable, is judged to be reasonably possible, management will disclose, if it can be estimated, a
possible range of loss or state that an estimate cannot be
71
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
made. Management evaluates each legal
action and records reserves for losses as warranted by establishing a reserve in its consolidated
balance sheets in loss and loss adjustment expense reserves for bad faith claims and in other
liabilities for other lawsuits. Amounts incurred are recorded in the Companys consolidated
statements of operations in losses and loss adjustment expenses for bad faith claims and in
insurance operating expenses for other lawsuits unless otherwise disclosed.
The Company established an accrual for losses related to the litigation settlements entered
into during fiscal year 2009 related to litigation brought against the Company in Alabama and
Georgia with respect to its sales practices, primarily the sale of ancillary motor club memberships
currently or formerly sold in those states. Pursuant to the terms of the settlements, eligible
class members are entitled to certain premium credits towards a future automobile insurance policy
with the Company or a reimbursement certificate for future rental or towing expenses. Benefits to
the Georgia and Alabama class members commenced January 1, 2009 and March 7, 2009, respectively.
Any premium credits issued to class members as described above will be prorated over a twelve-month
term not to extend beyond August 2011, and the class members will be entitled to the prorated
premium credit only so long as their insurance premiums remain current during the twelve-month
term.
At December 31, 2008, the Company accrued $5.2 million for premium credits available to class
members who were actively insured by the Company. The following is a progression of the activity
associated with the estimated premium credit liability (in thousands).
|
|
|
|
|
Balance at December 31, 2008 |
|
$ |
5,227 |
|
Credits utilized |
|
|
(1,338 |
) |
Credits forfeited |
|
|
(904 |
) |
|
|
|
|
Balance at June 30, 2009 |
|
|
2,985 |
|
Credits utilized |
|
|
(2,622 |
) |
Credits forfeited |
|
|
(317 |
) |
|
|
|
|
Balance at June 30, 2010 |
|
$ |
46 |
|
|
|
|
|
The Company has not established an accrual for $0.1 million in potential premium credits
available to class members who were not actively insured by the Company upon commencement of the
settlement due to the uncertainty associated with this group having to purchase a new automobile
insurance policy. The Company did not incur any significant costs associated with the reimbursement
certificates. The final costs of the settlements will depend on, among other factors, the rate of
redemption and forfeiture of the premium credits and reimbursement certificates.
The litigation settlement costs are classified in the litigation settlement expenses line item
in the Companys consolidated statements of operations. The litigation settlement accrual for those
currently estimable costs associated with the utilization of premium credits is classified in other
liabilities in the Companys consolidated balance sheets. Based on the maximum remaining available
premium credits, management does not expect any material adjustments during future periods.
The Company received $2.95 million in July 2009 from its insurance carrier regarding coverage
for the costs and expenses incurred by the Company relating to the settlement of the Georgia and
Alabama litigation. The insurance recovery was accrued in fiscal year 2009 and is included in other
assets in the Companys consolidated balance sheet at June 30, 2009.
72
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
17. Fair Value of Financial Instruments
The carrying values and fair values of certain of the Companys financial instruments were as
follows (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010 |
|
|
June 30, 2009 |
|
|
|
Carrying |
|
|
Fair |
|
|
Carrying |
|
|
Fair |
|
|
|
Value |
|
|
Value |
|
|
Value |
|
|
Value |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments, available-for-sale |
|
$ |
187,907 |
|
|
$ |
196,550 |
|
|
$ |
140,849 |
|
|
$ |
140,311 |
|
Cash and cash equivalents |
|
|
26,184 |
|
|
|
26,184 |
|
|
|
77,201 |
|
|
|
77,201 |
|
Premiums and fees receivable, net |
|
|
41,276 |
|
|
|
41,276 |
|
|
|
45,309 |
|
|
|
45,309 |
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debentures payable |
|
|
41,240 |
|
|
|
19,701 |
|
|
|
41,240 |
|
|
|
15,568 |
|
The fair values as presented represent the Companys best estimates and may not be
substantiated by comparisons to independent markets. The fair value of the debentures payable was
based on current market rates offered for debt with similar risks and maturities. Certain
financial instruments and all non-financial instruments are not required to be disclosed.
