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FAC > SEC Filings for FAC > Form 10-Q on 6-Nov-2012All Recent SEC Filings

Show all filings for FIRST ACCEPTANCE CORP /DE/

Form 10-Q for FIRST ACCEPTANCE CORP /DE/


6-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

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 September 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 September 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               Nine Months  Ended
                                                    September 30,                    September 30,
                                                2012             2011             2012             2011
Retail locations - beginning of period              369              385             382             393
Opened                                               -                -               -               -
Closed                                               -                (2 )           (13 )           (10 )

Retail locations - end of period                    369              383             369             383

The following table shows the number of our retail locations by state.

                               September 30,           June 30,           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         67        63        68          67        73
            Indiana               17         17        17        17          17        17
            Mississippi            7          8         7         8           8         8
            Missouri              11         12        11        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         75        69        76          75        78

            Total                369        383       369       385         382       393


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FIRST ACCEPTANCE CORPORATION 10-Q

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, a higher percentage of full coverage policies sold and rate increases taken in most states, net premiums earned for the three and nine months ended September 30, 2012 increased 14.7% and 9.8%, respectively, compared with the same periods in the prior year.

                                     Three Months Ended            Nine Months Ended
                                        September 30,                September 30,
                                     2012           2011          2012           2011
     Gross premiums earned:
     Georgia                       $   9,694      $  8,711      $  29,127      $  27,430
     Florida                           6,863         4,810         19,781         14,705
     Texas                             5,520         5,219         17,049         16,863
     Illinois                          5,394         5,268         16,518         16,596
     Alabama                           4,275         3,986         12,946         12,339
     Ohio                              3,940         3,367         11,741         10,388
     South Carolina                    3,172         2,389          9,406          7,339
     Tennessee                         2,960         2,524          8,971          7,853
     Pennsylvania                      2,083         2,020          6,230          6,476
     Indiana                           1,161         1,049          3,540          3,328
     Missouri                            773           614          2,395          2,014
     Mississippi                         657           593          2,004          1,899

     Total gross premiums earned      46,492        40,550        139,708        127,230
     Premiums ceded to reinsurer         (48 )         (45 )         (144 )         (138 )

     Total net premiums earned     $  46,444      $ 40,505      $ 139,564      $ 127,092

The following table presents the change in the total number of policies in force ("PIF") for the insurance operations. PIF increased on a year-over-year basis as a result of improved policy life and retention, as well as higher new business policy production driven by improved retail sales execution and the addition of sales through the call center and website. At September 30, 2012, PIF was 5.6% higher than at the same date in the prior year. The higher percentage decrease in PIF in the current quarter of 5.7%, compared with 2.4% during the same period in the prior year, resulted from higher new business policy production during the first and second quarters of 2012 and the timing of cancellations on those policies. The decline in the current quarter is attributed to new business as renewal business PIF is up 1.0% in the current quarter.


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                       FIRST ACCEPTANCE CORPORATION 10-Q



                                                   Three Months Ended            Nine Months Ended
                                                     September 30,                 September 30,
                                                  2012           2011           2012          2011
Policies in force - beginning of period           157,795        144,410        141,862       144,582
Net change during period                           (8,996 )       (3,480 )        6,937        (3,652 )

Policies in force - end of period                 148,799        140,930        148,799       140,930

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, call center and web. 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 September 30, 2012. PIF from open retail locations increased 6.6% during the current quarter on a year-over-year basis. In addition, the percentage of PIF with full coverage at September 30, 2012 that were sold through our open retail locations increased to 41.7%, compared with 39.3% at the same date in the prior year.

