Item 1. Financial Statements
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Investments, available-for-sale at fair value (amortized cost of $119,780 and
$128,304, respectively)
|
|
$
|
122,646
|
|
|
$
|
131,582
|
|
|
Cash, cash equivalents, and restricted cash
|
|
|
143,371
|
|
|
|
115,587
|
|
|
Premiums, fees, and commissions receivable, net of allowance of $451 and
$454, respectively
|
|
|
75,770
|
|
|
|
69,881
|
|
|
Receivable for securities
|
|
|
20,026
|
|
|
|
—
|
|
|
Deferred tax assets, net
|
|
|
32,216
|
|
|
|
18,301
|
|
|
Other investments
|
|
|
9,653
|
|
|
|
11,256
|
|
|
Other assets
|
|
|
6,613
|
|
|
|
6,950
|
|
|
Property and equipment, net
|
|
|
5,292
|
|
|
|
5,141
|
|
|
Deferred acquisition costs
|
|
|
5,750
|
|
|
|
5,509
|
|
|
Goodwill
|
|
|
29,384
|
|
|
|
29,429
|
|
|
Identifiable intangible assets, net
|
|
|
7,814
|
|
|
|
8,491
|
|
|
TOTAL ASSETS
|
|
$
|
458,535
|
|
|
$
|
402,127
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
Loss and loss adjustment expense reserves
|
|
$
|
164,700
|
|
|
$
|
122,071
|
|
|
Unearned premiums and fees
|
|
|
89,820
|
|
|
|
83,426
|
|
|
Debentures payable
|
|
|
40,290
|
|
|
|
40,256
|
|
|
Term loan from principal stockholder
|
|
|
29,773
|
|
|
|
29,753
|
|
|
Payable for securities
|
|
|
37,929
|
|
|
|
—
|
|
|
Accrued expenses
|
|
|
7,265
|
|
|
|
7,345
|
|
|
Other liabilities
|
|
|
10,693
|
|
|
|
15,606
|
|
|
Total liabilities
|
|
|
380,470
|
|
|
|
298,457
|
|
|
Stockholders’ equity:
|
|
|
|
|
|
|
|
|
|
Preferred stock, $.01 par value, 10,000 shares authorized
|
|
|
—
|
|
|
|
—
|
|
|
Common stock, $.01 par value, 75,000 shares authorized; 41,096 issued and outstanding
|
|
|
411
|
|
|
|
411
|
|
|
Additional paid-in capital
|
|
|
457,681
|
|
|
|
457,476
|
|
|
Accumulated other comprehensive income, net of tax of $22 and $62, respectively
|
|
|
3,416
|
|
|
|
3,491
|
|
|
Accumulated deficit
|
|
|
(383,443
|
)
|
|
|
(357,708
|
)
|
|
Total stockholders’ equity
|
|
|
78,065
|
|
|
|
103,670
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$
|
458,535
|
|
|
$
|
402,127
|
|
See notes to consolidated financial statements.
1
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Unaudited)
(in thousands, except per share data)
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned
|
|
$
|
76,740
|
|
|
$
|
67,508
|
|
|
$
|
233,997
|
|
|
$
|
197,423
|
|
|
Commission and fee income
|
|
|
19,291
|
|
|
|
18,974
|
|
|
|
58,055
|
|
|
|
42,252
|
|
|
Investment income
|
|
|
1,187
|
|
|
|
1,144
|
|
|
|
3,795
|
|
|
|
3,695
|
|
|
Gain on sale of foreclosed real estate
|
|
|
—
|
|
|
|
—
|
|
|
|
1,237
|
|
|
|
—
|
|
|
Net realized gains (losses) on investments, available-for-
sale (includes $4,892 and $4,745, respectively, of
accumulated other comprehensive loss
reclassification for net unrealized gains in 2016)
|
|
|
4,897
|
|
|
|
(6
|
)
|
|
|
4,733
|
|
|
|
(13
|
)
|
|
|
|
|
102,115
|
|
|
|
87,620
|
|
|
|
301,817
|
|
|
|
243,357
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and loss adjustment expenses
|
|
|
71,079
|
|
|
|
57,367
|
|
|
|
245,262
|
|
|
|
160,304
|
|
|
Insurance operating expenses
|
|
|
28,940
|
|
|
|
29,309
|
|
|
|
88,901
|
|
|
|
78,039
|
|
|
Other operating expenses
|
|
|
369
|
|
|
|
295
|
|
|
|
932
|
|
|
|
881
|
|
|
Litigation settlement
|
|
|
—
|
|
|
|
3,406
|
|
|
|
—
|
|
|
|
3,645
|
|
|
Stock-based compensation
|
|
|
59
|
|
|
|
37
|
|
|
|
164
|
|
|
|
109
|
|
|
Depreciation
|
|
|
667
|
|
|
|
424
|
|
|
|
1,934
|
|
|
|
1,224
|
|
|
Amortization of identifiable intangibles assets
|
|
|
240
|
|
|
|
254
|
|
|
|
717
|
|
|
|
261
|
|
|
Interest expense
|
|
|
1,088
|
|
|
|
1,052
|
|
|
|
3,213
|
|
|
|
1,924
|
|
|
|
|
|
102,442
|
|
|
|
92,144
|
|
|
|
341,123
|
|
|
|
246,387
|
|
|
Loss before income taxes
|
|
|
(327
|
)
|
|
|
(4,524
|
)
|
|
|
(39,306
|
)
|
|
|
(3,030
|
)
|
|
Provision (benefit) for income taxes
|
|
|
6
|
|
|
|
(1,506
|
)
|
|
|
(13,571
|
)
|
|
|
(813
|
)
|
|
Net loss
|
|
$
|
(333
|
)
|
|
$
|
(3,018
|
)
|
|
$
|
(25,735
|
)
|
|
$
|
(2,217
|
)
|
|
Net loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(0.01
|
)
|
|
$
|
(0.07
|
)
|
|
$
|
(0.63
|
)
|
|
$
|
(0.05
|
)
|
|
Number of shares used to calculate net loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
41,096
|
|
|
|
41,041
|
|
|
|
41,074
|
|
|
|
41,026
|
|
|
Reconciliation of net loss to other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(333
|
)
|
|
$
|
(3,018
|
)
|
|
$
|
(25,735
|
)
|
|
$
|
(2,217
|
)
|
|
Unrealized change in investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized change in investments arising during
the period, net of tax of $4, $(17), $1,621
and $(609), respectively
|
|
|
7
|
|
|
|
(32
|
)
|
|
|
3,009
|
|
|
|
(1,131
|
)
|
|
Reclassification of net realized gains on investments,
available-for-sale, included in net loss, net of tax
of $(1,712) and $(1,661), respectively, in 2016
|
|
|
(3,180
|
)
|
|
|
—
|
|
|
|
(3,084
|
)
|
|
|
—
|
|
|
Comprehensive loss
|
|
$
|
(3,506
|
)
|
|
$
|
(3,050
|
)
|
|
$
|
(25,810
|
)
|
|
$
|
(3,348
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Detail of net realized gains (losses) on investments,
available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized gains (losses) on sales and redemptions
|
|
$
|
4,897
|
|
|
$
|
(6
|
)
|
|
$
|
4,880
|
|
|
$
|
(13
|
)
|
|
Other-than-temporary impairment charges
|
|
|
—
|
|
|
|
—
|
|
|
|
(147
|
)
|
|
|
—
|
|
|
Net realized gains (losses) on investments, available-for-
sale
|
|
$
|
4,897
|
|
|
$
|
(6
|
)
|
|
$
|
4,733
|
|
|
$
|
(13
|
)
|
See notes to consolidated financial statements.
2
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in thousands)
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2016
|
|
2015
|
|
Cash flows from operating activities:
|
|
|
|
|
|
Net loss
|
|
$ (25,735)
|
|
$ (2,217)
|
|
Adjustments to reconcile net loss to cash provided by operating activities:
|
|
|
|
|
|
Depreciation
|
|
1,934
|
|
1,224
|
|
Amortization of identifiable intangibles assets
|
|
717
|
|
261
|
|
Stock-based compensation
|
|
164
|
|
109
|
|
Deferred income taxes
|
|
(13,879)
|
|
(1,111)
|
|
Other-than-temporary impairment on investments, available-for-sale
|
|
147
|
|
—
|
|
Net realized (gains) losses on sales and redemptions of investments
|
|
(4,880)
|
|
13
|
|
Investment income from other investments
|
|
(408)
|
|
(301)
|
|
Gain on sale of foreclosed real estate, net
|
|
(1,237)
|
|
—
|
|
Other
|
|
170
|
|
212
|
|
Change in:
|
|
|
|
|
|
Premiums, fees, and commission receivable
|
|
(5,886)
|
|
(18,041)
|
|
Deferred acquisition costs
|
|
(241)
|
|
(1,969)
|
|
Loss and loss adjustment expense reserves
|
|
42,629
|
|
18,396
|
|
Unearned premiums and fees
|
|
6,394
|
|
18,935
|
|
Accrued expenses
|
|
(47)
|
|
6,122
|
|
Other liabilities
|
|
(4,913)
|
|
2,403
|
|
Other
|
|
(692)
|
|
13
|
|
Net cash (used in) provided by operating activities
|
|
(5,763)
|
|
24,049
|
|
Cash flows from investing activities:
|
|
|
|
|
|
Purchases of investments, available-for-sale
|
|
(62,950)
|
|
(21,022)
|
|
Maturities and redemptions of investments, available-for-sale
|
|
9,155
|
|
8,372
|
|
Sales of fixed maturities, available-for-sale
|
|
66,879
|
|
—
|
|
Purchases of other investments
|
|
(957)
|
|
(1,739)
|
|
Distributions from other investments
|
|
3,270
|
|
577
|
|
Net change in receivable/payable for securities
|
|
17,903
|
|
—
|
|
Capital expenditures
|
|
(1,523)
|
|
(1,529)
|
|
Proceeds from sale of foreclosed real estate, net
|
|
1,769
|
|
—
|
|
Acquisition of identifiable intangible assets
|
|
(40)
|
|
(205)
|
|
Business acquired through asset purchase
|
|
—
|
|
(33,770)
|
|
Net cash provided by (used in) investing activities
|
|
33,506
|
|
(49,316)
|
|
Cash flows from financing activities:
|
|
|
|
|
|
Proceeds from term loan from principal stockholder
|
|
—
|
|
30,000
|
|
Net proceeds from issuance of common stock
|
|
41
|
|
45
|
|
Net cash provided by financing activities
|
|
41
|
|
30,045
|
|
Net change in cash, cash equivalents, and restricted cash
|
|
27,784
|
|
4,778
|
|
Cash, cash equivalents, and restricted cash, beginning of period
|
|
115,587
|
|
102,429
|
|
|
|
Cash, cash equivalents, and restricted cash, end of period
|
|
$ 143,371
|
|
$ 107,207
|
See notes to consolidated financial statements.
