Item 1. Financial Statements
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(Unaudited)
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Investments, available-for-sale at fair value (amortized cost of $115,233 and
$117,902, respectively)
|
|
$
|
116,012
|
|
|
$
|
117,212
|
|
Cash, cash equivalents, and restricted cash
|
|
|
125,530
|
|
|
|
118,681
|
|
Premiums, fees, and commissions receivable, net of allowance of $378 and
$279, respectively
|
|
|
76,847
|
|
|
|
66,393
|
|
Deferred tax assets, net
|
|
|
34,784
|
|
|
|
35,641
|
|
Other investments
|
|
|
10,468
|
|
|
|
9,994
|
|
Other assets
|
|
|
5,753
|
|
|
|
6,078
|
|
Property and equipment, net
|
|
|
3,475
|
|
|
|
4,213
|
|
Deferred acquisition costs
|
|
|
5,332
|
|
|
|
4,852
|
|
Goodwill
|
|
|
29,384
|
|
|
|
29,384
|
|
Identifiable intangible assets, net
|
|
|
7,243
|
|
|
|
7,626
|
|
TOTAL ASSETS
|
|
$
|
414,828
|
|
|
$
|
400,074
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Loss and loss adjustment expense reserves
|
|
$
|
162,232
|
|
|
$
|
161,079
|
|
Unearned premiums and fees
|
|
|
91,644
|
|
|
|
78,861
|
|
Debentures payable
|
|
|
40,324
|
|
|
|
40,302
|
|
Term loan from principal stockholder
|
|
|
29,792
|
|
|
|
29,779
|
|
Accrued expenses
|
|
|
5,514
|
|
|
|
7,089
|
|
Other liabilities
|
|
|
11,701
|
|
|
|
10,476
|
|
Total liabilities
|
|
|
341,207
|
|
|
|
327,586
|
|
Stockholders’ equity:
|
|
|
|
|
|
|
|
|
Preferred stock, $.01 par value, 10,000 shares authorized
|
|
|
—
|
|
|
|
—
|
|
Common stock, $.01 par value, 75,000 shares authorized; 41,200 and 41,160 issued and outstanding, respectively
|
|
|
412
|
|
|
|
412
|
|
Additional paid-in capital
|
|
|
457,898
|
|
|
|
457,750
|
|
Accumulated other comprehensive income, net of tax of $(482) and $(1,110), respectively
|
|
|
2,474
|
|
|
|
1,316
|
|
Accumulated deficit
|
|
|
(387,163
|
)
|
|
|
(386,990
|
)
|
Total stockholders’ equity
|
|
|
73,621
|
|
|
|
72,488
|
|
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$
|
414,828
|
|
|
$
|
400,074
|
|
See notes to consolidated financial statements.
1
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(Unaudited)
(in thousands, except per share data)
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned
|
|
$
|
73,459
|
|
|
$
|
80,850
|
|
|
$
|
143,272
|
|
|
$
|
157,257
|
|
Commission and fee income
|
|
|
16,824
|
|
|
|
19,183
|
|
|
|
34,052
|
|
|
|
38,764
|
|
Investment income
|
|
|
1,123
|
|
|
|
1,646
|
|
|
|
2,156
|
|
|
|
2,608
|
|
Gain on sale of foreclosed real estate
|
|
|
—
|
|
|
|
1,237
|
|
|
|
—
|
|
|
|
1,237
|
|
Net realized gains (losses) on investments, available-for-sale
|
|
|
5
|
|
|
|
(162
|
)
|
|
|
—
|
|
|
|
(164
|
)
|
|
|
|
91,411
|
|
|
|
102,754
|
|
|
|
179,480
|
|
|
|
199,702
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and loss adjustment expenses
|
|
|
62,806
|
|
|
|
100,765
|
|
|
|
119,086
|
|
|
|
174,184
|
|
Insurance operating expenses
|
|
|
27,879
|
|
|
|
30,314
|
|
|
|
55,935
|
|
|
|
59,961
|
|
Other operating expenses
|
|
|
267
|
|
|
|
283
|
|
|
|
538
|
|
|
|
563
|
|
Stock-based compensation
|
|
|
74
|
|
|
|
68
|
|
|
|
113
|
|
|
|
105
|
|
Depreciation
|
|
|
540
|
|
|
|
616
|
|
|
|
1,086
|
|
|
|
1,267
|
|
Amortization of identifiable intangibles assets
|
|
|
195
|
|
|
|
239
|
|
|
|
398
|
|
|
|
477
|
|
Interest expense
|
|
|
1,130
|
|
|
|
1,076
|
|
|
|
2,228
|
|
|
|
2,126
|
|
|
|
|
92,891
|
|
|
|
133,361
|
|
|
|
179,384
|
|
|
|
238,683
|
|
(Loss) income before income taxes
|
|
|
(1,480
|
)
|
|
|
(30,607
|
)
|
|
|
96
|
|
|
|
(38,981
|
)
|
(Benefit) provision for income taxes
|
|
|
(577
|
)
|
|
|
(10,708
|
)
|
|
|
269
|
|
|
|
(13,577
|
)
|
Net loss
|
|
$
|
(903
|
)
|
|
$
|
(19,899
|
)
|
|
$
|
(173
|
)
|
|
$
|
(25,404
|
)
|
Net loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.02
|
)
|
|
$
|
(0.48
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.62
|
)
|
Diluted
|
|
$
|
(0.02
|
)
|
|
$
|
(0.48
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.62
|
)
|
Number of shares used to calculate net loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
41,164
|
|
|
|
41,064
|
|
|
|
41,162
|
|
|
|
41,062
|
|
Diluted
|
|
|
41,164
|
|
|
|
41,064
|
|
|
|
41,162
|
|
|
|
41,062
|
|
Reconciliation of net loss income to other comprehensive (loss) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(903
|
)
|
|
$
|
(19,899
|
)
|
|
$
|
(173
|
)
|
|
$
|
(25,404
|
)
|
Net unrealized change in investments, net of tax of $388,
$757, $628 and $1,668, respectively
|
|
|
720
|
|
|
|
1,407
|
|
|
|
1,158
|
|
|
|
3,098
|
|
Comprehensive (loss) income
|
|
$
|
(183
|
)
|
|
$
|
(18,492
|
)
|
|
$
|
985
|
|
|
$
|
(22,306
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Detail of net realized gains (losses) on investments, available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized gains (losses) on redemptions
|
|
$
|
5
|
|
|
$
|
(15
|
)
|
|
$
|
—
|
|
|
$
|
(17
|
)
|
Other-than-temporary impairment charges
|
|
|
—
|
|
|
|
(147
|
)
|
|
|
—
|
|
|
|
(147
|
)
|
Net realized gains (losses) on investments, available-for-sale
|
|
$
|
5
|
|
|
$
|
(162
|
)
|
|
$
|
-
|
|
|
$
|
(164
|
)
|
See notes to consolidated financial statements.
2
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in thousands)
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(173
|
)
|
|
$
|
(25,404
|
)
|
Adjustments to reconcile net loss to cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
1,086
|
|
|
|
1,267
|
|
Amortization of identifiable intangibles assets
|
|
|
398
|
|
|
|
477
|
|
Stock-based compensation
|
|
|
113
|
|
|
|
105
|
|
Deferred income taxes
|
|
|
229
|
|
|
|
(13,736
|
)
|
Other-than-temporary impairment on investments, available-for-sale
|
|
|
—
|
|
|
|
147
|
|
Net realized losses on redemptions of investments
|
|
|
—
|
|
|
|
17
|
|
Investment income from other investments
|
|
|
(343
|
)
|
|
|
(355
|
)
|
Gain on sale of foreclosed real estate, net
|
|
|
—
|
|
|
|
(1,237
|
)
|
Other
|
|
|
118
|
|
|
|
61
|
|
Change in:
|
|
|
|
|
|
|
|
|
Premiums, fees, and commission receivable
|
|
|
(10,355
|
)
|
|
|
(9,230
|
)
|
Deferred acquisition costs
|
|
|
(480
|
)
|
|
|
(183
|
)
|
Loss and loss adjustment expense reserves
|
|
|
1,153
|
|
|
|
43,941
|
|
Unearned premiums and fees
|
|
|
12,783
|
|
|
|
11,920
|
|
Other liabilities
|
|
|
1,225
|
|
|
|
1,347
|
|
Other
|
|
|
(1,221
|
)
|
|
|
1,652
|
|
Net cash provided by operating activities
|
|
|
4,533
|
|
|
|
10,789
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchases of investments, available-for-sale
|
|
|
(3,519
|
)
|
|
|
(156
|
)
|
Maturities and redemptions of investments, available-for-sale
|
|
|
5,977
|
|
|
|
6,968
|
|
Purchases of other investments
|
|
|
(133
|
)
|
|
|
(725
|
)
|
Distributions from other investments
|
|
|
319
|
|
|
|
2,190
|
|
Capital expenditures
|
|
|
(348
|
)
|
|
|
(1,983
|
)
|
Proceeds from sale of foreclosed real estate, net
|
|
|
—
|
|
|
|
1,769
|
|
Acquisition of identifiable intangible assets
|
|
|
(15
|
)
|
|
|
(40
|
)
|
Net cash provided by investing activities
|
|
|
2,281
|
|
|
|
8,023
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Net proceeds from issuance of common stock
|
|
|
35
|
|
|
|
40
|
|
Net cash provided by financing activities
|
|
|
35
|
|
|
|
40
|
|
Net change in cash, cash equivalents, and restricted cash
|
|
|
6,849
|
|
|
|
18,852
|
|
Cash, cash equivalents, and restricted cash, beginning of period
|
|
|
118,681
|
|
|
|
115,587
|
|
Cash, cash equivalents, and restricted cash, end of period
|
|
$
|
125,530
|
|
|
$
|
134,439
|
|
See notes to consolidated financial statements.
