FACO First Acceptance Corporation (QX)

First Acceptance Corporation (NYSE:FAC) today reported its financial results for the three and nine months ended September 30, 2016.

Operating Results

Loss before income taxes, for the three months ended September 30, 2016 was $0.3 million, compared with $4.5 million for the three months ended September 30, 2015. Net loss for the three months ended September 30, 2016 was $0.3 million, compared with $3.0 million for the three months ended September 30, 2015. Basic and diluted net loss per share were $0.01 for the three months ended September 30, 2016, compared with $0.07 for the same period in the prior year.

Loss before income taxes, for the nine months ended September 30, 2016 was $39.3 million, compared with $3.0 million for the nine months ended September 30, 2015. Net loss for the nine months ended September 30, 2016 was $25.7 million, compared with $2.2 million for the nine months ended September 30, 2015. Basic and diluted net loss per share were $0.63 for the nine months ended September 30, 2016, compared with $0.05 for the same period in the prior year.

For the three and nine months ended September 30, 2016, we recognized $0.1 million of favorable prior period loss development and $27.5 million of unfavorable prior period loss development, respectively. Additionally, the results for these periods were favorably impacted by net realized gains on investments of $4.9 million from the sales of fixed maturities that were sold to increase the statutory capital and surplus of our insurance company subsidiaries. The nine months ended September 30, 2016 also includes a $1.2 million gain on sale of foreclosed real estate. The three and nine months ended September 30, 2015 included $3.4 million and $3.6 million, respectively, of costs related to a litigation settlement.

Recently-appointed President and Chief Executive Officer, Ken Russell, commented, “There have been extreme challenges within the automobile insurance industry over the last year, particularly in the non-standard sector. My goal is to return the Company to profitability by combating these obstacles through a focus on appropriate pricing and risk segmentation of our product and efficient processing of claims.”

Loss Ratio. The loss ratio was 92.6% for the three months ended September 30, 2016, compared with 85.0% for the three months ended September 30, 2015. The loss ratio was 104.8% for the nine months ended September 30, 2016, compared with 81.2% for the nine months ended September 30, 2015. We experienced favorable development related to prior periods of $0.1 million and unfavorable development related to prior periods of $27.5 million for the three and nine months ended September 30, 2016, respectively. This unfavorable development for the nine months ended September 30, 2016 was the result of increased losses primarily from the 2015 accident year across all major coverages. The most significant causes of the development were a greater than usual emergence of reported claims and higher bodily injury severity.

Excluding prior period development, the loss ratio for the 2016 accident year is now estimated to be 92.7%. This elevated loss ratio is primarily due to higher than expected claim frequency across all major coverages and higher bodily injury severity. We believe that an increase in distracted driving, along with an increase in the number of miles driven by insured drivers as a result of lower gas prices and a favorable economy has been a contributing factor to an industry-wide increase in frequency. In response, the Company has continued to implement aggressive rate and underwriting actions as warranted at a state and coverage level and strengthen its claims organization and processes.  

Revenues. Revenues for the three months ended September 30, 2016 increased 17% to $102.1 million from $87.6 million in the same period in the prior year. Revenues for the nine months ended September 30, 2016 increased 24% to $301.8 million from $243.4 million in the same period in the prior year.

Premiums earned increased by $9.2 million, or 14%, to $76.7 million for the three months ended September 30, 2016, from $67.5 million for the three months ended September 30, 2015. For the nine months ended September 30, 2016 premiums earned increased by $36.6 million, or 19%, to $234.0 million from $197.4 million for the nine months ended September 30, 2015. This improvement was primarily due to higher average premiums resulting from our recent rate increases.

Commission and fee income increased by $0.3 million, or 1%, to $19.3 million for the three months ended September 30, 2016, from $19.0 million for the three months ended September 30, 2015. For the nine months ended September 30, 2016, commission and fee income increased by $15.8 million, or 37%, to $58.1 million from $42.3 million for the nine months ended September 30, 2015, primarily as a result of revenue from the former Titan retail locations acquired on July 1, 2015. Commission and fee income also increased as a result of higher fee income related to commissionable ancillary products sold through our previously-existing retail locations.

Expense Ratio. The expense ratio was 13.8% for the three months ended September 30, 2016, compared with 16.3% for the three months ended September 30, 2015. The expense ratio was 14.3% for the nine months ended September 30, 2016, compared with 18.9% for the nine months ended September 30, 2015. The year-over-year decrease in the expense ratio was primarily due to the increase in premiums earned which resulted in a lower percentage of fixed expenses in our retail operations (such as rent and base salary) and our ongoing efforts on cost containment. 

