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| FAC > SEC Filings for FAC > Form 10-Q on 7-Aug-2012 | All Recent SEC Filings |
7-Aug-2012
Quarterly Report
Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements which involve risks and uncertainties. Our actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such a difference include those discussed in Item 1A. "Risk Factors" in our Transition Report on Form 10-K for the transition period from July 1, 2011 to December 31, 2011. The following discussion should be read in conjunction with our consolidated financial statements included with this report and our consolidated financial statements and related Management's Discussion and Analysis of Financial Condition and Results of Operations for the six months ended December 31, 2011 included in our Transition Report on Form 10-K for the transition period from July 1, 2011 to December 31, 2011.
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.
At June 30, 2012, we leased and operated 369 retail locations (or "stores") staffed by employee-agents who primarily sell non-standard personal automobile insurance products underwritten by us as well as certain commissionable ancillary products. In most states, our employee-agents also sell a tenant homeowner insurance product underwritten by us. At June 30, 2012, we wrote non-standard personal automobile insurance in 12 states and were licensed in 13 additional states. See the discussion in Item 1. "Business - General" in our Transition Report on Form 10-K for the transition period from July 1, 2011 to December 31, 2011 for additional information with respect to our business.
The following table shows the number of our retail locations. Retail location counts are based upon the date that a location commenced or ceased writing business.
Three Months Ended Six Months Ended
June 30, June 30,
2012 2011 2012 2011
Retail locations - beginning of period 378 385 382 393
Opened - - - -
Closed (9 ) - (13 ) (8 )
Retail locations - end of period 369 385 369 385
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The following table shows the number of our retail locations by state.
June 30, March 31, December 31,
2012 2011 2012 2011 2011 2010
Alabama 24 24 24 24 24 25
Florida 30 31 30 31 30 31
Georgia 60 60 60 60 60 60
Illinois 63 68 66 68 67 73
Indiana 17 17 17 17 17 17
Mississippi 7 8 8 8 8 8
Missouri 11 12 12 12 12 12
Ohio 27 27 27 27 27 27
Pennsylvania 16 16 16 16 16 16
South Carolina 26 26 26 26 26 26
Tennessee 19 20 19 20 20 20
Texas 69 76 73 76 75 78
Total 369 385 378 385 382 393
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Consolidated Results of Operations
Overview
Our primary focus is selling, servicing and underwriting non-standard personal automobile insurance. Our real estate and corporate segment consists of activities related to the disposition of real estate held for sale, interest expense associated with debt, and other general corporate overhead expenses. Our insurance operations generate revenues from selling, servicing and underwriting non-standard personal automobile insurance policies in 12 states. We conduct our underwriting operations through three insurance company subsidiaries: First Acceptance Insurance Company, Inc., First Acceptance Insurance Company of Georgia, Inc. and First Acceptance Insurance Company of Tennessee, Inc. Our insurance revenues are primarily generated from:
• premiums earned, including policy and renewal fees, from sales of policies written and assumed by our insurance company subsidiaries;
• commission and fee income, including installment billing fees on policies written, agency fees and commissions and fees for other ancillary products and services; and
• investment income earned on the invested assets of the insurance company subsidiaries.
The following table presents gross premiums earned by state (in thousands). Driven by improvements in sales execution, net premiums earned for the three and six months ended June 30, 2012 increased 10.6% and 7.5%, respectively, compared with the same periods in the prior year.
Three Months Ended Six Months Ended
June 30, June 30,
2012 2011 2012 2011
Gross premiums earned:
Georgia $ 9,904 $ 9,269 $ 19,433 $ 18,719
Florida 6,847 5,057 12,919 9,896
Texas 5,851 5,753 11,528 11,644
Illinois 5,586 5,617 11,124 11,328
Alabama 4,442 4,176 8,670 8,353
Ohio 3,999 3,545 7,802 7,021
South Carolina 3,222 2,481 6,234 4,951
Tennessee 3,058 2,628 6,010 5,329
Pennsylvania 2,100 2,201 4,147 4,455
Indiana 1,203 1,136 2,379 2,279
Missouri 834 674 1,622 1,400
Mississippi 702 652 1,348 1,306
Total gross premiums earned 47,748 43,189 93,216 86,681
Premiums ceded to reinsurer (47 ) (46 ) (96 ) (94 )
Total net premiums earned $ 47,701 $ 43,143 $ 93,120 $ 86,587
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The following table presents the change in the total number of policies in force ("PIF") for the insurance operations. PIF increased as a result of higher new business policy production and improved policy life and retention. At June 30, 2012, PIF was 9.3% higher than at the same date in the prior year.