Therefore, the aggregate fair values presented in the table do not purport to represent the
Companys underlying value.
18. Segment Information
The Company operates in two business segments with its primary focus being the selling,
servicing and underwriting of non-standard personal automobile insurance. The real estate and
corporate segment consists of the activities related to the disposition of foreclosed real estate
held for sale, interest expense associated with all debt and other general corporate overhead
expenses.
The following table presents selected financial data by business segment (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Insurance |
|
$ |
223,054 |
|
|
$ |
265,341 |
|
|
$ |
332,219 |
|
Real estate and corporate |
|
|
119 |
|
|
|
124 |
|
|
|
180 |
|
|
|
|
|
|
|
|
|
|
|
Consolidated total |
|
$ |
223,173 |
|
|
$ |
265,465 |
|
|
$ |
332,399 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes: |
|
|
|
|
|
|
|
|
|
|
|
|
Insurance |
|
$ |
14,568 |
|
|
$ |
(42,536 |
) |
|
$ |
4,685 |
|
Real estate and corporate |
|
|
(7,087 |
) |
|
|
(7,368 |
) |
|
|
(8,708 |
) |
|
|
|
|
|
|
|
|
|
|
Consolidated total |
|
$ |
7,481 |
|
|
$ |
(49,904 |
) |
|
$ |
(4,023 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
2010 |
|
|
2009 |
|
Total assets: |
|
|
|
|
|
|
|
|
Insurance |
|
$ |
343,499 |
|
|
$ |
348,801 |
|
Real estate and corporate |
|
|
12,843 |
|
|
|
10,155 |
|
|
|
|
|
|
|
|
Consolidated total |
|
$ |
356,342 |
|
|
$ |
358,956 |
|
|
|
|
|
|
|
|
73
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
19. Statutory Financial Information and Accounting Policies
The statutory-basis financial statements of the Insurance Companies are prepared in accordance
with accounting practices prescribed or permitted by the Department of Insurance in each respective
state of domicile. Each state of domicile requires that insurance companies domiciled in the state
prepare their statutory-basis financial statements in accordance with the National Association of
Insurance Commissioners Accounting Practices and Procedures Manual subject to any deviations
prescribed or permitted by the insurance commissioner in each state of domicile. The Insurance
Companies are required to report their risk-based capital (RBC) each December 31. Failure to
maintain an adequate RBC could subject the Insurance Companies to regulatory action and could
restrict the payment of dividends. At December 31, 2009, the RBC levels of the Insurance Companies
did not subject them to any regulatory action.
At June 30, 2010 and 2009, on an unaudited consolidated statutory basis, capital and surplus
was $120.3 million and $114.3 million, respectively. For the fiscal year ended June 30, 2010, 2009
and 2008, unaudited consolidated statutory net income as filed was $5.2 million, $7.3 million and
$3.8 million, respectively.
The maximum amount of dividends which can be paid by First Acceptance Insurance Company, Inc.
(FAIC) to the Company, without the prior approval of the Texas insurance commissioner, is limited
to the greater of 10% of statutory capital and surplus at December 31 of the next preceding year or
net income for the year. Accordingly, at December 31, 2009, the maximum amount of dividends
available to be paid to the Company from FAIC without prior approval in any preceding twelve-month
period is approximately $12 million. Based on FAICs earned surplus, the Company believes that it
has extraordinary dividend capacity, of an additional $7 million, subject to regulatory approval.
