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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2014

Commission File Number: 001-12117

 

 

FIRST ACCEPTANCE CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   75-1328153

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

3813 Green Hills Village Drive

Nashville, Tennessee

  37215
(Address of principal executive offices)   (Zip Code)

(615) 844-2800

(Registrant’s telephone number, including area code)

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller Reporting Company   x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

At August 4, 2014, there were 40,999,909 shares outstanding of the registrant’s common stock, par value $0.01 per share.

 

 

 


Table of Contents

FIRST ACCEPTANCE CORPORATION

FORM 10-Q

FOR THE QUARTER ENDED JUNE 30, 2014

INDEX

 

PART I – FINANCIAL INFORMATION

  

Item 1. Financial Statements

     1   

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     15   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     25   

Item 4. Controls and Procedures

     28   

PART II – OTHER INFORMATION

  

Item 1. Legal Proceedings

     29   

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

     29   

Item 4. Mine Safety Disclosures

     29   

Item 6. Exhibits

     29   

SIGNATURES

  

 

i


Table of Contents

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)

 

     June 30,
2014
    December 31,
2013
 
     (Unaudited)        
ASSETS     

Investments, available-for-sale at fair value (amortized cost of $124,959 and $126,873, respectively)

   $ 131,284      $ 130,248   

Cash and cash equivalents

     85,408        72,033   

Premiums and fees receivable, net of allowance of $407 and $311

     53,185        46,228   

Limited partnership interests

     9,053        7,513   

Other assets

     5,974        6,471   

Property and equipment, net

     3,121        3,512   

Deferred acquisition costs

     3,314        2,902   

Identifiable intangible assets

     4,800        4,800   
  

 

 

   

 

 

 

TOTAL ASSETS

   $ 296,139      $ 273,707   
  

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY     

Loss and loss adjustment expense reserves

   $ 88,797      $ 84,286   

Unearned premiums and fees

     65,617        55,983   

Debentures payable

     40,321        40,301   

Other liabilities

     17,406        16,205   
  

 

 

   

 

 

 

Total liabilities

     212,141        196,775   
  

 

 

   

 

 

 

Stockholders’ equity:

    

Preferred stock, $.01 par value, 10,000 shares authorized

     —          —     

Common stock, $.01 par value, 75,000 shares authorized; 41,000 and 40,983 shares issued and outstanding, respectively

     410        410   

Additional paid-in capital

     457,129        456,993   

Accumulated other comprehensive income

     6,325        3,375   

Accumulated deficit

     (379,866     (383,846
  

 

 

   

 

 

 

Total stockholders’ equity

     83,998        76,932   
  

 

 

   

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

   $ 296,139      $ 273,707   
  

 

 

   

 

 

 

See notes to consolidated financial statements.

 

1


Table of Contents

FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(in thousands, except per share data)

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2014     2013     2014      2013  

Revenues:

         

Premiums earned

   $ 55,854      $ 52,118      $ 107,602       $ 101,521   

Commission and fee income

     10,051        9,162        19,226         17,759   

Investment income

     1,257        1,268        2,794         2,544   

Net realized gains (losses) on investments, available-for-sale (includes $(42), $(55), $40 and $(42), respectively, of accumulated other comprehensive income (loss) reclassification for unrealized gains (losses))

     (42     (55     40         (42
  

 

 

   

 

 

   

 

 

    

 

 

 
     67,120        62,493        129,662         121,782   
  

 

 

   

 

 

   

 

 

    

 

 

 

Costs and expenses:

         

Losses and loss adjustment expenses

     41,066        39,087        77,883         72,592   

Insurance operating expenses

     21,162        19,909        45,191         42,249   

Other operating expenses

     245        223        478         452   

Stock-based compensation

     66        56        112         140   

Depreciation and amortization

     437        537        880         1,108   

Interest expense

     421        427        848         870   
  

 

 

   

 

 

   

 

 

    

 

 

 
     63,397        60,239        125,392         117,411   
  

 

 

   

 

 

   

 

 

    

 

 

 

Income before income taxes

     3,723        2,254        4,270         4,371   

Provision for income taxes (includes $(15), $(19), $14 and $(15), respectively, of income tax expense from reclassification items)

     254        188        290         281   
  

 

 

   

 

 

   

 

 

    

 

 

 

Net income

   $ 3,469      $ 2,066      $ 3,980       $ 4,090   
  

 

 

   

 

 

   

 

 

    

 

 

 

Net income per share:

         

Basic

   $ 0.08      $ 0.05      $ 0.10       $ 0.10   
  

 

 

   

 

 

   

 

 

    

 

 

 

Diluted

   $ 0.08      $ 0.05      $ 0.10       $ 0.10   
  

 

 

   

 

 

   

 

 

    

 

 

 

Number of shares used to calculate net income per share:

         

Basic

     40,978        40,921        40,974         40,915   
  

 

 

   

 

 

   

 

 

    

 

 

 

Diluted

     41,274        40,948        41,278         40,942   
  

 

 

   

 

 

   

 

 

    

 

 

 

Reconciliation of net income to other comprehensive income (loss):

         

Net income

   $ 3,469      $ 2,066      $ 3,980       $ 4,090   

Net unrealized change in investments

     1,297        (3,623     2,950         (4,027
  

 

 

   

 

 

   

 

 

    

 

 

 

Comprehensive income (loss)

   $ 4,766      $ (1,557   $ 6,930       $ 63   
  

 

 

   

 

 

   

 

 

    

 

 

 

 

         

Detail of net realized gains (losses) on investments, available-for-sale:

         

Net realized gains (losses) on sales and redemptions

   $ (42   $ (55   $ 40       $ (14

OTTI charges reclassified from other comprehensive income (loss) and recognized in net income

     —          —          —           (28
  

 

 

   

 

 

   

 

 

    

 

 

 

Net realized gains (losses) on investments, available-for-sale

   $ (42   $ (55   $ 40       $ (42
  

 

 

   

 

 

   

 

 

    

 

 

 

See notes to consolidated financial statements.

 

2


Table of Contents

FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(in thousands)

 

     Six Months Ended
June 30,
 
     2014     2013  

Cash flows from operating activities:

    

Net income

   $ 3,980      $ 4,090   

Adjustments to reconcile net income to cash provided by operating activities:

    

Depreciation and amortization

     880        1,108   

Stock-based compensation

     112        140   

Other-than-temporary impairment on investment securities

     —          28   

Net realized (gains) losses on sales and redemptions of investments

     (40     14   

Investment income and equity in earnings from limited partnership interests

     (277     —     

Other

     169        47   

Change in:

    

Premiums and fees receivable

     (7,053     (2,023

Loss and loss adjustment expense reserves

     4,511        6,738   

Unearned premiums and fees

     9,634        4,388   

Other

     1,306        1,043   
  

 

 

   

 

 

 

Net cash provided by operating activities

     13,222        15,573   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Purchases of investments, available-for-sale

     (5,441     (8,287

Purchases of limited partnership interests

     (1,416     (1,747

Maturities and redemptions of investments, available-for-sale

     7,317        10,348   

Capital expenditures

     (489     (631

Other

     152        (2
  

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     123        (319
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Net proceeds from issuance of common stock

     30        24   
  

 

 

   

 

 

 

Net cash provided by financing activities

     30        24   
  

 

 

   

 

 

 

Net change in cash and cash equivalents

     13,375        15,278   

Cash and cash equivalents, beginning of period

     72,033        59,104   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 85,408      $ 74,382   
  

 

 

   

 

 

 

See notes to consolidated financial statements.

