NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.
|
Summary of Significant Accounting Policies
|
General
First Acceptance Corporation (the “Company”) is a holding company based in Nashville, Tennessee with operating subsidiaries whose primary operations include the selling, servicing, and underwriting of non-standard personal automobile insurance and related products. In 2016, our insurance operations generated revenue from selling non-standard personal automobile insurance products and related products in 17 states and conducted our servicing and underwriting operations in 14 states. In December 2016, we closed all of our retail locations and ceased writing new business in the state of Missouri. The Company issued policies of insurance through three wholly-owned subsidiaries: First Acceptance Insurance Company, Inc., First Acceptance Insurance Company of Georgia, Inc. and First Acceptance Insurance Company of Tennessee, Inc. (collectively, the “Insurance Companies”).
Basis of Consolidation and Reporting
The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries which are all wholly owned. The accounts of First Acceptance Statutory Trust I (“FAST I”) are not consolidated since it does not meet the requirements for consolidation of FASB ASC 810,
Consolidation (
see Note 10)
.
These financial statements have been prepared in conformity with U.S. generally accepted accounting principles. All intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. It also requires disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported revenues and expenses during the period. Actual results could differ from those estimates.
Investments
Investments, available-for-sale at fair value, include bonds with fixed principal payment schedules and mortgage-backed securities which are amortized using the retrospective method. These securities and investments in mutual funds are carried at fair value with the corresponding unrealized appreciation or depreciation, net of deferred income taxes, reported in other comprehensive (loss) income.
Premiums and discounts on collateralized mortgage obligations (“CMOs”) are amortized over a period based on estimated future principal payments, including prepayments. Prepayment assumptions are reviewed periodically and adjusted to reflect actual prepayments and changes in expectations. The most significant determinants of prepayments are the difference between interest rates on the underlying mortgages and the current mortgage loan rates and the structure of the security. Other factors affecting prepayments include the size, type, and age of underlying mortgages, the geographic location of the mortgaged properties, and the credit worthiness of the borrowers. Variations from anticipated prepayments will affect the life and yield of these securities.
Investment securities are exposed to various risks such as interest rate, market, and credit risk. Fair values of securities fluctuate based on changing market conditions. Significant changes in market conditions could materially affect portfolio value in the near term. Management reviews investments for impairment on a quarterly basis. Fair values of investments are based on prices quoted in the most active market for each security. If quoted prices are not available, fair value is estimated based on the fair value of comparable securities, discounted cash flow models or similar methods. Any decline in the fair value of any available-for-sale security below cost that is deemed to be other-than-temporary would result in a reduction in the amortized cost of the security.
43
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
If management can assert that it does not intend to sell an impaired fixed maturity security and it is more likely than not that it will not have to sell the security before recovery of its amortized cost basis, then an entity m
ust separate other-than-temporary impairments (“OTTI”) into the following two components: (i) the amount related to credit losses, which are charged against income, and (ii) the amount related to all other factors, which are recorded in other comprehensive
(loss) income. The credit-related portion of an OTTI is measured by comparing a security’s amortized cost to the present value of its current expected cash flows discounted at its effective yield prior to the impairment charge. If management intends to se
ll an impaired security, or it is more likely than not that it will be required to sell the security before recovery, an impairment charge is required to reduce the amortized cost of that security to fair value.
Realized gains and losses on sales and redemptions of securities are computed based on specific identification.
Cash, Cash Equivalents, and Restricted Cash
Cash, cash equivalents, and restricted cash consist of bank demand deposits and other highly-liquid investments. All investments with maturities of three months or less at the date of purchase are considered cash equivalents. At December 31, 2016 and December 31, 2015 the Company had restricted cash equivalents of $18.6 million and $9.4 million, respectively.
Other Investments
Other investments consist of limited partnership interests and an investment in the common stock of a real estate investment trust (“REIT”). Limited partnership interests are recorded at net asset value which approximates fair value. Valuations are based upon the GAAP financial statements of the partnerships which are required to be audited annually. The common stock of the REIT is recorded at a fair value with the corresponding unrealized appreciation or depreciation, net of deferred income taxes, reported in other comprehensive (loss) income.
The change in net asset value of limited partnership interests and any dividends paid by the REIT are recorded in investment income in the consolidated statements of comprehensive (loss) income.
Revenue Recognition
Insurance premiums earned include policy and renewal fees and are recognized on a pro-rata basis over the respective terms of the policies. Written premiums are recorded as of the effective date of the policies for the full policy premium, although most policyholders elect to pay on a monthly installment basis. Premiums and fees are generally collected in advance of providing risk coverage, minimizing the Company’s exposure to credit risk. Premiums receivable are recorded net of an estimated allowance for uncollectible amounts.
Commission and fee income includes installment fees recognized when billed, commissions and fees from ancillary products recognized on a pro-rata basis over the respected terms of the contracts, and commissions and related policy fees, written for third-party insurance companies, recognized, at the date the customer is initially billed or as of the effective date of the insurance policy, whichever is later. A liability for returned commissions is established for the amount of commission income received that the Company estimates (based on historical experience) will be returned to third-party insurance companies as a result of policy cancellations.
Income Taxes
Income taxes are accounted for under the liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
A valuation allowance for the deferred taxes is established based upon management’s estimate of whether it is more likely than not that the Company would not realize tax benefits in future periods to the full extent available. Changes in the valuation allowance are recognized in income during the period in which the circumstances that cause such a change in management’s estimate occur.
44
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The Company accounts for income tax uncertainties under the provisions of FASB ASC 740,
Income Taxes
. The Company has recognized no additional liability or reduction in deferred tax assets for unrecognize
d tax benefits at December 31, 2016 and 2015. Any interest and penalties incurred in connection with income taxes are recorded as a component of the provision for income taxes. The Company is generally not subject to U.S. federal, state or local income tax
examinations by tax authorities for taxable years prior to 2012.