20. Selected Quarterly Financial Data (unaudited)
Interim results are not necessarily indicative of fiscal year performance because of the
impact of seasonal and short-term variations. Selected quarterly financial data for the years
ended June 30, 2010 and 2009 is summarized as follows (in thousands, except per share data).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended |
|
|
|
September 30, |
|
|
December 31, |
|
|
March 31, |
|
|
June 30, |
|
Year Ended June 30, 2010: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
57,312 |
|
|
$ |
53,775 |
|
|
$ |
56,116 |
|
|
$ |
55,970 |
|
Income before income taxes |
|
$ |
2,861 |
|
|
$ |
1,577 |
|
|
$ |
2,193 |
|
|
$ |
850 |
|
Net income |
|
$ |
2,760 |
|
|
$ |
1,475 |
|
|
$ |
2,069 |
|
|
$ |
736 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net income per share |
|
$ |
0.06 |
|
|
$ |
0.03 |
|
|
$ |
0.04 |
|
|
$ |
0.02 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, 2009: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
71,589 |
|
|
$ |
65,080 |
|
|
$ |
67,097 |
|
|
$ |
61,699 |
|
Income (loss) before income taxes |
|
$ |
3,753 |
|
|
$ |
(1,388 |
) |
|
$ |
3,991 |
|
|
$ |
(56,260 |
) |
Net income (loss) |
|
$ |
1,841 |
|
|
$ |
(1,003 |
) |
|
$ |
2,394 |
|
|
$ |
(71,532 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net income (loss)
per share |
|
$ |
0.04 |
|
|
$ |
(0.02 |
) |
|
$ |
0.05 |
|
|
$ |
(1.50 |
) |
Income
before income taxes for the quarter ended June 30, 2010 of $0.9 million included $1.0
million of favorable development in the Companys estimate of unpaid loss and loss adjustment
expenses. Loss before income taxes for the quarter ended June 30, 2009 of $56.3 million included a
goodwill impairment charge of $68.0 million (see Note 1), $4.5 million of favorable development in
the Companys estimate of unpaid loss and loss adjustment expenses, and an insurance recovery of
$2.95 million reflected as a reduction of litigation settlement expenses (see Note 16). Net loss
for the quarter ended June 30, 2009 included a net charge to the tax provision of $10.2 million
resulting from the $15.3 million tax effect of the goodwill impairment charge and the establishment
of a full valuation allowance on the remaining deferred tax assets offset by a tax benefit of $5.1
million related to the utilization of federal NOL carryforwards that were to expire on June 30,
2009 that had been previously reserved for through a valuation allowance (see Note 11).
74
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management team, including our
Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of our disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act
of 1934, as amended, or the Exchange Act) as of June 30, 2010. Based on that evaluation, our
Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal
financial officer) concluded that our disclosure controls and procedures were effective as of
June 30, 2010 to ensure that information required to be disclosed by us in the reports that we file
or submit under the Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the SECs rules and forms.
Managements Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining effective internal control over
financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our
internal control over financial reporting is designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles.
Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, we conducted an assessment of the effectiveness of
our internal control over financial reporting based on the framework in Internal Control
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on our assessment under the Internal Control Integrated Framework, our
management concluded that our internal control over financial reporting was effective as of June
30, 2010.
Our independent registered public accounting firm, Ernst & Young LLP has issued an attestation
report on our internal control over financial reporting, which such report appears herein.
Changes in Internal Control over Financial Reporting
During the fourth fiscal quarter of the period covered by this report, there has been no
change in our internal control over financial reporting that has materially affected, or is
reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
None.
75
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Information with respect to our directors and executive officers, set forth in our Definitive
Proxy Statement for the Annual Meeting of Stockholders to be held November 16, 2010, is
incorporated herein by reference.
Information with respect to compliance with Section 16(a) of the Securities Exchange Act of
1934, as amended, set forth in our Definitive Proxy Statement for the Annual Meeting of
Stockholders to be held November 16, 2010, is incorporated herein by reference.
Information with respect to our code of business conduct and ethics, set forth in our
Definitive Proxy Statement for the Annual Meeting of Stockholders to be held November 16, 2010, is
incorporated herein by reference.
