FACO First Acceptance Corporation (QX)

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

Operating Results

For the three and six months ended June 30, 2016, we recognized $25.8 million and $31.0 million, respectively, of unfavorable prior period loss development.

Loss before income taxes, for the three months ended June 30, 2016 was $30.6 million, compared with income before income taxes of $0.7 million for the three months ended June 30, 2015. Net loss for the three months ended June 30, 2016 was $19.9 million, compared with net income of $0.3 million for the three months ended June 30, 2015. Basic and diluted net loss per share were $0.48 for the three months ended June 30, 2016, compared with basic and diluted net income per share of $0.01 for the same period in the prior year.

Loss before income taxes, for the six months ended June 30, 2016 was $39.0 million, compared with income before income taxes of $1.5 million for the six months ended June 30, 2015. Net loss for the six months ended June 30, 2016 was $25.4 million, compared with net income of $0.8 million for the six months ended June 30, 2015. Basic and diluted net loss per share were $0.62 for the six months ended June 30, 2016, compared with basic and diluted net income per share of $0.02 for the same period in the prior year.

Loss Ratio. The loss ratio was 124.6% for the three months ended June 30, 2016, compared with 81.7% for the three months ended June 30, 2015. The loss ratio was 110.8% for the six months ended June 30, 2016, compared with 79.2% for the six months ended June 30, 2015. We experienced unfavorable development related to prior periods of $25.8 million and $31.0 million for the three and six months ended June 30, 2016, respectively. This unfavorable development for the three and six months ended June 30, 2016 was the result of increased losses primarily from the 2015 accident year across all major coverages. The most significant causes of the development were a greater than usual emergence of reported claims and higher bodily injury severity.

Excluding prior period development, the loss ratios for the 2016 and 2015 accident years are now estimated to be 91.1% and 89.9%, respectively. These elevated loss ratios are primarily due to higher than expected claim frequency across all major coverages and higher bodily injury severity. We believe that an increase in distracted driving, along with an increase in the number of miles driven by insured drivers as a result of lower gas prices and a favorable economy has been a contributing factor to an industry-wide increase in frequency. In response, the Company has continued to implement aggressive rate and underwriting actions as warranted at a state and coverage level and strengthen its claims organization and processes.

Revenues. Revenues for the three months ended June 30, 2016 increased 28% to $102.8 million from $80.6 million in the same period in the prior year. Revenues for the six months ended June 30, 2016 increased 28% to $199.7 million from $155.7 million in the same period in the prior year.

Premiums earned increased by $13.6 million, or 20%, to $80.9 million for the three months ended June 30, 2016, from $67.3 million for the three months ended June 30, 2015. For the six months ended June 30, 2016 premiums earned increased by $27.4 million, or 21%, to $157.3 million from $129.9 million for the six months ended June 30, 2015. This improvement was primarily due to higher average premiums and an increase in the number of policies in force.

Commission and fee income increased by $7.3 million, or 61%, to $19.2 million for the three months ended June 30, 2016, from $11.9 million for the three months ended June 30, 2015. For the six months ended June 30, 2016, commission and fee income increased by $15.5 million, or 67%, to $38.8 million from $23.3 million for the six months ended June 30, 2015. Revenue from the former Titan retail locations acquired on July 1, 2015 contributed towards this increase. 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 and the increase in the number of policies in force.

Expense Ratio. The expense ratio was 14.8% for the three months ended June 30, 2016, compared with 18.0% for the three months ended June 30, 2015. The expense ratio was 14.6% for the six months ended June 30, 2016, compared with 20.2% for the six months ended June 30, 2015. The year-over-year decrease in the expense ratio was primarily due to the increase in premiums earned which resulted in a lower percentage of fixed expenses in our retail operations (such as rent and base salary) and our ongoing efforts on cost containment.

Combined Ratio. The combined ratio increased to 139.4% for the three months ended June 30, 2016 from 99.7% for the three months ended June 30, 2015. For the six months ended June 30, 2016, the combined ratio increased to 125.4% from 99.4% for the six months ended June 30, 2015.