3
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. General
The consolidated financial statements of First Acceptance Corporation (the “Company”) included herein have been prepared without audit pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, certain information and disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been omitted. In the opinion of management, the consolidated financial statements reflect all adjustments (consisting of normal recurring adjustments) necessary for a fair statement of the interim periods.
The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the full year. These consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements included in its Annual Report on Form 10-K for the year ended December 31, 2016.
Cash, Cash Equivalents, and Restricted Cash
Cash, cash equivalents, and restricted cash consist of bank demand deposits and highly-liquid investments. All investments with maturities of three months or less at the date of purchase are considered cash equivalents. At June 30, 2017 and December 31, 2016, the Company had restricted cash equivalents of $17.3 million and $18.6 million, respectively.
2. Fair Value
Fair value is the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements are generally based upon observable and unobservable inputs. Observable inputs are based on market data from independent sources, while unobservable inputs reflect the Company’s view of market assumptions in the absence of observable market information. All assets and liabilities that are carried at fair value are classified and disclosed in one of the following categories:
|
Level 1 -
|
Quoted prices in active markets for identical assets or liabilities.
|
|
L
evel 2 -
|
Quoted market prices for similar assets or liabilities in active markets; quoted prices by independent pricing services for identical or similar assets or liabilities in markets that are not active; and valuations, using models or other valuation techniques, that use observable market data. All significant inputs are observable, or derived from observable information in the marketplace, or are supported by observable levels at which transactions are executed in the marketplace.
|
|
Level 3 -
|
Instruments that use non-binding broker quotes or model driven valuations that do not have observable market data.
|
NAV - Calculated net asset value (“NAV”) based on an ownership interest to which a proportionate share of net assets is attributed.
The Company considers the valuation methods used in both its identifiable intangible assets initial measurement and impairment tests as Level 3. To determine the fair value of acquired trademarks and trade names, the Company uses the relief-from-royalty method, which requires the Company to estimate the future revenue for the related brands, the appropriate royalty rate and the weighted average cost of capital. To determine the fair value of the acquired policy renewal rights and customer relationships, the Company uses an “excess earnings” method that relies on projected future net cash flows and includes key assumptions for the customer retention and renewal rates. The data used in these methods is not observable in the market.
4
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Fair Value of
Financial Instruments
The carrying values and fair values of certain financial instruments were as follows (in thousands).
|
|
June 30, 2017
|
|
|
December 31, 2016
|
|
|
|
Carrying
|
|
|
Fair
|
|
|
Carrying
|
|
|
Fair
|
|
|
|
Value
|
|
|
Value
|
|
|
Value
|
|
|
Value
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments, available-for-sale
|
|
$
|
116,012
|
|
|
$
|
116,012
|
|
|
$
|
117,212
|
|
|
$
|
117,212
|
|
Other investments
|
|
|
10,468
|
|
|
|
10,468
|
|
|
|
9,994
|
|
|
|
9,994
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debentures payable
|
|
|
40,324
|
|
|
|
17,266
|
|
|
|
40,302
|
|
|
|
11,488
|
|
Term loan from principal stockholder
|
|
|
29,792
|
|
|
|
22,126
|
|
|
|
29,779
|
|
|
|
15,000
|
|
The fair values as presented represent the Company’s best estimates and may not be substantiated by comparisons to independent markets. The fair value of the debentures payable and the term loan from principal shareholder are categorized as Level 3, since they were based on current market rates offered for debt with similar risks and maturities, an unobservable input categorized as Level 3. Carrying values of certain financial instruments, such as cash and cash equivalents and premiums, fees, and commissions receivable, approximate fair value due to the short-term nature of the instruments and are not required to be disclosed. Therefore, the aggregate of the fair values presented in the preceding table does not purport to represent the Company’s underlying value.
The following tables present the fair-value measurements for each major category of assets that are measured on a recurring basis (in thousands). Other investments are carried at net asset value which approximates fair value.
|
|
|
|
|
|
Fair Value Measurements Using
|
|
|
|
|
|
|
|
Quoted Prices
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active
|
|
|
Other
|
|
|
Significant
|
|
|
Proportionate
|
|
|
|
|
|
|
|
Markets for
|
|
|
Observable
|
|
|
Unobservable
|
|
|
Share of
|
|
|
|
|
|
|
|
Identical Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
Net Assets
|
|
June 30, 2017
|
|
Total
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
(NAV)
|
|
Fixed maturities, available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agencies
|
|
$
|
19,499
|
|
|
$
|
19,499
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Political subdivisions
|
|
|
4,183
|
|
|
|
—
|
|
|
|
4,183
|
|
|
|
—
|
|
|
|
—
|
|
Revenue and assessment
|
|
|
5,463
|
|
|
|
—
|
|
|
|
5,463
|
|
|
|
—
|
|
|
|
—
|
|
Corporate bonds
|
|
|
44,829
|
|
|
|
—
|
|
|
|
44,829
|
|
|
|
—
|
|
|
|
—
|
|
Collateralized mortgage obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency backed
|
|
|
21,610
|
|
|
|
—
|
|
|
|
21,610
|
|
|
|
—
|
|
|
|
—
|
|
Non-agency backed – residential
|
|
|
2,765
|
|
|
|
—
|
|
|
|
2,765
|
|
|
|
—
|
|
|
|
—
|
|
Non-agency backed – commercial
|
|
|
1,710
|
|
|
|
—
|
|
|
|
1,710
|
|
|
|
—
|
|
|
|
—
|
|
Total fixed maturities, available-for-sale
|
|
|
100,059
|
|
|
|
19,499
|
|
|
|
80,560
|
|
|
|
—
|
|
|
|
—
|
|
Preferred stocks, available-for-sale
|
|
|
3,266
|
|
|
|
3,266
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Mutual funds, available-for-sale
|
|
|
12,687
|
|
|
|
12,687
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total investments, available-for-sale
|
|
|
116,012
|
|
|
|
35,452
|
|
|
|
80,560
|
|
|
|
—
|
|
|
|
—
|
|
Other investments
|
|
|
10,468
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5,252
|
|
|
|
5,216
|
|
Cash, cash equivalents, and restricted cash
|
|
|
125,530
|
|
|
|
125,530
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
252,010
|
|
|
$
|
160,982
|
|
|
$
|
80,560
|
|
|
$
|
5,252
|
|
|
$
|
5,216
|
|
5
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
|
|
|
|
|
|
Fair Value Measurements Using
|
|
|
|
|
|
|
|
Quoted Prices
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active
|
|
|
Other
|
|
|
Significant
|
|
|
Proportionate
|
|
|
|
|
|
|
|
Markets for
|
|
|
Observable
|
|
|
Unobservable
|
|
|
Share of
|
|
|
|
|
|
|
|
Identical Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
Net Assets
|
|
December 31, 2016
|
|
Total
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
(NAV)
|
|
Fixed maturities, available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agencies
|
|
$
|
18,951
|
|
|
$
|
18,951
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Political subdivisions
|
|
|
4,165
|
|
|
|
—
|
|
|
|
4,165
|
|
|
|
—
|
|
|
|
—
|
|
Revenue and assessment
|
|
|
5,683
|
|
|
|
—
|
|
|
|
5,683
|
|
|
|
—
|
|
|
|
—
|
|
Corporate bonds
|
|
|
45,540
|
|
|
|
—
|
|
|
|
45,540
|
|
|
|
—
|
|
|
|
—
|
|
Collateralized mortgage obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency backed
|
|
|
22,422
|
|
|
|
—
|
|
|
|
22,422
|
|
|
|
—
|
|
|
|
—
|
|
Non-agency backed – residential
|
|
|
2,933
|
|
|
|
—
|
|
|
|
2,933
|
|
|
|
—
|
|
|
|
—
|
|
Non-agency backed – commercial
|
|
|
1,895
|
|
|
|
—
|
|
|
|
1,895
|
|
|
|
—
|
|
|
|
—
|
|
Total fixed maturities, available-for-sale
|
|
|
101,589
|
|
|
|
18,951
|
|
|
|
82,638
|
|
|
|
—
|
|
|
|
—
|
|
Preferred stocks, available-for-sale
|
|
|
3,112
|
|
|
|
3,112
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Mutual funds, available-for-sale
|
|
|
12,511
|
|
|
|
12,511
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total investments, available-for-sale
|
|
|
117,212
|
|
|
|
34,574
|
|
|
|
82,638
|
|
|
|
—
|
|
|
|
—
|
|
Other investment
|
|
|
9,994
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,858
|
|
|
|
5,136
|
|
Cash, cash equivalents, and restricted cash
|
|
|
118,681
|
|
|
|
118,681
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
245,887
|
|
|
$
|
153,255
|
|
|
$
|
82,638
|
|
|
$
|
4,858
|
|
|
$
|
5,136
|
|
The fair values of the Company’s investments are determined by management after taking into consideration available sources of data. All of the portfolio valuations classified as Level 1 or Level 2 in the above tables are priced exclusively by utilizing the services of independent pricing sources using observable market data. The Level 2 classified security valuations are obtained from a single independent pricing service. The Level 3 classified security in the table above consists of an investment in the common stock of a real estate investment trust for which fair value has been determined using a model driven valuation that does not have observable market data. There were no transfers between Level 1 and Level 2 for the three and six months ended June 30, 2017 and 2016. The Company’s policy is to recognize transfers between levels at the end of the reporting period based on specific identification. The Company has not made any adjustments to the prices obtained from the independent pricing sources.