Property and Equipment
Property and equipment are initially recorded at cost. Depreciation is provided over the estimated useful lives of the assets (generally ranging from three to five years) using the straight-line method. Leasehold improvements are amortized over the shorter of the lives of the respective leases or the service lives of the improvements. Repairs and maintenance are charged to expense as incurred. Equipment under capitalized lease obligations is stated at the present value of the minimum lease payments at the beginning of the lease term.
Foreclosed Real Estate Held for Sale
Foreclosed real estate held for sale is recorded at the lower of cost or fair value less estimated costs to sell. The Company periodically reviews its portfolio of foreclosed real estate held for sale using current information including (i) independent appraisals, (ii) general economic factors affecting the area where the property is located, (iii) recent sales activity and asking prices for comparable properties and (iv) costs to sell and/or develop that would serve to lower the expected proceeds from the disposal of the real estate. Gains (losses) realized on liquidation are recorded directly to operations and included in revenues. Foreclosed real estate held for sale assets of $0.2 million and $0.8 million at December 31, 2016 and 2015, respectively, are included within other assets in the accompanying consolidated balance sheets.
On May 4, 2016, the Company sold one tract of land resulting in a gain of $1.2 million.
Deferred Acquisition Costs
Deferred acquisition costs include premium taxes and other variable underwriting and direct sales costs incurred in connection with writing successful new and renewal business. These costs are deferred and amortized over the policy period in which the related premiums are earned, to the extent that such costs are deemed recoverable from future unearned premiums and anticipated investment income. Advertising costs are expensed when incurred and are not a part of deferred acquisition costs. Amortization expense for the years ended December 31, 2016, 2015 and 2014 was $18.9 million, $16.3 million and $11.4 million, respectively, and is included within insurance operating expenses in the accompanying consolidated statements of operations and comprehensive (loss) income.
Goodwill and Other Identifiable Intangible Assets
Goodwill and identifiable intangible assets are attributable to the Company’s insurance operations and were initially recorded at their estimated fair values at their dates of acquisition. Identifiable intangible assets with an indefinite life, (trade name and state insurance licenses) are not amortized for financial statement purposes while those with a definite life (policy renewal rights, customer relationships, and software licenses) are amortized in proportion to projected policy expirations or life of the asset. At December 31, 2016 and 2015, identifiable intangible assets were $7.6 million and $8.5 million, respectively, stated net of accumulated amortization expense of $1.5 million and $0.5 million, respectively. The estimated amortization expense for the five succeeding fiscal years is $0.8 million, $0.6 million, $0.5 million, $0.4 million, and $0.3 million.
Effective with an accounting change made during the quarter ended December 31, 2015, the Company performs required annual impairment tests of its goodwill and identifiable intangible assets as of October 1st of each year. In the event that facts and circumstances indicate that goodwill or identifiable intangible assets may be impaired, an interim impairment test would be required. For goodwill impairment analysis purposes, the Company considers the Titan Agencies to be a separate reporting unit (see note 18).
The Company follows the accounting guidelines, which allows companies to waive comparing the fair value of goodwill and intangible assets to their carrying amounts in assessing the recoverability of these assets if, based on qualitative factors, it is more likely than not that the fair value of the goodwill and intangible assets is greater than their carrying amounts. Based on recent entity-specific events, the Company elected to prepare a quantitative analysis for its annual impairment testing as of October 1, 2016. This review did not indicate any impairment.
45
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Loss and Loss Adjustment Expense Reserves
Loss and loss adjustment expense reserves are undiscounted and represent case-basis estimates of reported losses and estimates based on certain actuarial assumptions regarding the past experience of reported losses, including an estimate of losses incurred but not reported. Management believes that the loss and loss adjustment reserves are adequate to cover the ultimate associated liability. However, such estimates may be more or less than the amount ultimately paid when the claims are finally settled.
Evaluation of Going Concern
Conformity with U.S. generally accepted accounting principles requires the Company to evaluate whether there are conditions and events that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the financial statements are issued. Management’s evaluation determined that the Company does not have substantial doubt continuing one year after the financial statements are issued.
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. The Company has revenue from non-insurance arrangements, such as commissionable ancillary products, which will fall under this guidance. The Company has not finalized the impact, if any, on our consolidated financial statements at this time. However, based on the initial evaluation of this guidance as it relates to these non-insurance arrangements, the Company does not expect the future impacts to be material.
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 e
arly adoption permitted. The Company adopted this requirement effective December 31, 2016 which did not have a material impact on the consolidated financial statements.
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 December 31, 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 adopted this requirement effective December 31, 2016, and these disclosures are included in note 9.
46
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
In January 2016, the FASB issued ASU No. 2016-01, “
Financi
al Instruments – Overall (Subtopic 825-20): Recognition and Measure of Financial Assets and Financial Liabilities
” which requires entities to measure many equity investments at fair value and recognize changes in fair value in net income (loss), as opposed
to the current practice of other comprehensive income (loss). The 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 altern
ative for equity investments that do not have readily determinable fair values and do not qualify for the net asset value practical expedient. Under this alternative, these investments can be measured at cost, less any impairment, plus or minus changes res
ulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. The guidance is effective for public business entities for annual periods beginning after December 15, 2017, and interim periods with
in those years. The Company believes that its other investment in a REIT 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 ot
her comprehensive income (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 record most leases on their balance sheets as lease liabilities with corresponding right-of-use assets, but recognize expense in a manner similar to the current accounting treatment. The guidance 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. The Company’s lease arrangements fall under this guidance and will be required to be shown on its consolidated balance sheet. The Company is currently evaluating controls and processes to ensure this guidance is reflected properly on future consolidated financial statements.
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 (loss) income. The guidance is effective for public business entities for annual periods beginning after December 15, 2019, and interim periods within those years. Early adoption is permitted. The Company has not determined the impact on future consolidated financial statements once this is adopted.
In August 2016, the FASB issued ASU No. 2016-15,
“Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments”
which clarifies how entities should classify certain cash receipts and cash payments, including how the predominance principle should be applied when cash receipts and cash payments have aspects of more than one class of cash flows. The guidance is effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those years. Early adoption is permitted. Entities will have to apply the guidance retrospectively, but if it is impracticable to do so for an issue, the amendments related to that issue would be applied prospectively. The Company has not determined the impact on future consolidated financial statements once this is adopted.
