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FAC > SEC Filings for FAC > Form 10-Q on 8-May-2013All Recent SEC Filings

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Form 10-Q for FIRST ACCEPTANCE CORP /DE/


8-May-2013

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 Annual Report on Form 10-K for year ended December 31, 2012. 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 year ended December 31, 2012 included in our Annual Report on Form 10-K for the year ended December 31, 2012.

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 (loss), income (loss) 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" of our Annual Report on Form 10-K for the year ended December 31, 2012.

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.

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.


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FIRST ACCEPTANCE CORPORATION 10-Q

At March 31, 2013, we leased and operated 367 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 complementary tenant homeowner insurance product underwritten by us. In addition, during the three months ended March 31, 2013, select retail locations in highly competitive markets in Illinois and Texas began offering non-standard personal automobile insurance serviced and underwritten by other third-party insurance carriers. At March 31, 2013, we wrote non-standard personal automobile insurance in 12 states and were licensed in 13 additional states. See the discussion in Item 1. "Business - General" in our Annual Report on Form 10-K for the year ended December 31, 2012 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
                                                         March  31,
                                                     2013            2012
          Retail locations - beginning of period        369            382
          Opened                                         -              -
          Closed                                         (2 )           (4 )

          Retail locations - end of period              367            378

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

                                    March 31,                  December 31,
                               2013          2012           2012          2011
            Alabama                 24            24             24            24
            Florida                 30            30             30            30
            Georgia                 60            60             60            60
            Illinois                62            66             63            67
            Indiana                 17            17             17            17
            Mississippi              7             8              7             8
            Missouri                11            12             11            12
            Ohio                    27            27             27            27
            Pennsylvania            16            16             16            16
            South Carolina          26            26             26            26
            Tennessee               19            19             19            20
            Texas                   68            73             69            75

            Total                  367           378            369           382


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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 and related products 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 policies sold on behalf of third-party insurance carriers; 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 months ended March 31, 2013 increased 8.8% compared with the same period in the prior year. The change in premiums earned in Illinois and Texas for the three months ended March 31, 2013 was adversely impacted by the increase in policies sold on behalf of third party carriers which generate commission and fee income instead of premiums earned.

                                                Three Months Ended
                                                     March 31,
                                                2013           2012
                Gross premiums earned:
                Georgia                       $   9,651      $  9,529
                Florida                           7,621         6,069
                Texas                             5,822         5,677
                Illinois                          5,317         5,538
                Alabama                           5,048         4,228
                Ohio                              4,360         3,802
                South Carolina                    3,659         3,012
                Tennessee                         3,040         2,954
                Pennsylvania                      2,144         2,047
                Indiana                           1,245         1,176
                Missouri                            887           788
                Mississippi                         657           646

                Total gross premiums earned      49,451        45,466
                Premiums ceded to reinsurer         (48 )         (47 )

                Total net premiums earned     $  49,403      $ 45,419


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FIRST ACCEPTANCE CORPORATION 10-Q

The following table presents the change in the total number of policies in force ("PIF") for the insurance operations, including policies underwritten on behalf of third party carriers. PIF increase as a result of new policies issued and decrease as a result of policies that are canceled or expire and are not renewed. At March 31, 2013, PIF was 2.5% higher than at the same date in the prior year.

                                                      Three Months Ended
                                                           March 31,
                                                      2013          2012
          Policies in force - beginning of period     147,176       141,862
          Net increase during period                   27,280        28,392

          Policies in force - end of period           174,456       170,254

The following tables present total PIF for the insurance operations segregated by policies that were sold through retail locations, independent agents, call center and website, and include those sold on behalf of third party carriers. 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. The percentage of PIF with full coverage at March 31, 2013 that were sold through our retail locations increased to 42.3%, compared with 40.8% at the same date in the prior year. The PIF for policies sold through our call center and website grew to 3,417; representing 2.0% of total PIF at March 31, 2013, compared with 0.4% at the same date in the prior year.

                                                   March 31,
                                              2013          2012
                  Retail locations:
                  New                          91,217        89,737
                  Renewal                      77,799        77,468

                                              169,016       167,205

                  Independent agents            2,023         2,407
                  Call center and website       3,417           642

                  Total policies in force     174,456       170,254

                                                   March 31,
                                              2013          2012
                  Retail locations:
                  Liability-only               97,493        98,931
                  Full coverage                71,523        68,274

                                              169,016       167,205

                  Independent agents            2,023         2,407
                  Call center and website       3,417           642

                  Total policies in force     174,456       170,254

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.


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FIRST ACCEPTANCE CORPORATION 10-Q

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
                                                      March  31,
                                                  2013           2012
             Loss and loss adjustment expense        67.8 %        85.6 %
             Expense                                 27.8 %        31.9 %

             Combined                                95.6 %       117.5 %

Operational Initiatives

During the past year, we renewed our focus on improving the customer experience and value through several initiatives. Through April 2013, our progress has included:

investment in our sales organization to improve the quality and consistency of the customer experience in our retail stores,

continued development of our brand,

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 our website,

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,

launch of our trial implementation of sales of third party carrier automobile insurance to select Illinois and Texas locations where pricing is highly competitive, and

development of an internet-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, website 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,

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

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

continued assessment and possible expansion of 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 website 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 debt securities, and include 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 $134.0 million at March 31, 2013 and consisted of fixed maturity securities and an investment in a mutual fund, all carried at fair value with unrealized gains and losses reported as a separate component of stockholders' equity. At March 31, 2013, we had gross unrealized gains of $8.8 million and gross unrealized losses of $0.5 million in our consolidated investment portfolio.