The Company has reviewed the pricing techniques and methodologies of the independent pricing service for Level 2 investments and believes that its policies adequately consider market activity, either based on specific transactions for the security valued or based on modeling of securities with similar credit quality, duration, yield and structure that were recently traded. The Company monitored security-specific valuation trends and has made inquiries with the pricing service about material changes or the absence of expected changes to understand the underlying factors and inputs and to validate the reasonableness of the pricing. Likewise, the Company reviews the Level 3 valuation model to understand the underlying factors and inputs and to validate the reasonableness of the pricing.
6
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The following table represents the quantitativ
e disclosure for the asset classified as Level 3 during the
six months ended June 30, 2017
(in thousands).
|
|
Fair Value
|
|
|
|
Measurements Using
|
|
|
|
Significant Unobservable
|
|
|
|
Inputs (Level 3)
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
|
at Fair Value
|
|
Balance at December 31, 2016
|
|
$
|
4,858
|
|
Gains included in net loss
|
|
|
—
|
|
Gains included in comprehensive income (loss)
|
|
|
317
|
|
Investments and capital calls
|
|
|
77
|
|
Distributions received
|
|
|
—
|
|
Transfers into and out of Level 3
|
|
|
—
|
|
Balance at June 30, 2017
|
|
$
|
5,252
|
|
3. Investments
Investments, Available-for-Sale
The following tables summarize the Company’s investment securities (in thousands).
|
|
|
|
Gross
|
|
Gross
|
|
|
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
Fair
|
June 30, 2017
|
|
Cost
|
|
Gains
|
|
Losses
|
|
Value
|
U.S. government and agencies
|
|
$ 19,641
|
|
$ 96
|
|
$ (238)
|
|
$ 19,499
|
Political subdivisions
|
|
4,173
|
|
10
|
|
—
|
|
4,183
|
Revenue and assessment
|
|
5,255
|
|
208
|
|
—
|
|
5,463
|
Corporate bonds
|
|
45,908
|
|
67
|
|
(1,146)
|
|
44,829
|
Collateralized mortgage obligations:
|
|
|
|
|
|
|
|
|
Agency backed
|
|
22,149
|
|
68
|
|
(607)
|
|
21,610
|
Non-agency backed – residential
|
|
2,213
|
|
560
|
|
(8)
|
|
2,765
|
Non-agency backed – commercial
|
|
1,056
|
|
654
|
|
—
|
|
1,710
|
Total fixed maturities, available-for-sale
|
|
100,395
|
|
1,663
|
|
(1,999)
|
|
100,059
|
Preferred stocks, available-for-sale
|
|
3,025
|
|
281
|
|
(40)
|
|
3,266
|
Mutual funds, available-for-sale
|
|
11,813
|
|
874
|
|
|
|
12,687
|
|
|
$ 115,233
|
|
$ 2,818
|
|
$ (2,039)
|
|
$ 116,012
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
December 31, 2016
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
U.S. government and agencies
|
|
$
|
19,142
|
|
|
$
|
112
|
|
|
$
|
(303
|
)
|
|
$
|
18,951
|
|
Political subdivisions
|
|
|
4,233
|
|
|
|
—
|
|
|
|
(68
|
)
|
|
|
4,165
|
|
Revenue and assessment
|
|
|
5,539
|
|
|
|
185
|
|
|
|
(41
|
)
|
|
|
5,683
|
|
Corporate bonds
|
|
|
47,238
|
|
|
|
107
|
|
|
|
(1,805
|
)
|
|
|
45,540
|
|
Collateralized mortgage obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency backed
|
|
|
23,093
|
|
|
|
73
|
|
|
|
(744
|
)
|
|
|
22,422
|
|
Non-agency backed – residential
|
|
|
2,411
|
|
|
|
529
|
|
|
|
(7
|
)
|
|
|
2,933
|
|
Non-agency backed – commercial
|
|
|
1,408
|
|
|
|
487
|
|
|
|
—
|
|
|
|
1,895
|
|
Total fixed maturities, available-for-sale
|
|
|
103,064
|
|
|
|
1,493
|
|
|
|
(2,968
|
)
|
|
|
101,589
|
|
Preferred stocks, available-for-sale
|
|
|
3,025
|
|
|
|
198
|
|
|
|
(111
|
)
|
|
|
3,112
|
|
Mutual funds, available-for-sale
|
|
|
11,813
|
|
|
|
698
|
|
|
|
—
|
|
|
|
12,511
|
|
|
|
$
|
117,902
|
|
|
$
|
2,389
|
|
|
$
|
(3,079
|
)
|
|
$
|
117,212
|
|
7
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The following table sets forth the scheduled maturities of the Company’s fixed maturity securities based on their fair values (in thousands).
Actual maturities may differ from contractual maturities because certain securities may be called or prepaid by the issuers.
|
|
|
|
|
|
|
|
|
|
Securities
|
|
|
|
|
|
|
|
Securities
|
|
|
Securities
|
|
|
with No
|
|
|
All
|
|
|
|
with
|
|
|
with
|
|
|
Unrealized
|
|
|
Fixed
|
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Gains or
|
|
|
Maturity
|
|
June 30, 2017
|
|
Gains
|
|
|
Losses
|
|
|
Losses
|
|
|
Securities
|
|
One year or less
|
|
$
|
1,779
|
|
|
$
|
3,574
|
|
|
$
|
—
|
|
|
$
|
5,353
|
|
After one through five years
|
|
|
12,802
|
|
|
|
17,345
|
|
|
|
—
|
|
|
|
30,147
|
|
After five through ten years
|
|
|
2,844
|
|
|
|
30,879
|
|
|
|
—
|
|
|
|
33,723
|
|
After ten years
|
|
|
4,751
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,751
|
|
No single maturity date
|
|
|
4,818
|
|
|
|
21,267
|
|
|
|
—
|
|
|
|
26,085
|
|
|
|
$
|
26,994
|
|
|
$
|
73,065
|
|
|
$
|
—
|
|
|
$
|
100,059
|
|
The following table reflects the number of fixed maturity securities with gross unrealized gains and losses. Gross unrealized losses are further segregated by the length of time that individual securities have been in a continuous unrealized loss position.
|
|
Gross Unrealized Losses
|
|
|
|
|
|
|
|
Less than
|
|
|
Greater
|
|
|
Gross
|
|
|
|
or equal to
|
|
|
than 12
|
|
|
Unrealized
|
|
At:
|
|
12 months
|
|
|
months
|
|
|
Gains
|
|
June 30, 2017
|
|
|
36
|
|
|
|
1
|
|
|
|
39
|
|
December 31, 2016
|
|
|
37
|
|
|
|
—
|
|
|
|
40
|
|
The following table reflects the fair value and gross unrealized losses of those fixed maturity securities in a continuous unrealized loss position for greater than 12 months at June 30, 2017. There were no securities meeting these criteria at December 31, 2016. Gross unrealized losses are further segregated by the percentage of amortized cost (in thousands, except number of securities).
|
|
Number
|
|
|
|
|
|
|
Gross
|
|
Gross Unrealized Losses
|
|
of
|
|
|
Fair
|
|
|
Unrealized
|
|
at June 30, 2017:
|
|
Securities
|
|
|
Value
|
|
|
Losses
|
|
Less than or equal to 10%
|
|
|
1
|
|
|
$
|
108
|
|
|
$
|
(4
|
)
|
Greater than 10%
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
1
|
|
|
$
|
108
|
|
|
$
|
(4
|
)
|
8
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The following tables set forth the amount of gross unrealized losses by current severity (as compared to amortized cost) and length of time that individual securities have been in a continuous unrealized loss position (in thousands).
|
|
Fair Value of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities with
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Length of
|
|
Gross
|
|
|
Gross
|
|
|
Severity of Gross Unrealized Losses
|
|
Gross Unrealized Losses
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Less
|
|
|
5% to
|
|
|
Greater
|
|
at June 30, 2017:
|
|
Losses
|
|
|
Losses
|
|
|
than 5%
|
|
|
|
10%
|
|
|
than 10%
|
|
Less than or equal to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months
|
|
$
|
12,453
|
|
|
$
|
(39
|
)
|
|
$
|
(39
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
Six months
|
|
|
299
|
|
|
|
(3
|
)
|
|
|
(3
|
)
|
|
|
—
|
|
|
|
—
|
|
Nine months
|
|
|
34,834
|
|
|
|
(983
|
)
|
|
|
(983
|
)
|
|
|
—
|
|
|
|
—
|
|
Twelve months
|
|
|
27,008
|
|
|
|
(1,010
|
)
|
|
|
(839
|
)
|
|
|
(171
|
)
|
|
|
—
|
|
Greater than twelve months
|
|
|
108
|
|
|
|
(4
|
)
|
|
|
(4
|
)
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
74,702
|
|
|
$
|
(2,039
|
)
|
|
$
|
(1,868
|
)
|
|
$
|
(171
|
)
|
|
$
|
—
|
|
|
|
Fair Value of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities with
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Length of
|
|
Gross
|
|
|
Gross
|
|
|
Severity of Gross Unrealized Losses
|
|
Gross Unrealized Losses
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Less
|
|
|
5% to
|
|
|
Greater
|
|
at December 31, 2016:
|
|
Losses
|
|
|
Losses
|
|
|
than 5%
|
|
|
|
10%
|
|
|
than 10%
|
|
Less than or equal to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months
|
|
$
|
58,550
|
|
|
$
|
(1,886
|
)
|
|
$
|
(1,461
|
)
|
|
$
|
(425
|
)
|
|
$
|
—
|
|
Six months
|
|
|
27,193
|
|
|
|
(1,186
|
)
|
|
|
(232
|
)
|
|
|
(954
|
)
|
|
|
—
|
|
Nine months
|
|
|
152
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Twelve months
|
|
|
105
|
|
|
|
(7
|
)
|
|
|
—
|
|
|
|
(7
|
)
|
|
|
—
|
|
Greater than twelve months
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
86,000
|
|
|
$
|
(3,079
|
)
|
|
$
|
(1,693
|
)
|
|
$
|
(1,386
|
)
|
|
$
|
-
|
|
Other-Than-Temporary Impairment
For the six months ended June 30, 2017, the Company did not recognize any OTTI charges in net income (loss).