In January 2017, the FASB issued ASU No. 2017-04,
“Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment”
which eliminates the requirement to calculate the implied fair value of goodwill to measure an impairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value. The standard will be applied prospectively. The guidance is effective for annual and interim impairment tests performed by public business entities for periods beginning after December 15, 2019. Early adoption is permitted for impairment testing dates after January 1, 2017. The Company believes that it will be reasonably able to comply with these requirements.
Supplemental Cash Flow Information
During the years ended December 31, 2016, 2015 and 2014, the Company paid $0.2 million, $0.7 million and $0.7 million, respectively, in income taxes and $4.2 million, $1.7 million and $1.7 million, respectively, in interest.
Basic and Diluted Net (Loss) Income Per Share
Basic net (loss) income per share is computed by dividing net (loss) income available to common shareholders by the weighted average number of common shares, while diluted net (loss) income per share is computed by dividing net (loss) income available to
47
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
common shareholders by the weighted average number of such common shares and dilutive share equivalents. Dilutive share equivalents may result from the assumed exercise of employee stock options and
restricted stock units and are calculated using the treasury stock method.
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 categorizes 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 relied on projected future net cash flows and included key assumptions for the customer retention and renewal rates. The data used in these methods is not observable in the market.
Fair Value of Financial Instruments
The carrying values and fair values of certain of the Company’s financial instruments were as follows (in thousands).
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
|
|
Carrying
|
|
|
Fair
|
|
|
Carrying
|
|
|
Fair
|
|
|
|
Value
|
|
|
Value
|
|
|
Value
|
|
|
Value
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments, available-for-sale
|
|
$
|
117,212
|
|
|
$
|
117,212
|
|
|
$
|
131,582
|
|
|
$
|
131,582
|
|
Other investments
|
|
|
9,994
|
|
|
|
9,994
|
|
|
|
11,256
|
|
|
|
11,256
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debentures payable
|
|
|
40,302
|
|
|
|
11,488
|
|
|
|
40,256
|
|
|
|
20,275
|
|
Term loan from principal stockholder
|
|
|
29,779
|
|
|
|
15,000
|
|
|
|
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 stockholder 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 and fees receivable, approximate fair value due to the short-term nature of the instruments and are not required to be disclosed. Therefore, the aggregate of the fair values presented in the preceding table do not purport to represent the Company’s underlying value.
48
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following tables present the fair-value measurements for each major category of assets that are measured on a recurring basis (in thousands). Certain other investments are carried at n
et 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
|
|
December 31, 2016
|
|
Total
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
(NAV)
|
|
Fixed maturities, available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agencies
|
|
$
|
18,951
|
|
|
$
|
18,951
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Political subdivisions
|
|
|
4,165
|
|
|
|
—
|
|
|
|
4,165
|
|
|
|
—
|
|
|
|
—
|
|
Revenue and assessment
|
|
|
5,683
|
|
|
|
—
|
|
|
|
5,683
|
|
|
|
—
|
|
|
|
—
|
|
Corporate bonds
|
|
|
45,540
|
|
|
|
—
|
|
|
|
45,540
|
|
|
|
—
|
|
|
|
—
|
|
Collateralized mortgage obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency backed
|
|
|
22,422
|
|
|
|
—
|
|
|
|
22,422
|
|
|
|
—
|
|
|
|
—
|
|
Non-agency backed – residential
|
|
|
2,933
|
|
|
|
—
|
|
|
|
2,933
|
|
|
|
—
|
|
|
|
—
|
|
Non-agency backed – commercial
|
|
|
1,895
|
|
|
|
—
|
|
|
|
1,895
|
|
|
|
—
|
|
|
|
—
|
|
Total fixed maturities, available-for-sale
|
|
|
101,589
|
|
|
|
18,951
|
|
|
|
82,638
|
|
|
|
—
|
|
|
|
—
|
|
Preferred stock, available-for-sale
|
|
|
3,112
|
|
|
|
3,112
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Mutual funds, available-for-sale
|
|
|
12,511
|
|
|
|
12,511
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total investments, available-for-sale
|
|
|
117,212
|
|
|
|
34,574
|
|
|
|
82,638
|
|
|
|
—
|
|
|
|
—
|
|
Other investments
|
|
|
9,994
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,858
|
|
|
|
5,136
|
|
Cash, cash equivalents, and restricted cash
|
|
|
118,681
|
|
|
|
118,681
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
245,887
|
|
|
$
|
153,255
|
|
|
$
|
82,638
|
|
|
$
|
4,858
|
|
|
$
|
5,136
|
|
|
|
|
|
|
|
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 and cash equivalents
|
|
|
115,587
|
|
|
|
115,587
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
258,425
|
|
|
$
|
141,840
|
|
|
$
|
105,329
|
|
|
$
|
3,276
|
|
|
$
|
7,980
|
|
49
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The fair values of the Company’s investments are determined by managem
ent 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 REIT 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 years ended December 31, 2016 and 2015. The Company’s policy is to recognize transfers between levels at the end of the reporting per
iod based on specific identification. The Company has not made any adjustments to the prices obtained from the independent pricing source.
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.
The following table represents the quantitative disclosure for those assets classified as Level 3 during the year ended December 31, 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
|
|
|
625
|
|
Investments and capital calls
|
|
|
957
|
|
Distributions received
|
|
|
—
|
|
Transfers into and out of Level 3
|
|
|
—
|
|
Balance at December 31, 2016
|
|
$
|
4,858
|
|
50
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Investments, Available-for-Sale
The following tables summarize the Company’s investment securities (in thousands).