 

3


Table of Contents

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, 2013.

 

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.
Level 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 market place.
Level 3 -   Instruments that use non-binding broker quotes or model driven valuations that do not have observable market data or those that are estimated based on an ownership interest to which a proportionate share of net assets is attributed.

The Company categorizes valuation methods used in its identifiable intangible assets 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. The Company also categorizes valuation methods used to fair value its investments in limited partnerships as Level 3, since these investments have redemptions and transfer restrictions and are therefore not readily marketable.

Fair Value of Financial Instruments

The carrying values and fair values of certain of the Company’s financial instruments were as follows (in thousands).

 

     June 30, 2014      December 31, 2013  
     Carrying
Value
     Fair
Value
     Carrying
Value
     Fair
Value
 

Assets:

           

Investments, available-for-sale

   $ 131,284       $ 131,284       $ 130,248       $ 130,248   

Limited partnership interests

     9,053         9,053         7,513         7,513   

Liabilities:

           

Debentures payable

     40,321         18,412         40,301         15,006   

 

4


Table of Contents

FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

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 is categorized as Level 3, since it was 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 and fees 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 do not purport to represent the Company’s underlying value.

The Company holds available-for-sale investments and limited partnership interests, which are carried at either net asset value or under the equity method which approximates fair value. The following tables present the fair-value measurements for each major category of assets that are measured on a recurring basis (in thousands).

 

            Fair Value Measurements Using  

June 30, 2014

   Total      Quoted Prices
in Active
Markets for
Identical
Assets

(Level 1)
     Significant
Other
Observable
Inputs

(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 

Fixed maturities, available-for-sale:

           

U.S. government and agencies

   $ 12,361       $ 12,361       $ —         $ —     

State

     733         —           733         —     

Political subdivisions

     511         —           511         —     

Revenue and assessment

     12,935         —           12,935         —     

Corporate bonds

     76,866         —           76,866         —     

Collateralized mortgage obligations:

           

Agency backed

     7,175         —           7,175         —     

Non-agency backed – residential

     4,548         —           4,548         —     

Non-agency backed – commercial

     3,400         —           3,400         —     

Redeemable preferred stock

     1,696         1,696         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total fixed maturities, available-for-sale

     120,225         14,057         106,168         —     

Mutual funds, available-for-sale

     11,059         11,059         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investments, available-for-sale

     131,284         25,116         106,168         —     

Limited partnership interests

     9,053         —           —           9,053   

Cash and cash equivalents

     85,408         85,408         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 225,745       $ 110,524       $ 106,168       $ 9,053   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

5


Table of Contents

FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

            Fair Value Measurements Using  

December 31, 2013

   Total      Quoted Prices
in Active
Markets for
Identical Assets

(Level 1)
     Significant
Other
Observable
Inputs

(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 

Fixed maturities, available-for-sale:

           

U.S. government and agencies

   $ 12,485       $ 12,485       $ —         $ —     

State

     736         —           736         —     

Political subdivisions

     612         —           612         —     

Revenue and assessment

     14,658         —           14,658         —     

Corporate bonds

     73,325         —           73,325         —     

Collateralized mortgage obligations:

           

Agency backed

     7,514         —           7,514         —     

Non-agency backed – residential

     4,660         —           4,660         —     

Non-agency backed – commercial

     3,943         —           3,943         —     

Redeemable preferred stock

     1,578         1,578         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total fixed maturities, available-for-sale

     119,511         14,063         105,448         —     

Mutual funds, available-for-sale

     10,737         10,737         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investments, available-for-sale

     130,248         24,800         105,448         —     

Limited partnership interests

     7,513         —           —           7,513   

Cash and cash equivalents

     72,033         72,033         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 209,794       $ 96,833       $ 105,448       $ 7,513   
  

 

 

    

 

 

    

 

 

    

 

 

 

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 securities in the table above consist of limited partnership interests for which fair value is estimated based on the Company’s ownership interest in partners’ capital. There were no transfers between Level 1 and Level 2 for the three and six months ended June 30, 2014 and 2013. 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.

 

6


Table of Contents

FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

The following table represents the quantitative disclosure for those assets classified as Level 3 during the six months ended June 30, 2014 (in thousands).

 

     Fair Value Measurements Using
Significant Unobservable Inputs (Level 3)
 
     Limited partnership interests
carried at
     Total  
     Net asset
value
    Equity
method
    

Balance at December 31, 2013

   $ 3,314      $ 4,199       $ 7,513   

Gains included in net income

     124        153         277   

Investments and capital calls

     1,416        —           1,416   

Distributions received

     (153     —           (153

Transfers into and out of Level 3

     —          —           —     
  

 

 

   

 

 

    

 

 

 

Balance at June 30, 2014

   $ 4,701      $ 4,352       $ 9,053   
  

 

 

   

 

 

    

 

 

 

 

3. Investments

Investments, Available-for-Sale

The following tables summarize the Company’s investment securities (in thousands).

 

June 30, 2014

   Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair
Value
 

U.S. government and agencies

   $ 12,005       $ 361       $ (5   $ 12,361   

State

     698         35         —          733   

Political subdivisions

     501         10         —          511   

Revenue and assessment

     11,838         1,097         —          12,935   

Corporate bonds

     75,093         2,818         (1,045     76,866   

Collateralized mortgage obligations:

          

Agency backed

     6,892         283         —          7,175   

Non-agency backed – residential

     3,855         693         —          4,548   

Non-agency backed – commercial

     2,676         724         —          3,400   

Redeemable preferred stock

     1,500         196         —          1,696   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total fixed maturities, available-for-sale

     115,058         6,217         (1,050     120,225   

Mutual funds, available-for-sale

     9,901         1,158         —          11,059   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 124,959       $ 7,375       $ (1,050   $ 131,284   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

December 31, 2013

   Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair
Value
 

U.S. government and agencies

   $ 12,006       $ 495       $ (16   $ 12,485   

State

     697         39         —          736   

Political subdivisions

     601         11         —          612   

Revenue and assessment

     14,050         619         (11     14,658   

Corporate bonds

     73,461         2,127         (2,263     73,325   

Collateralized mortgage obligations:

          

Agency backed

     7,113         401         —          7,514   

Non-agency backed – residential

     4,181         480         (1     4,660   

Non-agency backed – commercial

     3,363         580         —          3,943   

Redeemable preferred stock

     1,500         78         —          1,578   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total fixed maturities, available-for-sale

     116,972         4,830         (2,291     119,511   

Mutual funds, available-for-sale

     9,901         836         —          10,737   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 126,873       $ 5,666       $ (2,291   $ 130,248   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

 

7


Table of Contents

FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

The following tables set 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.

 

June 30, 2014

   Securities
with
Unrealized
Gains
     Securities
with
Unrealized
Losses
     Securities
with No
Unrealized
Gains or
Losses
     All
Fixed
Maturity
Securities
 

One year or less

   $ 13,199       $ —         $ —         $ 13,199   

After one through five years

     25,572         11,013         —           36,585   

After five through ten years

     27,218         18,049         —           45,267   

After ten years

     6,727         1,628         —           8,355   

No single maturity date

     16,819         —           —           16,819   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 89,535       $ 30,690       $ —         $ 120,225   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

December 31, 2013

   Securities
with
Unrealized
Gains
     Securities
with
Unrealized
Losses
     Securities
with No
Unrealized
Gains or
Losses
     All
Fixed
Maturity
Securities
 

One year or less

   $ 14,305       $ —         $ —         $ 14,305   

After one through five years

     25,667         10,888         —           36,555   

After five through ten years

     20,445         22,836         —           43,281   

After ten years

     3,667         4,008         —           7,675   

No single maturity date

     17,506         189         —           17,695   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 81,590       $ 37,921       $ —         $ 119,511   
  

 

 

    

 

 

    

 

 

    

 

 

 

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      Gross
Unrealized
Gains
 

At:

   Less than
or equal to
12 months
     Greater
than 12
months
    

June 30, 2014

     4         10         85   

December 31, 2013

     12         7         83   

The following tables reflect the fair value and gross unrealized losses of those fixed maturity securities in a continuous unrealized loss position for greater than 12 months. Gross unrealized losses are further segregated by the percentage of amortized cost (in thousands, except number of securities).