The Company believes that the securities having unrealized losses at June 30, 2017 were not other-than-temporarily impaired. The Company also does not intend to sell any of these securities and it is more likely than not that the Company will not be required to sell any of these securities before the recovery of their amortized cost basis.
For the six months ended June 30, 2016, the Company recognized OTTI charges in net income (loss) of $147 thousand related to one mutual fund.
Other Investments
Other investments consist of the common stock of a real estate investment trust and limited partnership interests in three funds that invest in (i) commercial real estate and secured commercial real estate loans acquired from financial intuitions, (ii) undervalued international publicly-traded equities and (iii)a pre-identified pool of select buyout private equity funds. These investments have redemption and transfer restrictions. The Company does not intend to sell these investments, and it is more likely than not that the Company will not be required to sell them before the expiration of such restrictions.
At June 30, 2017, the Company had unfunded commitments to invest $2.5 million into two of these investments.
Restrictions
At June 30, 2017, fixed maturities and cash equivalents with a fair value and amortized cost of $6.4 million were on deposit with various insurance departments as a requirement of doing business in those states. Cash equivalents with a fair value and amortized cost of $17.2 million were on deposit with another insurance company as collateral for an assumed reinsurance contract.
9
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Investment Income and Net Realized Gains and Losses
The major categories of investment income follow (in thousands).
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Fixed maturities, available-for-sale
|
|
$
|
616
|
|
|
$
|
981
|
|
|
$
|
1,239
|
|
|
$
|
1,951
|
|
Mutual funds, available-for-sale
|
|
|
158
|
|
|
|
160
|
|
|
|
320
|
|
|
|
366
|
|
Preferred stocks
|
|
|
44
|
|
|
|
25
|
|
|
|
89
|
|
|
|
49
|
|
Other investments
|
|
|
194
|
|
|
|
525
|
|
|
|
343
|
|
|
|
355
|
|
Cash and cash equivalents
|
|
|
217
|
|
|
|
66
|
|
|
|
376
|
|
|
|
107
|
|
Other
|
|
|
17
|
|
|
|
14
|
|
|
|
31
|
|
|
|
27
|
|
Investment expenses
|
|
|
(123
|
)
|
|
|
(125
|
)
|
|
|
(242
|
)
|
|
|
(247
|
)
|
|
|
$
|
1,123
|
|
|
$
|
1,646
|
|
|
$
|
2,156
|
|
|
$
|
2,608
|
|
The components of net realized gains (losses) on investments, available-for-sale at fair value follow (in thousands).
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Gains
|
|
$
|
8
|
|
|
$
|
—
|
|
|
$
|
8
|
|
|
$
|
—
|
|
Losses
|
|
|
(3
|
)
|
|
|
(15
|
)
|
|
|
(8
|
)
|
|
|
(17
|
)
|
Other-than-temporary impairment
|
|
|
—
|
|
|
|
(147
|
)
|
|
|
—
|
|
|
|
(147
|
)
|
|
|
$
|
5
|
|
|
$
|
(162
|
)
|
|
$
|
-
|
|
|
$
|
(164
|
)
|
Realized gains and losses on sales and redemptions are computed based on specific identification. The non-credit related portion of other-than-temporary impairment (“OTTI”) is included in other comprehensive loss. The amounts of non-credit OTTI for securities still owned was $1.1 million at both June 30, 2017 and December 31, 2016.
4. Net Loss Per Share
The following table sets forth the computation of basic and diluted net loss per share (in thousands, except per share data).
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Net loss
|
|
$
|
(903
|
)
|
|
$
|
(19,899
|
)
|
|
$
|
(173
|
)
|
|
$
|
(25,404
|
)
|
Weighted average common basic shares
|
|
|
41,164
|
|
|
|
41,064
|
|
|
|
41,162
|
|
|
|
41,062
|
|
Effect of dilutive securities
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Weighted average common dilutive shares
|
|
|
41,164
|
|
|
|
41,064
|
|
|
|
41,162
|
|
|
|
41,062
|
|
Basic and diluted net loss per share
|
|
$
|
(0.02
|
)
|
|
$
|
(0.48
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.62
|
)
|
On May 9, 2017, the Compensation Committee of the Board of Directors of the Company awarded 500 thousand restricted stock units to an executive officer. Such restricted stock units will vest, and an equal number of shares of common stock will be deliverable upon the third anniversary of the date of grant. Compensation expense related to the units of $590 thousand was calculated based upon the closing market price of the common stock on the date of grant ($1.18) and is recorded on a straight-line basis over the vesting period.
For the three and six months ended June 30, 2017, the computation of diluted net loss per share did not include 576 thousand restricted stock units having dilutive effects of 37 and 39 thousand shares, respectively, since their inclusion would have been anti-dilutive. Options to purchase 120 thousand shares and 93 thousand restricted stock units were not included in the computation of diluted net income per share for these periods, since the exercise price of the stock options was in excess of the average stock price for this period and the inclusion of the restricted stock units would have been anti-dilutive.
10
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
For the
three and six months
ended June 30, 2016
, the computation of diluted net loss per share did not include options to purchase 825 thousand shares and
270
thousand restricted stock units, a dilutive effect of
180
thousand shares
and 237 thousand shares, respectively,
since their
inclusion would have been anti-dilutive. Options to purchase
24
0 thousand shares were not included in the computation of diluted net loss per share for the
three and six months ended June 30, 2016
, since their exercise price was in excess of the aver
age st
ock price for these
period
s
.
5. Losses and Loss Adjustment Expenses Incurred and Paid
Information regarding the reserve for unpaid losses and loss adjustment expenses (“LAE”) is as follows (in thousands).
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Liability for unpaid losses and LAE at beginning of period, gross
|
|
$
|
156,410
|
|
|
$
|
132,650
|
|
|
$
|
161,079
|
|
|
$
|
122,071
|
|
Reinsurance balances receivable
|
|
|
(763
|
)
|
|
|
(491
|
)
|
|
|
(769
|
)
|
|
|
(464
|
)
|
Liability for unpaid losses and LAE at beginning of period, net
|
|
|
155,647
|
|
|
|
132,159
|
|
|
|
160,310
|
|
|
|
121,607
|
|
Add: Provision for losses and LAE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current period
|
|
|
62,599
|
|
|
|
74,974
|
|
|
|
119,665
|
|
|
|
143,173
|
|
Prior periods
|
|
|
207
|
|
|
|
25,791
|
|
|
|
(579
|
)
|
|
|
31,011
|
|
Net losses and LAE incurred
|
|
|
62,806
|
|
|
|
100,765
|
|
|
|
119,086
|
|
|
|
174,184
|
|
Less: Losses and LAE paid:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current period
|
|
|
30,182
|
|
|
|
40,345
|
|
|
|
46,319
|
|
|
|
58,750
|
|
Prior periods
|
|
|
26,833
|
|
|
|
27,241
|
|
|
|
71,639
|
|
|
|
71,703
|
|
Net losses and LAE paid
|
|
|
57,015
|
|
|
|
67,586
|
|
|
|
117,958
|
|
|
|
130,453
|
|
Liability for unpaid losses and LAE at end of period, net
|
|
|
161,438
|
|
|
|
165,338
|
|
|
|
161,438
|
|
|
|
165,338
|
|
Reinsurance balances receivable
|
|
|
794
|
|
|
|
674
|
|
|
|
794
|
|
|
|
674
|
|
Liability for unpaid losses and LAE at end of period, gross
|
|
$
|
162,232
|
|
|
$
|
166,012
|
|
|
$
|
162,232
|
|
|
$
|
166,012
|
|
The development for the three and six months ended June 30, 2017 was the net result of favorable LAE development related to bodily injury claims over multiple prior accident periods, offset by unfavorable development on losses related to bodily injury severity related to the 2016 and 2017 accident years.
The unfavorable development for the three and six months ended June 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.
.
11
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
6
. Income Taxe
s
The (benefit) provision for income taxes consisted of the following (in thousands).
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Federal:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
(92
|
)
|
|
$
|
—
|
|
|
$
|
30
|
|
|
$
|
—
|
|
Deferred
|
|
|
(398
|
)
|
|
|
(10,665
|
)
|
|
|
229
|
|
|
|
(13,627
|
)
|
|
|
|
(490
|
)
|
|
|
(10,665
|
)
|
|
|
259
|
|
|
|
(13,627
|
)
|
State:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
(70
|
)
|
|
|
60
|
|
|
|
10
|
|
|
|
159
|
|
Deferred
|
|
|
(17
|
)
|
|
|
(103
|
)
|
|
|
—
|
|
|
|
(109
|
)
|
|
|
|
(87
|
)
|
|
|
(43
|
)
|
|
|
10
|
|
|
|
50
|
|
|
|
$
|
(577
|
)
|
|
$
|
(10,708
|
)
|
|
$
|
269
|
|
|
$
|
(13,577
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The (benefit) provision for income taxes differs from the amounts computed by applying the statutory federal corporate tax rate of 35% to loss before income taxes as a result of the following (in thousands).