Next Release of Financial Results

We currently plan to report our financial results for the three and nine months ending September 30, 2016 on November 8, 2016.

About First Acceptance Corporation

We are principally a retailer, servicer and underwriter of non-standard personal automobile insurance based in Nashville, Tennessee. Our insurance operations generate revenues from selling non-standard personal automobile insurance policies and related products in 17 states. We conduct our servicing and underwriting operations in 14 states and are licensed as an insurer in 12 additional states. Non-standard personal automobile insurance is made available to individuals because of their inability or unwillingness to obtain standard insurance coverage due to various factors, including payment history, payment preference, failure in the past to maintain continuous insurance coverage or driving record and/or vehicle type.

At June 30, 2016, we leased and operated 410 retail locations and a call center staffed with employee-agents. Our employee-agents primarily sell non-standard personal automobile insurance products underwritten by us, as well as certain commissionable ancillary products. In most states, our employee-agents also sell a complementary insurance product providing personal property and liability coverage for renters underwritten by us. In addition, retail locations in some markets offer non-standard personal automobile insurance serviced and underwritten by other third-party insurance carriers for which we receive a commission. In addition to our retail locations, we are able to complete the entire sales process over the phone via our call center or through the internet via our consumer-based website or mobile platform. On a limited basis, we also sell our products through selected retail locations operated by independent agents. Additional information about First Acceptance Corporation can be found online at www.acceptance.com.

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

FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations and Comprehensive Loss
(unaudited)
(in thousands, except per share data)
		Three Months Ended								Six Months Ended
		June 30,								June 30,
			2016				2015				2016				2015
Revenues:
Premiums earned		$	80,850			$	67,300			$	157,257			$	129,915
Commission and fee income			19,183				11,929				38,764				23,278
Investment income			1,646				1,406				2,608				2,551
Gain on sale of foreclosed real estate			1,237				—				1,237				—
Net realized losses on investments, available-for-sale (includes $147 of accumulated other comprehensive  loss reclassification for unrealized loss in 2016)			(162	)			(4	)			(164	)			(7	)
			102,754				80,631				199,702				155,737
Costs and expenses:
Losses and loss adjustment expenses			100,765				55,003				174,184				102,937
Insurance operating expenses			30,314				23,645				59,961				48,730
Other operating expenses			283				263				563				586
Litigation settlement			—				129				—				239
Stock-based compensation			68				53				105				72
Depreciation			616				392				1,267				800
Amortization of identifiable intangibles assets			239				7				477				7
Interest expense			1,076				449				2,126				872
			133,361				79,941				238,683				154,243
(Loss) income before income taxes			(30,607	)			690				(38,981	)			1,494
(Benefit) provision for income taxes			(10,708	)			375				(13,577	)			693
Net (loss) income		$	(19,899	)		$	315			$	(25,404	)		$	801
Net (loss) income per share:
Basic		$	(0.48	)		$	0.01			$	(0.62	)		$	0.02
Diluted		$	(0.48	)		$	0.01			$	(0.62	)		$	0.02
Number of shares used to calculate net (loss) income per share:
Basic			41,064				41,020				41,062				41,018
Diluted			41,064				41,384				41,062				41,347
Reconciliation of net (loss) income to other comprehensive loss:
Net (loss) income		$	(19,899	)		$	315			$	(25,404	)		$	801
Net unrealized change in investments, net of tax of $757, $(938), $1,668 and $(592), respectively			1,407				(1,741	)			3,098				(1,099	)
Comprehensive loss		$	(18,492	)		$	(1,426	)		$	(22,306	)		$	(298	)
Detail of net realized losses on investments, available-for-sale:
Net realized losses on redemptions		$	(15	)		$	(4	)		$	(17	)		$	(7	)
Other-than-temporary impairment charges			(147	)			—				(147	)			—
Net realized losses on investments, available-for-sale		$	(162	)		$	(4	)		$	(164	)		$	(7	)

FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except per share data)
		June 30,				December 31,
		2016				2015
		(Unaudited)
ASSETS
Investments, available-for-sale at fair value (amortized cost of $121,218 and $128,304, respectively)		$	129,088			$	131,582
Cash and cash equivalents			134,439				115,587
Premiums, fees, and commissions receivable, net of allowance of $504 and $454, respectively			79,156				69,881
Deferred tax assets, net			30,364				18,301
Other investments			10,322				11,256
Other assets			5,807				6,950
Property and equipment, net			5,227				5,141
Deferred acquisition costs			5,692				5,509
Goodwill			29,384				29,429
Identifiable intangible assets, net			8,054				8,491
TOTAL ASSETS		$	437,533			$	402,127
LIABILITIES AND STOCKHOLDERS’ EQUITY
Loss and loss adjustment expense reserves		$	166,012			$	122,071
Unearned premiums and fees			95,346				83,426
Debentures payable			40,279				40,256
Term loan from principal stockholder			29,766				29,753
Accrued expenses			7,675				7,345
Other liabilities			16,946				15,606
Total liabilities			356,024				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			457,621				457,476
Accumulated other comprehensive income, net of tax of $1,730 and $62, respectively			6,589				3,491
Accumulated deficit			(383,112	)			(357,708	)
Total stockholders’ equity			81,509				103,670
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	437,533			$	402,127

  

FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
Supplemental Data
(Unaudited)
PREMIUMS EARNED BY STATE
		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2016				2015				2016				2015
Gross premiums earned:
Georgia		$	16,271			$	12,795			$	31,328			$	24,540
Florida			12,176				10,566				23,785				20,408
Texas			11,266				9,011				21,883				17,375
Ohio			8,094				6,761				15,690				13,126
South Carolina			7,352				6,226				13,946				12,183
Alabama			7,286				6,249				14,050				12,095
Illinois			5,516				4,954				11,256				9,576
Tennessee			5,107				4,036				9,988				7,655
Pennsylvania			2,575				2,361				4,993				4,620
Indiana			2,395				2,021				4,672				3,866
Missouri			1,633				1,462				3,386				2,864
Mississippi			1,043				872				2,038				1,688
Virginia			251				78				465				94
Total gross premiums earned			80,965				67,392				157,480				130,090
Premiums ceded to reinsurer			(115	)			(92	)			(223	)			(175	)
Total net premiums earned		$	80,850			$	67,300			$	157,257			$	129,915
COMBINED RATIOS (INSURANCE OPERATIONS)
		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2016				2015				2016				2015
Loss			124.6	%			81.7	%			110.8	%			79.2	%
Expense			14.8	%			18.0	%			14.6	%			20.2	%
Combined			139.4	%			99.7	%			125.4	%			99.4	%
NUMBER OF RETAIL LOCATIONS
Retail location counts are based upon the date that a location commenced or ceased writing business.
		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2016				2015				2016				2015
Retail locations – beginning of period			414				355				440				356
Opened			2				5				4				5
Closed			(6	)			(1	)			(34	)			(2	)
Retail locations – end of period			410				359				410				359

 

FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
Supplemental Data (continued)
(Unaudited)
RETAIL LOCATIONS BY STATE
		March 31,								December 31,
		2016				2015				2015				2014
Alabama			24				24				24				24
Arizona			10				—				10				—
California			48				—				48				—
Florida			39				31				39				31
Georgia			60				60				60				60
Illinois			39				60				61				60
Indiana			17				17				17				17
Mississippi			7				7				7				7
Missouri			9				9				9				10
Nevada			4				—				4				—
New Mexico			5				—				5				—
Ohio			27				27				27				27
Pennsylvania			14				15				14				15
South Carolina			23				25				24				25
Tennessee			23				22				23				22
Texas			65				58				68				58
Total			414				355				440				356

 

INVESTOR RELATIONS CONTACT: 
Michael J. Bodayle 
615.844.2885