Information with respect to our corporate governance disclosures, set forth in our Definitive
Proxy Statement for the Annual Meeting of Stockholders to be held November 16, 2010, is
incorporated herein by reference.
Item 11. Executive Compensation
Information with respect to the compensation of our executive officers, set forth in our
Definitive Proxy Statement for the Annual Meeting of Stockholders to be held November 16, 2010, is
incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Information with respect to security ownership of certain beneficial owners and management and
related stockholder matters, set forth in our Definitive Proxy Statement for the Annual Meeting of
Stockholders to be held November 16, 2010, is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Information with respect to certain relationships and related transactions, and director
independence, set forth in our Definitive Proxy Statement for the Annual Meeting of Stockholders to
be held November 16, 2010, is incorporated herein by reference.
Item 14. Principal Accountant Fees and Services
Information with respect to the fees paid to and services provided by our principal
accountants, set forth in our Definitive Proxy Statement for the Annual Meeting of Stockholders to
be held November 16, 2010, is incorporated herein by reference.
76
PART IV
Item 15. Exhibits, Financial Statement Schedules
(a) |
|
Financial Statements, Financial Statement Schedules and Exhibits |
|
(1) |
|
Consolidated Financial Statements: See Index to Consolidated Financial
Statements in Part II, Item 8 of this Form 10-K. |
|
|
(2) |
|
Financial Statement Schedules: |
|
|
|
|
Schedule I Financial Information of Registrant (Parent Company) |
|
|
(3) |
|
Exhibits: See the exhibit listing set forth below. |
|
|
|
Exhibit |
|
|
Number |
|
|
2.1
|
|
Agreement and Plan of Merger by and among the Company, USAH Merger Sub, Inc., USAuto
Holdings, Inc. and the Stockholders of USAuto Holdings, Inc., dated as of December 15, 2003
(incorporated by reference to Exhibit 2.1 of Registration Statement No. 333-111161 on Form
S-1, filed December 15, 2003). |
|
|
|
3.1
|
|
Restated Certificate of Incorporation of First Acceptance Corporation (incorporated by
reference to Exhibit 3.1 of the Companys Current Report on Form 8-K dated May 3, 2004). |
|
|
|
3.2
|
|
Second Amended and Restated Bylaws of First Acceptance Corporation (incorporated by reference
to Exhibit 3 of the Companys Current Report on Form 8-K dated November 9, 2007). |
|
|
|
4.1
|
|
Registration Rights Agreement, dated as of July 1, 2002, by and between the Company and
Donald J. Edwards (incorporated by reference to Exhibit 4.1 of the Companys Current Report on
Form 8-K dated July 11, 2002). |
|
|
|
4.2
|
|
Form of certificate representing shares of common stock, par value $0.01 per share
(incorporated by reference to Exhibit 4.1 of the Companys Registration Statement on Form S-8
filed December 26, 2002). |
|
|
|
10.1
|
|
Amended and Restated First Acceptance Corporation 2002 Long Term Incentive Plan (incorporated
by reference to Exhibit 99.1 of the Companys Current Report on Form 8-K dated November 23,
2009).* |
|
|
|
10.2
|
|
Nonqualified Stock Option Agreement, dated as of July 9, 2002, by and between the Company and
Donald J. Edwards (incorporated by reference to Exhibit 10.3 of the Companys Current Report
on Form 8-K dated July 11, 2002).* |
|
|
|
10.3
|
|
Advisory Services Agreement, dated as of April 30, 2004, by and between First Acceptance