 

Gross Unrealized Losses at June 30, 2014:

   Number
of
Securities
     Fair
Value
     Gross
Unrealized
Losses
 

Less than or equal to 10%

     10       $ 23,891       $ (916

Greater than 10%

     —           —           —     
  

 

 

    

 

 

    

 

 

 
     10       $ 23,891       $ (916
  

 

 

    

 

 

    

 

 

 

 

Gross Unrealized Losses at December 31, 2013:

   Number
of
Securities
     Fair
Value
     Gross
Unrealized
Losses
 

Less than or equal to 10%

     7       $ 13,980       $ (1,270

Greater than 10%

     —           —           —     
  

 

 

    

 

 

    

 

 

 
     7       $ 13,980       $ (1,270
  

 

 

    

 

 

    

 

 

 

 

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Table of Contents

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 Gross
Unrealized
Losses
     Gross
Unrealized
Losses
   

 

Severity of Gross Unrealized Losses

 

Length of Gross Unrealized Losses at June 30, 2014:

        Less
than 5%
    5% to
10%
    Greater
than 10%
 

Less than or equal to:

           

Three months

   $ 4,172       $ (2   $ (2   $ —        $ —     

Six months

     —           —          —          —          —     

Nine months

     999         (5     (5     —          —     

Twelve months

     1,628         (127     —          (127     —     

Greater than twelve months

     23,891         (916     (568     (348     —     
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 30,690       $ (1,050   $ (575   $ (475   $ —     
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

     Fair Value of
Securities
with Gross
Unrealized
Losses
     Gross
Unrealized
Losses
   

 

Severity of Gross Unrealized Losses

 

Length of Gross Unrealized Losses at December 31, 2013:

        Less
than 5%
    5% to
10%
    Greater
than 10%
 

Less than or equal to:

           

Three months

   $ 6,417       $ (40   $ (40   $ —        $ —     

Six months

     1,653         (129     —          (129     —     

Nine months

     15,871         (852     (153     (699     —     

Twelve months

     —           —          —          —          —     

Greater than twelve months

     13,980         (1,270     (85     (1,185     —     
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 37,921       $ (2,291   $ (278   $ (2,013   $ —     
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Limited Partnership Interests

Limited partnership interests consist of investments in three funds that invest in (i) commercial real estate and secured commercial real estate loans acquired from financial intuitions, (ii) small balance distressed secured loans and debt securities and (iii) undervalued international publicly-traded equities, respectively. These investments have redemption and transfer restrictions; however, the Company does not intend to sell these limited partnership interests, 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, 2014, the Company had an unfunded commitment of $0.9 million to one of the limited partnerships.

Net income from limited partnership interests is recorded in investment income in the consolidated statements of comprehensive income (loss).

Restrictions

At June 30, 2014, fixed maturities and cash equivalents with a fair value and amortized cost of $5.2 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 $9.4 million were on deposit with another insurance company as collateral for an assumed reinsurance contract.

 

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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
June 30,
    Six Months Ended
June 30,
 
     2014     2013     2014     2013  

Fixed maturities, available-for-sale

   $ 1,162      $ 1,270      $ 2,401      $ 2,553   

Mutual funds, available-for-sale

     147        145        307        285   

Limited partnership interests

     49        —          124        —     

Equity in income (loss) of limited partnership interest

     (11     —          153        —     

Other

     28        22        54        42   

Investment expenses

     (118     (169     (245     (336
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 1,257      $ 1,268      $ 2,794      $ 2,544   
  

 

 

   

 

 

   

 

 

   

 

 

 

The components of net realized gains (losses) on investments, available-for-sale at fair value follow (in thousands).

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2014     2013     2014     2013  

Gains

   $ —        $ 7      $ 85      $ 48   

Losses

     (42     (62     (45     (62

Other-than-temporary impairment

     —          —          —          (28
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ (42   $ (55   $ 40      $ (42
  

 

 

   

 

 

   

 

 

   

 

 

 

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 income (loss). The amounts of non-credit OTTI for securities still owned was $0.9 million for non-agency backed residential collateralized mortgage obligations (“CMOs”) and $0.2 million related to non-agency backed commercial CMOs at both June 30, 2014 and December 31, 2013.

Other-Than-Temporary Impairment

The Company separates OTTI into the following two components: (i) the amount related to credit losses, which is recognized in the consolidated statement of comprehensive income (loss) and (ii) the amount related to all other factors, which is recorded in comprehensive income (loss). The credit-related portion of an OTTI is measured by comparing a security’s amortized cost to the present value of its current expected cash flows discounted at its effective yield prior to the impairment charge.

The determination of whether unrealized losses are “other-than-temporary” requires judgment based on subjective as well as objective factors. The Company routinely monitors its investment portfolio for changes in fair value that might indicate potential impairments and performs detailed reviews on such securities. Changes in fair value are evaluated to determine the extent to which such changes are attributable to (i) fundamental factors specific to the issuer or (ii) market-related factors such as interest rates or sector declines.

Securities with declines attributable to issuer-specific fundamentals are reviewed to identify all available evidence to estimate the potential for impairment. Resources used include historical financial data included in filings with the SEC for corporate bonds and performance data regarding the underlying loans for CMOs. Securities with declines attributable solely to market or sector declines where the Company does not intend to sell the security and it is more likely than not that the Company will not be required to sell the security before the full recovery of its amortized cost basis are not deemed to be other-than-temporarily impaired.

 

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FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

The issuer-specific factors considered in reaching the conclusion that securities with declines are not other-than-temporary include (i) the extent and duration of the decline in fair value, including the duration of any significant decline in value, (ii) whether the security is current as to payments of principal and interest, (iii) a valuation of any underlying collateral, (iv) current and future conditions and trends for both the business and its industry, (v) changes in cash flow assumptions for CMOs and (vi) rating agency actions. Based on these factors, the Company makes a determination as to the probability of recovering principal and interest on the security.

For the six months ended June 30, 2013, the Company recognized OTTI charges in net income of $28 thousand related to one non-agency backed residential CMO.

The following is a progression of the credit-related portion of OTTI on investments owned at June 30, 2014 and 2013 (in thousands).

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2014     2013     2014     2013  

Beginning balance

   $ (2,632   $ (2,607   $ (2,632   $ (2,666

Additional credit impairments on:

        

Previously impaired securities

     —          —          —          (28

Securities without previous impairments

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 
     —          —          —          (28

Reductions for securities sold (realized)

     —          (8     —          (95
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ (2,632   $ (2,599   $ (2,632   $ (2,599
  

 

 

   

 

 

   

 

 

   

 

 

 

The Company believes that the remaining securities having unrealized losses at June 30, 2014 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.

 

4. Net Income Per Share

The following table sets forth the computation of basic and diluted net income per share (in thousands, except per share data).