Three Months Ended Six Months Ended
June 30, June 30,
2012 2011 2012 2011
Policies in force - beginning of period 170,254 160,588 141,862 144,582
Net change during period (12,459 ) (16,178 ) 15,933 (172 )
Policies in force - end of period 157,795 144,410 157,795 144,410
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The following tables present total PIF for the insurance operations segregated by policies that were sold through our open and closed retail locations as well as our independent agents. For our retail locations, PIF are further segregated by (i) new and renewal and (ii) liability-only or full coverage. New policies are defined as those policies issued to both first-time customers and customers who have reinstated a lapsed or cancelled policy. Renewal policies are those policies which renewed after completing their full uninterrupted policy term. Liability-only policies are defined as those policies including only bodily injury (or no-fault) and property damage coverages, which are the required coverages in most states. For comparative purposes, the PIF data with respect to closed retail locations for each of the periods presented below includes all retail locations closed at June 30, 2012. PIF from open retail locations increased 10.2% during the current quarter on a year-over-year basis. In addition, the percentage of PIF with full coverage at June 30, 2012 that were sold through our open retail locations increased to 41.3%, compared with 39.2% at the same date in the prior year.
June 30,
2012 2011
Retail locations:
Open retail locations:
New 75,137 62,680
Renewal 76,598 75,011
151,735 137,691
Closed retail locations:
New 681 1,504
Renewal 2,307 3,379
2,988 4,883
Independent agents 3,072 1,836
Total policies in force 157,795 144,410
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June 30,
2012 2011
Retail locations:
Open retail locations:
Liability-only 89,006 83,736
Full coverage 62,729 53,955
151,735 137,691
Closed retail locations:
Liability-only 1,758 3,112
Full coverage 1,230 1,771
2,988 4,883
Independent agents 3,072 1,836
Total policies in force 157,795 144,410
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Insurance companies present a combined ratio as a measure of their overall underwriting profitability. The components of the combined ratio are as follows.
Loss Ratio - Loss ratio is the ratio (expressed as a percentage) of losses and loss adjustment expenses incurred to premiums earned and is a basic element of underwriting profitability. We calculate this ratio based on all direct and assumed premiums earned, net of ceded reinsurance.
Expense Ratio - Expense ratio is the ratio (expressed as a percentage) of insurance operating expenses to net premiums earned. Insurance operating expenses are reduced by commission and fee income from insureds. This is a measurement that illustrates relative management efficiency in administering our operations.
Combined Ratio - Combined ratio is the sum of the loss ratio and the expense ratio. If the combined ratio is at or above 100%, an insurance company cannot be profitable without sufficient investment income.
FIRST ACCEPTANCE CORPORATION 10-Q
The following table presents the loss, expense and combined ratios for our
insurance operations.
Three Months Ended Six Months Ended
June 30, June 30,
2012 2011 2012 2011
Loss and loss adjustment expense 83.3 % 74.6 % 84.4 % 73.6 %
Expense 25.8 % 28.4 % 28.8 % 29.8 %
Combined 109.1 % 103.0 % 113.2 % 103.4 %
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Excluding the severance and related benefits charges incurred in connection with the separation of certain executive officers of $1.3 million during March 2011, the expense and combined ratios for the six months ended June 30, 2011 were 28.2% and 101.9%, respectively.
Operational Initiatives
During the past year, we renewed our focus on improving the customer experience and value through several initiatives. Through July 2012, our progress has included:
• investment in our sales management organization that improved the quality and consistency of the customer experience in our retail stores,
• development of a new brand logo and cohesive brand strategy,
• investment in rebranding our store fronts and refurbish our stores interiors,
• development of electronic signature capabilities, thereby enabling most customers to receive quotes and bind policies over the phone and through the internet,
• development of a consumer-based website that reflects our branding strategy, improves the customer experience, and allows for full-service capabilities including quoting, binding and receiving payments, and
• implementation of our new multivariate (or scored) pricing programs.