Corporation and Edwards Capital LLC (incorporated by reference to Exhibit 10.1 of the
Companys Current Report on Form 8-K dated May 3, 2004).* |
|
|
|
10.4
|
|
Nonqualified Stock Option Agreement, dated as of April 30, 2004, by and between First
Acceptance Corporation and Stephen J. Harrison (incorporated by reference to Exhibit 10.5 of
the Companys Current Report on Form 8-K dated May 3, 2004).* |
|
|
|
10.5
|
|
Nonqualified Stock Option Agreement, dated as of April 30, 2004, by and between First
Acceptance Corporation and Thomas M. Harrison, Jr. (incorporated by reference to Exhibit 10.6
of the Companys Current Report on Form 8-K dated May 3, 2004).* |
77
|
|
|
Exhibit |
|
|
Number |
|
|
10.6
|
|
Registration Rights Agreement, dated as of April 30, 2004, by and among First Acceptance
Corporation, Stephen J. Harrison and Thomas M. Harrison, Jr. (incorporated by reference to
Exhibit 10.7 of the Companys Current Report on Form 8-K dated May 3, 2004). |
|
|
|
10.7
|
|
Form of Restricted Stock Award Agreement under the Companys 2002 Long Term Incentive Plan
(incorporated by reference to Exhibit 10.1 of the Companys Current Report on Form 8-K dated
November 3, 2004).* |
|
|
|
10.8
|
|
Form of Nonqualified Stock Option Agreement under the Companys 2002 Long Term Incentive Plan
(incorporated by reference to Exhibit 10.2 of the Companys Current Report on Form 8-K dated
November 3, 2004).* |
|
|
|
10.9
|
|
First Acceptance Corporation Employee Stock Purchase Plan (incorporated by reference to
Exhibit 10.1 of the Registration Statement No. 333-121551 on Form S-8, filed December 22,
2004). |
|
|
|
10.10
|
|
Summary of Compensation for Non- Employee Directors and Named Executive Officers. |
|
|
|
10.11
|
|
Asset Purchase Agreement, dated as of January 12, 2006, by and among First Acceptance
Corporation, Acceptance Insurance Agency of Illinois, Inc., Insurance Plus Agency II, Inc.,
Yale International Insurance Agency, Inc. and Constantine Danos (incorporated by reference to
Exhibit 10.1 of the Companys Current Report on Form 8-K dated January 18, 2006). |
|
|
|
10.12
|
|
Stock Purchase Agreement, dated as of September 13, 2006, by and between First Acceptance
Corporation and Edward Pierce (incorporated by reference to Exhibit 99.2 of the Companys
Current Report on Form 8-K dated September 19, 2006).* |
|
|
|
10.13
|
|
Nonqualified Stock Option Agreement, dated as of September 13, 2006, by and between First
Acceptance Corporation and Edward Pierce (incorporated by reference to Exhibit 99.3 of the
Companys Current Report on Form 8-K dated September 19, 2006).* |
|
|
|
10.14
|
|
Nonqualified Stock Option Agreement, dated as of October 9, 2006, by and between First
Acceptance Corporation and Kevin P. Cohn (incorporated by reference to Exhibit 99.2 of the
Companys Current Report on Form 8-K dated October 12, 2006).* |
|
|
|
10.15
|
|
Form of Restricted Stock Award Agreement of Outside Directors under the Companys 2002 Long
Term Incentive Plan (incorporated by reference to Exhibit 10.2 of the Companys Current Report
on Form 10-Q dated May 10, 2007).* |
|
|
|
10.16
|
|
Form of Indemnification Agreement between the Company and each of the Companys directors
and executive officers (incorporated by reference to Exhibit 10.3 of the Companys Current
Report on Form 10-Q dated May 10, 2007).* |
|
|
|
10.17
|
|
Junior Subordinated Indenture, dated June 15, 2007, between First Acceptance Corporation and
Wilmington Trust Company (incorporated by reference to Exhibit 99.2 of the Companys Current
Report on Form 8-K dated June 18, 2007). |
|
|
|