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2014      2013      2014      2013  

Net income

   $ 3,469       $ 2,066       $ 3,980       $ 4,090   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average common basic shares

     40,978         40,921         40,974         40,915   

Effect of dilutive securities

     296         27         304         27   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average common dilutive shares

     41,274         40,948         41,278         40,942   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic and diluted net income per share

   $ 0.08       $ 0.05       $ 0.10       $ 0.10   
  

 

 

    

 

 

    

 

 

    

 

 

 

For the three months ended June 30, 2014, the computation of diluted net income per share included 5 thousand shares of unvested restricted common stock and exercisable options to purchase approximately 0.8 million shares that had a dilutive effect of 291 thousand shares. For the six months ended June 30, 2014, the computation of diluted net income per share included 5 thousand shares of unvested restricted common stock and exercisable options to purchase approximately 0.8 million shares that had a dilutive effect of 299 thousand shares. Options to purchase 350 thousand shares were not included in the computation of diluted net income per share for the three and six months ended June 30, 2014, as their exercise prices were in excess of the average stock prices for the periods.

 

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FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

For both the three and six months ended June 30, 2013, 27 thousand shares of unvested restricted common stock were included in the computation of diluted income per share. Options to purchase 1.3 million shares were not included in the computation of diluted net income per share for the three and six months ended June 30, 2013 as their exercise prices were in excess of the average stock prices for the periods.

 

5. Income Taxes

The provision (benefit) for income taxes consisted of the following (in thousands).

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2014     2013      2014     2013  

Federal:

         

Current

   $ 81      $ 41       $ 91      $ 67   

Deferred

     (2     —           (2     —     
  

 

 

   

 

 

    

 

 

   

 

 

 
     79        41         89        67   

State:

         

Current

     174        146         199        212   

Deferred

     1        1         2        2   
  

 

 

   

 

 

    

 

 

   

 

 

 
     175        147         201        214   
  

 

 

   

 

 

    

 

 

   

 

 

 
   $ 254      $ 188       $ 290      $ 281   
  

 

 

   

 

 

    

 

 

   

 

 

 

The 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
June 30,
    Six Months Ended
June 30,
 
     2014     2013     2014     2013  

Provision for income taxes at statutory rate

   $ 1,303      $ 789      $ 1,495      $ 1,530   

Tax effect of:

        

Tax-exempt investment income

     (5     (5     (10     (10

Change in the beginning of the period balance of the valuation allowance for deferred tax assets allocated to federal income taxes

     (1,233     (749     (1,456     (1,635

Stock-based compensation

     7        —          44        171   

State income taxes, net of federal income tax benefit and valuation allowance

     175        147        201        214   

Other

     7        6        16        11   
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 254      $ 188      $ 290      $ 281   
  

 

 

   

 

 

   

 

 

   

 

 

 

The Company had a valuation allowance of $21.7 million and $24.2 million at June 30, 2014 and December 31, 2013, respectively, to reduce deferred tax assets to the amount that is more likely than not to be realized. The change in the total valuation allowance for the six months ended June 30, 2014 was a decrease of $2.5 million. For the six months ended June 30, 2014, the change in the valuation allowance included an increase of $1.0 million related to unrealized change in investments included in other comprehensive income (loss) and was net of the utilization of $5.0 million in net operating loss carryforwards.

In assessing the realization of deferred tax assets, management considered whether it was more likely than not that some portion or all of the deferred tax assets will not be realized. The Company is required to assess whether a valuation allowance should be established against the Company’s net deferred tax assets based on the consideration of all available evidence using a more likely than not standard. In making such judgments, significant weight is given to evidence that can be objectively verified. In assessing the Company’s ability to support the realizability of its deferred tax assets, management considered both positive and negative evidence. The Company placed greater weight on historical results than on the Company’s outlook for future profitability and established a

 

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FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

deferred tax valuation allowance at June 30, 2014 and December 31, 2013. The deferred tax 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 deferred tax assets will be realized. In the event the deferred tax valuation allowance is adjusted, the Company would record an income tax benefit for the adjustment.

 

6. 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, interest expense associated with all debt and other general corporate overhead expenses.

The following table presents selected financial data by business segment (in thousands).

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2014     2013     2014     2013  

Revenues:

        

Insurance

   $ 67,105      $ 62,481      $ 129,632      $ 121,759   

Real estate and corporate

     15        12        30        23   
  

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated total

   $ 67,120      $ 62,493      $ 129,662      $ 121,782   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes:

        

Insurance

   $ 4,441      $ 2,949      $ 5,679      $ 5,811   

Real estate and corporate

     (718     (695     (1,409     (1,440
  

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated total

   $ 3,723      $ 2,254      $ 4,270      $ 4,371   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

     June 30,
2014
     December 31,
2013
 

Total assets:

     

Insurance

   $ 282,419       $ 262,869   

Real estate and corporate

     13,720         10,838   
  

 

 

    

 

 

 

Consolidated total

   $ 296,139       $ 273,707   
  

 

 

    

 

 

 

 

7. 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.

In January 2014, one current and three former employees filed a class action lawsuit against the Company in the U.S. District Court for the Middle District of Tennessee. The case is styled Lykins, et al. v. First Acceptance Corporation, et al. The suit alleges the Company violated the Fair Labor Standards Act by misclassifying its insurance agents as exempt employees. Plaintiffs seek unpaid wages, overtime, attorneys’ fees and costs. The Company answered the plaintiffs’ Complaint and denied all of the allegations contained therein. In April 2014, the case was conditionally certified as a class action, and a notice regarding the case was sent to all potential class

 

13


Table of Contents

FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

members. Approximately 200 individuals chose to participate in the case during the opt-in period which closed on July 15, 2014. The Company strongly disagrees with the allegations and will put forth a vigorous defense. The case is still in its early stages, and discovery has not yet begun. This litigation could have a lengthy duration. Therefore, based on these reasons, an estimate of the ultimate impact of this litigation on the Company, if any, cannot be made at this time.

 

8. Recent Accounting Pronouncements

In May 2014, the Financial Standards Board (“FASB”) and the International Accounting Standards Board (“IASB”) have jointly issued a new revenue recognition standard, Accounting Standard Update (“ASU”) No. 2019-09, “Revenue from Contracts with Customers”, that will supersede virtually all revenue recognition guidance in GAAP and International Financial Reporting Standards (“IFRS”). This guidance has an effective date for public companies for annual and interim periods beginning after December 15, 2016, with early adoption not permitted. The standard is intended to increase comparability across industries and jurisdictions. To aid in this happening the boards are creating joint transition groups. Separately, the American Institute of Certified Public Accountants (“AICPA”) has formed sub-groups to focus on implementation issues involving broker-dealers, depository institutions, insurance companies and investment companies. 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 standard also requires more detailed disclosures and provides additional guidance for transactions that were not addressed completely in the prior accounting guidance. The Company is currently evaluating this guidance and the impact it will have on future consolidated financial statements. At this time the impact is unknown.

In June 2014, the FASB made a decision to require insurance companies to make additional disclosures about short-term duration contracts to make their financial statements more transparent. There is currently no effective date set for this guidance, but the recommendation is for reporting periods after December 15, 2014 for public entities. The Company believes that it will be reasonably able to comply with these requirements.

 

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Table of Contents

FIRST ACCEPTANCE CORPORATION 10-Q

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements which involve risks and uncertainties. Our actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such a difference include those discussed in Item 1A. “Risk Factors” in our Annual Report on Form 10-K for year ended December 31, 2013. The following discussion should be read in conjunction with our consolidated financial statements included with this report and our consolidated financial statements and related Management’s Discussion and Analysis of Financial Condition and Results of Operations for year ended December 31, 2013 included in our Annual Report on Form 10-K for the year ended December 31, 2013.