                                                  September 30,
                                               2012          2011
                  Retail locations:
                  Open retail locations:
                  New                           65,978        59,932
                  Renewal                       77,644        74,759

                                               143,622       134,691

                  Closed retail locations:
                  New                              135         1,311
                  Renewal                        1,847         3,111

                                                 1,982         4,422

                  Independent agents             1,895         1,783
                  Call center and web            1,300            34

                  Total policies in force      148,799       140,930


                                                  September 30,
                                               2012          2011
                  Retail locations:
                  Open retail locations:
                  Liability-only                83,740        81,806
                  Full coverage                 59,882        52,885

                                               143,622       134,691

                  Closed retail locations:
                  Liability-only                 1,161         2,778
                  Full coverage                    821         1,644

                                                 1,982         4,422

                  Independent agents             1,895         1,783
                  Call center and web            1,300            34

                  Total policies in force      148,799       140,930

Insurance companies present a combined ratio as a measure of their overall underwriting profitability. The components of the combined ratio are as follows.


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FIRST ACCEPTANCE CORPORATION 10-Q

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.

The following table presents the loss, expense and combined ratios for our insurance operations.

                                        Three Months Ended           Nine Months  Ended
                                           September 30,                September 30,
                                        2012           2011          2012           2011
   Loss and loss adjustment expense        77.1 %        82.1 %         82.0 %        76.4 %
   Expense                                 22.8 %        27.5 %         26.8 %        29.0 %

   Combined                                99.9 %       109.6 %        108.8 %       105.4 %

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 nine months ended September 30, 2011 were 28.0% and 104.3%, respectively.

Operational Initiatives

During the past year, we renewed our focus on improving the customer experience and value through several initiatives. Through October 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 refurbishing our store 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,

implementation of trial sales of third party carrier auto insurance in select locations where pricing is highly competitive, and

development of a web-specific sales strategy to drive quote traffic to our website.

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, web and call center initiatives, 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,

continued investment and refinement of our web-specific sales strategy,

continued investment and development of our website's full-service capabilities,

continued trial sales of third party carrier auto insurance in select locations where pricing is highly competitive, and

investment in our call center processes and people in order to better support our phone and web sales efforts.


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FIRST ACCEPTANCE CORPORATION 10-Q

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, the credit quality of specific securities or other corporate objectives.

The value of our consolidated investment portfolio was $126.5 million at September 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 September 30, 2012, we had gross unrealized gains of $9.4 million and gross unrealized losses of $0.1 million in our consolidated investment portfolio.

At September 30, 2012, 84% 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 AA- at September 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 $24.0 million at September 30, 2012 and represented 20% of our fixed maturity portfolio. At September 30, 2012, 75% of our CMOs were considered investment grade by nationally recognized statistical rating agencies. In addition, 14% of our CMOs were rated AAA and 55% of our CMOs were backed by agencies of the United States government. Of the non-agency backed CMOs, 30% were rated AAA.

The following table summarizes our investment securities at September 30, 2012 (in thousands).

                                                              Gross             Gross
                                           Amortized        Unrealized       Unrealized          Fair
September 30, 2012                            Cost            Gains            Losses            Value
U.S. government and agencies               $   17,202      $      1,000      $        -        $  18,202
State                                           3,997               160               -            4,157
Political subdivisions                            753                42               -              795
Revenue and assessment                         19,652             1,593               (7 )        21,238
Corporate bonds                                44,232             3,945               -           48,177
Collateralized mortgage obligations:
Agency backed                                  12,242               934               -           13,176
Non-agency backed - residential                 5,232               438             (115 )         5,555
Non-agency backed - commercial                  4,904               405               -            5,309
Redeemable preferred stock                      1,500               246               -            1,746

Total fixed maturities,
available-for-sale                            109,714             8,763             (122 )       118,355
Investment in mutual fund,
available-for-sale                              7,501               683               -            8,184

                                           $  117,215      $      9,446      $      (122 )     $ 126,539

Three and Nine Months Ended September 30, 2012 Compared with the Three and Nine Months Ended September 30, 2011

Consolidated Results

Revenues for the three months ended September 30, 2012 increased 19% to $59.6 million from $50.0 million in the same period in the prior year. Income before income taxes for the three months ended September 30, 2012 was $3.4 million, compared with loss before income taxes of $3.6 million for the three months ended September 30, 2011. Income before income taxes for the three months ended September 30, 2012 included the recognition of a


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FIRST ACCEPTANCE CORPORATION 10-Q

net realized gain on investments of $3.2 million, or $0.08 per share on a diluted basis. Net income for the three months ended September 30, 2012 was $3.3 million, compared with net loss of $3.7 million for the three months ended September 30, 2011. Basic and diluted net income per share were $0.08 for the three months ended September 30, 2012, compared with basic and diluted net loss per share of $0.08 for the same period in the prior year.