3
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. General
The consolidated financial statements of First Acceptance Corporation (the “Company”) included herein have been prepared without audit pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, certain information and disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been omitted. In the opinion of management, the consolidated financial statements reflect all adjustments (consisting of normal recurring adjustments) necessary for a fair statement of the interim periods.
The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the full year. These consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements included in its Annual Report on Form 10-K for the year ended December 31, 2015.
Cash, Cash Equivalents, and Restricted Cash
Cash, cash equivalents, and restricted cash consist of bank demand deposits and highly-liquid investments, including overnight collateralized purchase agreements. All investments with maturities of three months or less at the date of purchase are considered cash equivalents. At September 30, 2016 and December 31, 2015 the Company had restricted cash equivalents of $17.1 million and $9.4 million, respectively.
2. Fair Value
Fair value is the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements are generally based upon observable and unobservable inputs. Observable inputs are based on market data from independent sources, while unobservable inputs reflect the Company’s view of market assumptions in the absence of observable market information. All assets and liabilities that are carried at fair value are classified and disclosed in one of the following categories:
|
|
Level 1 -
|
Quoted prices in active markets for identical assets or liabilities.
|
|
|
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 marketplace.
|
|
|
Level 3 -
|
Instruments that use non-binding broker quotes or model driven valuations that do not have observable market data.
|
NAV - Calculated net asset value (“NAV”) based on an ownership interest to which a proportionate share of net assets is attributed.
The Company considers the valuation methods used in both its identifiable intangible assets initial measurement and impairment tests as Level 3. To determine the fair value of acquired trademarks and trade names, the Company uses the relief-from-royalty method, which requires the Company to estimate the future revenue for the related brands, the appropriate royalty rate and the weighted average cost of capital. To determine the fair value of the acquired policy renewal rights and customer relationships, the Company uses an “excess earnings” method that relies on projected future net cash flows and includes key assumptions for the customer retention and renewal rates. The data used in these methods is not observable in the market.
4
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Fair Value of Financial Instruments
The carrying values and fair values of certain financial instruments were as follows (in thousands).
|
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
|
|
|
Carrying
|
|
|
Fair
|
|
|
Carrying
|
|
|
Fair
|
|
|
|
|
Value
|
|
|
Value
|
|
|
Value
|
|
|
Value
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments, available-for-sale
|
|
$
|
122,646
|
|
|
$
|
122,646
|
|
|
$
|
131,582
|
|
|
$
|
131,582
|
|
|
Other investments
|
|
|
9,653
|
|
|
|
9,653
|
|
|
|
11,256
|
|
|
|
11,256
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debentures payable
|
|
|
40,290
|
|
|
|
11,242
|
|
|
|
40,256
|
|
|
|
20,275
|
|
|
Term loan from principal stockholder
|
|
|
29,773
|
|
|
|
15,815
|
|
|
|
29,753
|
|
|
|
28,504
|
|
The fair values as presented represent the Company’s best estimates and may not be substantiated by comparisons to independent markets. The fair value of the debentures payable and the term loan from principal shareholder are categorized as Level 3, since they were based on current market rates offered for debt with similar risks and maturities, an unobservable input categorized as Level 3. Carrying values of certain financial instruments, such as cash and cash equivalents and premiums, fees, and commissions receivable, approximate fair value due to the short-term nature of the instruments and are not required to be disclosed. Therefore, the aggregate of the fair values presented in the preceding table does not purport to represent the Company’s underlying value.
The following tables present the fair-value measurements for each major category of assets that are measured on a recurring basis (in thousands). Other investments are carried at net asset value which approximates fair value.
|
|
|
|
|
|
|
Fair Value Measurements Using
|
|
|
|
|
|
|
|
|
Quoted Prices
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active
|
|
|
Other
|
|
|
Significant
|
|
|
Proportionate
|
|
|
|
|
|
|
|
|
Markets for
|
|
|
Observable
|
|
|
Unobservable
|
|
|
Share of
|
|
|
|
|
|
|
|
|
Identical Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
Net Assets
|
|
|
September 30, 2016
|
|
Total
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
(NAV)
|
|
|
Fixed maturities, available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agencies
|
|
$
|
19,380
|
|
|
$
|
19,380
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Political subdivisions
|
|
|
4,319
|
|
|
|
—
|
|
|
|
4,319
|
|
|
|
—
|
|
|
|
—
|
|
|
Revenue and assessment
|
|
|
5,947
|
|
|
|
—
|
|
|
|
5,947
|
|
|
|
—
|
|
|
|
—
|
|
|
Corporate bonds
|
|
|
48,704
|
|
|
|
—
|
|
|
|
48,704
|
|
|
|
—
|
|
|
|
—
|
|
|
Collateralized mortgage obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency backed
|
|
|
23,624
|
|
|
|
—
|
|
|
|
23,624
|
|
|
|
—
|
|
|
|
—
|
|
|
Non-agency backed – residential
|
|
|
3,055
|
|
|
|
—
|
|
|
|
3,055
|
|
|
|
—
|
|
|
|
—
|
|
|
Non-agency backed – commercial
|
|
|
1,922
|
|
|
|
—
|
|
|
|
1,922
|
|
|
|
—
|
|
|
|
—
|
|
|
Total fixed maturities, available-for-sale
|
|
|
106,951
|
|
|
|
19,380
|
|
|
|
87,571
|
|
|
|
—
|
|
|
|
—
|
|
|
Preferred stock, available-for-sale
|
|
|
3,313
|
|
|
|
3,313
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Mutual funds, available-for-sale
|
|
|
12,382
|
|
|
|
12,382
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Total investments, available-for-sale
|
|
|
122,646
|
|
|
|
35,075
|
|
|
|
87,571
|
|
|
|
—
|
|
|
|
—
|
|
|
Other investments
|
|
|
9,653
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,535
|
|
|
|
5,118
|
|
|
Cash, cash equivalents, and restricted cash
|
|
|
143,371
|
|
|
|
143,371
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Total
|
|
$
|
275,670
|
|
|
$
|
178,446
|
|
|
$
|
87,571
|
|
|
$
|
4,535
|
|
|
$
|
5,118
|
|
5
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
|
|
|
|
|
|
|
Fair Value Measurements Using
|
|
|
|
|
|
|
|
|
Quoted Prices
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active
|
|
|
Other
|
|
|
Significant
|
|
|
Proportionate
|
|
|
|
|
|
|
|
|
Markets for
|
|
|
Observable
|
|
|
Unobservable
|
|
|
Share of
|
|
|
|
|
|
|
|
|
Identical Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
Net Assets
|
|
|
December 31, 2015
|
|
Total
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
(NAV)
|
|
|
Fixed maturities, available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agencies
|
|
$
|
13,113
|
|
|
$
|
13,113
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
State
|
|
|
702
|
|
|
|
—
|
|
|
|
702
|
|
|
|
—
|
|
|
|
—
|
|
|
Political subdivisions
|
|
|
4,363
|
|
|
|
—
|
|
|
|
4,363
|
|
|
|
—
|
|
|
|
—
|
|
|
Revenue and assessment
|
|
|
12,644
|
|
|
|
—
|
|
|
|
12,644
|
|
|
|
—
|
|
|
|
—
|
|
|
Corporate bonds
|
|
|
80,785
|
|
|
|
—
|
|
|
|
80,785
|
|
|
|
—
|
|
|
|
—
|
|
|
Collateralized mortgage obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency backed
|
|
|
873
|
|
|
|
—
|
|
|
|
873
|
|
|
|
—
|
|
|
|
—
|
|
|
Non-agency backed – residential
|
|
|
3,455
|
|
|
|
—
|
|
|
|
3,455
|
|
|
|
—
|
|
|
|
—
|
|
|
Non-agency backed – commercial
|
|
|
2,507
|
|
|
|
—
|
|
|
|
2,507
|
|
|
|
—
|
|
|
|
—
|
|
|
Total fixed maturities, available-for-sale
|
|
|
118,442
|
|
|
|
13,113
|
|
|
|
105,329
|
|
|
|
—
|
|
|
|
—
|
|
|
Preferred stock, available-for-sale
|
|
|
1,723
|
|
|
|
1,723
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Mutual funds, available-for-sale
|
|
|
11,417
|
|
|
|
11,417
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Total investments, available-for-sale
|
|
|
131,582
|
|
|
|
26,253
|
|
|
|
105,329
|
|
|
|
—
|
|
|
|
—
|
|
|
Other investment
|
|
|
11,256
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,276
|
|
|
|
7,980
|
|
|
Cash, cash equivalents, and restricted cash
|
|
|
115,587
|
|
|
|
115,587
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Total
|
|
$
|
258,425
|
|
|
$
|
141,840
|
|
|
$
|
105,329
|
|
|
$
|
3,276
|
|
|
$
|
7,980
|
|
The fair values of the Company’s investments are determined by management after taking into consideration available sources of data. All of the portfolio valuations classified as Level 1 or Level 2 in the above tables are priced exclusively by utilizing the services of independent pricing sources using observable market data. The Level 2 classified security valuations are obtained from a single independent pricing service. The Level 3 classified security in the table above consists of an investment in the common stock of a real estate investment trust for which fair value has been determined using a model driven valuation that does not have observable market data. There were no transfers between Level 1 and Level 2 for the three and nine months ended September 30, 2016 and 2015. The Company’s policy is to recognize transfers between levels at the end of the reporting period based on specific identification. The Company has not made any adjustments to the prices obtained from the independent pricing sources.
The Company has reviewed the pricing techniques and methodologies of the independent pricing service for Level 2 investments and believes that its policies adequately consider market activity, either based on specific transactions for the security valued or based on modeling of securities with similar credit quality, duration, yield and structure that were recently traded. The Company monitored security-specific valuation trends and has made inquiries with the pricing service about material changes or the absence of expected changes to understand the underlying factors and inputs and to validate the reasonableness of the pricing. Likewise, the Company reviews the Level 3 valuation model to understand the underlying factors and inputs and to validate the reasonableness of the pricing.