Forward-Looking Statements

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements made in this report, other than statements of historical fact, are forward-looking statements. You can identify these statements from our use of the words “may,” “should,” “could,” “potential,” “continue,” “plan,” “forecast,” “estimate,” “project,” “believe,” “intent,” “anticipate,” “expect,” “target,” “is likely,” “will,” or the negative of these terms and similar expressions. These statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements may include, among other things, statements and assumptions relating to:

 

    our future growth, income, income per share and other financial performance measures;

 

    the anticipated effects on our results of operations or financial condition from recent and expected developments or events;

 

    the financial condition of, and other issues relating to the strength of and liquidity available to, issuers of securities held in our investment portfolio;

 

    the accuracy and adequacy of our loss reserving methodologies; and

 

    our business and growth strategies.

We believe that our expectations are based on reasonable assumptions. However, these forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause our actual results, performance or achievements, or industry results to differ materially from our expectations of future results, performance or achievements expressed or implied by these forward-looking statements. In addition, our past results of operations do not necessarily indicate our future results. We discuss these and other uncertainties in “Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2013.

You should not place undue reliance on any forward-looking statements. These statements speak only as of the date of this report. Except as otherwise required by applicable laws, we undertake no obligation to publicly update or revise any forward-looking statements or the risk factors described in this report, whether as a result of new information, future events, changed circumstances or any other reason after the date of this report.

General

We are principally a retailer, servicer and underwriter of non-standard personal automobile insurance. We also own two tracts of land in San Antonio, Texas that are held for sale. Non-standard personal automobile insurance is made available to individuals because of their inability or unwillingness to obtain standard insurance coverage due to various factors, including payment history, payment preference, failure in the past to maintain continuous insurance coverage, driving record and/or vehicle type.

 

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FIRST ACCEPTANCE CORPORATION 10-Q

 

At June 30, 2014, we leased and operated 353 retail locations (or “stores”) staffed by employee-agents who primarily sell non-standard personal automobile insurance products underwritten by us as well as certain commissionable ancillary products. In most states, our employee-agents also sell a complementary insurance product providing personal property and liability coverage for renters underwritten by us. In addition, select retail locations in highly competitive markets in Illinois and Texas offer non-standard personal automobile insurance serviced and underwritten by other third-party insurance carriers. In addition to our retail locations, we are able to complete the entire sales process over the phone via our call center or through the internet via our consumer-based website or mobile platform. We also sell our products through 11 retail locations operated by independent agents.

At June 30, 2014, we wrote non-standard personal automobile insurance in 12 states and were licensed in 13 additional states. See the discussion in Item 1. “Business - General” in our Annual Report on Form 10-K for the year ended December 31, 2013 for additional information with respect to our business.

The following table shows the number of our retail locations. Retail location counts are based upon the date that a location commenced or ceased writing business.

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2014     2013     2014     2013  

Retail locations – beginning of period

     355        367        360        369   

Opened

     —          —          —          —     

Closed

     (2     (1     (7     (3
  

 

 

   

 

 

   

 

 

   

 

 

 

Retail locations – end of period

     353        366        353        366   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

     June 30,      March 31,      December 31,  
     2014      2013      2014      2013      2013      2012  

Alabama

     24         24         24         24         24         24   

Florida

     30         30         30         30         30         30   

Georgia

     60         60         60         60         60         60   

Illinois

     60         62         61         62         61         63   

Indiana

     17         17         17         17         17         17   

Mississippi

     7         7         7         7         7         7   

Missouri

     10         11         11         11         11         11   

Ohio

     27         27         27         27         27         27   

Pennsylvania

     16         16         16         16         16         16   

South Carolina

     25         26         25         26         25         26   

Tennessee

     19         19         19         19         19         19   

Texas

     58         67         58         68         63         69   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     353         366         355         367         360         369   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Consolidated Results of Operations

Overview

Our primary focus is selling, servicing and underwriting non-standard personal automobile insurance. Our real estate and corporate segment consists of activities related to the disposition of real estate held for sale, interest expense associated with debt, and other general corporate overhead expenses. Our insurance operations generate revenues from selling, servicing and underwriting non-standard personal automobile insurance policies and related products in 12 states. We conduct our underwriting operations through three insurance company subsidiaries: First Acceptance Insurance Company, Inc., First Acceptance Insurance Company of Georgia, Inc. and First Acceptance Insurance Company of Tennessee, Inc. Our insurance revenues are primarily generated from:

 

    premiums earned, including policy and renewal fees, from sales of policies written and assumed by our insurance company subsidiaries;

 

    commission and fee income, including installment billing fees on policies written, agency fees and commissions and fees for other ancillary products and policies sold on behalf of third-party insurance carriers; and

 

    investment income earned on the invested assets of the insurance company subsidiaries.

The following table presents gross premiums earned by state (in thousands). Driven by a higher percentage of full coverage policies sold and rate increases taken in most states, net premiums earned for the three and six months ended June 30, 2014 increased 7.2% and 6.0%, respectively, compared with the same periods in the prior year.

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2014     2013     2014     2013  

Gross premiums earned:

        

Georgia

   $ 10,322      $ 9,887      $ 19,902      $ 19,538   

Florida

     8,657        8,092        16,620        15,713   

Texas

     7,169        6,168        13,638        11,990   

Ohio

     5,757        4,684        10,906        9,044   

Alabama

     5,604        5,523        10,857        10,571   

Illinois

     5,092        5,327        9,821        10,644   

South Carolina

     4,235        4,036        8,242        7,694   

Tennessee

     3,208        3,182        6,394        6,222   

Pennsylvania

     2,257        2,228        4,403        4,372   

Indiana

     1,562        1,355        2,994        2,599   

Missouri

     1,275        982        2,413        1,870   

Mississippi

     789        703        1,539        1,361   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total gross premiums earned

     55,927        52,167        107,729        101,618   

Premiums ceded to reinsurer

     (73     (49     (127     (97
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net premiums earned

   $ 55,854      $ 52,118      $ 107,602      $ 101,521   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

 

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The following table presents the change in the total number of policies in force (“PIF”) for policies underwritten by our insurance company subsidiaries. PIF increases as a result of new policies issued and decreases as a result of policies that are canceled or expire and are not renewed. At June 30, 2014, PIF was 3.7% higher than at the same date in the prior year.

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2014     2013     2014      2013  

Policies in force – beginning of period

     168,607        169,424        143,077         145,938   

Net change during period

     (9,314     (15,829     16,216         7,657   
  

 

 

   

 

 

   

 

 

    

 

 

 

Policies in force – end of period

     159,293        153,595        159,293         153,595   
  

 

 

   

 

 

   

 

 

    

 

 

 

Insurance companies present a combined ratio as a measure of their overall underwriting profitability. The components of the combined ratio are as follows.

Loss Ratio - Loss ratio is the ratio (expressed as a percentage) of losses and loss adjustment expenses incurred to premiums earned and is a basic element of underwriting profitability. We calculate this ratio based on all direct and assumed premiums earned, net of ceded reinsurance.

Expense Ratio - Expense ratio is the ratio (expressed as a percentage) of insurance operating expenses (including depreciation and amortization) to net premiums earned. Insurance operating expenses are reduced by commission and fee income from insureds. This is a measurement that illustrates relative management efficiency in administering our operations.

