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FAC > SEC Filings for FAC > Form 10-Q on 6-May-2014All Recent SEC Filings

Show all filings for FIRST ACCEPTANCE CORP /DE/

Form 10-Q for FIRST ACCEPTANCE CORP /DE/


6-May-2014

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, 2013. 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, 2013 included in our Annual Report on Form 10-K for the year ended December 31, 2013.

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, 2013.

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 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 March 31, 2014, we leased and operated 355 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, select retail locations in highly competitive markets in Illinois and Texas offer non-standard personal automobile insurance serviced and underwritten by other third-party insurance carriers. In addition to our retail locations, we are able to complete the entire sales process over the phone via our call center or through the internet via our consumer-based website or mobile platform. We also sell our products through 10 retail locations operated by independent agents.


FIRST ACCEPTANCE CORPORATION 10-Q

At March 31, 2014, 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, 2013 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,
                                                   2014               2013
        Retail locations - beginning of period         360                369
        Opened                                          -                  -
        Closed                                          (5 )               (2 )

        Retail locations - end of period               355                367

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

                                    March 31,                  December 31,
                               2014          2013           2013          2012
            Alabama                 24            24             24            24
            Florida                 30            30             30            30
            Georgia                 60            60             60            60
            Illinois                61            62             61            63
            Indiana                 17            17             17            17
            Mississippi              7             7              7             7
            Missouri                11            11             11            11
            Ohio                    27            27             27            27
            Pennsylvania            16            16             16            16
            South Carolina          25            26             25            26
            Tennessee               19            19             19            19
            Texas                   58            68             63            69

            Total                  355           367            360           369


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 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, 2014 increased 4.7% compared with the same period in the prior year. The change in premiums earned in Illinois for the three months ended March 31, 2014 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
                                                    March 31,
                                               2014            2013
              Gross premiums earned:
              Georgia                       $    9,581      $    9,651
              Florida                            7,963           7,621
              Texas                              6,468           5,822
              Alabama                            5,253           5,048
              Ohio                               5,149           4,360
              Illinois                           4,729           5,317
              South Carolina                     4,008           3,659
              Tennessee                          3,186           3,040
              Pennsylvania                       2,146           2,144
              Indiana                            1,431           1,245
              Missouri                           1,138             887
              Mississippi                          750             657

              Total gross premiums earned       51,802          49,451
              Premiums ceded                       (54 )           (48 )

              Total net premiums earned     $   51,748      $   49,403


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, 2014, PIF was 4.4% higher than at the same date in the prior year.

                                                      Three Months Ended
                                                           March 31,
                                                      2014          2013
          Policies in force - beginning of period     154,183       147,500
          Net increase during period                   27,894        26,956

          Policies in force - end of period           182,077       174,456

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 (including depreciation and amortization) 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
                                           March 31,
                                      2014           2013
                         Loss            71.1 %        67.8 %
                         Expense         29.6 %        29.0 %

                         Combined       100.7 %        96.8 %


FIRST ACCEPTANCE CORPORATION 10-Q

Operational Initiatives

Since the beginning of 2012, we renewed our focus on improving the customer experience and value through several initiatives. Through April 2014, 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,

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,

continued expansion of our call center staff and capabilities to meet increasing consumer demand,

launch and expansion of complementary insurance products including term life, renters, third party homeowners and third party commercial automobile, and

development and trial implementation of a low-cost limited coverage automobile policy in select markets.

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, and

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


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 $133.2 million at March 31, 2014 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 March 31, 2014, we had gross unrealized gains of $6.6 million and gross unrealized losses of $1.5 million in our consolidated available-for-sale investment portfolio.

At March 31, 2014, 93% 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 $15.4 million at March 31, 2014 and represented 13% of our fixed maturity portfolio. At March 31, 2014, 65% of our CMOs were considered investment grade by nationally recognized statistical rating agencies and 48% were backed by agencies of the United States government.

The following table summarizes our investment securities at March 31, 2014 (in thousands).

                                                                 Gross             Gross
                                              Amortized        Unrealized        Unrealized          Fair
March 31, 2014                                   Cost            Gains             Losses            Value
U.S. government and agencies                  $   12,005      $        433      $        (13 )     $  12,425
State                                                697                37                -              734
Political subdivisions                               601                11                -              612
Revenue and assessment                            13,823               827                -           14,650
Corporate bonds                                   75,886             2,421            (1,511 )        76,796
Collateralized mortgage obligations:
Agency backed                                      6,994               341                -            7,335
Non-agency backed - residential                    4,013               559                -            4,572
Non-agency backed - commercial                     2,765               705                -            3,470
Redeemable preferred stock                         1,500               204                -            1,704

Total fixed maturities, available-for-sale       118,284             5,538            (1,524 )       122,298
Mutual funds, available-for-sale                   9,901             1,014                -           10,915

                                              $  128,185      $      6,552      $     (1,524 )     $ 133,213


FIRST ACCEPTANCE CORPORATION 10-Q

Three Months Ended March 31, 2014 Compared with the Three Months Ended March 31, 2013

Consolidated Results

Revenues for the three months ended March 31, 2014 increased 5% to $62.5 million from $59.3 million in the same period in the prior year. Income before income taxes for the three months ended March 31, 2014 was $0.5 million, compared with income before income taxes of $2.1 million for the three months ended March 31, 2013. Net income for the three months ended March 31, 2014 was $0.5 million, compared with net income of $2.0 million for the three months ended March 31, 2013. Basic and diluted net income per share were $0.01 for the three months ended March 31, 2014, compared with basic and diluted net income per share of $0.05 for the same period in the prior year.