6
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The following table represents the quantitative disclosure for the asset classified as Level 3 during the nine months ended September 30, 2016 (in thousands).
|
|
|
Fair Value
|
|
|
|
|
Measurements Using
|
|
|
|
|
Significant Unobservable
|
|
|
|
|
Inputs (Level 3)
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
|
|
at Fair Value
|
|
|
Balance at December 31, 2015
|
|
$
|
3,276
|
|
|
Gains included in net loss
|
|
|
—
|
|
|
Gains included in comprehensive loss
|
|
|
302
|
|
|
Investments and capital calls
|
|
|
957
|
|
|
Distributions received
|
|
|
—
|
|
|
Transfers into and out of Level 3
|
|
|
—
|
|
|
Balance at September 30, 2016
|
|
$
|
4,535
|
|
3. Investments
Investments, Available-for-Sale
The following tables summarize the Company’s investment securities (in thousands).
|
|
|
|
|
Gross
|
|
Gross
|
|
|
|
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
Fair
|
|
September 30, 2016
|
|
Cost
|
|
Gains
|
|
Losses
|
|
Value
|
|
U.S. government and agencies
|
|
$ 19,141
|
|
$ 246
|
|
$ (7)
|
|
$ 19,380
|
|
Political subdivisions
|
|
4,264
|
|
55
|
|
—
|
|
4,319
|
|
Revenue and assessment
|
|
5,639
|
|
308
|
|
—
|
|
5,947
|
|
Corporate bonds
|
|
48,419
|
|
391
|
|
(106)
|
|
48,704
|
|
Collateralized mortgage obligations:
|
|
|
|
|
|
|
|
|
|
Agency backed
|
|
23,553
|
|
86
|
|
(15)
|
|
23,624
|
|
Non-agency backed – residential
|
|
2,493
|
|
569
|
|
(7)
|
|
3,055
|
|
Non-agency backed – commercial
|
|
1,433
|
|
489
|
|
—
|
|
1,922
|
|
Total fixed maturities, available-for-sale
|
|
104,942
|
|
2,144
|
|
(135)
|
|
106,951
|
|
Preferred stock, available-for-sale
|
|
3,025
|
|
307
|
|
(19)
|
|
3,313
|
|
Mutual funds, available-for-sale
|
|
11,813
|
|
569
|
|
—
|
|
12,382
|
|
|
|
$ 119,780
|
|
$ 3,020
|
|
$ (154)
|
|
$ 122,646
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
December 31, 2015
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
U.S. government and agencies
|
|
$
|
13,036
|
|
|
$
|
162
|
|
|
$
|
(85
|
)
|
|
$
|
13,113
|
|
|
State
|
|
|
698
|
|
|
|
4
|
|
|
|
—
|
|
|
|
702
|
|
|
Political subdivisions
|
|
|
4,354
|
|
|
|
9
|
|
|
|
—
|
|
|
|
4,363
|
|
|
Revenue and assessment
|
|
|
11,770
|
|
|
|
895
|
|
|
|
(21
|
)
|
|
|
12,644
|
|
|
Corporate bonds
|
|
|
79,426
|
|
|
|
2,022
|
|
|
|
(663
|
)
|
|
|
80,785
|
|
|
Collateralized mortgage obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency backed
|
|
|
793
|
|
|
|
80
|
|
|
|
—
|
|
|
|
873
|
|
|
Non-agency backed – residential
|
|
|
2,877
|
|
|
|
579
|
|
|
|
(1
|
)
|
|
|
3,455
|
|
|
Non-agency backed – commercial
|
|
|
1,891
|
|
|
|
616
|
|
|
|
—
|
|
|
|
2,507
|
|
|
Total fixed maturities, available-for-sale
|
|
|
114,845
|
|
|
|
4,367
|
|
|
|
(770
|
)
|
|
|
118,442
|
|
|
Preferred stock, available-for-sale
|
|
|
1,500
|
|
|
|
223
|
|
|
|
—
|
|
|
|
1,723
|
|
|
Mutual funds, available-for-sale
|
|
|
11,959
|
|
|
|
120
|
|
|
|
(662
|
)
|
|
|
11,417
|
|
|
|
|
$
|
128,304
|
|
|
$
|
4,710
|
|
|
$
|
(1,432
|
)
|
|
$
|
131,582
|
|
7
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The following table sets forth the scheduled maturities of the Company’s fixed maturity securities based on their fair values (in thousands).
Actual maturities may differ from contractual maturities because certain securities may be called or prepaid by the issuers.
|
|
|
|
|
|
|
|
|
|
|
Securities
|
|
|
|
|
|
|
|
|
Securities
|
|
|
Securities
|
|
|
with No
|
|
|
All
|
|
|
|
|
with
|
|
|
with
|
|
|
Unrealized
|
|
|
Fixed
|
|
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Gains or
|
|
|
Maturity
|
|
|
September 30, 2016
|
|
Gains
|
|
|
Losses
|
|
|
Losses
|
|
|
Securities
|
|
|
One year or less
|
|
$
|
4,821
|
|
|
$
|
3,572
|
|
|
$
|
—
|
|
|
$
|
8,393
|
|
|
After one through five years
|
|
|
24,019
|
|
|
|
2,112
|
|
|
|
2,000
|
|
|
|
28,131
|
|
|
After five through ten years
|
|
|
16,149
|
|
|
|
12,957
|
|
|
|
—
|
|
|
|
29,106
|
|
|
After ten years
|
|
|
7,762
|
|
|
|
4,958
|
|
|
|
—
|
|
|
|
12,720
|
|
|
No single maturity date
|
|
|
5,709
|
|
|
|
22,892
|
|
|
|
—
|
|
|
|
28,601
|
|
|
|
|
$
|
58,460
|
|
|
$
|
46,491
|
|
|
$
|
2,000
|
|
|
$
|
106,951
|
|
The following table reflects the number of fixed maturity securities with gross unrealized gains and losses. Gross unrealized losses are further segregated by the length of time that individual securities have been in a continuous unrealized loss position.
|
|
|
Gross Unrealized Losses
|
|
|
|
|
|
|
|
|
Less than
|
|
|
Greater
|
|
|
Gross
|
|
|
|
|
or equal to
|
|
|
than 12
|
|
|
Unrealized
|
|
|
At:
|
|
12 months
|
|
|
months
|
|
|
Gains
|
|
|
September 30, 2016
|
|
|
12
|
|
|
|
—
|
|
|
|
57
|
|
|
December 31, 2015
|
|
|
21
|
|
|
|
4
|
|
|
|
70
|
|
The following table reflects the fair value and gross unrealized losses of those fixed maturity securities in a continuous unrealized loss position for greater than 12 months at December 31, 2015. There were no securities meeting these criteria at September 30, 2016. Gross unrealized losses are further segregated by the percentage of amortized cost (in thousands, except number of securities).
|
|
|
Number
|
|
|
|
|
|
|
Gross
|
|
|
Gross Unrealized Losses
|
|
of
|
|
|
Fair
|
|
|
Unrealized
|
|
|
at December 31, 2015:
|
|
Securities
|
|
|
Value
|
|
|
Losses
|
|
|
Less than or equal to 10%
|
|
|
4
|
|
|
$
|
7,689
|
|
|
$
|
(241
|
)
|
|
Greater than 10%
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
4
|
|
|
$
|
7,689
|
|
|
$
|
(241
|
)
|
8
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The following tables set forth the amount of gross unrealized losses by current severity (as compared to amortized cost) and length of time that individual securities have been
in a continuous unrealized loss position (in thousands).
|
|
|
Fair Value of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities with
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Length of
|
|
Gross
|
|
|
Gross
|
|
|
Severity of Gross Unrealized Losses
|
|
|
Gross Unrealized Losses
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Less
|
|
|
5% to
|
|
|
Greater
|
|
|
at September 30, 2016:
|
|
Losses
|
|
|
Losses
|
|
|
than 5%
|
|
|
|
10%
|
|
|
than 10%
|
|
|
Less than or equal to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months
|
|
$
|
47,891
|
|
|
$
|
(147
|
)
|
|
$
|
(147
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Six months
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Nine months
|
|
|
105
|
|
|
|
(7
|
)
|
|
|
—
|
|
|
|
(7
|
)
|
|
|
—
|
|
|
Twelve months
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Greater than twelve months
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Total
|
|
$
|
47,996
|
|
|
$
|
(154
|
)
|
|
$
|
(147
|
)
|
|
$
|
(7
|
)
|
|
$
|
—
|
|
|
|
|
Fair Value of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities with
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Length of
|
|
Gross
|
|
|
Gross
|
|
|
Severity of Gross Unrealized Losses
|
|
|
Gross Unrealized Losses
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Less
|
|
|
5% to
|
|
|
Greater
|
|
|
at December 31, 2015:
|
|
Losses
|
|
|
Losses
|
|
|
than 5%
|
|
|
|
10%
|
|
|
than 10%
|
|
|
Less than or equal to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months
|
|
$
|
20,899
|
|
|
$
|
(130
|
)
|
|
$
|
(130
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Six months
|
|
|
7,036
|
|
|
|
(465
|
)
|
|
|
—
|
|
|
|
(465
|
)
|
|
|
—
|
|
|
Nine months
|
|
|
14,057
|
|
|
|
(395
|
)
|
|
|
(197
|
)
|
|
|
(197
|
)
|
|
|
(1
|
)
|
|
Twelve months
|
|
|
7,892
|
|
|
|
(201
|
)
|
|
|
(201
|
)
|
|
|
—
|
|
|
|
—
|
|
|
Greater than twelve months
|
|
|
7,689
|
|
|
|
(241
|
)
|
|
|
(241
|
)
|
|
|
—
|
|
|
|
—
|
|
|
Total
|
|
$
|
57,573
|
|
|
$
|
(1,432
|
)
|
|
$
|
(769
|
)
|
|
$
|
(662
|
)
|
|
$
|
(1
|
)
|
Other-Than-Temporary Impairment
For the nine months ended September 30, 2016, the Company recognized OTTI charges in net income of $147 thousand related to one mutual fund.
The Company believes that the remaining securities having unrealized losses at September 30, 2016 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.
Other Investments
Other investments consist of the common stock of a real estate investment trust and limited partnership interests in two 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. These investments have redemption and transfer restrictions. The Company recently withdrew from one limited partnership investment and received the final withdrawal installment in July 2016. The Company does not intend to sell the remaining investments, and it is more likely than not that the Company will not be required to sell them before the expiration of such restrictions.
At September 30, 2016, the Company had unfunded commitments of $0.2 million with two of these investments.
Restrictions
At September 30, 2016, fixed maturities and cash equivalents with a fair value and amortized cost of $6.6 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 $15.6 million were on deposit with another insurance company as collateral for an assumed reinsurance contract.
9
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Investment Income and Net Realized Gains and Losses
The major categories of investment income follow (in thousands).