Combined Ratio - Combined ratio is the sum of the loss ratio and the expense ratio. If the combined ratio is at or above 100%, an insurance company cannot be profitable without sufficient investment income.

The following table presents the loss, expense and combined ratios for our insurance operations.

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2014     2013     2014     2013  

Loss

     73.5     75.0     72.4     71.5

Expense

     20.7     21.7     24.9     25.2
  

 

 

   

 

 

   

 

 

   

 

 

 

Combined

     94.2     96.7     97.3     96.7
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Operational Initiatives

Since the beginning of 2012, we renewed our focus on improving the customer experience and value through several initiatives. Through July 2014, our progress has included:

 

    investment in our sales organization to improve the quality and consistency of the customer experience in our retail stores,

 

    continued development and consolidation of our “Acceptance” brand,

 

    development of electronic signature capabilities, thereby enabling most customers to receive quotes and bind policies over the phone and through our website,

 

    development of a consumer-based website that reflects our branding strategy, improves the customer experience, and allows for full-service capabilities including quoting, binding and receiving payments,

 

    development of an internet-specific sales strategy to drive quote traffic to our website, including the release of a mobile platform that puts the full range of our services into the broad spectrum of handheld devices, including mobile phones and tablets,

 

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

 

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

 

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

Moving forward, we continue to believe that our retail stores are the foundation of our business, providing an opportunity for us to directly interact with our customers on a regular basis. We also recognize that customer preferences have changed and that we need to adapt to meet those needs. For that reason, we will continue to invest in our people, retail stores, website and call center initiatives, and our customer interaction efforts in order to improve the customer experience. Our current initiatives include:

 

    expansion of our potential customer base through enhancements to our insurance products and the methods through which customer payments are accepted,

 

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

 

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

 

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Investments

We use the services of an independent investment manager to manage our investment portfolio. The investment manager conducts, in accordance with our investment policy, all of the investment purchases and sales for our insurance company subsidiaries. Our investment policy has been established by the Investment Committee of our Board of Directors and specifically addresses overall investment goals and objectives, authorized investments, prohibited securities, restrictions on sales by the investment manager and guidelines as to asset allocation, duration and credit quality. Management and the Investment Committee meet regularly with our investment manager to review the performance of the portfolio and compliance with our investment guidelines.

The invested assets of the insurance company subsidiaries consist substantially of marketable, investment grade debt securities, and include U.S. government securities, municipal bonds, corporate bonds, mutual funds and collateralized mortgage obligations (“CMOs”), in addition to some recent investments made into limited partnership interests. Investment income is comprised primarily of interest earned on these securities, net of related investment expenses. Realized gains and losses may occur from time to time as changes are made to our holdings based upon changes in interest rates or the credit quality of specific securities.

The value of our consolidated available-for-sale investment portfolio was $131.3 million at June 30, 2014 and consisted of fixed maturity securities and investments in mutual funds, all carried at fair value with unrealized gains and losses reported as a separate component of stockholders’ equity. At June 30, 2014, we had gross unrealized gains of $7.4 million and gross unrealized losses of $1.1 million in our consolidated available-for-sale investment portfolio.

At June 30, 2014, 94% of the fair value of our fixed maturity portfolio was rated “investment grade” (a credit rating of AAA to BBB-) by nationally recognized statistical rating organizations. Investment grade securities generally bear lower yields and have lower degrees of risk than those that are unrated or non-investment grade. We believe that a high quality investment portfolio is more likely to generate a stable and predictable investment return.

Investments in CMOs had a fair value of $15.1 million at June 30, 2014 and represented 13% of our fixed maturity portfolio. At June 30, 2014, 65% of our CMOs were considered investment grade by nationally recognized statistical rating agencies and 47% were backed by agencies of the United States government.

The following table summarizes our investment securities at June 30, 2014 (in thousands).

 

June 30, 2014

   Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair
Value
 

U.S. government and agencies

   $ 12,005       $ 361       $ (5   $ 12,361   

State

     698         35         —          733   

Political subdivisions

     501         10         —          511   

Revenue and assessment

     11,838         1,097         —          12,935   

Corporate bonds

     75,093         2,818         (1,045     76,866   

Collateralized mortgage obligations:

          

Agency backed

     6,892         283         —          7,175   

Non-agency backed – residential

     3,855         693         —          4,548   

Non-agency backed – commercial

     2,676         724         —          3,400   

Redeemable preferred stocks

     1,500         196         —          1,696   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total fixed maturities, available-for-sale

     115,058         6,217         (1,050     120,225   

Mutual funds, available-for-sale

     9,901         1,158         —          11,059   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 124,959       $ 7,375       $ (1,050   $ 131,284   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

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Three and Six Months Ended June 30, 2014 Compared with the Three and Six Months Ended June 30, 2013

Consolidated Results

Revenues for the three months ended June 30, 2014 increased 7% to $67.1 million from $62.5 million in the same period in the prior year. Income before income taxes for the three months ended June 30, 2014 was $3.7 million, compared with income before income taxes of $2.3 million for the three months ended June 30, 2013. Net income for the three months ended June 30, 2014 was $3.5 million, compared with net income of $2.1 million for the three months ended June 30, 2013. Basic and diluted net income per share were $0.08 for the three months ended June 30, 2014, compared with basic and diluted net income per share of $0.05 for the same period in the prior year.

Revenues for the six months ended June 30, 2014 increased 6% to $129.7 million from $121.8 million in the same period in the prior year. Income before income taxes for the six months ended June 30, 2014 was $4.3 million, compared with income before income taxes of $4.4 million for the six months ended June 30, 2013. Net income for the six months ended June 30, 2014 was $4.0 million, compared with net income of $4.1 million for the six months ended June 30, 2013. Basic and diluted net income per share were $0.10 for both the six months ended June 30, 2014 and 2013.

Insurance Operations

Revenues from insurance operations were $67.1 million for the three months ended June 30, 2014, compared with $62.5 million for the three months ended June 30, 2013. Revenues from insurance operations were $129.7 million for the six months ended June 30, 2014, compared with $121.8 million for the six months ended June 30, 2013.

Income before income taxes from insurance operations for the three months ended June 30, 2014 was $4.4 million, compared with income before income taxes from insurance operations of $2.9 million for the three months ended June 30, 2013. Income before income taxes from insurance operations for the six months ended June 30, 2014 was $5.7 million, compared with income before income taxes from insurance operations of $5.8 million for the six months ended June 30, 2013.

Premiums Earned

Premiums earned increased by $3.8 million, or 7%, to $55.9 million for the three months ended June 30, 2014, from $52.1 million for the three months ended June 30, 2013. For the six months ended June 30, 2014, premiums earned increased by $6.1 million, or 6%, to $107.6 million from $101.5 million for the six months ended June 30, 2013. This improvement was primarily due to a higher percentage of full coverage policies sold and our recent pricing actions.

Commission and Fee Income

Commission and fee income increased by $0.8 million, or 9%, to $10.0 million for the three months ended June 30, 2014, from $9.2 million for the three months ended June 30, 2013. For the six months ended June 30, 2014, commission and fee income increased by $1.4 million, or 8%, to $19.2 million from $17.8 million for the six months ended June 30, 2013. This increase in commission and fee income was a result of increases in sales of ancillary products and policies sold on behalf of third-party insurance carriers.