10.18
|
|
Guarantee Agreement, dated June 15, 2007, between First Acceptance Corporation and
Wilmington Trust Company (incorporated by reference to Exhibit 99.3 of the Companys Current
Report on Form 8-K dated June 18, 2007). |
|
|
|
10.19
|
|
Amended and Restated Trust Agreement, dated June 15, 2007, among First Acceptance
Corporation, Wilmington Trust Company and the Administrative Trustees Named Therein
(incorporated by reference to Exhibit 99.4 of the Companys Current Report on Form 8-K dated
June 18, 2007). |
78
|
|
|
Exhibit |
|
|
Number |
|
|
10.20
|
|
Amended and Restated Employment Agreement, made as of February 8, 2008, to be effective
January 1, 2008, by and between First Acceptance Corporation and Stephen J. Harrison
(incorporated by reference to Exhibit 99.3 of the Companys Current Report on Form 8-K dated
February 11, 2008).* |
|
|
|
10.21
|
|
Amended and Restated Employment Agreement, made as of February 8, 2008, to be effective
January 1, 2008, by and between First Acceptance Corporation and Edward Pierce (incorporated
by reference to Exhibit 99.4 of the Companys Current Report on Form 8-K dated February 11,
2008).* |
|
|
|
10.22
|
|
Amended and Restated Employment Agreement, made as of February 8, 2008, to be effective
January 1, 2008, by and between First Acceptance Corporation and Kevin P. Cohn (incorporated
by reference to Exhibit 99.5 of the Companys Current Report on Form 8-K dated February 11,
2008).* |
|
|
|
10.23
|
|
Employment Agreement, made as of February 8, 2008, to be effective January 1, 2008, by and
between First Acceptance Corporation and William R. Pentecost (incorporated by reference to
Exhibit 99.6 of the Companys Current Report on Form 8-K dated February 11, 2008).* |
|
|
|
10.24
|
|
First Amendment to First Acceptance Corporation Employee Stock Purchase Plan (incorporated
by reference to Exhibit 10.1 of the Companys Quarterly Report on Form 10-Q dated February 11,
2008). |
|
|
|
10.25
|
|
Restricted Stock Award Agreement, dated as of March 18, 2008, between First Acceptance
Corporation and Edward Pierce (incorporated by reference to Exhibit 99.1 of the Companys
Current Report on Form 8-K dated March 21, 2008).* |
|
|
|
10.26
|
|
Form of Restricted Stock Award Agreement between First Acceptance Corporation and Stephen J.
Harrison and Edward Pierce (incorporated by reference to Exhibit 99 of the Companys Current
Report on Form 8-K dated October 6, 2008).* |
|
|
|
10.27
|
|
Stipulation and Agreement of Settlement, made and entered into as of September 10, 2008, by
First Acceptance Insurance Company of Georgia, Inc., and its predecessors and affiliates,
Village Auto Insurance Company, U.S. Auto Insurance Company, and Transit Auto Club, Inc., and
Annette Rush and all other persons similarly situated by and through their undersigned
attorneys of record (incorporated by reference to Exhibit 10 of the Companys Quarterly Report
on Form 10-Q dated November 10, 2008). |
|
|
|
10.28
|
|
Stipulation and Agreement of Settlement, dated as of December 5, 2008, by First Acceptance
Insurance Company, Inc., and its predecessors and affiliates, USAuto Insurance Company, and
Transit Automobile Club, Inc., by and through their attorneys of record, and Margaret Franklin
and all other persons similarly situated, by and through their attorneys of record
(incorporated by reference to Exhibit 99 of the Companys Current Report on Form 8-K dated
December 11, 2008). |
|
|
|
10.29
|
|
Employment Agreement, made as of February 8, 2008, to be effective January 1, 2008, between
