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

Show all filings for FIRST ACCEPTANCE CORP /DE/

Form 10-Q for FIRST ACCEPTANCE CORP /DE/


6-Nov-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 September 30, 2013, we leased and operated 363 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 insurance product providing personal property and liability coverage for renters underwritten by us. In addition, during the nine months ended September 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 September 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          Nine Months Ended
                                               September 30,              September 30,
                                            2013            2012        2013           2012

 Retail locations - beginning of period        366            369          369           382
 Opened                                         -              -            -             -
 Closed                                         (3 )           -            (6 )         (13 )

 Retail locations - end of period              363            369          363           369

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

                               September 30,           June 30,           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        63          63        67
            Indiana               17         17        17        17          17        17
            Mississippi            7          7         7         7           7         8
            Missouri              11         11        11        11          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                 64         69        67        69          69        75

            Total                363        369       366       369         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 nine months ended September 30, 2013 increased 6.5% and 8.2%, respectively, compared with the same periods in the prior year. The changes in premiums earned in Illinois and Texas for the three and nine months ended September 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            Nine Months Ended
                                        September 30,                September 30,
                                     2013           2012          2013           2012
     Gross premiums earned:
     Georgia                       $   9,320      $  9,694      $  28,858      $  29,127
     Florida                           7,448         6,863         23,161         19,781
     Texas                             6,075         5,520         18,065         17,049
     Alabama                           5,246         4,275         15,816         12,946
     Illinois                          4,920         5,394         15,565         16,518
     Ohio                              4,519         3,940         13,563         11,741
     South Carolina                    3,840         3,172         11,534          9,406
     Tennessee                         3,095         2,960          9,316          8,971
     Pennsylvania                      2,138         2,083          6,511          6,230
     Indiana                           1,294         1,161          3,893          3,540
     Missouri                            952           773          2,822          2,395
     Mississippi                         669           657          2,030          2,004

     Total gross premiums earned      49,516        46,492        151,134        139,708
     Premiums ceded to reinsurer         (49 )         (48 )         (146 )         (144 )

     Total net premiums earned     $  49,467      $ 46,444      $ 150,988      $ 139,564


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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 September 30, 2013, PIF was 5.6% higher than at the same date in the prior year.

                                                   Three Months Ended            Nine Months Ended
                                                     September 30,                 September 30,
                                                  2013           2012           2013          2012
Policies in force - beginning of period           161,045        157,795        147,176       141,862
Net change during period                           (3,926 )       (8,996 )        9,943         6,937

Policies in force - end of period                 157,119        148,799        157,119       148,799

The following table presents total PIF for the insurance operations segregated by policies that were sold through retail locations, independent agents, and our combined call center and website channels, and include those sold on behalf of third party carriers. For our retail locations, PIF are further segregated by new and renewal. 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. The PIF for policies sold through our call center and website grew to 4,801 representing 3.1% of total PIF at September 30, 2013, compared with 0.9% at the same date in the prior year.

                                                 September 30,
                                              2013          2012
                  Retail locations:
                  New                          69,862        66,125
                  Renewal                      80,769        79,484

                                              150,061       145,609

                  Independent agents            1,687         1,895
                  Call center and website       4,801         1,295

                  Total policies in force     157,119       148,799

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 and third party carriers. 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           Nine Months Ended
                                           September 30,               September 30,
                                        2013            2012         2013          2012
   Loss and loss adjustment expense        73.0 %        77.1 %        72.0 %        82.0 %
   Expense                                 23.3 %        22.8 %        23.8 %        26.8 %

   Combined                                96.3 %        99.9 %        95.8 %       108.8 %

Operational Initiatives

Since the beginning of 2012, we renewed our focus on improving the customer experience and value through several initiatives. Through October 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 and consolidation of our "Acceptance" 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, including the release of a mobile platform that puts the full range of our services into the broad spectrum of handheld devices, including mobile phones and tablets,

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

launch of the sale of a complementary term life insurance product through select 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, mutual funds and collateralized mortgage obligations ("CMOs"), in addition to some recent investments made into limited partnership interests. 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 $135.4 million at September 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 September 30, 2013, we had gross unrealized gains of $6.3 million and gross unrealized losses of $2.0 million in our consolidated investment portfolio.