 

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Investment Income

Investment income was $1.3 million for both the three months ended June 30, 2014 and 2013. For the six months ended June 30, 2014, investment income increased to $2.8 million from $2.5 million during the six months ended June 30, 2013. This increase in investment income was primarily a result of returns from investments in limited partnership interests and a reduction in investment expenses. At June 30, 2014 and 2013, the tax-equivalent book yields for our managed fixed maturities and cash equivalents portfolio were 2.8% and 3.0%, respectively, with effective durations of 3.07 and 2.85 years, respectively.

Net Realized Gains (Losses) on Investments, Available-for-sale

Net realized losses on investments, available-for-sale during the three months ended June 30, 2014 and 2013 included $42 thousand and $55 thousand, respectively, of net realized losses on redemptions.

For the six months ended June 30, 2014 net realized gains on investments, available-for-sale included $40 thousand in net realized gains on redemptions. For the six months ended June 30, 2013 net realized losses on investments, available-for-sale included $14 thousand in net realized losses on redemptions and $28 thousand of charges related to OTTI on certain non-agency backed CMOs.

Loss and Loss Adjustment Expenses

The loss ratio was 73.5% for the three months ended June 30, 2014, compared with 75.0% for the three months ended June 30, 2013. The loss ratio was 72.4% for the six months ended June 30, 2014, compared with 71.5% for the six months ended June 30, 2013. We experienced favorable development related to prior periods of $2.4 million for the three months ended June 30, 2014, compared with favorable development of $1.4 million for the three months ended June 30, 2013. For the six months ended June 30, 2014, we experienced favorable development related to prior periods of $4.4 million, compared with favorable development of $2.5 million for the six months ended June 30, 2013. The favorable development for the three and six month periods ended June 30, 2014 was primarily due to lower than expected development related to bodily injury emergence in recent accident quarters.

Excluding the development related to prior periods for the three months ended June 30, 2014 and 2013, the loss ratios were 77.8% and 77.7%, respectively. Excluding the development related to prior periods, the loss ratios for the six months ended June 30, 2014 and 2013 were 76.5% and 74.0%, respectively. The year-over-year increase in the loss ratio was primarily due to weather-related claims frequency in the collision and property damage coverages.

Insurance Operating Expenses

Insurance operating expenses increased 7% to $21.2 million for the three months ended June 30, 2014, from $19.9 million for the three months ended June 30, 2013. For the six months ended June 30, 2014, insurance operating expenses increased 7% to $45.2 million from $42.2 million for the six months ended June 30, 2013. The increase was primarily attributable to additional salaries and benefit costs for the sales organization.

The expense ratio was 20.7% for the three months ended June 30, 2014, compared with 21.7% for the three months ended June 30, 2013. The expense ratio was 24.9% for the six months ended June 30, 2014, compared with 25.2% for the six months ended June 30, 2013. 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).

Overall, the combined ratio decreased to 94.2% for the three months ended June 30, 2014 from 96.7% for the three months ended June 30, 2013. For the six months ended June 30, 2014, the combined ratio increased to 97.3% from 96.7% for the six months ended June 30, 2013.

 

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Provision for Income Taxes

The provision for income taxes was $0.3 million and $0.2 million, respectively, for the three months ended June 30, 2014 and 2013. The provision for income taxes was $0.3 million for both the six months ended June 30, 2014 and 2013. The provision for income taxes related primarily to current state income taxes for certain subsidiaries with taxable income. At June 30, 2014 and 2013, we established a valuation allowance to reduce deferred tax assets to the amount that is more likely than not to be realized. In assessing our ability to support the realizability of our deferred tax assets, we considered both positive and negative evidence. We placed greater weight on historical results than on our outlook for future profitability. The deferred tax valuation allowance may be adjusted in future periods if we determine that it is more likely than not that some portion or all of the deferred tax assets will be realized. In the event the deferred tax valuation allowance is adjusted, we would record an income tax benefit for the adjustment.

Real Estate and Corporate

Loss before income taxes from real estate and corporate operations for the three months ended both June 30, 2014 and 2013 was $0.7 million. Loss before income taxes from real estate and corporate operations for the six months ended both June 30, 2014 and 2013 was $1.4 million. Segment losses consist of other operating expenses not directly related to our insurance operations, interest expense and stock-based compensation offset by investment income on corporate invested assets. We incurred $0.4 million of interest expense for both the three months ended June 30, 2014 and 2013 related to debentures issued in July 2007. We incurred $0.8 million and $0.9 million, respectively, of interest expense for the six months ended June 30, 2014 and 2013 related to the debentures. For additional information, see “Liquidity and Capital Resources” in this report.

 

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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, 2014 was $13.2 million, compared with $15.6 million for the same period in the prior fiscal year. Net cash provided by investing activities for the six months ended June 30, 2014 was $0.1 million, compared with net cash used in investing activities of $0.3 million for the same period in the prior fiscal year. The six months ended June 30, 2014 and 2013 included net reductions in our investment portfolio of $0.5 million and $0.3 million, respectively. The net reductions in our investment portfolio in both periods were primarily a result of maturities and redemptions in excess of purchases. Investing activities during the six months ended June 30, 2014 also included capital expenditures primarily related to system enhancements of $0.5 million as compared to $0.6 million in the same period in the prior year.

Our holding company requires cash for general corporate overhead expenses and for debt service related to our debentures payable. The holding company’s primary source of unrestricted cash to meet its obligations is the sale of ancillary products and policies on behalf of third-party carriers. If necessary and available subject to state law limitations, the holding company may receive dividends from our insurance company subsidiaries. To a lesser extent, the holding company also receives cash from operating activities as a result of investment income. Through an intercompany tax allocation arrangement, taxable losses of the holding company provide cash to the holding company to the extent that taxable income is generated by the insurance company subsidiaries. At June 30, 2014, we had $10.8 million available in unrestricted cash and investments outside of the insurance company subsidiaries. These funds and the additional unrestricted cash from the sources noted above will be used to pay our future cash requirements outside of the insurance company subsidiaries.

The holding company has debt service requirements related to the debentures payable. The debentures are interest-only and mature in full in July 2037. The debentures pay interest at a variable rate equal to Three-Month LIBOR plus 375 basis points, which resets quarterly. The interest rate related to the debentures was 3.986% for the period from November 2013 to April 2014. The interest rate reset in April 2014 to 3.975% through July 2014. In July 2014 the interest rate reset to 3.986% through October 2014.

State insurance laws limit the amount of dividends that may be paid from our insurance company subsidiaries. At June 30, 2014, our insurance company subsidiaries could not pay ordinary dividends without prior regulatory approval due to a negative statutory surplus position.

The National Association of Insurance Commissioners 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. 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 2.19-to-1 at June 30, 2014. Based on our current forecast on a combined basis, we anticipate that our risk-based capital levels will be adequate and that our ratio of net premiums written to statutory capital and surplus will not exceed the 3-to-1 statutory guideline for the reasonably foreseeable future. We therefore believe that our insurance company subsidiaries have sufficient statutory capital and surplus available to support their net premium writings in this time frame.

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 reasonably foreseeable future. Any future growth strategy may require external financing, and we may from time to time seek to obtain external financing. We cannot assure that additional sources of financing will be available to us on favorable terms, or at all, or that any such financing would not negatively impact our results of operations.

 

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Off-Balance Sheet Arrangements

We have not entered into any new off-balance sheet arrangements since December 31, 2013. For information with respect to our off-balance sheet arrangements at December 31, 2013, 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, 2013.