Moving forward, we continue to believe that our retail stores are the foundation of our business, providing an opportunity for us to directly interact with our customers on a regular basis. We also recognize that customer preferences have changed and that we need to adapt to meet those needs. For that reason, we will continue to invest in our people, retail stores and our customer interaction efforts in order to improve the customer experience. Our current initiatives include:
• expansion of our potential customer base through enhancements to our insurance products and expansion of ancillary product offerings, including life insurance,
• trial sales of third party carrier auto insurance in select locations where pricing is highly competitive,
• development of a web-specific sales strategy to drive quote traffic to our website,
• continued investment and development of our website's full-service capabilities, and
• investment in our call center processes and people in order to better support our phone and web sales efforts.
Investments
We use the services of an independent investment manager to manage our investment portfolio. The investment manager conducts, in accordance with our investment policy, all of the investment purchases and sales for our insurance company subsidiaries. Our investment policy has been established by the Investment Committee of our Board of Directors and specifically addresses overall investment goals and objectives, authorized investments, prohibited securities, restrictions on sales by the investment manager and guidelines as to asset allocation, duration and credit quality. Management and the Investment Committee meet regularly with our investment manager to review the performance of the portfolio and compliance with our investment guidelines.
The invested assets of the insurance company subsidiaries consist substantially of marketable, investment grade, U.S. government securities, municipal bonds, corporate bonds and collateralized mortgage obligations ("CMOs"). Investment income is comprised primarily of interest earned on these securities, net of related investment expenses. Realized gains and losses may occur from time to time as changes are made to our holdings based upon changes in interest rates or the credit quality of specific securities.
The value of our consolidated investment portfolio was $161.9 million at June 30, 2012 and consisted of fixed maturity securities and an investment in a mutual fund, all carried at fair value with unrealized gains and losses reported as a separate component of stockholders' equity. At June 30, 2012, we had gross unrealized gains of $11.4 million and gross unrealized losses of $0.2 million in our consolidated investment portfolio.
At June 30, 2012, 88% of the fair value of our fixed maturity portfolio was rated "investment grade" (a credit rating of AAA to BBB-) by nationally recognized statistical rating organizations. The average credit rating of our fixed maturity portfolio was A+ at June 30, 2012. 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 $25.1 million at June 30, 2012 and represented 16% of our fixed maturity portfolio. At June 30, 2012, 78% of our CMOs were considered investment grade by nationally recognized statistical rating agencies. In addition, 14% of our CMOs were rated AAA and 57% of our CMOs were backed by agencies of the United States government. Of the non-agency backed CMOs, 32% were rated AAA.
The following table summarizes our investment securities at June 30, 2012 (in thousands).
Gross Gross
Amortized Unrealized Unrealized Fair
June 30, 2012 Cost Gains Losses Value
U.S. government and agencies $ 22,184 $ 1,234 $ - $ 23,418
State 5,010 194 - 5,204
Political subdivisions 753 45 - 798
Revenue and assessment 22,058 1,559 (11 ) 23,606
Corporate bonds 67,561 6,394 - 73,955
Collateralized mortgage obligations:
Agency backed 13,485 956 - 14,441
Non-agency backed - residential 5,349 143 (130 ) 5,362
Non-agency backed - commercial 5,018 302 - 5,320
Redeemable preferred stocks 1,676 215 (11 ) 1,880
Total fixed maturities,
available-for-sale 143,094 11,042 (152 ) 153,984
Investment in mutual fund,
available-for-sale 7,501 376 - 7,877
$ 150,595 $ 11,418 $ (152 ) $ 161,861
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The following table sets forth the scheduled maturities of our fixed maturity securities at June 30, 2012 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 $ 20,002 $ - $ 2,155 $ 22,157
After one through five years 51,538 1,003 - 52,541
After five through ten years 41,685 - - 41,685
After ten years 10,598 - - 10,598
No single maturity date 24,992 1,933 78 27,003
$ 148,815 $ 2,936 $ 2,233 $ 153,984
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Three and Six Months Ended June 30, 2012 Compared with the Three and Six Months Ended June 30, 2011
Consolidated Results
Revenues for the three months ended June 30, 2012 increased 9% to $57.9 million from $53.1 million in the same period in the prior year. Loss before income taxes for the three months ended June 30, 2012 was $4.5 million, compared with loss before income taxes of $53.2 million for the three months ended June 30, 2011. The loss before income taxes for the three months ended June 30, 2011 included a goodwill and intangible assets impairment charge of $52.4 million, or $1.09 per share on a diluted basis. Net loss for the three months ended June 30, 2012 was $4.2 million, compared with net loss of $53.5 million for the three months ended June 30, 2011. Basic and diluted net loss per share were $0.10 for the three months ended June 30, 2012, compared with basic and diluted net loss per share of $1.11 for the same period in the prior year.