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
Fixed maturities, available-for-sale
|
|
$
|
971
|
|
|
$
|
1,077
|
|
|
$
|
2,922
|
|
|
$
|
3,131
|
|
|
Mutual funds, available-for-sale
|
|
|
153
|
|
|
|
164
|
|
|
|
519
|
|
|
|
457
|
|
|
Other investments
|
|
|
53
|
|
|
|
(27
|
)
|
|
|
408
|
|
|
|
301
|
|
|
Other
|
|
|
130
|
|
|
|
56
|
|
|
|
313
|
|
|
|
174
|
|
|
Investment expenses
|
|
|
(120
|
)
|
|
|
(126
|
)
|
|
|
(367
|
)
|
|
|
(368
|
)
|
|
|
|
$
|
1,187
|
|
|
$
|
1,144
|
|
|
$
|
3,795
|
|
|
$
|
3,695
|
|
The components of net realized gains (losses) on investments, available-for-sale at fair value follow (in thousands).
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
Gains
|
|
$
|
4,900
|
|
|
$
|
—
|
|
|
$
|
4,900
|
|
|
$
|
3
|
|
|
Losses
|
|
|
(3
|
)
|
|
|
(6
|
)
|
|
|
(20
|
)
|
|
|
(16
|
)
|
|
Other-than-temporary impairment
|
|
|
—
|
|
|
|
—
|
|
|
|
(147
|
)
|
|
|
—
|
|
|
|
|
$
|
4,897
|
|
|
$
|
(6
|
)
|
|
$
|
4,733
|
|
|
$
|
(13
|
)
|
Realized gains and losses on sales and redemptions are computed based on specific identification. The non-credit related portion of other-than-temporary impairment (“OTTI”) is included in other comprehensive loss. The amounts of non-credit OTTI for securities still owned was $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 September 30, 2016 and December 31, 2015.
4. Net Loss Per Share
The following table sets forth the computation of basic and diluted net loss per share (in thousands, except per share data).
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
Net loss
|
|
$
|
(333
|
)
|
|
$
|
(3,018
|
)
|
|
$
|
(25,735
|
)
|
|
$
|
(2,217
|
)
|
|
Weighted average common basic shares
|
|
|
41,096
|
|
|
|
41,041
|
|
|
|
41,074
|
|
|
|
41,026
|
|
|
Effect of dilutive securities
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Weighted average common dilutive shares
|
|
|
41,096
|
|
|
|
41,041
|
|
|
|
41,074
|
|
|
|
41,026
|
|
|
Basic and diluted net loss per share
|
|
$
|
(0.01
|
)
|
|
$
|
(0.07
|
)
|
|
$
|
(0.63
|
)
|
|
$
|
(0.05
|
)
|
On March 15, 2016, the Compensation Committee of the Board of Directors of the Company awarded 146 thousand restricted stock units to executive officers. Such restricted stock units will vest, and an equal number of shares of common stock will be deliverable upon the third anniversary of the date of grant. Compensation expense related to the units was calculated based upon the closing market price of the common stock on the date of grant ($2.30) and is recorded on a straight-line basis over the vesting period.
For the three months ended September 30, 2016, the computation of diluted net loss per share did not include 270 thousand restricted stock units, a dilutive effect of 5 thousand shares, since their inclusion would have been anti-dilutive. Options to purchase 1,045 thousand shares were not included in the computation of diluted net loss per share for the three months ended September 30, 2016, since their exercise price was in excess of the average stock prices for these periods.
10
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
For the nine months ended September 30, 2016, the computation of diluted net loss per share did not include options to purchase 825 thousand shares and 270 thousand restricted stock un
its, a dilutive effect of 176 thousand shares and 23 thousand shares, respectively, since their inclusion would have been anti-dilutive. Options to purchase 220 thousand shares were not included in the computation of diluted net loss per share for the nine
months ended September 30, 2016, since their exercise price was in excess of the average stock prices for these periods.
For the three and nine months ended September 30, 2015, the computation of diluted net income per share did not include options to purchase 825 thousand shares, a dilutive effect of 335 thousand shares and 324 thousand shares, respectively, and 141 thousand restricted stock units, a dilutive effect of 30 thousand shares and 19 thousand shares, respectively, since their inclusion would have been anti-dilutive. Options to purchase 260 thousand shares were not included in the computation of diluted net income per share for the three and nine months ended September 30, 2015, since their exercise prices were in excess of the average stock prices for these periods.
5. Losses and Loss Adjustment Expenses Incurred and Paid
Information regarding the reserve for unpaid losses and loss adjustment expenses (“LAE”) is as follows (in thousands).
|
|
|
Nine Months Ended
|
|
|
|
|
September 30,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Liability for unpaid losses and LAE at beginning of period, gross
|
|
$
|
122,071
|
|
|
$
|
96,613
|
|
|
Reinsurance balances receivable
|
|
|
(464
|
)
|
|
|
(362
|
)
|
|
Liability for unpaid losses and LAE at beginning of period, net
|
|
|
121,607
|
|
|
|
96,251
|
|
|
Add: Provision for losses and LAE:
|
|
|
|
|
|
|
|
|
|
Current period
|
|
|
217,802
|
|
|
|
159,686
|
|
|
Prior periods
|
|
|
27,460
|
|
|
|
618
|
|
|
Net losses and LAE incurred
|
|
|
245,262
|
|
|
|
160,304
|
|
|
Less: Losses and LAE paid:
|
|
|
|
|
|
|
|
|
|
Current period
|
|
|
111,307
|
|
|
|
87,280
|
|
|
Prior periods
|
|
|
91,703
|
|
|
|
54,697
|
|
|
Net losses and LAE paid
|
|
|
203,010
|
|
|
|
141,977
|
|
|
Liability for unpaid losses and LAE at end of period, net
|
|
|
163,859
|
|
|
|
114,578
|
|
|
Reinsurance balances receivable
|
|
|
841
|
|
|
|
431
|
|
|
Liability for unpaid losses and LAE at end of period, gross
|
|
$
|
164,700
|
|
|
$
|
115,009
|
|
The unfavorable development for the nine months ended September 30, 2016 was the result of increased losses primarily from the 2015 accident year across all major coverages. The most significant causes of the development were a greater than usual emergence of reported claims and higher bodily injury severity.
6. Income Taxes
The provision (benefit) for income taxes consisted of the following (in thousands).
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
Federal:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
—
|
|
|
$
|
(30
|
)
|
|
$
|
—
|
|
|
$
|
21
|
|
|
Deferred
|
|
|
(162
|
)
|
|
|
(1,467
|
)
|
|
|
(13,789
|
)
|
|
|
(1,065
|
)
|
|
|
|
|
(162
|
)
|
|
|
(1,497
|
)
|
|
|
(13,789
|
)
|
|
|
(1,044
|
)
|
|
State:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
149
|
|
|
|
43
|
|
|
|
308
|
|
|
|
277
|
|
|
Deferred
|
|
|
19
|
|
|
|
(52
|
)
|
|
|
(90
|
)
|
|
|
(46
|
)
|
|
|
|
|
168
|
|
|
|
(9
|
)
|
|
|
218
|
|
|
|
231
|
|
|
|
|
$
|
6
|
|
|
$
|
(1,506
|
)
|
|
$
|
(13,571
|
)
|
|
$
|
(813
|
)
|
11
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The provision (benefit) for income taxes differs from the amounts computed by applying the statutory federal corporate tax rate of 35% to loss before income tax
es as a result of the following (in thousands).
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
Benefit for income taxes at statutory rate
|
|
$
|
(115
|
)
|
|
$
|
(1,584
|
)
|
|
$
|
(13,758
|
)
|
|
$
|
(1,061
|
)
|
|
Tax effect of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax-exempt investment income
|
|
|
(10
|
)
|
|
|
(5
|
)
|
|
|
(30
|
)
|
|
|
(15
|
)
|
|
Change in the beginning of the period balance of the
valuation allowance for deferred tax assets allocated
to federal income taxes
|
|
|
(6
|
)
|
|
|
6
|
|
|
|
51
|
|
|
|
8
|
|
|
Stock-based compensation
|
|
|
12
|
|
|
|
—
|
|
|
|
29
|
|
|
|
22
|
|
|
State income taxes, net of federal income tax benefit
and state valuation allowance
|
|
|
116
|
|
|
|
(24
|
)
|
|
|
110
|
|
|
|
134
|
|
|
Other
|
|
|
9
|
|
|
|
101
|
|
|
|
27
|
|
|
|
99
|
|
|
|
|
$
|
6
|
|
|
$
|
(1,506
|
)
|
|
$
|
(13,571
|
)
|
|
$
|
(813
|
)
|
The Company had a deferred tax asset (“DTA”) valuation allowance of $2.1 million at September 30, 2016 and $1.7 million at December 31, 2015, attributable to certain amounts related to state taxes and OTTI that are not more likely than not to be realized. In assessing the Company’s ability to realize the DTA, both positive and negative evidence are used to evaluate the allowance. Although the Company has incurred a nine-month pre-tax loss of $39.3 million which is a source of negative evidence, it placed greater weight on its outlook for future taxable income over the allowable time period for realization of the DTA and concluded that it is more likely than not that the remaining DTA will be realized. Regarding the length of time available to realize the DTA, at September 30, 2016, $20.6 million of the DTA related to net operating loss carryforwards do not expire until 2031 through 2036 and $2.0 million in AMT (“Alternative Minimum Tax”) carryforwards have no expiration date. The DTA valuation allowance may be adjusted in future periods if management determines that it is more likely than not that some portion or all of the DTA will not be realized. In the event the DTA valuation allowance is adjusted, the Company would record an income tax expense for the adjustment.
7. Segment Information
The Company operates in two business segments with its primary focus being the selling, servicing and underwriting of non-standard personal automobile insurance. The real estate and corporate segment consists of the activities related to the disposition of foreclosed real estate held for sale, 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
|
|
|
Nine Months Ended
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
|
|
$
|
102,099
|
|
|
$
|
87,604
|
|
|
$
|
300,533
|
|
|
$
|
243,307
|
|
|
Real estate and corporate
|
|
|
16
|
|
|
|
16
|
|
|
|
1,284
|
|
|
|
50
|
|
|
Consolidated total
|
|
$
|
102,115
|
|
|
$
|
87,620
|
|
|
$
|
301,817
|
|
|
$
|
243,357
|
|
|
Income (loss) before income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
|
|
$
|
1,173
|
|
|
$
|
(3,156
|
)
|
|
$
|
(36,280
|
)
|
|
$
|
(166
|
)
|
|
Real estate and corporate
|
|
|
(1,500
|
)
|
|
|
(1,368
|
)
|
|
|
(3,026
|
)
|
|
|
(2,864
|
)
|
|
Consolidated total
|
|
$
|
(327
|
)
|
|
$
|
(4,524
|
)
|
|
$
|
(39,306
|
)
|
|
$
|
(3,030
|
)
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Total assets:
|
|
|
|
|
|
|
|
|
|
Insurance
|
|
$
|
416,182
|
|
|
$
|
373,475
|
|
|
Real estate and corporate
|
|
|
42,353
|
|
|
|
28,652
|
|
|
Consolidated total
|
|
$
|
458,535
|
|
|
$
|
402,127
|
|
12
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
8. Litigation
The Company is named as a defendant in various lawsuits, arising in the ordinary course of business, generally relating to its insurance operations. All legal actions relating to claims made under insurance policies are considered by the Company in establishing its loss and loss adjustment expense reserves. The Company also faces lawsuits from time to time that seek damages beyond policy limits, commonly known as bad faith claims, as well as class action and individual lawsuits that involve issues arising in the course of the Company’s business. The Company continually evaluates potential liabilities and reserves for litigation of these types using the criteria established by FASB ASC 450,
Contingencies
(“FASB ASC 450”). Pursuant to FASB ASC 450, reserves for a loss may only be recognized if the likelihood of occurrence is probable and the amount can be reasonably estimated. If a loss, while not probable, is judged to be reasonably possible, management will disclose, if it can be estimated, a possible range of loss or state that an estimate cannot be made. Management evaluates each legal action and records reserves for losses, as warranted, by establishing a reserve in its consolidated balance sheets in loss and loss adjustment expense reserves for bad faith claims and in other liabilities for other lawsuits. Amounts incurred are recorded in the Company’s consolidated statements of comprehensive loss in losses and loss adjustment expenses for bad faith claims and in insurance operating expenses for other lawsuits unless otherwise disclosed.
9. Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) and the International Accounting Standards Board (“IASB”) jointly issued a new revenue recognition standard, Accounting Standard Update (“ASU”) No. 2014-09, “
Revenue from Contracts with Customers,”
that will supersede virtually all revenue recognition guidance in GAAP and International Financial Reporting Standards (“IFRS”). This guidance had an effective date for public companies for annual and interim periods beginning after December 15, 2016, with early adoption not permitted. In July 2015, the FASB issued a one-year deferral of this effective date with the option for entities to early adopt at the original effective date. The standard is intended to increase comparability across industries and jurisdictions. The underlying principle of the new standard is that a business or other organization will recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects what it expects in exchange for the goods or services. The new standard will not change accounting guidance for insurance contracts. However, the Company is currently evaluating this guidance as it relates to non-insurance arrangements and any impact it will have on future consolidated financial statements.
In August 2014, the FASB issued ASU No. 2014-15,
“Presentation of Financial Statements – Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern”
which requires companies to evaluate whether there are conditions and events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the financial statements are issued. The evaluation will be required for each annual and interim reporting period. This guidance has an effective date for public companies for annual reporting periods ending after December 15, 2016 and interim reporting periods thereafter, with early adoption permitted. The Company believes that it will be reasonably able to comply with these requirements.
In April 2015, the FASB issued ASU No. 2015-05, “
Intangibles-Goodwill and Other-Internal Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement”
to clarify how customers in cloud computing arrangements should determine whether the arrangement includes a software license. The amendment also eliminates today’s requirement that customers analogize to the leases standard when determining the assets acquired in a software licensing arrangement. For calendar year-end entities, the guidance was effective January 1, 2016 with the option to apply the guidance either prospectively or retrospectively. The Company has elected to apply this guidance prospectively, which resulted in $5 thousand of software licenses included in identifiable intangibles assets on the consolidated balance sheet as of September 30, 2016. Prior to this guidance, these licenses would have been included in property and equipment on the consolidated balance sheet.
In May 2015, the FASB issued ASU No. 2015-09, “
Financial Services-Insurance (Topic 944): Disclosures about Short-Duration Contracts”
which requires insurance companies to make additional disclosures about short-term duration contracts. This guidance has an effective date for public companies for annual reporting periods beginning after December 15, 2015 and interim reporting periods beginning after December 15, 2016, with early adoption permitted. The Company believes that it will be reasonably able to comply with these requirements.
13
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
In January 2016, the FASB issued ASU No. 2016-01, “
Financial Instruments – Overall (Subtopic 825-20):
Recognition and Measure of Financial Assets and Financial Liabilities
” which requires entities to measure many equity investments at fair value and recognize changes in fair value in net income (loss), as opposed to the current practice of other comprehens
ive income (loss). The requirement does not apply to equity investments that result in consolidation, those accounted for under the equity method and certain others. The guidance provides a new measurement alternative for equity investments that do not hav
e readily determinable fair values and do not qualify for the net asset value practical expedient. Under this alternative, these investments can be measured at cost, less any impairment, plus or minus changes resulting from observable price changes in orde
rly transactions for the identical or a similar investment of the same issuer. The guidance is effective for public business entities for annual periods beginning after December 15, 2017, and interim periods within those years. The Company believes that it
s other investment in a real estate investment trust will fall under the guidance of the new measurement alternative and that future changes in fair value will be recognized in net income (loss), as opposed to the current practice of other comprehensive in
come (loss). The Company has not determined the impact on future consolidated financial statements once this is adopted.
In February 2016, the FASB issued ASU No. 2016-02, “
Leases (Topic 842)
” which requires lessees to put most leases on their balance sheets as lease liabilities with corresponding right-of-use assets, but recognize expense in a manner similar to the current accounting treatment. The guidance also eliminates the current real estate-specific provisions and changes the guidance on sale-leaseback transactions, initial direct costs and lease executory costs for all entities. The guidance could have broad implications for an entity’s finances and operations and will require additional disclosures. The guidance is effective for public business entities for annual periods beginning after December 15, 2018, and interim periods within those years. Early adoption is permitted. Entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in their financial statements. They also have the option to use certain relief and full retrospective application is prohibited. The Company believes its lease arrangements fall under this guidance and will be required to be shown on its consolidated balance sheet. The Company is currently evaluating controls and processes to ensure this guidance is reflected properly on future consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13,
“Financial Instruments – Credit Losses (Topic 326)”
which requires financial assets measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses will be based on relevant information, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. The expected increases and decreases in the credit loss will be reflected on the consolidated statement of comprehensive income (loss). The guidance is effective for public business entities for annual periods beginning after December 15, 2019, and interim periods within those years. Early adoption is permitted. The Company has not determined the impact on future consolidated financial statements once this is adopted.
In August 2016, the FASB issued ASU No. 2016-15,
“Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments”
which clarifies how entities should classify certain cash receipts and cash payments, including how the predominance principle should be applied when cash receipts and cash payments have aspects of more than one class of cash flows. The guidance is effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those years. Early adoption is permitted. Entities will have to apply the guidance retrospectively, but if it is impracticable to do so for an issue, the amendments related to that issue would be applied prospectively. The Company has not determined the impact on future consolidated financial statements once this is adopted.
10. Related Parties
In April 2016, the Company entered into standard agreements for Treasury and Custodial Services with a bank indirectly owned 15% by our principal stockholder. The fees under these agreements for the three and nine months ended September 30, 2016 were $47 thousand and $93 thousand, respectively.
14
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
11. Business Combination
Acquisition of the Titan Agencies
On July 1, 2015, in order to expand its geographic presence, the Company completed the acquisition of certain assets of Titan Insurance Services, Inc. and Titan Auto Insurance of New Mexico, Inc. (the “Titan Agencies”). These agencies sell private passenger non-standard automobile insurance and complimentary products, principally in California, but also in Texas, Arizona, Florida, Nevada and New Mexico. The Titan Agencies were previously owned and operated by Nationwide. Pursuant to the Asset Purchase Agreement (the “APA”), the Company acquired the assets of 83 retail stores for total consideration of $36.0 million, which included liabilities assumed estimated to be $2.3 million. The Company has accounted for the acquisition as a business combination applying the acquisition method.
Liabilities assumed included a $2.0 million estimate of the expected liability for returned commissions as of the closing date. This liability was subject to change based on the actual amount of returned commissions and the Company’s final estimation of this liability resulted in a $0.8 million reduction in goodwill through June 30, 2016.
The Company considers this acquisition to be a separate reporting unit for goodwill impairment analysis purposes. At September 30, 2016, the Company concluded that there was no indication of impairment and that a quantitative analysis was not necessary as of this date. The date of the Company’s annual impairment analysis is each October 1.
15
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Pro Forma Information
The following unaudited pro forma combined statement of income for the nine months ended September 30, 2015 is based on our historical consolidated financial statements and gives effect to the acquisition of the Titan Agencies as if it had occurred on January 1, 2014. The pro forma combined financial statement does not necessarily reflect what the combined results of operations would have been had the acquisition occurred on the date indicated. It also may not be useful in predicting the future combined results of operations. The actual combined results of operations may differ significantly from the combined pro forma amounts reflected herein due to a variety of factors.
|
Pro Forma Statement of Income
Nine Months Ended September 30, 2015
|
|
Company Historical
|
|
Titan Agencies Historical Six Months Ended June 30, 2015
|
|
Pro Forma Adjustments
|
|
Pro Forma Combined
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
Premiums earned
|
|
$ 197,423
|
|
$ —
|
|
$ —
|
|
$ 197,423
|
|
Commission and fee income
|
|
42,252
|
|
14,547
|
|
—
|
|
56,799
|
|
Investment income
|
|
3,695
|
|
—
|
|
—
|
|
3,695
|
|
Net realized losses on investments, available-for-sale
|
|
(13)
|
|
—
|
|
—
|
|
(13)
|
|
|
|
243,357
|
|
14,547
|
|
—
|
|
257,904
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
Losses and loss adjustment expenses
|
|
160,304
|
|
—
|
|
—
|
|
160,304
|
|
Insurance operating expenses
|
|
78,039
|
|
14,555
|
|
—
|
|
92,594
|
|
Other operating expenses
|
|
881
|
|
—
|
|
—
|
|
881
|
|
Litigation settlement
|
|
3,645
|
|
—
|
|
—
|
|
3,645
|
|
Stock-based compensation
|
|
109
|
|
—
|
|
—
|
|
109
|
|
Depreciation
|
|
1,224
|
|
—
|
|
50
|
(a)
|
1,274
|
|
Amortization of identifiable intangibles assets
|
|
261
|
|
—
|
|
455
|
(b)
|
716
|
|
Interest expense
|
|
1,924
|
|
—
|
|
1,190
|
(c)
|
3,114
|
|
|
|
246,387
|
|
14,555
|
|
1,695
|
|
262,637
|
|
Loss before income taxes
|
|
(3,030)
|
|
(8)
|
|
(1,695)
|
|
(4,733)
|
|
Benefit for income taxes
|
|
(813)
|
|
(3)
|
|
(678)
|
(d)
|
(1,494)
|
|
Net loss
|
|
$ (2,217)
|
|
$ (5)
|
|
$ (1,017)
|
|
$ (3,239)
|
|
Net loss per share:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ (0.05)
|
|
|
|
|
|
$ (0.08)
|
|
Diluted
|
|
$ (0.05)
|
|
|
|
|
|
$ (0.08)
|
|
Number of shares used to calculate net loss per share:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
41,026
|
|
|
|
|
|
41,026
|
|
Diluted
|
|
41,026
|
|
|
|
|
|
41,026
|
Pro forma adjustments
The following adjustments have been reflected in the unaudited pro forma combined financial information.
|
|
(a)
|
Depreciation expense related to acquired tangible asset
|
|
|
(b)
|
Amortization expense related to acquired identifiable intangible asset
|
|
|
(c)
|
Interest expense related to acquisition financing
|
|
|
(d)
|
Calculated income tax effect of pro forma adjustments at the estimated combined federal and state statutory rate of 40%
|
16
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
12. Current Liquidity and Statutory Capital and Surplus
The Company has $70.0 million in long-term borrowings of which $40.0 million matures in 2037 and $30.0 million matures in 2025. At September 30, 2016, the Company was in compliance with the covenants related to these borrowings. Such borrowings are not obligations of the Company’s regulated insurance company subsidiaries who at September 30, 2016 had combined statutory capital and surplus of $62.5 million. The Company believes that it has sufficient liquidity to meet its current obligations in the foreseeable future, including the payment of interest on its long-term borrowings which it currently funds through the cash flows of its agency operations which are generated outside the Company’s regulated insurance company subsidiaries and are not subject to any limitation on the payment of dividends to the holding company.