First Acceptance Corporation and Daniel L. Walker (incorporated by reference to Exhibit 10.1
of the Companys Quarterly Report on Form 10-Q dated May 11, 2009).* |
|
|
|
10.30
|
|
Amended and Restated Employment Agreement, made as of February 8, 2008, to be effective
January 1, 2008, between First Acceptance Corporation and Keith E. Bornemann (incorporated by
reference to Exhibit 10.2 of the Companys Quarterly Report on Form 10-Q dated May 11, 2009).* |
|
|
|
10.31
|
|
Option Cancellation and Restricted Award Agreement, made as of November 18, 2009, between
First Acceptance Corporation and Keith E. Bornemann (incorporated by reference to Exhibit 99.2
of the Companys Current Report on Form 8-K dated November 23, 2009).* |
|
|
|
10.32
|
|
Option Cancellation and Restricted Award Agreement, made as of November 18, 2009, between
First Acceptance Corporation and Kevin P. Cohn (incorporated by reference to Exhibit 99.3 of
the Companys Current Report on Form 8-K dated November 23, 2009).* |
79
|
|
|
Exhibit |
|
|
Number |
|
|
10.33
|
|
Option Cancellation and Restricted Award Agreement, made as of November 18, 2009, between
First Acceptance Corporation and Stephen J. Harrison (incorporated by reference to Exhibit
99.4 of the Companys Current Report on Form 8-K dated November 23, 2009).* |
|
|
|
10.34
|
|
Option Cancellation and Restricted Award Agreement, made as of November 18, 2009, between
First Acceptance Corporation and Edward L. Pierce (incorporated by reference to Exhibit 99.5
of the Companys Current Report on Form 8-K dated November 23, 2009).* |
|
|
|
14
|
|
First Acceptance Corporation Code of Business Conduct and Ethics (incorporated by reference
to Exhibit 14 of the Companys Annual Report on Form 10-K dated September 28, 2004). |
|
|
|
21
|
|
Subsidiaries of First Acceptance Corporation. |
|
|
|
23.1
|
|
Consent of Ernst & Young LLP. |
|
|
|
31.1
|
|
Certification of Chief Executive Officer pursuant to Rule 13a-14(a). |
|
|
|
31.2
|
|
Certification of Chief Financial Officer pursuant to Rule 13a-14(a). |
|
|
|
32.1
|
|
Chief Executive Officers Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.2
|
|
Chief Financial Officers Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
* |
|
Management contract or compensatory plan or arrangement. |
80
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
|
|
|
|
|
FIRST ACCEPTANCE CORPORATION
|
|
Date: August 31, 2010 |
By
|
/s/ Stephen J. Harrison |
|
|
|
Stephen J. Harrison |
|
|
|
Chief Executive Officer |
|
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the capacities and on the
dates indicated.
|
|
|
|
|
Signature |
|
Title |
|
Date |
|
|
|
|
|
|
|
Chief Executive Officer and
Director (Principal Executive
Officer)
|
|
August 31, 2010 |
Stephen J. Harrison |
|
|
|
|
|
|
|
|
|
|
|
Senior Vice President and Chief
Financial Officer
|
|
August 31, 2010 |
Kevin P. Cohn |
|
(Principal
Financial Officer and Principal
Accounting Officer) |
|
|
|
|
|
|
|
|
|
Chairman of the Board of Directors
|
|
August 31, 2010 |
Gerald J. Ford |
|
|
|
|
|
|
|
|
|
/s/ Thomas M. Harrison, Jr.
|
|
Director
|
|
August 31, 2010 |
Thomas M. Harrison, Jr. |
|
|
|
|
|
|
|
|
|
|
|
Director
|
|
August 31, 2010 |
Rhodes R. Bobbitt |
|
|
|
|
|
|
|
|
|
|
|
Director
|
|
August 31, 2010 |
Harvey B. Cash |
|
|
|
|
|
|
|
|
|
|
|
Director
|
|
August 31, 2010 |
Donald J. Edwards |
|
|
|
|
|
|
|
|
|
|
|
Director
|
|
August 31, 2010 |
Tom C. Nichols |
|
|
|
|
|
|
|
|
|
|
|
Director
|
|
August 31, 2010 |
Lyndon L. Olson |
|
|
|
|
|
|
|
|
|
/s/ William A. Shipp, Jr.