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
(Benefit) provision for income taxes at statutory rate
|
|
$
|
(518
|
)
|
|
$
|
(10,712
|
)
|
|
$
|
34
|
|
|
$
|
(13,643
|
)
|
Tax effect of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax-exempt investment income
|
|
|
—
|
|
|
|
(10
|
)
|
|
|
—
|
|
|
|
(20
|
)
|
Stock option expirations
|
|
|
—
|
|
|
|
13
|
|
|
|
229
|
|
|
|
17
|
|
State income taxes, net of federal income tax benefit
and state valuation allowance
|
|
|
(63
|
)
|
|
|
(65
|
)
|
|
|
6
|
|
|
|
(6
|
)
|
Other
|
|
|
4
|
|
|
|
66
|
|
|
|
—
|
|
|
|
75
|
|
|
|
$
|
(577
|
)
|
|
$
|
(10,708
|
)
|
|
$
|
269
|
|
|
$
|
(13,577
|
)
|
The Company had a deferred tax asset (“DTA”) valuation allowance of $1.8 million at both June 30, 2017 and December 31, 2016, attributable to certain amounts related to state taxes and OTTI that are not more likely than not to be realized. In assessing the Company’s ability to realize the DTA, both positive and negative evidence are used to evaluate the allowance. Although the Company incurred a 2016 pre-tax loss of $45.1 million which is a source of negative evidence, it placed greater weight on its outlook for future taxable income over the allowable time period for realization of the DTA and concluded that it is more likely than not that the remaining DTA will be realized. Regarding the length of time available to realize the DTA, at June 30, 2017, $23.8 million of the DTA related to net operating loss carryforwards do not expire until 2031 through 2036 and $2.0 million in AMT (“Alternative Minimum Tax”) carryforwards have no expiration date. The DTA valuation allowance may be adjusted in future periods if management determines that it is more likely than not that some portion or all of the DTA will not be realized. In the event the DTA valuation allowance is increased, the Company would record an income tax expense for the adjustment.
12
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
7
. Segment Information
The Company operates in two business segments with its primary focus being the selling, servicing and underwriting of non-standard personal automobile insurance. The real estate and corporate segment consists of the activities related to the disposition of foreclosed real estate held for sale and other operating expenses not directly related to the insurance operations, interest expense and stock-based compensation, offset by investment income on corporate invested assets.
The following table presents selected financial data by business segment (in thousands).
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
|
|
$
|
91,394
|
|
|
$
|
101,501
|
|
|
$
|
179,447
|
|
|
$
|
198,434
|
|
Real estate and corporate
|
|
|
17
|
|
|
|
1,253
|
|
|
|
33
|
|
|
|
1,268
|
|
Consolidated total
|
|
$
|
91,411
|
|
|
$
|
102,754
|
|
|
$
|
179,480
|
|
|
$
|
199,702
|
|
(Loss) income before income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
|
|
$
|
(26
|
)
|
|
$
|
(30,434
|
)
|
|
$
|
2,942
|
|
|
$
|
(37,455
|
)
|
Real estate and corporate
|
|
|
(1,454
|
)
|
|
|
(173
|
)
|
|
|
(2,846
|
)
|
|
|
(1,526
|
)
|
Consolidated total
|
|
$
|
(1,480
|
)
|
|
$
|
(30,607
|
)
|
|
$
|
96
|
|
|
$
|
(38,981
|
)
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Total assets:
|
|
|
|
|
|
|
|
|
Insurance
|
|
$
|
369,700
|
|
|
$
|
354,008
|
|
Real estate and corporate
|
|
|
45,128
|
|
|
|
46,066
|
|
Consolidated total
|
|
$
|
414,828
|
|
|
$
|
400,074
|
|
8. Litigation
The Company is named as a defendant in various lawsuits, arising in the ordinary course of business, generally relating to its insurance operations. All legal actions relating to claims made under insurance policies are considered by the Company in establishing its loss and loss adjustment expense reserves. The Company also faces lawsuits from time to time that seek damages beyond policy limits, commonly known as bad faith claims, as well as class action and individual lawsuits that involve issues arising in the course of the Company’s business. The Company continually evaluates potential liabilities and reserves for litigation of these types using the criteria established by FASB ASC 450,
Contingencies
(“FASB ASC 450”). Pursuant to FASB ASC 450, reserves for a loss may only be recognized if the likelihood of occurrence is probable and the amount can be reasonably estimated. If a loss, while not probable, is judged to be reasonably possible, management will disclose, if it can be estimated, a possible range of loss or state that an estimate cannot be made. Management evaluates each legal action and records reserves for losses, as warranted, by establishing a reserve in its consolidated balance sheets in loss and loss adjustment expense reserves for bad faith claims and in other liabilities for other lawsuits. Amounts incurred are recorded in the Company’s consolidated statements of comprehensive income (loss) in losses and loss adjustment expenses for bad faith claims and in insurance operating expenses for other lawsuits unless otherwise disclosed.
9. Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) and the International Accounting Standards Board (“IASB”) jointly issued a new revenue recognition standard, Accounting Standard Update (“ASU”) No. 2014-09, “
Revenue from Contracts with Customers,”
that will supersede virtually all revenue recognition guidance in GAAP and International Financial Reporting Standards (“IFRS”). This guidance had an effective date for public companies for annual and interim periods beginning after December 15, 2016, with early adoption not permitted. In July 2015, the FASB issued a one-year deferral of this effective date with the option for entities to early adopt at the original effective date. The standard is intended to increase comparability across industries and jurisdictions. The underlying principle of the new standard is that a business or other organization will recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects what it expects in exchange for the goods or services. The new standard will not change accounting guidance for insurance contracts. However, the Company has revenue from non-insurance arrangements which falls under this guidance, as would the sale of the Company’s tract of land that is held for sale. The Company is currently evaluating the applicability of this guidance to the various types of fee income related to its insurance contracts.
13
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Approximately 20% of t
he Company’s total revenues may be
subject to the guidance in ASU No. 2014-09. Historically, approximately 40% of these revenues are in the form of commissions paid by third party insurance carriers which are earned upon the effective date of bound coverag
e, less an estimated allowance for return commissions based upon historical experience, since no significant performance obligation remains in these arrangements after coverage is bound and the control of the underlying insurance policy is transferred to t
he customer. Approximately 25% of these revenues are in the form of commissions paid by a third
-
party entity on the sales of ancillary insurance products that are earned on a pro-rata basis over the life of the underlying contracts, since the Company has a
contractual performance obligation for these contracts. Approximately
3
5% of these r
evenues are derived from various
fees related to insurance contracts that are recognized into income as the related services are performed and c
osts are incurred.
The Company has not finalized the impact, if any, on our consolidated financial statements at this time. However, based on our initial evaluation of this guidance, including contract reviews, the Company does not expect the future impacts to be material.
In January 2016, the FASB issued ASU No. 2016-01, “
Financial Instruments – Overall (Subtopic 825-20): Recognition and Measure of Financial Assets and Financial Liabilities
” which requires entities to measure many equity investments at fair value and recognize changes in fair value in net income (loss), as opposed to the current practice of other comprehensive income (loss). The guidance provides a new measurement alternative for equity investments that do not have readily determinable fair values and do not qualify for the net asset value practical expedient. Under this alternative, these investments can be measured at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. The guidance is effective for public business entities for annual periods beginning after December 15, 2017, and interim periods within those years. The Company has not determined the impact on future consolidated financial statements once this is adopted.
In February 2016, the FASB issued ASU No. 2016-02, “
Leases (Topic 842)
” which requires lessees to record most leases on their balance sheets as lease liabilities with corresponding right-of-use assets, but recognize expense in a manner similar to the current accounting treatment. The guidance is effective for public business entities for annual periods beginning after December 15, 2018, and interim periods within those years. Early adoption is permitted. Entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in their financial statements. The Company’s lease arrangements fall under this guidance and will be required to be shown on its consolidated balance sheet. The Company is currently evaluating controls and processes to ensure this guidance is reflected properly on future consolidated financial statements and expects to adopt this guidance in its consolidated balance sheet as of March 31 2019 along with a corresponding restatement of its consolidated balance sheet as of March 31, 2018, As detailed in Note 8 of the 2016 10-K, the undiscounted contractual cash payments remaining on leased properties was $16.8 million as of December 31, 2017.
In March 2016, the FASB issued ASU No. 2016-09, “
Improvements to Employee Share-Based Payment Accounting
” which addressed the recognition, presentation and classification of awards, forfeitures and shares withheld for tax purposes. The standard was effective for fiscal periods beginning after December 15, 2016, with each provision having a different application method. The adoption of this standard effective January 1, 2017 did not have a material impact on our consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13,
“Financial Instruments – Credit Losses (Topic 326)”
which requires financial assets measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses will be based on relevant information, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. The expected increases and decreases in the credit loss will be reflected on the consolidated statement of comprehensive income (loss). The guidance is effective for public business entities for annual periods beginning after December 15, 2019, and interim periods within those years. Early adoption is permitted. The Company has not determined the impact on future consolidated financial statements once this is adopted.
In August 2016, the FASB issued ASU No. 2016-15,
“Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments”
which clarifies how entities should classify certain cash receipts and cash payments, including how the predominance principle should be applied when cash receipts and cash payments have aspects of more than one class of cash flows. The guidance is effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those years. Early adoption is permitted. Entities will have to apply the guidance retrospectively, but if it is impracticable to do so for an issue, the amendments related to that issue would be applied prospectively. The Company has not determined the impact on future consolidated financial statements once this is adopted.
In January 2017, the FASB issued ASU No. 2017-04,
“Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment”
which eliminates the requirement to calculate the implied fair value of goodwill to measure an impairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value.
14
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The standard will be applied prospectively. The guidance is effective for annual and interim impairment tests performed by public business entities for periods beginning after December 15, 2019. Early
adoption is permitted for impairment testing dates after January 1, 2017. The Company believes that it will be reasonably able to comply with these requirements.
In April 2017, the FASB issued ASU No. 2017-08,
“Receivables-Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium Amortization on Purchased Callable Debt Securities”
which shortens the amortization period for the premium on certain purchased callable debt securities to the earliest call date instead of the current practice of amortizing the premium as a yield adjustment over the contractual life of the security. The guidance is effective for public business entities for periods beginning after December 15, 2018. Early adoption is permitted. The guidance calls for a modified retrospective transition approach under which a cumulative-effect adjustment will be made to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. The Company believes that it will be reasonably able to comply with these requirements and has not determined the impact on future consolidated financial statements once this is adopted.