At March 31, 2013, 82% 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 March 31, 2013. 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 $20.6 million at March 31, 2013 and represented 16% of our fixed maturity portfolio. At March 31, 2013, 72% of our CMOs were considered investment grade by nationally recognized statistical rating agencies and 50% were backed by agencies of the United States government.

The following table summarizes our investment securities at March 31, 2013 (in thousands).

                                                              Gross             Gross
                                           Amortized        Unrealized       Unrealized          Fair
March 31, 2013                                Cost            Gains            Losses            Value
U.S. government and agencies               $   11,202      $        833      $        -        $  12,035
State                                           3,991                78               -            4,069
Political subdivisions                            752                33               -              785
Revenue and assessment                         18,103             1,497               (5 )        19,595
Corporate bonds                                63,696             3,409             (430 )        66,675
Collateralized mortgage obligations:
Agency backed                                   9,448               661               -           10,109
Non-agency backed - residential                 4,888               610              (66 )         5,432
Non-agency backed - commercial                  4,644               426               -            5,070
Redeemable preferred stocks                     1,500               292               -            1,792

Total fixed maturities,
available-for-sale                            118,224             7,839             (501 )       125,562
Investment in mutual fund,
available-for-sale                              7,501               963               -            8,464

                                           $  125,725      $      8,802      $      (501 )     $ 134,026


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FIRST ACCEPTANCE CORPORATION 10-Q

Three Months Ended March 31, 2013 Compared with the Three Months Ended March 31, 2012

Consolidated Results

Revenues for the three months ended March 31, 2013 increased 7% to $59.3 million from $55.5 million in the same period in the prior year. Income before income taxes for the three months ended March 31, 2013 was $2.1 million, compared with loss before income taxes of $8.1 million for the three months ended March 31, 2012. Net income for the three months ended March 31, 2013 was $2.0 million, compared with net loss of $8.2 million for the three months ended March 31, 2012. Basic and diluted net income per share were $0.05 for the three months ended March 31, 2013, compared with basic and diluted net loss per share of $0.20 for the same period in the prior year.

Insurance Operations

Revenues from insurance operations were $59.3 million for the three months ended March 31, 2013, compared with $55.4 million for the three months ended March 31, 2012. Income before income taxes from insurance operations for the three months ended March 31, 2013 was $2.9 million, compared with loss before income taxes from insurance operations of $6.6 million for the three months ended March 31, 2012.

Premiums Earned

Premiums earned increased by $4.0 million, or 9%, to $49.4 million for the three months ended March 31, 2013, from $45.4 million for the three months ended March 31, 2012. This improvement was primarily due to the continued sales, marketing, customer interaction and product initiatives, in addition to our recent pricing actions and a higher percentage of policies in force with full coverage at March 31, 2013.

Commission and Fee Income

Commission and fee income increased 4% to $8.6 million for the three months ended March 31, 2013, from $8.3 million for the three months ended March 31, 2012. This increase in commission and fee income was a result of higher fee income related to commissionable ancillary products and policies sold on behalf of third-party insurance carriers sold through our retail locations.

Investment Income

Investment income decreased to $1.3 million during the three months ended March 31, 2013 from $1.8 million during the three months ended March 31, 2012. This decrease in investment income was primarily a result of the low-yielding reinvestment opportunities for both portfolio maturities and the proceeds from the sale in September 2012 of $29.6 million of corporate bonds in order to increase the statutory surplus of the insurance company subsidiaries. At March 31, 2013 and 2012, the tax-equivalent book yields for our fixed maturities portfolio were 3.1% and 4.4%, respectively, with effective durations of 2.86 and 3.11 years, respectively.

Net realized gains on investments, available-for-sale

Net realized gains on investments, available-for-sale during the three months ended March 31, 2013 included $41 thousand in net realized gains on redemptions and $28 thousand of charges related to OTTI on certain non-agency backed CMOs. Net realized gains on investments, available-for-sale during the three months ended March 31, 2012 included $27 thousand in net realized gains on redemptions and $1 thousand of charges related to OTTI on certain non-agency backed CMOs. For additional information with respect to the determination of OTTI losses on investment securities, see Note 3 to our consolidated financial statements.

Loss and Loss Adjustment Expenses

The loss and loss adjustment expense ratio was 67.8% for the three months ended March 31, 2013, compared with 85.6% for the three months ended March 31, 2012. We experienced favorable development related to prior periods of $2.4 million for the three months ended March 31, 2013, compared with unfavorable development of $3.4 million for the three months ended March 31, 2012. The favorable development for the three months ended March 31, 2013 was primarily due to lower than expected severity related to property damage liability and no-fault claims that occurred in calendar year 2012, as well as lower than expected severity related to bodily injury claims that occurred in calendar years 2011 and 2012. In addition, the favorable development for the three months ended March 31, 2013 included a recovery related to the 2011 settlement of a claim for extra-contractual damages.


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FIRST ACCEPTANCE CORPORATION 10-Q

Excluding the development related to prior periods, the loss and loss adjustment expense ratios for the three months ended March 31, 2013 and 2012 were 72.7% and 78.1%, respectively. The year-over-year decrease in the loss and loss adjustment expense ratio was primarily due to a decrease in both frequency and severity and the impact of our recent pricing changes.

Operating Expenses

Insurance operating expenses decreased 2% to $22.3 million for the three months ended March 31, 2013 from $22.8 million for the three months ended March 31, 2012. The decrease was primarily a result of savings realized from the closure . . .

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