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
December 31, 2016
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
U.S. government and agencies
|
|
$
|
19,142
|
|
|
$
|
112
|
|
|
$
|
(303
|
)
|
|
$
|
18,951
|
|
Political subdivisions
|
|
|
4,233
|
|
|
|
—
|
|
|
|
(68
|
)
|
|
|
4,165
|
|
Revenue and assessment
|
|
|
5,539
|
|
|
|
185
|
|
|
|
(41
|
)
|
|
|
5,683
|
|
Corporate bonds
|
|
|
47,238
|
|
|
|
107
|
|
|
|
(1,805
|
)
|
|
|
45,540
|
|
Collateralized mortgage obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency backed
|
|
|
23,093
|
|
|
|
73
|
|
|
|
(744
|
)
|
|
|
22,422
|
|
Non-agency backed – residential
|
|
|
2,411
|
|
|
|
529
|
|
|
|
(7
|
)
|
|
|
2,933
|
|
Non-agency backed – commercial
|
|
|
1,408
|
|
|
|
487
|
|
|
|
—
|
|
|
|
1,895
|
|
Total fixed maturities, available-for-sale
|
|
|
103,064
|
|
|
|
1,493
|
|
|
|
(2,968
|
)
|
|
|
101,589
|
|
Preferred stock, available-for-sale
|
|
|
3,025
|
|
|
|
198
|
|
|
|
(111
|
)
|
|
|
3,112
|
|
Mutual funds, available-for-sale
|
|
|
11,813
|
|
|
|
698
|
|
|
|
—
|
|
|
|
12,511
|
|
|
|
$
|
117,902
|
|
|
$
|
2,389
|
|
|
$
|
(3,079
|
)
|
|
$
|
117,212
|
|
|
|
|
|
|
|
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
|
|
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
|
|
December 31, 2016
|
|
Gains
|
|
|
Losses
|
|
|
Losses
|
|
|
Securities
|
|
One year or less
|
|
$
|
2,302
|
|
|
$
|
6,577
|
|
|
$
|
—
|
|
|
$
|
8,879
|
|
After one through five years
|
|
|
7,596
|
|
|
|
23,015
|
|
|
|
—
|
|
|
|
30,611
|
|
After five through ten years
|
|
|
—
|
|
|
|
33,098
|
|
|
|
—
|
|
|
|
33,098
|
|
After ten years
|
|
|
1,751
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,751
|
|
No single maturity date
|
|
|
5,507
|
|
|
|
21,743
|
|
|
|
—
|
|
|
|
27,250
|
|
|
|
$
|
17,156
|
|
|
$
|
84,433
|
|
|
$
|
—
|
|
|
$
|
101,589
|
|
51
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The fair value and gross unrealized losses of investments, available-for-sale, by the length of time that individual securities have
been in a continuous unrealized loss position follows (in thousands).
|
|
Less than 12 months
|
|
|
12 months or longer
|
|
|
|
|
|
December 31, 2016
|
|
Fair Value
|
|
|
Gross Unrealized Losses
|
|
|
Fair Value
|
|
|
Gross Unrealized Losses
|
|
|
Total Gross Losses
|
|
U.S. government and agencies
|
|
$
|
14,837
|
|
|
$
|
(303
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(303
|
)
|
Political subdivisions
|
|
|
4,166
|
|
|
|
(68
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(68
|
)
|
Revenue and assessment
|
|
|
2,783
|
|
|
|
(41
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(41
|
)
|
Corporate bonds
|
|
|
41,057
|
|
|
|
(1,805
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,805
|
)
|
Collateralized mortgage obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency backed
|
|
|
21,637
|
|
|
|
(744
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(744
|
)
|
Non-agency backed – residential
|
|
|
105
|
|
|
|
(7
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(7
|
)
|
Non-agency backed – commercial
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total fixed maturities, available-for-sale
|
|
|
84,585
|
|
|
|
(2,968
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,968
|
)
|
Preferred stock, available-for-sale
|
|
|
1,415
|
|
|
|
(111
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(111
|
)
|
Mutual funds, available-for-sale
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
-
|
|
|
|
$
|
86,000
|
|
|
$
|
(3,079
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(3,079
|
)
|
|
|
Less than 12 months
|
|
|
12 months or longer
|
|
|
|
|
|
December 31, 2015
|
|
Fair Value
|
|
|
Gross Unrealized Losses
|
|
|
Fair Value
|
|
|
Gross Unrealized Losses
|
|
|
Total Gross Losses
|
|
U.S. government and agencies
|
|
$
|
8,946
|
|
|
$
|
(85
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(85
|
)
|
State
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Political subdivisions
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Revenue and assessment
|
|
|
1,733
|
|
|
|
(21
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(21
|
)
|
Corporate bonds
|
|
|
30,172
|
|
|
|
(422
|
)
|
|
|
7,689
|
|
|
|
(241
|
)
|
|
|
(663
|
)
|
Collateralized mortgage obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency backed
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Non-agency backed – residential
|
|
|
5
|
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(1
|
)
|
Non-agency backed – commercial
|
|
|
189
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total fixed maturities, available-for-sale
|
|
|
41,045
|
|
|
|
(529
|
)
|
|
|
7,689
|
|
|
|
(241
|
)
|
|
|
(770
|
)
|
Preferred stock, available-for-sale
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Mutual funds, available-for-sale
|
|
|
8,839
|
|
|
|
(662
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(662
|
)
|
|
|
$
|
49,884
|
|
|
$
|
(1,191
|
)
|
|
$
|
7,689
|
|
|
$
|
(241
|
)
|
|
$
|
(1,432
|
)
|
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
|
|
December 31, 2016
|
|
|
37
|
|
|
|
—
|
|
|
|
40
|
|
December 31, 2015
|
|
|
21
|
|
|
|
4
|
|
|
|
70
|
|
52
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
There were no fixed maturity securities in a continuous unrealized loss position for greater than 12 months as of December 31, 2016.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 as of December 31, 2015. 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
|
)
|
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 December 31, 2016:
|
|
Losses
|
|
|
Losses
|
|
|
than 5%
|
|
|
|
10%
|
|
|
than 10%
|
|
Less than or equal to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months
|
|
$
|
58,550
|
|
|
$
|
(1,886
|
)
|
|
$
|
(1,461
|
)
|
|
$
|
(425
|
)
|
|
$
|
—
|
|
Six months
|
|
|
27,193
|
|
|
|
(1,186
|
)
|
|
|
(232
|
)
|
|
|
(954
|
)
|
|
|
—
|
|
Nine months
|
|
|
152
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Twelve months
|
|
|
105
|
|
|
|
(7
|
)
|
|
|
—
|
|
|
|
(7
|
)
|
|
|
—
|
|
Greater than twelve months
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
86,000
|
|
|
$
|
(3,079
|
)
|
|
$
|
(1,693
|
)
|
|
$
|
(1,386
|
)
|
|
$
|
—
|
|
|
|
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 Investments
Other investments consist of the common stock of a REIT and limited partnership interests in two funds that invest in (i) commercial real estate and secured commercial real estate loans acquired from financial intuitions and (ii) 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 December 31, 2016, the Company had unfunded commitments of $0.2 million with two of these investments.