Insurance Operations

Revenues from insurance operations were $62.5 million for the three months ended March 31, 2014, compared with $59.3 million for the three months ended March 31, 2013. Income before income taxes from insurance operations for the three months ended March 31, 2014 was $1.2 million, compared with income before income taxes from insurance operations of $2.9 million for the three months ended March 31, 2013.

Premiums Earned

Premiums earned increased by $2.3 million, or 5%, to $51.7 million for the three months ended March 31, 2014, from $49.4 million for the three months ended March 31, 2013. This improvement was primarily due to a higher percentage of full coverage policies sold and our recent pricing actions.

Commission and Fee Income

Commission and fee income increased 7% to $9.2 million for the three months ended March 31, 2014, from $8.6 million for the three months ended March 31, 2013. This increase in commission and fee income was a result of increase in sales of ancillary products and policies sold on behalf of third-party insurance carriers.

Investment Income

Investment income increased to $1.5 million during the three months ended March 31, 2014 from $1.3 million during the three months ended March 31, 2013. This increase in investment income was primarily a result of the income earned from the recent investments in limited partnership interests. At March 31, 2014 and 2013, the tax-equivalent book yields for our fixed maturities portfolio were 3.3% and 3.1%, respectively, with effective durations of 3.72 and 2.86 years, respectively. Considering the un-invested cash on deposit at banks, the adjusted effective duration was 3.20 at March 31, 2014.

Net realized gains on investments, available-for-sale

Net realized gains on investments, available-for-sale during the three months ended March 31, 2014 included $82 thousand in net realized gains on redemptions, and 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. 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 ratio was 71.1% for the three months ended March 31, 2014, compared with 67.8% for the three months ended March 31, 2013. We experienced favorable development related to prior periods of $2.9 million for the three months ended March 31, 2014, compared with favorable development of $2.4 million for the three months ended March 31, 2013. The favorable development for the three months ended March 31, 2014 was primarily related to the lower than expected bodily injury claims related to accident year 2013, partially offset by unfavorable loss and loss adjustment expense development on Florida personal injury protection claims.


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, 2014 and 2013 were 76.8% and 72.7%, respectively. The year-over-year increase in the loss ratio was primarily due to the impact of an increase in weather-related claims frequency in the collision and property damage coverages.

Operating Expenses

Insurance operating expenses increased 7% to $24.0 million for the three months ended March 31, 2014 from $22.3 million for the three months ended March 31, 2013. The increase was primarily attributable to additional salaries and benefit costs as a result of an increase in our sales headcount.

The expense ratio was 29.6% for the three months ended March 31, 2014, compared with 29.0% for the three months ended March 31, 2013. The year-over-year increase in the expense ratio was primarily due to planned increases in sales headcount and advertising costs.

Overall, the combined ratio increased to 100.7% for the three months ended March 31, 2014 from 96.8% for the three months ended March 31, 2013.

Provision for Income Taxes

The provision for income taxes was $36 thousand and $93 thousand for the three months ended March 31, 2014 and 2013, respectively. The provision for income taxes related primarily to current state income taxes for certain subsidiaries with taxable income. At March 31, 2014 and 2013, we established a valuation allowance to reduce deferred tax assets to the amount that is more likely than not to be realized. In assessing our ability to support the realizability of our deferred tax assets, we considered both positive and negative evidence. We placed greater weight on historical results than on our outlook for future profitability. The deferred tax valuation allowance may be adjusted in future periods if we determine that it is more likely than not that some portion or all of the deferred tax assets will be realized. In the event the deferred tax valuation allowance is adjusted, we would record an income tax benefit for the adjustment.

Real Estate and Corporate

Loss before income taxes from real estate and corporate operations for both the three months ended March 31, 2014 and 2013 was $0.7 million. Segment losses consist of other operating expenses not directly related to our insurance operations, interest expense and stock-based compensation offset by investment income on corporate invested assets. We incurred $0.4 million of interest expense during both the three months ended March 31, 2014 and 2013, respectively, related to the debentures issued in June 2007. For additional information, see "Liquidity and Capital Resources" in this report.

Liquidity and Capital Resources

Our primary sources of funds are premiums, fees and investment income from our insurance company subsidiaries and commissions and fee income from our non-insurance company subsidiaries. Our primary uses of funds are the payment of claims and operating expenses. Net cash provided by operating activities for the three months ended March 31, 2014 was $6.8 million, compared with net cash provided by operating activities of $8.0 million for the same period in the prior fiscal year. Net cash used in investing activities for the three months ended March 31, 2014 was $1.7 million, compared with net cash provided by investing activities of $4.1 million for the same period in the prior fiscal year. The three months ended March 31, 2014 included net additions to our . . .

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