The Company has three insurance company subsidiaries that are organized and domiciled under the insurance statutes of Texas, Georgia, and Tennessee. The insurance company subsidiaries operate under licenses issued by various state insurance authorities. Such licenses may be of perpetual duration or periodically renewable, provided the insurance company subsidiaries continue to meet applicable regulatory requirements.
For the nine months ended September 30, 2016, the insurance company subsidiaries experienced a reduction in combined statutory capital and surplus of $36.3 million, primarily as a result of the unfavorable loss development during the period. The National Association of Insurance Commissioners (“NAIC”) Model Act for risk-based capital provides formulas to determine each December 31 on an annual basis the amount of statutory capital and surplus that an insurance company needs to ensure that it has an acceptable expectation of not becoming financially impaired. Failure to meet applicable risk-based capital requirements could subject our insurance company subsidiaries to further examination or corrective action imposed by state regulators, including limitations on their writing of additional business, state supervision, or even liquidation. Although statutory risk-based capital calculations are only made as of each December 31, the Company estimated that the three insurance company subsidiaries remain above the regulatory company action levels as of September 30, 2016. There are also statutory guidelines that suggest that on an annual calendar year basis an insurance company should not exceed a ratio of net premiums written to statutory capital and surplus of 3-to-1. On a combined basis, the ratio for our insurance company subsidiaries of net premiums written for the last twelve months to statutory capital and surplus was 4.90-to-1 at September 30, 2016 which is in excess of the suggested guidelines. Management is currently operating under a business plan to reduce premium writings and increase statutory capital and surplus to address the net premiums written to statutory capital and surplus guidelines.
17
FIRST ACCEPTANCE CORPORATION 10-Q
Item 2. Management’s Discuss
ion an
d 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, 2015. 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, 2015 included in our Annual Report on Form 10-K for the year ended December 31, 2015.
Forward-Looking Statements
This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements made in this report, other than statements of historical fact, are forward-looking statements. You can identify these statements from our use of the words “may,” “should,” “could,” “potential,” “continue,” “plan,” “forecast,” “estimate,” “project,” “believe,” “intent,” “anticipate,” “expect,” “target,” “is likely,” “will,” or the negative of these terms and similar expressions. These statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements may include, among other things, statements and assumptions relating to:
|
|
•
|
the accuracy and adequacy of our loss reserving methodologies;
|
|
|
•
|
income, 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, including the recently completed acquisition of the Titan Agencies;
|
|
|
•
|
the financial condition of, and other issues relating to the strength of and liquidity available to, issuers of securities held in our investment portfolio;
|
|
|
•
|
and our business and growth strategies.
|
We believe that our expectations are based on reasonable assumptions. However, these forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause our actual results, performance or achievements, or industry results to differ materially from our expectations of future results, performance or achievements expressed or implied by these forward-looking statements. In addition, our past results of operations do not necessarily indicate our future results. We discuss these and other uncertainties in “Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2015.
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.
New York Stock Exchange Listing
Our common stock is listed on the New York Stock Exchange (the “
NYSE
”). On October 14, 2016, we received notice from the NYSE (the “
NYSE Notice
”) that we were not in compliance with the NYSE’s continued listing standards set forth in the NYSE Listed Company Manual, which require the average closing price of our common stock to be at least $1.00 per share over a consecutive 30 trading-day period. As of October 12, 2016, the 30 trading-day average closing price of our common stock was $0.99 per share.
Upon receipt of the notice of non-compliance from the NYSE, we became subject to the procedures set forth in Sections 801 and 802 of the NYSE Listed Company Manual. As required by the NYSE, we have responded, acknowledging the notification. Under the NYSE rules, we have six months from receipt of the NYSE Notice to regain compliance with the minimum share price rule. We expect that our common stock will continue to be listed on the NYSE during this period, subject to our continued compliance with the NYSE’s other continued listing standards.
18
FIRST ACCEPTANCE CORPORATION 10-Q
General
We are principally a retailer, servicer and underwriter of non-standard personal automobile insurance. Non-standard personal automobile insurance is made available to individuals because of their inability or unwillingness to obtain standard insurance coverage due to various factors, including payment history, payment preference, and failure in the past to maintain continuous insurance coverage, driving record and/or vehicle type. At September 30, 2016, we also owned a tract of land in San Antonio, Texas that is held for sale. On May 4, 2016, we sold one tract of land resulting in a gain of $1.2 million.
At September 30, 2016, we leased and operated 369 retail locations (or “stores”) and a call center staffed by employee-agents who primarily sell non-standard personal automobile insurance products underwritten by us as well as certain commissionable ancillary products. In most states, our employee-agents also sell a complementary insurance product providing personal property and liability coverage for renters underwritten by us. In addition, retail locations in some markets offer non-standard personal automobile insurance serviced and underwritten by other third-party insurance carriers for which we receive a commission.
Our insurance operations generate revenue from selling non-standard personal automobile insurance products and related products in 17 states. We conduct our servicing and underwriting operations in 14 states and are licensed as an insurer in 12 additional states. After obtaining a license in California, we began selling our non-standard personal automobile insurance product in late June 2016 on a limited basis.
At September 30, 2016, 287 of our 369 stores primarily sell non-standard personal automobile insurance products underwritten by us.
See the discussion in Item 1. “Business—General” in our Annual Report on Form 10-K for the year ended December 31, 2015 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. The Company used the expiration of 24 Chicago-area leases in January 2016 to consolidate these locations and better align them with our customers’ needs. As a result, 7 strategically-placed stores were opened as replacements from November 2015 to April 2016.
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
September 30,
|
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
Retail locations – beginning of period
|
|
409
|
|
359
|
|
440
|
|
356
|
|
Opened
|
|
—
|
|
—
|
|
4
|
|
5
|
|
Acquired
|
|
—
|
|
83
|
|
—
|
|
83
|
|
Closed
|
|
(40)
|
|
(4)
|
|
(75)
|
|
(6)
|
|
Retail locations – end of period
|
|
369
|
|
438
|
|
369
|
|
438
|
19
FIRST ACCEPTANCE CORPORATION 10-Q
The following table shows the number of our retail locations by state.
|
|
|
September 30,
|
|
June 30,
|
|
December 31,
|
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
2015
|
|
2014
|
|
Alabama
|
|
23
|
|
24
|
|
24
|
|
24
|
|
24
|
|
24
|
|
Arizona
|
|
10
|
|
10
|
|
10
|
|
—
|
|
10
|
|
—
|
|
California
|
|
47
|
|
48
|
|
47
|
|
—
|
|
48
|
|
—
|
|
Florida
|
|
34
|
|
39
|
|
34
|
|
35
|
|
39
|
|
31
|
|
Georgia
|
|
53
|
|
60
|
|
60
|
|
60
|
|
60
|
|
60
|
|
Illinois
|
|
39
|
|
58
|
|
41
|
|
60
|
|
61
|
|
60
|
|
Indiana
|
|
16
|
|
17
|
|
17
|
|
17
|
|
17
|
|
17
|
|
Mississippi
|
|
6
|
|
7
|
|
7
|
|
7
|
|
7
|
|
7
|
|
Missouri
|
|
6
|
|
9
|
|
9
|
|
9
|
|
9
|
|
10
|
|
Nevada
|
|
4
|
|
4
|
|
4
|
|
—
|
|
4
|
|
—
|
|
New Mexico
|
|
5
|
|
5
|
|
5
|
|
—
|
|
5
|
|
—
|
|
Ohio
|
|
27
|
|
27
|
|
27
|
|
27
|
|
27
|
|
27
|
|
Pennsylvania
|
|
11
|
|
14
|
|
13
|
|
15
|
|
14
|
|
15
|
|
South Carolina
|
|
20
|
|
25
|
|
23
|
|
25
|
|
24
|
|
25
|
|
Tennessee
|
|
23
|
|
23
|
|
23
|
|
23
|
|
23
|
|
22
|
|
Texas
|
|
45
|
|
68
|
|
65
|
|
57
|
|
68
|
|
58
|
|
Total
|
|
369
|
|
438
|
|
409
|
|
359
|
|
440
|
|
356
|
Recent Actions
We have taken the following actions to reduce premiums written and increase statutory capital and surplus with the goal of returning our ratio of net premiums written to statutory capital and surplus to within regulatory guidelines and improve profitability:
|
|
•
|
We have filed and received approval for substantial rate increases in response to our increase in claim frequency. The magnitude and frequency of these increases is unprecedented in our recent history;
|
|
|
•
|
We closed 39 poorly-performing stores during the most recent quarter and an additional nine stores in October;
|
|
|
•
|
We reduced premium writings, through the closing of the poorly performing stores, by temporarily suspending new business in selected areas of our business, and tightening our underwriting standards;
|
|
|
•
|
We increased our statutory capital and surplus during the most recent quarter by selling available-for-sale securities with unrealized gains ($4.9 million) and through capital contributions from net income derived from our insurance agency operations ($2.6 million).
|
Titan Acquisition
Effective
July 1, 2015, we acquired certain assets of Titan Insurance Services, Inc. and Titan Auto Insurance of New Mexico, Inc. (the “Titan Agencies”). These 82 retail locations, which are now rebranded under our Acceptance Insurance name, primarily sell private passenger non-standard automobile insurance policies underwritten by unrelated insurance companies for which our revenues are in the form of commission and fee income. We currently offer our own product in Texas, Florida and, on a limited basis, in California and are developing our products for Arizona, Nevada and New Mexico. A call center location that we acquired was closed during 2016 and consolidated into our existing call center.