Restrictions
At December 31, 2016, fixed maturities and cash equivalents with a fair value and amortized cost of $6.4 million were on deposit with various insurance departments as a requirement of doing business in those states. Cash equivalents with a fair value and amortized cost of $17.0 million were on deposit with another insurance company as collateral for an assumed reinsurance contract.
53
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Investment Income and Net Realized Gains and Losses
The major categories of investment income follow (in thousands).
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Fixed maturities, available-for-sale
|
|
$
|
3,558
|
|
|
$
|
4,220
|
|
|
$
|
4,481
|
|
Mutual funds, available-for-sale
|
|
|
704
|
|
|
|
666
|
|
|
|
832
|
|
Other investments
|
|
|
427
|
|
|
|
396
|
|
|
|
85
|
|
Other
|
|
|
448
|
|
|
|
236
|
|
|
|
214
|
|
Investment expenses
|
|
|
(488
|
)
|
|
|
(494
|
)
|
|
|
(489
|
)
|
|
|
$
|
4,649
|
|
|
$
|
5,024
|
|
|
$
|
5,123
|
|
The components of net realized gains (losses) on investments, available-for-sale follow (in thousands).
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Gains
|
|
$
|
4,982
|
|
|
$
|
15
|
|
|
$
|
85
|
|
Losses
|
|
|
(22
|
)
|
|
|
(26
|
)
|
|
|
(62
|
)
|
Other than temporary impairment
|
|
|
(147
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
$
|
4,813
|
|
|
$
|
(11
|
)
|
|
$
|
23
|
|
Realized gains and losses on sales and redemptions are computed based on specific identification. The non-credit related portion of OTTI is included in other comprehensive (loss) income. The amounts of non-credit OTTI for securities still owned was $1.0 million and $1.2 million at December 31, 2016 and 2015, respectively.
Other-Than-Temporary Impairment
The Company separates OTTI into the following two components: (i) the amount related to credit losses, which is recognized in the consolidated statement of operations and comprehensive (loss) income and (ii) the amount related to all other factors, which is recorded in other comprehensive (loss) income. The credit-related portion of an OTTI is measured by comparing a security’s amortized cost to the present value of its current expected cash flows discounted at its effective yield prior to the impairment charge.
The determination of whether unrealized losses are “other-than-temporary” requires judgment based on subjective as well as objective factors. The Company routinely monitors its investment portfolio for changes in fair value that might indicate potential impairments and performs detailed reviews on such securities. Changes in fair value are evaluated to determine the extent to which such changes are attributable to (i) fundamental factors specific to the issuer or (ii) market-related factors such as interest rates or sector declines.
Securities with declines attributable to issuer-specific fundamentals are reviewed to identify all available evidence to estimate the potential for impairment. Resources used include historical financial data included in filings with the United States Securities and Exchange Commission (“SEC”) for corporate bonds and performance data regarding the underlying loans for CMOs. Securities with declines attributable solely to market or sector declines where the Company does not intend to sell the security and it is more likely than not that the Company will not be required to sell the security before the full recovery of its amortized cost basis are not deemed to be other-than-temporarily impaired.
The issuer-specific factors considered in reaching the conclusion that securities with declines are not other-than-temporary include (i) the extent and duration of the decline in fair value, including the duration of any significant decline in value, (ii) whether the security is current as to payments of principal and interest, (iii) a valuation of any underlying collateral, (iv) current and future conditions and trends for both the business and its industry, (v) changes in cash flow assumptions for CMOs and (vi) rating agency actions. Based on these factors, the Company makes a determination as to the probability of recovering principal and interest on the security.
54
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The Company recognized an OTTI charge for one mutual fund resulting in a loss of $147 thousand for the year ending December 31, 2016. The Company did not recognize any OTTI charges in net (loss) income for the years ended December 31, 2015 and
2014.
The following is a progression of the credit-related portion of OTTI on investments owned at December 31, 2016, 2015, and 2014 (in thousands).
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Beginning balance
|
|
$
|
(2,632
|
)
|
|
$
|
(2,632
|
)
|
|
$
|
(2,632
|
)
|
Additional credit impairments on:
|
|
|
|
|
|
|
|
|
|
|
|
|
Previously impaired securities
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Securities without previous impairments
|
|
|
(147
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
(147
|
)
|
|
|
—
|
|
|
|
—
|
|
Reductions for securities deemed worthless (realized)
|
|
|
595
|
|
|
|
—
|
|
|
|
—
|
|
|
|
$
|
(2,184
|
)
|
|
$
|
(2,632
|
)
|
|
$
|
(2,632
|
)
|
The Company believes that the remaining securities having unrealized losses at December 31, 2016 were impacted by the recent change in interest rates and are 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.
Total premiums written and earned are summarized as follows (in thousands).