In May 2017, the FASB issued ASU No. 2017-09,
“Compensation-Stock Compensation (Topic 718), Scope of Modification Accounting”
that clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. The new guidance will provide relief to entities that make non-substantive changes to their share-based payment awards. The guidance is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period. The Company currently has no intentions to modify any of its currently outstanding share-based payment awards, however, it would likely consider early adoption of this guidance upon any such occurrence.
10. Related Parties
On June 29, 2015, to finance the acquisition of the Titan Agencies, the Company borrowed the full amount under a $30 million Loan Agreement (the “Loan Agreement”) with Diamond Family Investments, LP, an affiliate of Gerald J. Ford, the Company’s controlling stockholder. The Loan Agreement provided a $30 million interest-only senior term loan facility, maturing in full on June 29, 2025. Commencing June 29, 2016, the Company has the right to prepay the loan in whole or in part, in cash, without premium or penalty, upon written notice to the lender. Amounts prepaid under the Loan Agreement may not be reborrowed. The term loan outstanding under the Loan Agreement bears interest at a rate of 8% per annum. The Loan Agreement contains certain representations, warranties and covenants. The Loan Agreement also contains customary events of default, including but not limited to: nonpayment; material inaccuracy of representations and warranties; violations of covenants; cross-default to material indebtedness; certain material judgments; certain bankruptcies and liquidations; invalidity of the loan documents and related events; and a change of control (as defined in the Loan Agreement).
In April 2016, the Company entered into standard agreements for treasury and investment custodial services with a bank in which our principal shareholder has a 15% indirect ownership interest. The fees under these agreements for the three and six months ended June 30, 2017 were $42 thousand and $91 thousand, respectively, and $32 thousand for the three months ended June 30, 2016.
11. Current Liquidity and Statutory Capital and Surplus
The Company has $70.0 million in long-term borrowings of which $40.0 million matures in 2037 and $30.0 million matures in 2025. At June 30, 2017, the Company was in compliance with the covenants related to these borrowings. Such borrowings are not obligations of the Company’s regulated insurance company subsidiaries who at June 30, 2017 had combined statutory capital and surplus of $60.6 million. The Company believes that it has sufficient liquidity to meet its current obligations in the foreseeable future, including the payment of interest on its long-term borrowings which it currently funds through the cash flows of its agency operations which are generated outside the Company’s regulated insurance company subsidiaries and are not subject to any limitation on the payment of dividends to the holding company.
The Company has three insurance company subsidiaries that are organized and domiciled under the insurance statutes of Texas, Georgia, and Tennessee. The insurance company subsidiaries operate under licenses issued by various state insurance authorities. Such licenses may be of perpetual duration or periodically renewable, provided the insurance company subsidiaries continue to meet applicable regulatory requirements.
15
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The National Association of Insurance Commissioners (“NAIC”) Model Act for risk-based capital provides formulas to determine each December 31 on an annual basis the amount
of statutory capital and surplus that an insurance company needs to ensure that it has an acceptable expectation of not becoming financially impaired. Failure to meet applicable risk-based capital requirements could subject our insurance company subsidiar
ies to further examination or corrective action imposed by state regulators, including limitations on their writing of additional business, state supervision, or even liquidation. Although statutory risk-based capital calculations are only made as of each
December 31, the Company estimated that the three insurance company subsidiaries are above the regulatory company action levels as of
June 30,
2017
. There are also statutory guidelines that suggest that on an annual calendar year basis an insurance company
should not exceed a ratio of net premiums written to statutory capital and surplus of 3-to-1. On a combined basis, the ratio for our insurance company subsidiaries of net premiums written for the last twelve months to statutory capital and surplus was
4.7
-to-1 at
June 30, 2017
which is in excess of the suggested guidelines. Management is currently operating under a business plan to reduce premium writings and increase statutory capital and surplus to address the net premiums written to
statutory capital an
d surplus guidelines.
16
FIRST ACCEPTANCE CORPORATION 10-Q
Item 2. Management’s Discuss
ion 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, 2016. 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, 2016 included in our Annual Report on Form 10-K for the year ended December 31, 2016.
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:
|
•
|
the accuracy and adequacy of our loss reserving methodologies;
|
|
•
|
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;
|
|
•
|
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, 2016.
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. 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, and failure in the past to maintain continuous insurance coverage, driving record and/or vehicle type. At June 30, 2017, we also owned a tract of land in San Antonio, Texas that is held for sale.
At June 30, 2017, we leased and operated 354 retail locations (or “stores”) and a call center 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, 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.
17
FIRST ACCEPTANCE CORPORATION 10-Q
Our insurance operations actively generate revenue from selling non-standard personal automobile insurance products and rela
ted products in 16 states. In December 2016, we closed all of our retail locations and ceased writing new business in the state of Missouri. As a result, we currently conduct our servicing and underwriting operations in 13 states and are licensed as an ins
urer in 13 additional states.
After obtaining a license in California, we began selling our non-standard personal automobile insurance product in late June 2016 on a limited basis.
At June 30, 2017, 277 of our 354 stores primarily sell non-standard personal automobile insurance products underwritten by us. The other retail locations primarily offer non-standard personal automobile insurance serviced and underwritten by other third-party insurance carriers for which we receive a commission
.
See the discussion in Item 1. “Business—General” in our Annual Report on Form 10-K for the year ended December 31, 2016 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. Since December 31, 2015, 90 locations were closed which included 53 that were part of our recent actions to improve profitability, 24 in the Chicago-area whose leases expired in January 2016, and 13 others closed in the normal course of business. During this period, 4 new locations were strategically-placed to replace and consolidate the closed Chicago-area locations.
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Retail locations – beginning of period
|
|
|
355
|
|
|
|
414
|
|
|
|
355
|
|
|
|
440
|
|
Opened
|
|
|
—
|
|
|
|
2
|
|
|
|
—
|
|
|
|
4
|
|
Closed
|
|
|
(1
|
)
|
|
|
(6
|
)
|
|
|
(1
|
)
|
|
|
(34
|
)
|
Retail locations – end of period
|
|
|
354
|
|
|
|
410
|
|
|
|
354
|
|
|
|
410
|
|
The following table shows the number of our retail locations by state.
|
|
June 30,
|
|
December 31,
|
|
|
2017
|
|
2016
|
|
2016
|
|
2015
|
Alabama
|
|
23
|
|
24
|
|
23
|
|
24
|
Arizona
|
|
10
|
|
10
|
|
10
|
|
10
|
California
|
|
47
|
|
48
|
|
47
|
|
48
|
Florida
|
|
34
|
|
34
|
|
34
|
|
39
|
Georgia
|
|
50
|
|
60
|
|
50
|
|
60
|
Illinois
|
|
38
|
|
41
|
|
39
|
|
61
|
Indiana
|
|
16
|
|
17
|
|
16
|
|
17
|
Mississippi
|
|
6
|
|
7
|
|
6
|
|
7
|
Missouri
|
|
—
|
|
9
|
|
—
|
|
9
|
Nevada
|
|
4
|
|
4
|
|
4
|
|
4
|
New Mexico
|
|
5
|
|
5
|
|
5
|
|
5
|
Ohio
|
|
27
|
|
27
|
|
27
|
|
27
|
Pennsylvania
|
|
11
|
|
13
|
|
11
|
|
14
|
South Carolina
|
|
15
|
|
23
|
|
15
|
|
24
|
Tennessee
|
|
23
|
|
23
|
|
23
|
|
23
|
Texas
|
|
45
|
|
65
|
|
45
|
|
68
|
Total
|
|
354
|
|
410
|
|
355
|
|
440
|
In response to consumer demand to purchase personal automobile insurance over the phone and through the internet, we offer customers the choice to purchase a policy through an employee-agent in our call center or via our www.acceptance.com website and mobile platform. As of June 30, 2017, approximately 13% of our policies in force were sold through a non-retail sales channel.
18
FIRST ACCEPTANCE CORPORATION 10-Q
Recent Actions
Since August 2016, we have taken the following actions towards the goal of returning our ratio of net premiums written to statutory capital and surplus to within regulatory guidelines and improving profitability:
|
•
|
Strengthened our Product team and filed and received approval for substantial rate increases and structural changes in our rating programs in response to our increase in claim frequency. The magnitude and frequency of these rate increases have been unprecedented in our recent history;
|
|
•
|
Reduced premium writings, through the closing of 53 poorly performing stores, by temporarily suspending or eliminating new business in selected areas of our business, and tightening our underwriting standards;
|
At June 30, 2017, these actions have resulted in a year-over year 23% decrease in our policies in force, which has been partially offset by a 17% year-over-year increase in our average in-force premium. This premium increase was driven by an estimated effective rate increase of 12% attained over the last twelve months.
Aggressive actions have been taken in our claims-handling operations. In October 2016, we hired a new Senior Vice President and restructured claims management to include three additional functional Vice President positions. This new structure makes optimal use of departmental availability and experience through redesigned workflows and increases accountability through recurring quality assurance review programs. In May 2017, a new text message status process was instituted allowing insureds and claimants to receive updates during the life cycle of their claim. Along with increased staffing and training, these efforts are helping reduce pending claims to targeted levels.
Collectively, we believe that these actions have contributed to the improved loss ratio for the current 2017 accident period.