20
FIRST ACCEPTANCE CORPORATION 10-Q
Consolidated Results of Operations
Overview
Our insurance operations generate revenue from selling non-standard personal automobile insurance products and related products in 17 states. We conduct our servicing and underwriting operations in 14 states and are licensed as an insurer in 11 additional 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 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 primarily by a 13% year-over-year increase in our average in-force premium, net premiums earned for the three and nine months ended September 30, 2016 increased 14% and 19%, compared with the same periods in the prior year.
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
September 30,
|
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
Gross premiums earned:
|
|
|
|
|
|
|
|
|
|
Georgia
|
|
$ 16,344
|
|
$ 13,079
|
|
$ 47,672
|
|
$ 37,619
|
|
Florida
|
|
11,524
|
|
10,231
|
|
35,309
|
|
30,639
|
|
Texas
|
|
10,402
|
|
8,990
|
|
32,285
|
|
26,365
|
|
Ohio
|
|
7,568
|
|
6,688
|
|
23,258
|
|
19,814
|
|
Alabama
|
|
7,143
|
|
6,238
|
|
21,193
|
|
18,333
|
|
South Carolina
|
|
6,718
|
|
5,115
|
|
20,664
|
|
14,691
|
|
Illinois
|
|
4,982
|
|
6,030
|
|
16,238
|
|
18,213
|
|
Tennessee
|
|
4,842
|
|
4,486
|
|
14,830
|
|
12,141
|
|
Pennsylvania
|
|
2,406
|
|
2,303
|
|
7,399
|
|
6,923
|
|
Indiana
|
|
2,322
|
|
2,003
|
|
6,994
|
|
5,869
|
|
Missouri
|
|
1,307
|
|
1,451
|
|
4,693
|
|
4,315
|
|
Mississippi
|
|
965
|
|
852
|
|
3,003
|
|
2,540
|
|
Virginia
|
|
235
|
|
138
|
|
700
|
|
232
|
|
California
|
|
99
|
|
—
|
|
99
|
|
—
|
|
Total gross premiums earned
|
|
76,857
|
|
67,604
|
|
234,337
|
|
197,694
|
|
Premiums ceded to reinsurer
|
|
(117)
|
|
(96)
|
|
(340)
|
|
(271)
|
|
Total net premiums earned
|
|
$ 76,740
|
|
$ 67,508
|
|
$ 233,997
|
|
$ 197,423
|
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.
21
FIRST ACCEPTANCE CORPORATION 10-Q
The following table presents the loss, expense, and combined ratios for our insurance operations:
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
Loss
|
|
|
92.6
|
%
|
|
|
85.0
|
%
|
|
|
104.8
|
%
|
|
|
81.2
|
%
|
|
Expense
|
|
|
13.8
|
%
|
|
|
16.3
|
%
|
|
|
14.3
|
%
|
|
|
18.9
|
%
|
|
Combined
|
|
|
106.4
|
%
|
|
|
101.3
|
%
|
|
|
119.1
|
%
|
|
|
100.1
|
%
|
Investments
We use the services of an independent investment manager to manage our investment portfolio. The investment manager conducts, in accordance with our investment policy, all of the investment purchases and sales for our insurance company subsidiaries. Our investment policy has been established by the Investment Committee of our Board of Directors and specifically addresses overall investment goals and objectives, authorized investments, prohibited securities, restrictions on sales by the investment manager and guidelines as to asset allocation, duration and credit quality. Management and the Investment Committee meet regularly with our investment manager to review the performance of the portfolio and compliance with our investment guidelines.
The invested assets of the insurance company subsidiaries consist substantially of marketable, investment grade debt securities, and include U.S. government securities, municipal bonds, corporate bonds, mutual funds, and collateralized mortgage obligations (“CMOs”), in addition to other alternative investments made into limited partnership interests and a real estate investment trust. Investment income is comprised primarily of interest earned on these securities, net of related investment expenses. Although investments are generally purchased with the intention to hold them until maturity, realized gains and losses could occur from time to time as changes are made to our holdings based upon changes in interest rates or the credit quality of specific securities, or as we did in the recent quarter, to increase the statutory capital and surplus of the insurance company subsidiaries who carry fixed maturity securities at amortized cost.
The value of our consolidated available-for-sale investment portfolio was $122.6 million at September 30, 2016 and consisted of fixed maturity securities, a preferred stock, and investments in mutual funds, all carried at fair value with unrealized gains and losses reported in a separate component of stockholders’ equity. At September 30, 2016, we had gross unrealized gains of $3.0 million and gross unrealized losses of $0.2 million in our consolidated investments available-for-sale portfolio.
The value of our other investments was $9.7 million at September 30, 2016 and consisted of limited partnership interests carried at net asset value, which approximates fair value, with unrealized gains and losses reported as investment income, and a privately-held real estate investment trust carried at fair value, with unrealized gains and losses reported in a separate component of stockholders’ equity. At September 30, 2016, we had gross unrealized gains attributable to our privately-held real estate investment trust of $0.6 million in our consolidated other investments.
At September 30, 2016, 96% of the fair value of our fixed maturity portfolio was rated “investment grade” (a credit rating of AAA to BBB-) by nationally recognized statistical rating organizations. Investment grade securities generally bear lower yields and have lower degrees of risk than those that are unrated or non-investment grade. We believe that a high quality investment portfolio is more likely to generate a stable and predictable investment return.
22
FIRST ACCEPTANCE CORPORATION 10-Q
The following table summarizes our investment securities at September 30, 2016 (in
thousands).
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
September 30, 2016
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
U.S. government and agencies
|
|
$
|
19,141
|
|
|
$
|
246
|
|
|
$
|
(7
|
)
|
|
$
|
19,380
|
|
|
Political subdivisions
|
|
|
4,264
|
|
|
|
55
|
|
|
|
—
|
|
|
|
4,319
|
|
|
Revenue and assessment
|
|
|
5,639
|
|
|
|
308
|
|
|
|
—
|
|
|
|
5,947
|
|
|
Corporate bonds
|
|
|
48,419
|
|
|
|
391
|
|
|
|
(106
|
)
|
|
|
48,704
|
|
|
Collateralized mortgage obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency backed
|
|
|
23,553
|
|
|
|
86
|
|
|
|
(15
|
)
|
|
|
23,624
|
|
|
Non-agency backed – residential
|
|
|
2,493
|
|
|
|
569
|
|
|
|
(7
|
)
|
|
|
3,055
|
|
|
Non-agency backed – commercial
|
|
|
1,433
|
|
|
|
489
|
|
|
—
|
|
|
|
1,922
|
|
|
Total fixed maturities, available-for-sale
|
|
|
104,942
|
|
|
|
2,144
|
|
|
|
(135
|
)
|
|
|
106,951
|
|
|
Preferred stock, available-for-sale
|
|
|
3,025
|
|
|
|
307
|
|
|
|
(19
|
)
|
|
|
3,313
|
|
|
Mutual funds, available-for-sale
|
|
|
11,813
|
|
|
|
569
|
|
|
|
—
|
|
|
|
12,382
|
|
|
|
|
$
|
119,780
|
|
|
$
|
3,020
|
|
|
$
|
(154
|
)
|
|
$
|
122,646
|
|
Three and Nine Months Ended September 30, 2016 Compared with the Three and Nine Months Ended September 30, 2015
Consolidated Results
Revenues for the three months ended September 30, 2016 increased 17% to $102.1 million from $87.6 million in the same period in the prior year. Loss before income taxes, for the three months ended September 30, 2016 was $0.3 million, compared with $4.5 million for the three months ended September 30, 2015. Net loss for the three months ended September 30, 2016 was $0.3 million, compared with $3.0 million for the three months ended September 30, 2015. Basic and diluted net loss per share were $0.01 for the three months ended September 30, 2016, compared with $0.07 for the same period in the prior year.
Revenues for the nine months ended September 30, 2016 increased 24% to $301.8 million from $243.4 million in the same period in the prior year. Loss before income taxes, for the nine months ended September 30, 2016 was $39.3 million, compared with $3.0 million for the nine months ended September 30, 2015. Net loss for the nine months ended September 30, 2016 was $25.7 million, compared with $2.2 million for the nine months ended September 30, 2015. Basic and diluted net loss per share were $0.63 for the nine months ended September 30, 2016, compared with $0.05 for the same period in the prior year.
For the three and nine months ended September 30, 2016, we recognized $0.1 million of favorable prior period loss development and $27.5 million of unfavorable prior period loss development, respectively. Additionally, the results for these periods were favorably impacted by net realized gains on investments of $4.9 million from the sales of fixed maturities that were sold to increase the statutory capital and surplus of our insurance company subsidiaries. The nine months ended September 30, 2016 also includes a $1.2 million gain on the sale of foreclosed real estate. The three and nine months ended September 30, 2015 included $3.4 million and $3.6 million, respectively, of costs related to a litigation settlement.
Insurance Operations
Revenues from insurance operations were $102.1 million for the three months ended September 30, 2016, compared with $87.6 million for the three months ended September 30, 2015. Revenues from insurance operations were $300.5 million for the nine months ended September 30, 2016, compared with $243.3 million for the nine months ended September 30, 2015.
Income before income taxes from insurance operations for the three months ended September 30, 2016 was $1.2 million, compared with loss before income taxes from insurance operations of $3.2 million for the three months ended September 30, 2015. Loss before income taxes from insurance operations for the nine months ended September 30, 2016 was $36.3 million, compared with $0.2 million for the nine months ended September 30, 2015.
Premiums Earned
Premiums earned increased by $9.2 million, or 14%, to $76.7 million for the three months ended September 30, 2016, from $67.5 million for the three months ended September 30, 2015. For the nine months ended September 30, 2016 premiums earned increased by $36.6 million, or 19%, to $234.0 million from $197.4 million for the nine months ended September 30, 2015. This improvement was primarily due to higher average premiums resulting from our recent rate increases.
23
FIRST ACCEPTANCE CORPORATION 10-Q
Commission and Fee Income
Commission and fee income increased by $0.3 million, or 1%, to $19.3 million for the three months ended September 30, 2016, from $19.0 million for the three months ended September 30, 2015. For the nine months ended September 30, 2016, commission and fee income increased by $15.8 million, or 37%, to $58.1 million from $42.3 million for the nine months ended September 30, 2015, primarily as a result of revenue from the former Titan retail locations acquired on July 1, 2015. Commission and fee income also increased as a result of higher fee income related to commissionable ancillary products sold through our previously-existing retail locations.