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
Written
|
|
|
Earned
|
|
|
Written
|
|
|
Earned
|
|
|
Written
|
|
|
Earned
|
|
Direct
|
|
$
|
262,110
|
|
|
$
|
265,256
|
|
|
$
|
247,498
|
|
|
$
|
233,652
|
|
|
$
|
200,983
|
|
|
$
|
191,093
|
|
Assumed
|
|
|
37,381
|
|
|
|
38,522
|
|
|
|
35,500
|
|
|
|
33,707
|
|
|
|
29,311
|
|
|
|
27,487
|
|
Ceded
|
|
|
(450
|
)
|
|
|
(450
|
)
|
|
|
(372
|
)
|
|
|
(372
|
)
|
|
|
(265
|
)
|
|
|
(265
|
)
|
Total
|
|
$
|
299,041
|
|
|
$
|
303,328
|
|
|
$
|
282,626
|
|
|
$
|
266,987
|
|
|
$
|
230,029
|
|
|
$
|
218,315
|
|
Assumed business represents private-passenger non-standard automobile insurance premiums in Texas written through a program with a county mutual insurance company and assumed by the Company through 100% quota-share reinsurance. The percentages of premiums assumed to net premiums written was 13% for each of the years ended December 31, 2016, 2015 and 2014, respectively.
The Insurance Companies utilize excess-of-loss reinsurance with an unaffiliated reinsurer to limit their exposure to losses under liability coverages for automobile policies issued with limits greater than the minimum statutory requirements and for tenant homeowner policies with higher liability limits. Although the reinsurance agreements contractually obligate the reinsurer to reimburse the Company for their share of losses, they do not discharge the primary liability of the Company, which remains contingently liable in the event the reinsurer is unable to meet their contractual obligations.
At December 31, 2016, the Insurance Companies had unsecured aggregate reinsurance receivables of $0.8 million.
55
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Ceded premiums earned and reinsurance recoveries on losses and loss adjustment expenses were as follows (in thousands):
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Ceded premiums earned
|
|
$
|
450
|
|
|
$
|
372
|
|
|
$
|
265
|
|
Reinsurance recoveries on losses
and loss adjustment expenses
|
|
$
|
589
|
|
|
$
|
239
|
|
|
$
|
137
|
|
5.
|
Stock-Based Compensation Plans
|
Employee Stock-Based Incentive Plan
The Company has issued stock options (“Stock Option Awards”) and restricted stock units (“Restricted Stock Units”) to employees and directors under its Amended and Restated First Acceptance Corporation 2002 Long Term Incentive Plan (the “Plan”) and accounts for such issuances in accordance with FASB ASC 718,
Compensation – Stock Compensation
. At December 31, 2016, there were 7,332,533 shares remaining available for issuance under the Plan.
Stock Option Awards were all granted with an exercise price equal to or greater than the market price of the Company’s stock at the date of grant. Stock Option Awards expire over five or ten years from the date of grant and were all fully vested as of January 2016. Compensation expense related to Stock Option Awards was calculated under the fair value method and recorded on a straight-line basis over the vesting period. No Stock Option Awards have been granted since January 2012, and of those outstanding, 750,000 expired unexercised at January 31, 2017 and 220,000 having a $3.04 exercise price expire on March 17, 2018.
A summary of the activity for the Company’s Stock Option Awards is presented below (in thousands, except per share data).
|
|
Options
|
|
|
Exercise Price
|
|
|
Weighted Average Exercise Price
|
|
|
Aggregated Intrinsic Value
|
|
Options outstanding at December 31, 2013
|
|
|
1,237
|
|
|
$1.45-$8.13
|
|
|
$
|
2.19
|
|
|
|
|
|
Forfeited
|
|
|
(117
|
)
|
|
$
|
5.22
|
|
|
$
|
5.22
|
|
|
|
|
|
Options outstanding at December 31, 2014
|
|
|
1,120
|
|
|
$1.45-$3.04
|
|
|
$
|
1.87
|
|
|
|
|
|
Forfeited
|
|
|
(35
|
)
|
|
$
|
3.04
|
|
|
$
|
3.04
|
|
|
|
|
|
Options outstanding at December 31, 2015
|
|
|
1,085
|
|
|
$1.45-$3.04
|
|
|
$
|
1.83
|
|
|
|
|
|
Forfeited
|
|
|
(115
|
)
|
|
$1.45-$3.04
|
|
|
$
|
2.00
|
|
|
|
|
|
Options outstanding at December 31, 2016
|
|
|
970
|
|
|
$1.45-$3.04
|
|
|
$
|
1.81
|
|
|
$
|
-
|
|
Options exercisable/vested at December 31, 2016
|
|
|
970
|
|
|
|
|
|
|
$
|
1.81
|
|
|
$
|
-
|
|
On March 15, 2016 and March 10, 2015 respectively, the Compensation Committee of the Board of Directors of the Company awarded 146 thousand and 141 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 dates of grants. Compensation expense related to the units was calculated based upon the closing market prices of the common stock on the dates of grants ($2.30 and $2.44) and is recorded on a straight-line basis over the vesting period.
Employee Stock Purchase Plan
The Company’s Board of Directors adopted the First Acceptance Corporation Employee Stock Purchase Plan (“ESPP”) whereby eligible employees may purchase shares of the Company’s common stock at a price equal to the lower of the closing market price on the first or last trading day of a six-month period. ESPP participants can authorize payroll deductions, administered through an independent plan custodian, of up to 15% of their salary to purchase semi-annually (June 30 and December 31) up to $25,000 of the Company’s common stock during each calendar year. The Company has reserved 600,000 shares of common stock for issuance under the ESPP. Employees purchased approximately 64,000, 37,000, and 31,000 shares during the years ended December 31, 2016, 2015 and 2014, respectively. Compensation expense attributable to subscriptions to purchase shares under the ESPP was $19 thousand, $12 thousand and $11 thousand for the years ended December 31, 2016, 2015 and 2014, respectively. At December 31, 2016, 186,174 shares remain available for issuance under the ESPP.
56
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The Company sponsors a defined contribution retirement plan (“401k Plan”) under Section 401(k) of the Internal Revenue Code. The 401k Plan covers substantially all employees who meet specified service requirements. Under the 401k Plan, the Company may, at its discretion, match 100% of the first 3% of an employee’s salary plus 50% of the next 2% up to the maximum allowed by the Internal Revenue Code. The Company’s contributions to the 401k Plan for the years ended December 31, 2016, 2015 and 2014 were $1.1 million, $1.0 million and $0.7 million, respectively, and are included within insurance operating expenses in the accompanying consolidated statements of operations and comprehensive (loss) income.
