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FAC > SEC Filings for FAC > Form 10-Q on 6-Aug-2013All Recent SEC Filings

Show all filings for FIRST ACCEPTANCE CORP /DE/

Form 10-Q for FIRST ACCEPTANCE CORP /DE/


6-Aug-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 June 30, 2013, we leased and operated 366 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 six months ended June 30, 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 June 30, 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           Six Months Ended
                                                 June  30,                   June  30,
                                            2013            2012         2013          2012

 Retail locations - beginning of period        367            378           369          382
 Opened                                         -              -             -            -
 Closed                                         (1 )           (9 )          (3 )        (13 )

 Retail locations - end of period              366            369           366          369

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

                                  June 30,            March 31,          December 31,
                               2013      2012      2013      2012       2012       2011
              Alabama             24        24        24        24          24        24
              Florida             30        30        30        30          30        30
              Georgia             60        60        60        60          60        60
              Illinois            62        63        62        66          63        67
              Indiana             17        17        17        17          17        17
              Mississippi          7         7         7         8           7         8
              Missouri            11        11        11        12          11        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        19        19        19          19        20
              Texas               67        69        68        73          69        75

              Total              366       369       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 and six months ended June 30, 2013 increased 9.3% and 9.0%, respectively, compared with the same periods in the prior year. The changes in premiums earned in Illinois and Texas for the three and six months ended June 30, 2013 were 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            Six Months Ended
                                          June 30,                     June 30,
                                     2013           2012          2013           2012
     Gross premiums earned:
     Georgia                       $   9,887      $  9,904      $  19,538      $ 19,433
     Florida                           8,092         6,847         15,713        12,919
     Texas                             6,168         5,851         11,990        11,528
     Alabama                           5,523         4,442         10,571         8,670
     Illinois                          5,327         5,586         10,644        11,124
     Ohio                              4,684         3,999          9,044         7,802
     South Carolina                    4,036         3,222          7,694         6,234
     Tennessee                         3,182         3,058          6,222         6,010
     Pennsylvania                      2,228         2,100          4,372         4,147
     Indiana                           1,355         1,203          2,599         2,379
     Missouri                            982           834          1,870         1,622
     Mississippi                         703           702          1,361         1,348

     Total gross premiums earned      52,167        47,748        101,618        93,216
     Premiums ceded to reinsurer         (49 )         (47 )          (97 )         (96 )

     Total net premiums earned     $  52,118      $ 47,701      $ 101,521      $ 93,120


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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 increases as a result of new policies issued and decreases as a result of policies that are canceled or expire and are not renewed. At June 30, 2013, PIF was 2.1% higher than at the same date in the prior year.

                                                   Three Months Ended            Six Months Ended
                                                        June 30,                     June 30,
                                                  2013           2012           2013          2012
Policies in force - beginning of period           174,456        170,254        147,176       141,862
Net change during period                          (13,411 )      (12,459 )       13,869        15,933

Policies in force - end of period                 161,045        157,795        161,045       157,795

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 PIF for policies sold through our call center and website grew to 3,535; representing 2.2% of total PIF at June 30, 2013, compared with 0.6% at the same date in the prior year.

                                                   June 30,
                                              2013          2012
                  Retail locations:
                  New                          77,615        75,819
                  Renewal                      78,117        78,908

                                              155,732       154,727
                  Independent agents            1,778         2,117
                  Call center and website       3,535           951

                  Total policies in force     161,045       157,795

                                                   June 30,
                                              2013          2012
                  Retail locations:
                  Liability-only               89,871        90,766
                  Full coverage                65,861        63,961

                                              155,732       154,727

                  Independent agents            1,778         2,117
                  Call center and website       3,535           951

                  Total policies in force     161,045       157,795

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.


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                       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,
                                         2013           2012          2013         2012
    Loss and loss adjustment expense        75.0 %        83.3 %        71.5 %       84.4 %
    Expense                                 20.6 %        25.8 %        24.1 %       28.8 %

    Combined                                95.6 %       109.1 %        95.6 %      113.2 %

Operational Initiatives

Since the beginning of 2012, we renewed our focus on improving the customer experience and value through several initiatives. Through July 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,

development of an internet-specific sales strategy to drive quote traffic to our website,

expanded our call center processes and people in order to better support our phone sales efforts, and

launched the sale of a complementary term life insurance product through our retail stores.

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,

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

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

continued assessment and possible expansion of sales of third party carrier auto insurance in select locations where pricing is highly competitive.


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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 available-for-sale investment portfolio was $132.8 million at June 30, 2013 and consisted of fixed maturity securities and investments in mutual funds, all carried at fair value with unrealized gains and losses reported as a separate component of stockholders' equity. At June 30, 2013, we had gross unrealized gains of $6.6 million and gross unrealized losses of $1.9 million in our consolidated investment portfolio.