Investment Income
Investment income was $1.2 million and $1.1 million for the three months ended September 30, 2016 and 2015, respectively. For the nine months ended September 30, 2016 and 2015, investment income was $3.8 million and $3.7 million, respectively. At September 30, 2016 and 2015, the tax-equivalent book yields for our managed fixed maturities and cash equivalents portfolio were 1.6% and 2.6%, respectively, with effective durations of 2.62 and 2.93 years, respectively.
During the three months ended September 30, 2016, in order to increase the statutory capital and surplus of our insurance company subsidiaries by realizing gains on fixed maturities carried at amortized cost for statutory purposes, we sold $66.9 million of available-for-sale securities yielding 3.6% and reinvested the proceeds at 2.2%. As a result, our investment income in future periods will decline from the reduced yield in our fixed maturities portfolio.
Net Realized Gains (Losses) on Investments, Available-for-sale
Net realized gains on investments, available-for-sale, during the three and nine months ended September 30, 2016 included $4.9 million from the previously-mentioned sale of fixed maturities. Net realized gains for the nine months ended September 30, 2016 are net of $147 thousand of charges related to other-than-temporary-impairment (“OTTI”) on a mutual fund and other net realized losses from redemptions.
Loss and Loss Adjustment Expenses
The loss ratio was 92.6% for the three months ended September 30, 2016, compared with 85.0% for the three months ended September 30, 2015. The loss ratio was 104.8% for the nine months ended September 30, 2016, compared with 81.2% for the nine months ended September 30, 2015. We experienced favorable development related to prior periods of $0.1 million and unfavorable development related to prior periods of $27.5 million for the three and nine months ended September 30, 2016, respectively. This unfavorable development for the nine months ended September 30, 2016 was the result of increased losses primarily from the 2015 accident year across all major coverages. The most significant causes of the development were a greater than usual emergence of reported cla
ims and higher bodily injury severity.
Excluding prior period development, the loss ratio for the 2016 accident year is now estimated to be 92.7%. This elevated loss ratio is primarily due to higher than expected claim frequency across all major coverages and higher bodily injury severity. We believe that an increase in distracted driving, along with an increase in the number of miles driven by insured drivers as a result of lower gas prices and a favorable economy has been a contributing factor to an industry-wide increase in frequency. In response, we have continued to implement aggressive rate and underwriting actions as warranted at a state and coverage level and strengthen its claims organization and processes.
Insurance Operating Expenses
Insurance operating expenses decreased 1% to $28.9 million for the three months ended September 30, 2016, from $29.3 million for the three months ended September 30, 2015. For the nine months ended September 30, 2016, insurance operating expenses increased 14.0% to $88.9 million from $78.0 million for nine months ended September 30, 2015. The increase in operating expenses for the nine months ended September 30, 2016 is primarily due to the addition of the former Titan retail locations which were not acquired until July 1, 2015.
During the three months ended September 30, 2016, we closed 39 poorly-performing stores. The cost of these closures, primarily for lease buyouts, was $792 thousand and is included in insurance operating expenses.
24
FIRST ACCEPTANCE CORPORATION 10-Q
The expense ratio was 13.8%
for the three months ended September 30, 2016, compared with 16.3% for the three months ended September 30, 2015. The expense ratio was 14.3% for the nine months ended September 30, 2016, compared with 18.9% for the nine months ended September 30, 2015. Th
e year-over-year decrease in the expense ratio was primarily due to the increase in premiums earned which resulted in a lower percentage of fixed expenses in our retail operations (such as rent and base salary) and our ongoing efforts on cost containment.
Overall, the combined ratio increased to 106.4% for the three months ended September 30, 2016 from 101.3% for the three months ended September 30, 2015. For the nine months ended September 30, 2016, the combined ratio increased to 119.1% from 100.1% for the nine months ended September 30, 2015.
Provision (Benefit) for Income Taxes
The provision for income taxes was $6 thousand for the three months ended September 30, 2016, compared with a benefit of $1.5 million for the three months ended September 30, 2015. The benefit for income taxes was $13.6 million for the nine months ended September 30, 2016, compared with $0.8 million for the nine months ended September 30, 2015. The nine months ended September 30, 2016 includes an increase in the valuation allowance for deferred tax assets of $0.3 million.
In assessing our ability to realize the DTA, both positive and negative evidence are used to evaluate the allowance. Although we have incurred a six-month pre-tax loss of $39.3 million which is a source of negative evidence, we placed greater weight on our outlook for future taxable income over the allowable time period for realization of the DTA and concluded that it is more likely than not that the remaining DTA will be realized. Regarding the length of time available to realize the DTA, at September 30, 2016, $20.6 million of the DTA related to net operating loss carryforwards do not expire until 2031 through 2036 and $2.0 million in AMT (“Alternative Minimum Tax”) carryforwards have no expiration date. The DTA valuation allowance may be adjusted in future periods if management determines that it is more likely than not that some portion or all of the DTA will not be realized. In the event the DTA valuation allowance is adjusted, we would record an income tax expense for the adjustment.
Real Estate and Corporate
Loss before income taxes from real estate and corporate operations for the three months ended September 30, 2016 was $1.5 million, compared with $1.4 million for the three months ended September 30, 2015. Loss before income taxes from real estate and corporate operations for the nine months ended September 30, 2016 and 2015 was $3.0 million and $2.9 million, respectively. Segment losses consist of other operating expenses not directly related to our insurance operations, interest expense and stock-based compensation offset by a gain on the sale of foreclosed real estate and investment income on corporate invested assets. On May 4, 2016, we sold one of our two remaining tracts of land resulting in a gain of $1.2 million.
We incurred $1.1 million of interest expense for the three months ended September 30, 2016 and 2015. We incurred $3.2 million of interest expense for the nine months ended September 30, 2016, compared with $1.9 million for the nine months ended September 30, 2015. The nine months ended September 30, 2016 included $1.8 million of interest expense compared to $0.6 million of interest expense for the nine months ended September 30, 2015 on the term loan from our principal stockholder to finance the July 1, 2015 Titan acquisition. The balance of interest expense is related to the debentures. For additional information, see “Liquidity and Capital Resources” in this report.
Liquidity and Capital Resources
Our primary sources of funds are premiums, fees and investment income from our insurance company subsidiaries and commissions and fee income from our non-insurance company subsidiaries. Our primary uses of funds are the payment of claims and operating expenses. Net cash used by operating activities for the nine months ended September 30, 2016 was $5.8 million, compared with net cash provided by operating activities of $24.0 million for the same period in the prior fiscal year. This change was primarily the result of our recent net loss from insurance operations. Net cash provided by investing activities for the nine months ended September 30, 2016 was $33.5 million, compared to net cash used by investing activities of $49.3 million for the same period in the prior fiscal year, which included a deposit of $33.7 million required under the Titan asset purchase agreement. Investing activities for the nine months ended September 30, 2016 were impacted by the sale of certain fixed maturities in an unrealized gain position to increase the statutory capital and surplus of the insurance company subsidiaries and their subsequent reinvestment. They also included a net change in the receivable and payable for securities of $17.9 million due to the timing of these sales and purchases. The current period also included $1.8 million of proceeds from the sale of foreclosed real estate.
25
FIRST ACCEPTANCE CORPORATION 10-Q
Our holding company requires cash for general corporate overhead expenses and for debt service related to our debentures and term loan payable. The holding company’s primary sourc
e of unrestricted cash to meet its obligations is the sale of ancillary products and insurance policies on behalf of third-party carriers by our agency operations, including the recent Titan acquisition. During the nine months ended September 30, 2016, the
holding company contributed $7.6 million to the statutory capital and surplus of the insurance company subsidiaries from our insurance agency net income. At October 31, 2016, our holding company had $1.5 million available remaining in unrestricted cash an
d investments. These funds and the additional unrestricted cash from our agency operations will be used to pay our future cash requirements outside of the insurance company subsidiaries in the short-term and foreseeable future.
The holding company has debt service requirements related to the debentures payable and the term loan to a principal shareholder. The debentures are interest-only and mature in full in July 2037. The debentures accrue interest at a variable rate equal to Three-Month LIBOR plus 375 basis points, which resets quarterly. The interest rate related to the debentures for the nine months ended September 30, 2016 ranged from 4.366% to 4.507%. In October 2016 the interest rate reset to 4.637% through January 2017. The term loan is interest-only and matures in full in June 2025. The interest rate on the term loan is 8%.
State insurance laws limit the amount of dividends that may be paid from our insurance company subsidiaries. At September 30, 2016, our insurance company subsidiaries could pay not pay any dividends due to a negative unassigned surplus position.
We have three insurance company subsidiaries that are organized and domiciled under the insurance statutes of Texas, Georgia, and Tennessee. Our insurance company subsidiaries also operate under licenses issued by various state insurance authorities. Such licenses may be of perpetual duration or periodically renewable, provided we continue to meet applicable regulatory requirements.
For the nine months ended September 30, 2016, the insurance company subsidiaries experienced a reduction in statutory capital and surplus of $36.3 million primarily as a result of the unfavorable loss development during this period. The National Association of Insurance Commissioners (“NAIC”) Model Act for risk-based capital provides formulas to determine each December 31 on an annual basis the amount of statutory capital and surplus that an insurance company needs to ensure that it has an acceptable expectation of not becoming financially impaired. Failure to meet applicable risk-based capital requirements could subject our insurance company subsidiaries to further examination or corrective action imposed by state regulators, including limitations on their writing of additional business, state supervision or even liquidation. Although statutory risk-based capital calculations are only made as of each December 31, we have estimated that the insurance company subsidiaries remain above the company action levels as of September 30, 2016. There are also statutory guidelines that suggest that on an annual calendar year basis an insurance company should not exceed a ratio of net premiums written to statutory capital and surplus of 3-to-1. On a combined basis, the ratio for our insurance company subsidiaries of net premiums written for the last twelve months to statutory capital and surplus was 4.90-to-1 at September 30, 2016 which is in excess of the suggested guidelines.
Management is currently operating under a business plan to reduce premium writings and increase statutory capital and surplus to address the net premiums written to statutory capital and surplus guidelines. We believe that existing cash and investment balances, when combined with anticipated cash flows as noted above, will be adequate to meet our expected liquidity needs, for both the holding company and our insurance company subsidiaries, in both the short-term and the foreseeable future.
Off-Balance Sheet Arrangements
We use off-balance sheet arrangements (e.g., operating leases) where the economics and sound business principles warrant their use. For information with respect to our off-balance sheet arrangements at December 31, 2015, 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, 2015. We have not entered into any new material off-balance sheet arrangements since December 31, 2015.
Critical Accounting Estimates
There have been no significant changes to our critical accounting estimates during the nine months ended September 30, 2016 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, 2015.
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FIRST ACCEPTANCE CORPORATION 10-Q