7.
|
Property and Equipment
|
The components of property and equipment are as follows (in thousands).
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Furniture and equipment
|
|
$
|
15,583
|
|
|
$
|
12,878
|
|
Leasehold improvements
|
|
|
3,844
|
|
|
|
6,451
|
|
Capitalized leases
|
|
|
—
|
|
|
|
238
|
|
Aircraft
|
|
|
190
|
|
|
|
190
|
|
|
|
|
19,617
|
|
|
|
19,757
|
|
Less: Accumulated depreciation
|
|
|
(15,404
|
)
|
|
|
(14,616
|
)
|
Property and equipment, net
|
|
$
|
4,213
|
|
|
$
|
5,141
|
|
Depreciation expense related to property and equipment was $2.5 million, $1.8 million and $1.8
million for the years ended December 31, 2016, 2015 and 2014, respectively.
The Company is committed under various operating lease agreements for office space. Certain lease agreements contain renewal options and rent escalation clauses. Rental expense for the years ended December 31, 2016, 2015 and 2014 was $11.3 million, $11.2 million and $8.9 million, respectively, and is included within insurance operating expenses in the accompanying consolidated statements of operations and comprehensive (loss) income. Future minimum lease payments under these agreements follow (in thousands).
For the Year Ended December 31,
|
|
Amount
|
|
2017
|
|
$
|
6,339
|
|
2018
|
|
|
4,036
|
|
2019
|
|
|
2,021
|
|
2020
|
|
|
1,041
|
|
2021
|
|
|
700
|
|
Thereafter
|
|
|
2,670
|
|
Total
|
|
$
|
16,807
|
|
57
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
9.
|
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).
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Liability for unpaid losses and LAE at beginning of year, gross
|
|
$
|
122,071
|
|
|
$
|
96,613
|
|
|
$
|
84,286
|
|
Reinsurance balances receivable
|
|
|
(464
|
)
|
|
|
(362
|
)
|
|
|
(305
|
)
|
Liability for unpaid losses and LAE at beginning of year, net
|
|
|
121,607
|
|
|
|
96,251
|
|
|
|
83,981
|
|
Add: Provision for losses and LAE:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year
|
|
|
278,366
|
|
|
|
218,186
|
|
|
|
166,179
|
|
Prior year
|
|
|
30,636
|
|
|
|
845
|
|
|
|
(4,877
|
)
|
Net losses and LAE incurred
|
|
|
309,002
|
|
|
|
219,031
|
|
|
|
161,302
|
|
Less: Losses and LAE paid:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year
|
|
|
163,792
|
|
|
|
129,216
|
|
|
|
98,437
|
|
Prior year
|
|
|
106,507
|
|
|
|
64,459
|
|
|
|
50,595
|
|
Net losses and LAE paid
|
|
|
270,299
|
|
|
|
193,675
|
|
|
|
149,032
|
|
Liability for unpaid losses and LAE at end of year, net
|
|
|
160,310
|
|
|
|
121,607
|
|
|
|
96,251
|
|
Reinsurance balances receivable
|
|
|
769
|
|
|
|
464
|
|
|
|
362
|
|
Liability for unpaid losses and LAE at end of year, gross
|
|
$
|
161,079
|
|
|
$
|
122,071
|
|
|
$
|
96,613
|
|
The unfavorable change in the estimate of unpaid losses and loss adjustment expenses of $30.6 million for the year ended December 31, 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.
The unfavorable change in the estimate of unpaid losses and loss adjustment expenses of $0.8 million for the year ended December 31, 2015 was largely the result of an increase in bodily injury loss adjustment expenses (primarily outside legal costs) driven by the overall increase in claim frequency.
The favorable change in the estimate of unpaid losses and loss adjustment expenses of $4.8 million for the year ended December 31, 2014 was primarily related to bodily injury claims occurring in accident years 2010 through 2013.
The information about incurred and paid claims development for the 2007 to 2015 years, and the average annual percentage payout of incurred claims by age as of December 31, 2016, is presented as required supplementary information.
Incurred losses and loss adjustment expenses, net of reinsurance, by accident year are as follows (in thousands).
|
For the years ended December 31,
|
|
Accident year
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
|
2007
|
$
|
233,004
|
|
|
$
|
230,360
|
|
|
$
|
228,601
|
|
|
$
|
228,716
|
|
|
$
|
231,729
|
|
|
$
|
231,931
|
|
|
$
|
231,058
|
|
|
$
|
230,931
|
|
|
$
|
230,877
|
|
|
$
|
230,862
|
|
2008
|
|
|
|
|
|
187,583
|
|
|
|
174,921
|
|
|
|
174,312
|
|
|
|
175,044
|
|
|
|
175,849
|
|
|
|
176,468
|
|
|
|
176,947
|
|
|
|
177,190
|
|
|
|
177,226
|
|
2009
|
|
|
|
|
|
|
|
|
|
146,584
|
|
|
|
140,539
|
|
|
|
140,501
|
|
|
|
141,936
|
|
|
|
142,819
|
|
|
|
142,772
|
|
|
|
142,546
|
|
|
|
142,705
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
135,458
|
|
|
|
133,283
|
|
|
|
134,470
|
|
|
|
134,446
|
|
|
|
134,191
|
|
|
|
134,144
|
|
|
|
133,983
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
126,384
|
|
|
|
126,886
|
|
|
|
126,272
|
|
|
|
126,373
|
|
|
|
125,810
|
|
|
|
125,670
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
144,231
|
|
|
|
140,111
|
|
|
|
140,249
|
|
|
|
140,673
|
|
|
|
141,375
|
|
2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
145,878
|
|
|
|
140,775
|
|
|
|
142,053
|
|
|
|
144,076
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
166,179
|
|
|
|
165,991
|
|
|
|
171,827
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
218,186
|
|
|
|
240,419
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
278,366
|
|
Total
|
|
|
$
|
1,786,509
|
|
58
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Cumulative paid losses and loss adjustment expenses, net of reinsurance, by accident year are as follows (in thousands).