At June 30, 2013, 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. 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 $19.3 million at June 30, 2013 and represented 15% of our fixed maturity portfolio. At June 30, 2013, 71% of our CMOs were considered investment grade by nationally recognized statistical rating agencies and 49% were backed by agencies of the United States government.

The following table summarizes our investment securities at June 30, 2013 (in thousands).

                                                                 Gross             Gross
                                              Amortized        Unrealized        Unrealized          Fair
June 30, 2013                                    Cost            Gains             Losses            Value
U.S. government and agencies                  $   11,202      $        670      $         -        $  11,872
State                                              2,986                61                (3 )         3,044
Political subdivisions                               752                21                -              773
Revenue and assessment                            15,219               920                (5 )        16,134
Corporate bonds                                   68,725             2,449            (1,854 )        69,320
Collateralized mortgage obligations:
Agency backed                                      8,781               553                -            9,334
Non-agency backed - residential                    4,642               479               (19 )         5,102
Non-agency backed - commercial                     4,357               496                -            4,853
Redeemable preferred stocks                        1,500               193                -            1,693

Total fixed maturities, available-for-sale       118,164             5,842            (1,881 )       122,125
Mutual fund, available-for-sale                    9,901               737                (1 )        10,637

                                              $  128,065      $      6,579      $     (1,882 )     $ 132,762


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FIRST ACCEPTANCE CORPORATION 10-Q

Three and Six Months Ended June 30, 2013 Compared with the Three and Six Months Ended June 30, 2012

Consolidated Results

Revenues for the three months ended June 30, 2013 increased 8% to $62.5 million from $57.9 million in the same period in the prior year. Income before income taxes for the three months ended June 30, 2013 was $2.3 million, compared with loss before income taxes of $4.5 million for the three months ended June 30, 2012. Net income for the three months ended June 30, 2013 was $2.1 million, compared with net loss of $4.2 million for the three months ended June 30, 2012. Basic and diluted net income per share were $0.05 for the three months ended June 30, 2013, compared with basic and diluted net loss per share of $0.10 for the same period in the prior year.

Revenues for the six months ended June 30, 2013 increased 7% to $121.8 million from $113.4 million in the same period in the prior year. Income before income taxes for the six months ended June 30, 2013 was $4.4 million, compared with loss before income taxes of $12.6 million for the six months ended June 30, 2012. Net income for the six months ended June 30, 2013 was $4.1 million, compared with net loss of $12.4 million for the six months ended June 30, 2012. Basic and diluted net income per share were $0.10 for the six months ended June 30, 2013, compared with basic and diluted net loss per share of $0.30 for the same period in the prior year.

Insurance Operations

Revenues from insurance operations were $62.5 million for the three months ended June 30, 2013, compared with $57.9 million for the three months ended June 30, 2012. Revenues from insurance operations were $121.8 million for the six months ended June 30, 2013, compared with $113.4 million for the six months ended June 30, 2012.

Income before income taxes from insurance operations for the three months ended June 30, 2013 was $2.9 million, compared with loss before income taxes from insurance operations of $3.2 million for the three months ended June 30, 2012. Income before income taxes from insurance operations for the six months ended June 30, 2013 was $5.8 million, compared with loss before income taxes from insurance operations of $9.8 million for the six months ended June 30, 2012.

Premiums Earned

Premiums earned increased by $4.4 million, or 9%, to $52.1 million for the three months ended June 30, 2013, from $47.7 million for the three months ended June 30, 2012. For the six months ended June 30, 2013, premiums earned increased by $8.4 million, or 9%, to $101.5 million from $93.1 million for the six months ended June 30, 2012. This improvement was primarily due to the continued sales, marketing, customer interaction and product initiatives, in addition to our recent pricing actions.

Commission and Fee Income

Commission and fee income increased 8% to $9.2 million for the three months ended June 30, 2013, from $8.5 million for the three months ended June 30, 2012. For the six months ended June 30, 2013, commission and fee income increased 6% to $17.8 million from $16.8 million for the six months ended June 30, 2012. This increase in commission and fee income was a result of higher fee income related to commissionable products sold on behalf of third-party insurance carriers sold through our retail locations.


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FIRST ACCEPTANCE CORPORATION 10-Q

Investment Income

Investment income decreased to $1.3 million during the three months ended June 30, 2013 from $1.8 million during the three months ended June 30, 2012. For the six months ended June 30, 2013, investment income decreased to $2.5 million from $3.5 million during the six months ended June 30, 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 June 30, 2013 and 2012, the tax-equivalent book yields for our fixed maturities portfolio were 3.1% and 4.4%, respectively, with effective durations of 2.98 and 3.05 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, 2013 included $55 thousand of net realized losses on redemptions. . . .

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