Critical Accounting Estimates

There have been no significant changes to our critical accounting estimates during the six months ended June 30, 2014 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, 2013.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market risk represents the potential economic loss arising from adverse changes in the fair value of financial instruments. Our exposures to market risk relate primarily to our investment portfolio, which is exposed primarily to interest rate risk and credit risk. The fair value of our investment portfolio is directly impacted by changes in market interest rates; generally, the fair value of fixed-income investments moves inversely with movements in market interest rates. Our fixed maturity portfolio is comprised of substantially all fixed rate investments with primarily short-term and intermediate-term maturities. Likewise, the underlying investments of our mutual fund investments are also primarily fixed-income investments. This portfolio composition allows flexibility in reacting to fluctuations of interest rates. Limited partnership interests offer additional risk through the diversity of their underlying investments and their lack of marketability. The portfolios of our insurance company subsidiaries are managed to achieve an adequate risk-adjusted return while maintaining sufficient liquidity to meet policyholder obligations.

 

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Interest Rate Risk

The fair values of our fixed maturity investments fluctuate in response to changes in market interest rates. Increases and decreases in prevailing interest rates generally translate into decreases and increases, respectively, in the fair values of those instruments. Additionally, the fair values of interest rate sensitive instruments may be affected by the creditworthiness of the issuer, prepayment options, relative values of alternative investments, the liquidity of the instrument and other general market conditions.

The following table summarizes the estimated effects of hypothetical increases and decreases in interest rates resulting from parallel shifts in market yield curves on our fixed maturity portfolio (in thousands). It is assumed that the effects are realized immediately upon the change in interest rates. The hypothetical changes in market interest rates do not reflect what could be deemed best or worst case scenarios. Variations in market interest rates could produce significant changes in the timing of repayments due to prepayment options available. For these and other reasons, actual results might differ from those reflected in the table.

 

     Sensitivity to Instantaneous Interest Rate Changes (basis points)  
     (100)      (50)      0      50      100      200  

Fair value of fixed maturity portfolio

   $ 125,515       $ 122,902       $ 120,225       $ 117,538       $ 114,583       $ 109,486   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following table provides information about our fixed maturity investments at June 30, 2014 which are sensitive to interest rate risk. The table shows expected principal cash flows (at par value, which differs from amortized cost as a result of premiums or discounts at the time of purchase and OTTI) by expected maturity date for each of the next five fiscal years and collectively for all fiscal years thereafter (in thousands). Callable bonds and notes are included based on call date or maturity date depending upon which date produces the most conservative yield. CMOs and sinking fund issues are included based on maturity year adjusted for expected payment patterns. Actual cash flows may differ from those expected.

 

Year Ending December 31,

   Securities
with
Unrealized
Gains
     Securities
with
Unrealized
Losses
     Securities
with No
Unrealized
Gains or
Losses
     All Fixed
Maturity
Securities
 

2014

   $ 13,651       $ —         $ —         $ 13,651   

2015

     15,395         —           —           15,395   

2016

     8,436         1,025         —           9,461   

2017

     5,874         6,575         —           12,449   

2018

     4,766         3,000         —           7,766   

Thereafter

     34,241         20,261         —           54,502   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 82,363       $ 30,861       $ —         $ 113,224   
  

 

 

    

 

 

    

 

 

    

 

 

 

Fair value

   $ 89,535       $ 30,690       $ —         $ 120,225   
  

 

 

    

 

 

    

 

 

    

 

 

 

On June 15, 2007, our wholly-owned unconsolidated trust entity, First Acceptance Statutory Trust I (FAST I), used the proceeds from its sale of trust preferred securities to purchase $41.2 million of junior subordinated debentures.

The debentures pay interest at a variable rate equal to Three-Month LIBOR plus 375 basis points, which resets quarterly. The interest rate related to the debentures was 3.986% for the periods from November 2013 to April 2014. The interest rate reset in April 2014 to 3.975% through July 2014. In July 2014 the interest rate reset to 3.986% through October 2014.

 

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Credit Risk

Credit risk is managed by diversifying our investment portfolio to avoid concentrations in any single industry group or issuer and by limiting investments in securities with lower credit ratings. Our largest investment in any one investment, excluding U.S. government and agency securities, is our investment in a single mutual fund with a fair value of $8.5 million, or 6% of our investment portfolio. Our five largest investments make up 18% of our investment portfolio.

The following table presents the underlying ratings of our fixed maturity portfolio by nationally recognized statistical rating organizations at June 30, 2014 (in thousands).

 

Comparable Rating

   Amortized
Cost
     % of
Amortized
Cost
    Fair
Value
     % of
Fair
Value
 

AAA

   $ 5,286         5   $ 5,458         5

AA+, AA, AA-

     45,276         39     45,890         38

A+, A, A-

     43,580         38     45,459         38

BBB+, BBB, BBB-

     14,096         12     15,228         13
  

 

 

    

 

 

   

 

 

    

 

 

 

Total investment grade

     108,238         94     112,035         94

Not rated

     2,700         2     2,854         2

BB+, BB, BB-

     —           0     —           0

B+, B, B-

     613         1     659         0

CCC+, CCC, CCC-

     1,477         1     1,833         2

CC+, CC, CC-

     463         0     867         1

C+, C, C-

     980         1     1,360         1

D

     587         1     617         0
  

 

 

    

 

 

   

 

 

    

 

 

 

Total non-investment grade

     4,120         4     5,336         4
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 115,058         100   $ 120,225         100
  

 

 

    

 

 

   

 

 

    

 

 

 

 

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Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management team, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended, or the “Exchange Act”) as of June 30, 2014. Based on that evaluation, our Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial officer) concluded that our disclosure controls and procedures were effective as of June 30, 2014 to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

Changes in Internal Control Over Financial Reporting

During the period covered by this report, there has been no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings

We and our subsidiaries are named from time to time as defendants in various legal actions that are incidental to our business, including those which arise out of or are related to the handling of claims made in connection with our insurance policies and claims handling. The plaintiffs in some of these lawsuits have alleged bad faith or extra-contractual damages, and some have sought punitive damages or class action status. We believe that the resolution of these legal actions will not have a material adverse effect on our financial condition or results of operations. However, the ultimate outcome of these matters is uncertain. See Note 7 to our consolidated financial statements for further information about legal proceedings.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The following table provides information regarding repurchases by us of our common stock during the periods indicated. During the three months ended June 30, 2014, we repurchased 333 shares from employees to cover payroll withholding taxes in connection with the vesting of restricted common stock.

 

Period Beginning

  

Period

Ending

   Total
Number of
Shares
Purchased
     Average
Price Paid
per Share
     Total Number of
Shares

Purchased as
Part of Publicly
Announced Plans
or Programs
     Approximate
Dollar Value of
Shares that May
Yet Be Purchased
Under the Plans

or Programs
 

April 1, 2014

   April 30, 2014      333       $ 2.44         —           —     

May 1, 2014

   May 31, 2014      —           —           —           —     

June 1, 2014

   June 30, 2014      —           —           —           —     
     

 

 

    

 

 

    

 

 

    

 

 

 

Total

        333       $ 2.44         —           —     

 

Item 4. Mine Safety Disclosures

None.

 

Item 6. Exhibits

The following exhibits are attached to this report:

 

  31.1    Certification of Principal Executive Officer pursuant to Rule 13a-14(a).
  31.2    Certification of Principal Financial Officer pursuant to Rule 13a-14(a).
  32.1    Principal Executive Officer’s Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
  32.2    Principal Financial Officer’s Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101 –    XBRL

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

        FIRST ACCEPTANCE CORPORATION
Date: August 5, 2014     By:  

/s/ Brent J. Gay

      Brent J. Gay
      Chief Financial Officer

 

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