Consolidated Results of Operations
Overview
Our insurance operations actively generate revenues from selling non-standard personal automobile insurance products and related products in 16 states. We currently conduct our servicing and underwriting operations in 13 states 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. (In December 2016, we closed all of our retail locations and ceased writing new business in the state of Missouri.) Our insurance revenues were 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 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.
|
19
FIRST ACCEPTANCE CORPORATION 10-Q
The following table presents gross premiums earned by state (i
n thousands). The e
ffect of a 23
% decrease
in our year-over-year policies in
force offset by a 17
% year-over-year increase in our average in-force premium, resulted in net premiums earned for the
three and six months ended June 30, 2017
decreasing by
9%
compared with the sam
e period in the prior year.
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
June 30,
|
|
June 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Gross premiums earned:
|
|
|
|
|
|
|
|
|
Georgia
|
|
$ 17,402
|
|
$ 16,271
|
|
$ 33,663
|
|
$ 31,328
|
Florida
|
|
10,761
|
|
12,176
|
|
21,012
|
|
23,785
|
Texas
|
|
8,252
|
|
11,266
|
|
16,796
|
|
21,883
|
Alabama
|
|
8,442
|
|
7,286
|
|
15,896
|
|
14,050
|
Ohio
|
|
7,707
|
|
8,094
|
|
15,012
|
|
15,690
|
South Carolina
|
|
5,281
|
|
7,352
|
|
10,231
|
|
13,946
|
Tennessee
|
|
5,275
|
|
5,107
|
|
10,023
|
|
9,988
|
Illinois
|
|
3,868
|
|
5,516
|
|
8,075
|
|
11,256
|
Indiana
|
|
2,492
|
|
2,395
|
|
4,810
|
|
4,672
|
Pennsylvania
|
|
2,395
|
|
2,575
|
|
4,646
|
|
4,993
|
Mississippi
|
|
1,115
|
|
1,043
|
|
2,078
|
|
2,038
|
California
|
|
420
|
|
—
|
|
734
|
|
—
|
Missouri
|
|
60
|
|
1,633
|
|
302
|
|
3,386
|
Virginia
|
|
96
|
|
251
|
|
206
|
|
465
|
Total gross premiums earned
|
|
73,566
|
|
80,965
|
|
143,484
|
|
157,480
|
Premiums ceded to reinsurer
|
|
(107)
|
|
(115)
|
|
(212)
|
|
(223)
|
Total net premiums earned
|
|
$ 73,459
|
|
$ 80,850
|
|
$ 143,272
|
|
$ 157,257
|
Our insurance segment presents a combined ratio as a measure of its 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
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Loss
|
|
|
85.5
|
%
|
|
|
124.6
|
%
|
|
|
83.1
|
%
|
|
|
110.8
|
%
|
Expense
|
|
|
16.0
|
%
|
|
|
14.8
|
%
|
|
|
16.3
|
%
|
|
|
14.6
|
%
|
Combined
|
|
|
101.5
|
%
|
|
|
139.4
|
%
|
|
|
99.4
|
%
|
|
|
125.4
|
%
|
20
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 other alternative investments made into limited partnership interests and a real estate investment trust. Investment income is comprised primarily of interest earned on these securities, net of related investment expenses. Although investments are generally purchased with the intention to hold them until maturity, realized gains and losses could 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, or as we did in 2016, to increase the statutory capital and surplus of the insurance company subsidiaries that carry fixed maturity securities at amortized cost.
The value of our consolidated available-for-sale investment portfolio was $116.0 million at June 30, 2017 and consisted of fixed maturity securities, preferred stocks, and investments in mutual funds, all carried at fair value with unrealized gains and losses reported in a separate component of stockholders’ equity. At June 30, 2017, we had gross unrealized gains of $2.8 million and gross unrealized losses of $2.0 million in our consolidated investments available-for-sale portfolio.
The value of our other investments was $10.5 million at June 30, 2017 and consisted of limited partnership interests carried at net asset value, which approximates fair value, with unrealized gains and losses reported as investment income, and a privately-held real estate investment trust (“REIT”) carried at fair value, with unrealized gains and losses reported in a separate component of stockholders’ equity. At June 30, 2017, we had gross unrealized gains attributable to the REIT of $1.2 million in our consolidated other investments.
At June 30, 2017, 96% 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.
The following table summarizes our investment securities at June 30, 2017 (in thousands).
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
June 30, 2017
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
U.S. government and agencies
|
|
$
|
19,641
|
|
|
$
|
96
|
|
|
$
|
(238
|
)
|
|
$
|
19,499
|
|
Political subdivisions
|
|
|
4,173
|
|
|
|
10
|
|
|
|
—
|
|
|
|
4,183
|
|
Revenue and assessment
|
|
|
5,255
|
|
|
|
208
|
|
|
|
—
|
|
|
|
5,463
|
|
Corporate bonds
|
|
|
45,908
|
|
|
|
67
|
|
|
|
(1,146
|
)
|
|
|
44,829
|
|
Collateralized mortgage obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency backed
|
|
|
22,149
|
|
|
|
68
|
|
|
|
(607
|
)
|
|
|
21,610
|
|
Non-agency backed – residential
|
|
|
2,213
|
|
|
|
560
|
|
|
|
(8
|
)
|
|
|
2,765
|
|
Non-agency backed – commercial
|
|
|
1,056
|
|
|
|
654
|
|
|
|
—
|
|
|
|
1,710
|
|
Total fixed maturities, available-for-sale
|
|
|
100,395
|
|
|
|
1,663
|
|
|
|
(1,999
|
)
|
|
|
100,059
|
|
Preferred stocks, available-for-sale
|
|
|
3,025
|
|
|
|
281
|
|
|
|
(40
|
)
|
|
|
3,266
|
|
Mutual funds, available-for-sale
|
|
|
11,813
|
|
|
|
874
|
|
|
|
|
|
|
|
12,687
|
|
|
|
$
|
115,233
|
|
|
$
|
2,818
|
|
|
$
|
(2,039
|
)
|
|
$
|
116,012
|
|
21
FIRST ACCEPTANCE CORPORATION 10-Q
Three
and Six Months Ended June 30
, 2017 Compared with the Three
and Six Months Ended June 30
, 2016
Consolidated Results
Revenues for the three months ended June 30, 2017 decreased 11% to $91.4 million from $102.8 million in the same period in the prior year. Loss before income taxes, for the three months ended June 30, 2017 was $1.5 million, compared with a loss before income taxes of $30.6 million for the three months ended June 30, 2016. Net loss for the three months ended June 30, 2017 was $0.9 million, compared with a net loss of $19.9 million for the three months ended June 30, 2016. Basic and diluted net loss per share were $0.02 for the three months ended June 30, 2017, compared with a basic and diluted net loss per share of $0.48 for the same period in the prior year.
For the three months ended June 30, 2017 and 2016, we recognized $0.2 million and $25.8 million, respectively, of unfavorable prior period loss and LAE development.
Revenues for the six months ended June 30, 2017 decreased 10% to $179.5 million from $199.7 million in the same period in the prior year. Income before income taxes, for the six months ended June 30, 2017 was $96 thousand, compared with a loss before income taxes of $39.0 million for the six months ended June 30, 2016. Net loss for the six months ended June 30, 2017 was $173 thousand, compared with a net loss of $25.4 million for the six months ended June 30, 2016. Basic and diluted net loss per share were $0.004 for the six months ended June 30, 2017, compared with a basic and diluted net loss per share of $0.62 for the same period in the prior year.
For the six months ended June 30, 2017, we recognized $0.6 million of favorable prior period loss and LAE development, and for the six months ended June 30, 2016, we recognized $31.0 million of unfavorable prior period loss and LAE development.
Insurance Operations
Revenues from insurance operations were $91.4 million for the three months ended June 30, 2017, compared with $101.5 million for the three months ended June 30, 2016. Revenues from insurance operations were $179.4 million for six months ended June 30, 2017, compared with $198.4 million for the six months ended June 30, 2016
.
Loss before income taxes from insurance operations for the three months ended June 30, 2017 was $26 thousand, compared with a loss before income taxes of $30.4 million for the three months ended June 30, 2016. Income before income taxes from insurance operations for the six months ended June 30, 2017 was $2.9 million, compared with a loss before income taxes from insurance operations of $37.5 million for the six months ended June 30, 2016.
Premiums Earned
Premiums earned decreased by $7.4 million, or 9%, to $73.5 million for the three months ended June 30, 2017, from $80.9 million for the three months ended June 30, 2016. For the six months ended June 30, 2017, premiums earned decreased by $14.0 million, or 9%, to $143.3 million from $157.3 million for the six months ended June 30, 2016. These decreases were the result of a targeted decline in new policies written to eliminate unprofitable business through store closures, rate increases and the tightening of underwriting standards. These actions resulted in a 23% decrease in our year-over-year policies in force which was partially offset by a 17% year-over-year increase in our average in-force premium that was driven by our recent rate actions. The estimated effective rate increase attained over the last twelve months was 12%.
Commission and Fee Income
Commission and fee income decreased by $2.4 million, or 12%, to $16.8 million for the three months ended June 30, 2017, from $19.2 million for the three months ended June 30, 2016. For the six months ended June 30, 2017, commission and fee income decreased by $4.7 million, or 12%, to $34.1 million from $38.8 million for the six months ended June 30, 2016. This decrease was primarily the result of a decrease in monthly billing fees as a result of the previously-mentioned decline in the number of policies in force.
Investment Income
Investment income decreased to $1.1 million for the three months ended June 30, 2017 from $1.6 million for the three months ended June 30, 2016, and to $2.2 million for the six months ended June 30, 2017 from $2.6 million for the six months ended June 30, 2016.
22
FIRST ACCEPTANCE CORPORATION 10-Q
During the three months ended Septe
mber 30, 2016, in order to increase the statutory capital and surplus of our insurance company subsidiaries by realizing gains on fixed maturities carried at amortized cost for statutory purposes, we sold $66.9 million of available-for-sale securities yiel
ding 3.6% and reinvested the proceeds at 2.2%. As a result, our investment in
come from fixed maturities in subsequent periods has
decline
d
from the reduced yield in our fixed maturities portfolio.