|
|
Director
|
|
August 31, 2010 |
William A. Shipp, Jr. |
|
|
|
|
81
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
SCHEDULE I. FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY)
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
2010 |
|
|
2009 |
|
Balance Sheets |
|
|
|
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
Investment in subsidiaries, at equity in net assets |
|
$ |
206,265 |
|
|
$ |
190,941 |
|
Cash and cash equivalents |
|
|
9,534 |
|
|
|
3,058 |
|
Other assets |
|
|
3,309 |
|
|
|
7,035 |
|
Amounts due from subsidiaries |
|
|
|
|
|
|
62 |
|
|
|
|
|
|
|
|
|
|
$ |
219,108 |
|
|
$ |
201,096 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
Debentures payable |
|
$ |
41,240 |
|
|
$ |
41,240 |
|
Other liabilities |
|
|
678 |
|
|
|
|
|
Stockholders equity |
|
|
177,190 |
|
|
|
159,856 |
|
|
|
|
|
|
|
|
|
|
$ |
219,108 |
|
|
$ |
201,096 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Statements of Operations |
|
|
|
|
|
|
|
|
|
|
|
|
Investment income |
|
$ |
119 |
|
|
$ |
124 |
|
|
$ |
180 |
|
Equity in income (loss) of subsidiaries, net of tax |
|
|
13,813 |
|
|
|
(58,650 |
) |
|
|
2,805 |
|
Expenses |
|
|
(7,206 |
) |
|
|
(7,492 |
) |
|
|
(8,888 |
) |
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
6,726 |
|
|
|
(66,018 |
) |
|
|
(5,903 |
) |
Provision (benefit) for income taxes |
|
|
(314 |
) |
|
|
2,282 |
|
|
|
11,942 |
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
7,040 |
|
|
$ |
(68,300 |
) |
|
$ |
(17,845 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Statements of Cash Flows |
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
7,040 |
|
|
$ |
(68,300 |
) |
|
$ |
(17,845 |
) |
Equity in income (loss) of subsidiaries, net of tax |
|
|
(13,813 |
) |
|
|
58,650 |
|
|
|
(2,805 |
) |
Stock-based compensation |
|
|
1,048 |
|
|
|
2,053 |
|
|
|
1,507 |
|
Deferred income taxes |
|
|
|
|
|
|
8,927 |
|
|
|
15,747 |
|
Other |
|
|
(2 |
) |
|
|
|
|
|
|
|
|
Change in assets and liabilities |
|
|
4,488 |
|
|
|
(5,044 |
) |
|
|
(2,829 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities |
|
|
(1,239 |
) |
|
|
(3,714 |
) |
|
|
(6,225 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Investment in subsidiary |
|
|
|
|
|
|
(2,685 |
) |
|
|
|
|
Dividend from subsidiary |
|
|
7,670 |
|
|
|
10,975 |
|
|
|
17,609 |
|
Improvements to foreclosed real estate |
|
|
(22 |
) |
|
|
(138 |
) |
|
|
(253 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by investing activities |
|
|
7,648 |
|
|
|
8,152 |
|
|
|
17,356 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Payments on borrowings |
|
|
|
|
|
|
(3,913 |
) |
|
|
(19,147 |
) |
Net proceeds from issuance of common stock |
|
|
67 |
|
|
|
68 |
|
|
|
131 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
67 |
|
|
|
(3,845 |
) |
|
|
(19,016 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
6,476 |
|
|
|
593 |
|
|
|
(7,885 |
) |
Cash and cash equivalents, beginning of year |
|
|
3,058 |
|
|
|
2,465 |
|
|
|
10,350 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year |
|
$ |
9,534 |
|
|
$ |
3,058 |
|
|
$ |
2,465 |
|
|
|
|
|
|
|
|
|
|
|
82