Revenues for the nine months ended September 30, 2012 increased 11% to $173.0 million from $155.9 million in the same period in the prior year. Loss before income taxes for the nine months ended September 30, 2012 was $9.2 million, compared with loss before income taxes of $58.7 million for the nine months ended September 30, 2011. The loss before income taxes for the nine months ended September 30, 2012 included the recognition of a net realized gain on investments of $3.2 million, or $0.08 per share on a diluted basis, while the loss before income taxes for the same period in the prior year 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 nine months ended September 30, 2012 was $9.1 million, compared with net loss of $58.8 million for the nine months ended September 30, 2011. Basic and diluted net loss per share were $0.22 for the nine months ended September 30, 2012, compared with basic and diluted net loss per share of $1.22 for the same period in the prior year.

Insurance Operations

Revenues from insurance operations were $59.6 million for the three months ended September 30, 2012, compared with $49.9 million for the three months ended September 30, 2011. Revenues from insurance operations were $172.9 million for the nine months ended September 30, 2012, compared with $155.8 million for the nine months ended September 30, 2011.

Income before income taxes from insurance operations for the three months ended September 30, 2012 was $4.3 million, compared with loss before income taxes from insurance operations of $2.3 million for the three months ended September 30, 2011. Loss before income taxes from insurance operations for the nine months ended September 30, 2012 was $5.5 million, compared with loss before income taxes from insurance operations of $54.2 million for the nine months ended September 30, 2011. Income (loss) before income taxes from insurance operations for the three and nine months ended September 30, 2012 included the recognition of a net realized gain on investments of $3.2 million, while the loss before income taxes from insurance operations for the nine months ended September 30, 2011 included a goodwill and intangible assets impairment charge of $52.4 million.

Premiums Earned

Premiums earned increased by $5.9 million, or 15%, to $46.4 million for the three months ended September 30, 2012, from $40.5 million for the three months ended September 30, 2011. For the nine months ended September 30, 2012, premiums earned increased by $12.5 million, or 10%, to $139.6 million from $127.1 million for the nine months ended September 30, 2011. This improvement was primarily due to an increase in the number of PIF from 140,930 at September 30, 2011 to 148,799 at September 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 nine-month period on a year-over-year basis and the number of PIF at September 30, 2012 compared to December 31, 2011. For those policies quoted, we continue to experience a higher close ratio for the quarter and nine-month period ended September 30, 2012 compared with the same periods in the prior year.

Commission and Fee Income

Commission and fee income increased 11% to $8.3 million for the three months ended September 30, 2012, from $7.5 million for the three months ended September 30, 2011. For the nine months ended September 30, 2012, commission and fee income increased 11% to $25.0 million from $22.6 million for the nine months ended September 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 $1.6 million during the three months ended September 30, 2012 from $2.0 million during the three months ended September 30, 2011. For the nine months ended September 30, 2012, investment income decreased to $5.2 million from $6.2 million during the nine months ended September 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 calendar year. At September 30, 2012 and 2011, the tax-equivalent book yields for our fixed maturities portfolio were 3.4% and 4.6%, respectively, with effective durations of 2.20 and 3.30 years, respectively.


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FIRST ACCEPTANCE CORPORATION 10-Q

Net realized gains (losses) on investments, available-for-sale

Net realized gains on investments, available-for-sale during the three and nine months ended September 30, 2012 primarily included $3.2 million in net realized gain from the sales of $29.6 million of corporate bonds which were sold in . . .

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