Combined Ratio. increased to 106.4% for the three months ended September 30, 2016 from 101.3% for the three months ended September 30, 2015. For the nine months ended September 30, 2016, the combined ratio increased to 119.1% from 100.1% for the nine months ended September 30, 2015.

Next Release of Financial Results

We currently plan to report our financial results for the three months and year ending December 31, 2016 on March 14, 2017.

About First Acceptance Corporation

We are principally a retailer, servicer and underwriter of non-standard personal automobile insurance based in Nashville, Tennessee. Our insurance operations generate revenues from selling non-standard personal automobile insurance policies and related products in 17 states. We conduct our servicing and underwriting operations in 14 states and are licensed as an insurer in 12 additional states. 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 or driving record and/or vehicle type.

At September 30, 2016, we leased and operated 369 retail locations and a call center staffed with employee-agents. Our employee-agents 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, retail locations in some markets offer non-standard personal automobile insurance serviced and underwritten by other third-party insurance carriers for which we receive a commission. 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. On a limited basis, we also sell our products through selected retail locations operated by independent agents. Additional information about First Acceptance Corporation can be found online at www.acceptance.com.

This press release contains forward-looking statements, including statements about the expected effects of the recently completed acquisition. These statements, which have been included in reliance on the “safe harbor” provisions of the federal securities laws, involve risks and uncertainties. Investors are hereby cautioned that these statements may be affected by important factors, including, among others, the factors set forth under the caption “Risk Factors” in Item 1A. of our Annual Report on Form 10-K for the year ended December 31, 2015 and in our other filings with the Securities and Exchange Commission. Actual operations and results may differ materially from the results discussed in the forward-looking statements. Except as required by law, we undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future developments or otherwise.

FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations and Comprehensive Loss
(unaudited)
		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2016				2015				2016				2015
Revenues:
Premiums earned		$	76,740			$	67,508			$	233,997			$	197,423
Commission and fee income			19,291				18,974				58,055				42,252
Investment income			1,187				1,144				3,795				3,695
Gain on sale of foreclosed real estate			—				—				1,237				—
Net realized gains (losses) on investments, available-for-  sale (includes $4,892 and $4,745, respectively, of  accumulated other comprehensive loss  reclassification for net unrealized gains in 2016)			4,897				(6	)			4,733				(13	)
			102,115				87,620				301,817				243,357
Costs and expenses:
Losses and loss adjustment expenses			71,079				57,367				245,262				160,304
Insurance operating expenses			28,940				29,309				88,901				78,039
Other operating expenses			369				295				932				881
Litigation settlement			—				3,406				—				3,645
Stock-based compensation			59				37				164				109
Depreciation			667				424				1,934				1,224
Amortization of identifiable intangibles assets			240				254				717				261
Interest expense			1,088				1,052				3,213				1,924
			102,442				92,144				341,123				246,387
Loss before income taxes			(327	)			(4,524	)			(39,306	)			(3,030	)
Provision (benefit) for income taxes			6				(1,506	)			(13,571	)			(813	)
Net loss		$	(333	)		$	(3,018	)		$	(25,735	)		$	(2,217	)
Net loss per share:
Basic and diluted		$	(0.01	)		$	(0.07	)		$	(0.63	)		$	(0.05	)
Number of shares used to calculate net loss per share:
Basic and diluted			41,096				41,041				41,074				41,026
Reconciliation of net loss to other comprehensive loss:
Net loss		$	(333	)		$	(3,018	)		$	(25,735	)		$	(2,217	)
Unrealized change in investments:
Unrealized change in investments arising during  the period, net of tax of $4, $(17), $1,621  and $(609), respectively			7				(32	)			3,009				(1,131	)
Reclassification of net realized gains on investments,  available-for-sale, included in net loss, net of tax  of $(1,712) and $(1,661), respectively, in 2016			(3,180	)			—				(3,084	)			—
Comprehensive loss		$	(3,506	)		$	(3,050	)		$	(25,810	)		$	(3,348	)
Detail of net realized gains (losses) on investments,  available-for-sale:
Net realized gains (losses) on sales and redemptions		$	4,897			$	(6	)		$	4,880			$	(13	)
Other-than-temporary impairment charges			—				—				(147	)			—
Net realized gains (losses) on investments, available-for-  sale		$	4,897			$	(6	)		$	4,733			$	(13	)

FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except per share data)
		September 30,				December 31,
		2016				2015
		(Unaudited)
ASSETS
Investments, available-for-sale at fair value (amortized cost of $119,780 and  $128,304, respectively)		$	122,646			$	131,582
Cash, cash equivalents, and restricted cash			143,371				115,587
Premiums, fees, and commissions receivable, net of allowance of $451 and  $454, respectively			75,770				69,881
Receivable for securities			20,026				—
Deferred tax assets, net			32,216				18,301
Other investments			9,653				11,256
Other assets			6,613				6,950
Property and equipment, net			5,292				5,141
Deferred acquisition costs			5,750				5,509
Goodwill			29,384				29,429
Identifiable intangible assets, net			7,814				8,491
TOTAL ASSETS		$	458,535			$	402,127
LIABILITIES AND STOCKHOLDERS’ EQUITY
Loss and loss adjustment expense reserves		$	164,700			$	122,071
Unearned premiums and fees			89,820				83,426
Debentures payable			40,290				40,256
Term loan from principal stockholder			29,773				29,753
Payable for securities			37,929				—
Accrued expenses			7,265				7,345
Other liabilities			10,693				15,606
Total liabilities			380,470				298,457
Stockholders’ equity:
Preferred stock, $.01 par value, 10,000 shares authorized			—				—
Common stock, $.01 par value, 75,000 shares authorized; 41,096 issued and outstanding			411				411
Additional paid-in capital			457,681				457,476
Accumulated other comprehensive income, net of tax of $22 and $62, respectively			3,416				3,491
Accumulated deficit			(383,443	)			(357,708	)
Total stockholders’ equity			78,065				103,670
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	458,535			$	402,127

FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
Supplemental Data
(Unaudited)
PREMIUMS EARNED BY STATE
		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2016				2015				2016				2015
Gross premiums earned:
Georgia		$	16,344			$	13,079			$	47,672			$	37,619
Florida			11,524				10,231				35,309				30,639
Texas			10,402				8,990				32,285				26,365
Ohio			7,568				6,688				23,258				19,814
Alabama			7,143				6,238				21,193				18,333
South Carolina			6,718				5,115				20,664				14,691
Illinois			4,982				6,030				16,238				18,213
Tennessee			4,842				4,486				14,830				12,141
Pennsylvania			2,406				2,303				7,399				6,923
Indiana			2,322				2,003				6,994				5,869
Missouri			1,307				1,451				4,693				4,315
Mississippi			965				852				3,003				2,540
Virginia			235				138				700				232
California			99				—				99				—
Total gross premiums earned			76,857				67,604				234,337				197,694
Premiums ceded to reinsurer			(117	)			(96	)			(340	)			(271	)
Total net premiums earned		$	76,740			$	67,508			$	233,997			$	197,423

COMBINED RATIOS (INSURANCE OPERATIONS)
		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2016				2015				2016				2015
Loss			92.6	%			85.0	%			104.8	%			81.2	%
Expense			13.8	%			16.3	%			14.3	%			18.9	%
Combined			106.4	%			101.3	%			119.1	%			100.1	%

NUMBER OF 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,
		2016				2015				2016				2015
Retail locations – beginning of period			409				359				440				356
Opened			—				—				4				5
Acquired			—				83				—				83
Closed			(40	)			(4	)			(75	)			(6	)
Retail locations – end of period			369				438				369				438

FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
Supplemental Data (continued)
(Unaudited)
RETAIL LOCATIONS BY STATE
		September 30,								June 30,								December 31,
		2016				2015				2016				2015				2015				2014
Alabama			23				24				24				24				24				24
Arizona			10				10				10				—				10				—
California			47				48				47				—				48				—
Florida			34				39				34				35				39				31
Georgia			53				60				60				60				60				60
Illinois			39				58				41				60				61				60
Indiana			16				17				17				17				17				17
Mississippi			6				7				7				7				7				7
Missouri			6				9				9				9				9				10
Nevada			4				4				4				—				4				—
New Mexico			5				5				5				—				5				—
Ohio			27				27				27				27				27				27
Pennsylvania			11				14				13				15				14				15
South Carolina			20				25				23				25				24				25
Tennessee			23				23				23				23				23				22
Texas			45				68				65				57				68				58
Total			369				438				409				359				440				356

INVESTOR RELATIONS CONTACT: 
Michael J. Bodayle 
615.844.2885