Revenues for the six months ended June 30, 2012 increased 7% to $113.4 million from $105.9 million in the same period in the prior year. Loss before income taxes for the six months ended June 30, 2012 was $12.6 million, compared with loss before income taxes of $55.1 million for the six months ended June 30, 2011. The loss before income taxes for the six months ended June 30, 2011 included a goodwill and intangible assets impairment charge of $52.4 million, or $1.09 per share on a diluted basis. Net loss for the six months ended June 30, 2012 was $12.4 million, compared with net loss of $55.1 million for the six months ended June 30, 2011. Basic and diluted net loss per share were $0.30 for the six months ended June 30, 2012, compared with basic and diluted net loss per share of $1.14 for the same period in the prior year.
Insurance Operations
Revenues from insurance operations were $57.9 million for the three months ended June 30, 2012, compared with $53.1 million for the three months ended June 30, 2011. Revenues from insurance operations were $113.4 million for the six months ended June 30, 2012, compared with $105.9 million for the six months ended June 30, 2011.
Loss before income taxes from insurance operations for the three months ended June 30, 2012 was $3.2 million, compared with loss before income taxes from insurance operations of $51.8 million for the three months ended June 30, 2011. Loss before income taxes from insurance operations for the six months ended June 30, 2012 was $9.8 million, compared with loss before income taxes from insurance operations of $51.9 million for the six months ended June 30, 2011. The loss before income taxes from insurance operations for the three and six months ended June 30, 2011 included a goodwill and intangible assets impairment charge of $52.4 million.
Premiums Earned
Premiums earned increased by $4.6 million, or 11%, to $47.7 million for the three months ended June 30, 2012, from $43.1 million for the three months ended June 30, 2011. For the six months ended June 30, 2012, premiums earned increased by $6.5 million, or 7%, to $93.1 million from $86.6 million for the six months ended June 30, 2011. This improvement was primarily due to an increase in the number of PIF from 144,410 at June 30, 2011 to 157,795 at June 30, 2012, which we attribute to the continued sales, marketing, customer interaction and product initiatives. In addition, we experienced increases in both new policies sold during the most recent quarter and six-month period on a year-over-year basis and the number of PIF at June 30, 2012 compared to December 31, 2011. For those policies quoted, we continue to experience a higher close ratio for the quarter and six-month period ended June 30, 2012 compared with the same periods in the prior year.
Commission and Fee Income
Commission and fee income increased 10% to $8.5 million for the three months ended June 30, 2012, from $7.7 million for the three months ended June 30, 2011. For the six months ended June 30, 2012, commission and fee income increased 11% to $16.8 million from $15.1 million for the six months ended June 30, 2011. This increase in commission and fee income was a result of higher fee income related to commissionable ancillary products sold through our retail locations and the increase in PIF noted above.
Investment Income
Investment income decreased to $1.8 million during the three months ended June 30, 2012 from $2.1 million during the three months ended June 30, 2011. For the six months ended June 30, 2012, investment income decreased to $3.5 million from $4.1 million during the six months ended June 30, 2011. This decrease in investment income was primarily a result of the decline in invested assets as a result of cash used in operations and the $11.0 million used for repurchases of common stock during the prior fiscal year. At June 30, 2012 and 2011, the tax-equivalent book yields for our fixed maturities portfolio were 4.4% and 4.9%, respectively, with effective durations of 3.05 and 3.38 years, respectively.
Net realized gains (losses) on investments, available-for-sale
Net realized losses on investments, available-for-sale during the three months ended June 30, 2012 primarily included $15 thousand of charges related to other-than-temporary impairment ("OTTI") on certain non-agency backed CMOs. Net realized gains on investments, available-for-sale during the three months ended June 30, 2011 included $149 thousand in net realized gains on redemptions.
For the six months ended June 30, 2012 net realized gains on investments, . . .
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