Recent results however have been favorable as a result of i
ncreased yields on cash a
nd cash equivalents while r
eturns from limited partnership investments
, although favorable,
have fluctuated from period-to-period
.
At June 30, 2017 and 2016, the tax-equivalent book yields for our managed fixed maturities and cash equivalents portfolio were 2.0% and 2.1%, respectively, with effective durations of 2.33 and 2.71 years, respectively.
Net Realized Gains (Losses) on Investments, Available-for-sale
Net realized gains (losses) on investments, available-for-sale during the three and six months ended June 30, 2016 included $147 thousand of charges related to other-than-temporary-impairment (“OTTI”) on a mutual fund and other net realized losses from redemptions. Other amounts recognized relate to gains and losses realized on redemptions.
Loss and Loss Adjustment Expenses
The loss ratio was 85.5% for the three months ended June 30, 2017, compared with 124.6% for the three months ended June 30, 2016. For the six months ended June 30, 2017, the loss ratio was 83.1% compared with 110.8% for the six months ended June 30, 2016. We experienced unfavorable development related to prior periods of $0.2 million for the three months ended June 30, 2017, and favorable development of $0.6 million for the six months ended June 30, 2017, compared with unfavorable development of $25.8 million and $31.0
million for the three and six months ended June 30, 2016.
The development for the three and six months ended June 30, 2017 was the net result of favorable LAE development related to bodily injury claims over multiple prior accident periods and unfavorable development on losses related to bodily injury severity related to the 2016 and 2017 accident years. The unfavorable development for the three and six months ended June 30, 2016 was the result of an increase in losses across all major coverages and over multiple prior accident periods. The primary causes of the unfavorable development were a sharp increase in bodily injury severity and a greater than usual amount of subsequent payments on previously closed claims.
Excluding the development related to prior periods, the loss ratio for the three months ended June 30, 2017 was 85.2% as compared with 81.4% for the preceding three months ended March 31, 2017. The primary causes for this higher loss ratio were increases in frequency across all major coverages and in bodily injury severity.
Excluding the development related to prior periods, the loss ratio for the six months ended June 30, 2017 was 83.5% as compared with 91.8% for the year ended December 31, 2016. We believe that this improvement in the loss ratio was the result of our aggressive rate and underwriting actions in addition to a moderate reduction in claims frequency.
Insurance Operating Expenses
Insurance operating expenses decreased 8% to $27.9 million for the three months ended June 30, 2017, from $30.3 million for the three months ended June 30, 2016. For the six months ended June 30, 2017, insurance operating expenses decreased 7% to $56.0 million from $60.0 million for the six months ended June 30, 2016. These decreases in operating expenses were primarily due to the costs savings from the recent store closures, a reduction in advertising costs, and reduced variable expenses (e.g. underwriting reports and postage) as a result of the decline in new business written.
The expense ratio was 16.0% for the three months ended June 30, 2017, compared with 14.8% for the three months ended June 30, 2016. For the six months ended June 30, 2017, the expense ratio was 16.3% compared with 14.6% for the six months ended June 30, 2016. The year-over-year increases in the expense ratio were primarily due to the decrease in premiums earned which resulted in a higher percentage of fixed expenses and the previously-mentioned decline in commission and fee income.
Overall, the combined ratio decreased to 101.5% for the three months ended June 30, 2017 from 139.4% for the three months ended June 30, 2016. For the six months ended June 30, 2017, the combined ratio decreased to 99.4% from 125.4% for the six months ended June 30, 2016.
23
FIRST ACCEPTANCE CORPORATION 10-Q
(Benefit)
Provision
for Income Taxes
The benefit for income taxes was $0.6 million for the three months ended June 30, 2017, compared with $10.7 million for the three months ended June 30, 2016. For the six months ended June 30, 2017, the provision for income taxes was $0.3 million compared with a benefit of $13.6 million for the six months ended June 30, 2016.
In assessing our ability to realize our deferred tax assets (“DTA”), both positive and negative evidence are used to evaluate the allowance. Although we incurred a 2016 pre-tax loss of $45.1 million which is a source of negative evidence, we placed greater weight on our outlook for future taxable income over the allowable time period for realization of the DTA and concluded that it is more likely than not that the remaining DTA will be realized. Regarding the length of time available to realize the DTA, at June 30, 2017, $23.8 million of the DTA related to net operating loss carryforwards do not expire until 2031 through 2036 and $2.0 million in AMT (“Alternative Minimum Tax”) carryforwards have no expiration date. The DTA valuation allowance may be adjusted in future periods if management determines that it is more likely than not that some portion or all of the DTA will not be realized. In the event the DTA valuation allowance is increased, we would record an income tax expense for the adjustment. Likewise, we would record an income tax expense in the period in which any reduction in the corporate tax rate was enacted.
Real Estate and Corporate
Loss before income taxes from real estate and corporate operations for the three months ended June 30, 2017, was $1.5 million, compared with a loss before income taxes of $0.2 million for the three months ended June 30, 2016. Loss before income taxes from real estate and corporate operations for the six months ended June 30, 2017, was $2.8 million, compared with a loss before income taxes of $1.5 million for the six months ended June 30, 2016. The three and six months ended June 30, 2016 include a $1.2 million gain on the sale of foreclosed real estate. 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 $1.1 million of interest expense for both the three months ended June 30, 2017 and 2016. For the six months ended June 30, 2017, interest expense increased to $2.2 million from $2.1 million for the six months ended June 30, 2016 as the result of an increase in LIBOR. Interest expense is from our debentures payable and the term loan from our principal stockholder to finance the July 1, 2015 Titan Agencies acquisition. 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 six months ended June 30, 2017 was $4.5 million, compared with net cash provided by operating activities of $10.8 million for the same period in the prior year. This decrease was primarily the result of the recent reduction in new business written. Net cash provided by investing activities for the six months ended June 30, 2017 was $2.3 million, compared to $8.0 million for the same period in the prior year. This decrease was primarily the result of a greater amount of purchases of investments, available-for-sale and a reduction in the amount of capital expenditures in the current year.
Our holding company requires cash for general corporate overhead expenses and for debt service related to our debentures and term loan payable. The holding company’s primary source of unrestricted cash to meet its obligations is the sale of ancillary products and insurance policies on behalf of third-party carriers by our agency operations, including the 2015 Titan Agencies acquisition. During the six months ended June 30, 2017, the holding company contributed $4.0 million to the statutory capital and surplus of the insurance company subsidiaries from our insurance agency net income. At June 30, 2017, our holding company had $3.2 million available remaining in unrestricted cash and investments. These funds and the additional unrestricted cash from our agency operations will be used to pay our future cash requirements outside of the insurance company subsidiaries in the short-term and foreseeable future.
The holding company has debt service requirements related to the debentures payable and the term loan to a principal stockholder. The debentures are interest-only and mature in full in July 2037. The debentures accrue interest at a variable rate equal to Three-Month LIBOR plus 375 basis points, which resets quarterly. The interest rate related to the debentures for the six months ended June 30, 2017 ranged from 4.637% to 4.920%. In July 2017, the interest rate reset to 5.061% through October 2017. The term loan is interest-only and matures in full in June 2025. The interest rate on the term loan is 8%.
State insurance laws limit the amount of dividends that may be paid from our insurance company subsidiaries. At June 30, 2017, our insurance company subsidiaries could not pay any dividends due to a negative unassigned surplus position.
24
FIRST ACCEPTANCE CORPORATION 10-Q
We have three insurance company subsidiaries that are organized and domiciled under the insurance statutes of Texas, Georgia, and Tennessee. Our insurance company subsidiaries also operate under licenses issued by various state insurance authorities. Such
licenses may be of perpetual duration or periodically renewable, provided we continue to meet applicable regulatory requirements.
The National Association of Insurance Commissioners (“NAIC”) Model Act for risk-based capital provides formulas to determine each December 31 on an annual basis the amount of statutory capital and surplus that an insurance company needs to ensure that it has an acceptable expectation of not becoming financially impaired. Failure to meet applicable risk-based capital requirements could subject our insurance company subsidiaries to further examination or corrective action imposed by state regulators, including limitations on their writing of additional business, state supervision or even liquidation. Although statutory risk-based capital calculations are only made as of each December 31, we have estimated that the insurance company subsidiaries remain above the company action levels as of June 30, 2017. There are also statutory guidelines that suggest that on an annual calendar year basis an insurance company should not exceed a ratio of net premiums written to statutory capital and surplus of 3-to-1. On a combined basis, the ratio for our insurance company subsidiaries of net premiums written for the last twelve months to statutory capital and surplus was 4.7-to-1 at June 30, 2017 which is in excess of the suggested guidelines.
Management is currently operating under a business plan to reduce premium writings and increase statutory capital and surplus to address the net premiums written to statutory capital and surplus guidelines. We believe that existing cash and investment balances, when combined with anticipated cash flows as noted above, will be adequate to meet our expected liquidity needs, for both the holding company and our insurance company subsidiaries, in both the short-term and the foreseeable future.
Off-Balance Sheet Arrangements
We use off-balance sheet arrangements (e.g., operating leases) where the economics and sound business principles warrant their use. For information with respect to our off-balance sheet arrangements at December 31, 2016, see Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Off-Balance Sheet Arrangements” included in our Annual Report on Form 10-K for the year ended December 31, 2016. We have not entered into any new material off-balance sheet arrangements since December 31, 2016.
Critical Accounting Estimates
There have been no significant changes to our critical accounting estimates during the six months ended June 30, 2017 compared with those disclosed in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Estimates” included in our Annual Report on Form 10-K for the year ended December 31, 2016.