At September 30, 2013, 85% 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 $17.4 million at September 30, 2013 and represented 14% of our fixed maturity portfolio. At September 30, 2013, 68% of our CMOs were considered investment grade by nationally recognized statistical rating agencies and 36% were backed by agencies of the United States government.

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

                                                                 Gross             Gross
                                              Amortized        Unrealized        Unrealized          Fair
September 30, 2013                               Cost            Gains             Losses            Value
U.S. government and agencies                  $   11,002      $        594      $         -        $  11,596
State                                                697                27                -              724
Political subdivisions                             1,602                66                -            1,668
Revenue and assessment                            15,557               630              (115 )        16,072
Corporate bonds                                   75,083             2,521            (1,911 )        75,693
Collateralized mortgage obligations:
Agency backed                                      5,892               350                -            6,242
Non-agency backed - residential                    5,763               620                -            6,383
Non-agency backed - commercial                     4,173               628                -            4,801
Redeemable preferred stocks                        1,500                59                -            1,559

Total fixed maturities, available-for-sale       121,269             5,495            (2,026 )       124,738
Mutual fund, available-for-sale                    9,901               790                (1 )        10,690

                                              $  131,170      $      6,285      $     (2,027 )     $ 135,428


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FIRST ACCEPTANCE CORPORATION 10-Q

Three and Nine Months Ended September 30, 2013 Compared with the Three and Nine Months Ended September 30, 2012

Consolidated Results

Revenues for both the three months ended September 30, 2013 and 2012 were $59.6 million. Income before income taxes for the three months ended September 30, 2013 was $2.1 million, compared with income before income taxes of $3.4 million for the three months ended September 30, 2012. Net income for the three months ended September 30, 2013 was $1.9 million, compared with net income of $3.3 million for the three months ended September 30, 2012. Basic and diluted net income per share were $0.05 for the three months ended September 30, 2013, compared with basic and diluted net income per share of $0.08 for the same period in the prior year. Income before income taxes for the three 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.

Revenues for the nine months ended September 30, 2013 increased 5% to $181.4 million from $173.0 million in the same period in the prior year. Income before income taxes for the nine months ended September 30, 2013 was $6.5 million, compared with loss before income taxes of $9.2 million for the nine months ended September 30, 2012. Net income for the nine months ended September 30, 2013 was $6.0 million, compared with net loss of $9.1 million for the nine months ended September 30, 2012. Basic and diluted net income per share were $0.15 for the nine months ended September 30, 2013, compared with basic and diluted net loss per share of $0.22 for the same period in the prior year. 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.

Insurance Operations

Revenues from insurance operations were $59.6 million for both the three months ended September 30, 2013 and 2012. Revenues from insurance operations were $181.3 million for the nine months ended September 30, 2013, compared with $172.9 million for the nine months ended September 30, 2012.

Income before income taxes from insurance operations for the three months ended September 30, 2013 was $2.8 million, compared with income before income taxes from insurance operations of $4.3 million for the three months ended September 30, 2012. Income before income taxes from insurance operations for the nine months ended September 30, 2013 was $8.6 million, compared with loss before income taxes from insurance operations of $5.5 million for the nine months ended September 30, 2012.

Premiums Earned

Premiums earned increased by $3.1 million, or 7%, to $49.5 million for the three months ended September 30, 2013, from $46.4 million for the three months ended September 30, 2012. For the nine months ended September 30, 2013, premiums earned increased by $11.4 million, or 8%, to $151.0 million from $139.6 million for the nine months ended September 30, 2012. This improvement was primarily due to the continued sales, marketing, customer interaction and product initiatives, in addition to our recent pricing actions. Excluding closed retail locations, premiums earned increased by 8% and 10% for the three and nine month periods ended September 30, 2013, respectively.

Commission and Fee Income

Commission and fee income increased 4% to $8.6 million for the three months ended September 30, 2013, from $8.3 million for the three months ended September 30, 2012. For the nine months ended September 30, 2013, commission and fee income increased 6% to $26.4 million from $25.0 million for the nine months ended September 30, 2012. This increase in commission and fee income was a result of higher fee income related to commissionable products sold for other ancillary products and polices 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 $1.5 million during the three months ended September 30, 2013 from $1.6 million during the three months ended September 30, 2012. For the nine months ended September 30, 2013, investment income decreased to $4.0 million from $5.2 million during the nine months ended September 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. Such decreases were offset however by investment income earned during the three months ended September 30, 2013 from the recent investments in limited . . .

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