|
For the years ended December 31,
|
|
Accident
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
year
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
|
2007
|
$
|
157,162
|
|
|
$
|
210,678
|
|
|
$
|
222,406
|
|
|
$
|
225,978
|
|
|
$
|
228,304
|
|
|
$
|
231,493
|
|
|
$
|
230,891
|
|
|
$
|
230,892
|
|
|
$
|
230,873
|
|
|
$
|
230,860
|
|
2008
|
|
|
|
|
|
122,207
|
|
|
|
160,366
|
|
|
|
169,373
|
|
|
|
172,768
|
|
|
|
174,688
|
|
|
|
175,700
|
|
|
|
176,331
|
|
|
|
176,907
|
|
|
|
177,154
|
|
2009
|
|
|
|
|
|
|
|
|
|
92,372
|
|
|
|
127,355
|
|
|
|
135,701
|
|
|
|
139,436
|
|
|
|
141,399
|
|
|
|
142,294
|
|
|
|
142,441
|
|
|
|
142,654
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
87,319
|
|
|
|
120,301
|
|
|
|
128,843
|
|
|
|
131,878
|
|
|
|
132,989
|
|
|
|
133,648
|
|
|
|
133,896
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
82,945
|
|
|
|
113,199
|
|
|
|
120,790
|
|
|
|
123,888
|
|
|
|
125,012
|
|
|
|
125,383
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
89,159
|
|
|
|
123,869
|
|
|
|
133,397
|
|
|
|
137,968
|
|
|
|
139,781
|
|
2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
88,726
|
|
|
|
124,021
|
|
|
|
134,931
|
|
|
|
141,444
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
98,437
|
|
|
|
144,943
|
|
|
|
162,702
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
129,216
|
|
|
|
208,533
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
163,792
|
|
Total
|
|
|
$
|
1,626,199
|
|
Total outstanding reserves for unpaid losses and LAE, net of reinsurance
|
|
|
$
|
160,310
|
|
As of December 31, 2016, frequency of claims by accident based on number of claimants is as follows.
Accident year
|
Incurred losses and LAE, net of reinsurance
|
|
|
Total of incurred but not reported liabilities plus expected development on reported claims
|
|
|
Cumulative number of reported claims
|
|
2007
|
$
|
230,862
|
|
|
$
|
3
|
|
|
|
117,206
|
|
2008
|
|
177,226
|
|
|
|
33
|
|
|
|
100,188
|
|
2009
|
|
142,705
|
|
|
|
26
|
|
|
|
78,607
|
|
2010
|
|
133,983
|
|
|
|
62
|
|
|
|
71,008
|
|
2011
|
|
125,670
|
|
|
|
211
|
|
|
|
65,831
|
|
2012
|
|
141,375
|
|
|
|
597
|
|
|
|
73,164
|
|
2013
|
|
144,076
|
|
|
|
1,784
|
|
|
|
73,714
|
|
2014
|
|
171,827
|
|
|
|
6,003
|
|
|
|
84,791
|
|
2015
|
|
240,419
|
|
|
|
21,968
|
|
|
|
108,755
|
|
2016
|
|
278,366
|
|
|
|
69,261
|
|
|
|
112,441
|
|
The average historical annual percentage payout of incurred losses by age, net of reinsurance is as follows. The amounts reflected below represent the average length of time between the occurrence of a loss and its payment. These percentages are averages of the years present and therefore may not equal 100%.
|
|
|
(Unaudited)
|
|
|
|
|
Year 1
|
|
|
Year 2
|
|
|
Year 3
|
|
|
Year 4
|
|
|
Year 5
|
|
|
Year 6
|
|
|
Year 7
|
|
|
Year 8
|
|
|
Year 9
|
|
|
Year 10
|
|
Non-standard auto
|
|
|
62.7
|
%
|
|
|
25.2
|
%
|
|
|
6.6
|
%
|
|
|
2.7
|
%
|
|
|
1.1
|
%
|
|
|
0.7
|
%
|
|
|
0.1
|
%
|
|
|
0.2
|
%
|
|
|
0.1
|
%
|
|
|
0.0
|
%
|
10.
|
Debentures Payable and Term Loan from Principal Stockholder
|
In June 2007, First Acceptance Statutory Trust I (“FAST I”), a wholly-owned unconsolidated subsidiary trust of the Company, issued 40,000 shares of preferred securities at $1,000 per share to outside investors and 1,240 shares of common securities to the Company, also at $1,000 per share. FAST I used the proceeds from the sale of the preferred securities to purchase $41.2 million of junior subordinated debentures from the Company. The sole assets of FAST I are $41.2 million of junior subordinated debentures issued by the Company. The debentures will mature on July 30, 2037 and are currently redeemable by the Company in whole or in part and the preferred securities are callable. The debentures paid a fixed rate of 9.277% until July 30, 2012, after which the rate became variable (Three-Month LIBOR plus 375 basis points, resetting quarterly). The interest rate related to the debentures ranged from 4.366% to 4.637% during 2016. In January 2017, the interest rate reset to 4.789% through April 2017.
59
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The obligations of the Company under the junior subordinated debentures represent full and unconditional guarantees by the Company of FAST I’s obligations for the preferred securities. Dividends on the preferred securities are cumulative, payable quarterly
in arrears and are deferrable at the Company’s option for up to five years. The dividends on these securities, which have not been deferred, are the same as the interest on the debentures. The Company cannot pay dividends on its common stock during such d
eferments.
The debentures are classified as debentures payable in the Company’s consolidated balance sheets and the interest paid on these debentures is classified as interest expense in the consolidated statements of operations and comprehensive (loss) income. At December 31, 2016, the unamortized debt discount and issuance costs of $0.9 million are being amortized to interest expense over the term of the debentures.
On June 29, 2015, to finance the acquisition of the Titan Agencies, the Company borrowed the full amount under a $30 million Loan Agreement (the “Loan Agreement”) with Diamond Family Investments, LP, an affiliate of Gerald J. Ford, the Company’s controlling stockholder. The Loan Agreement provided a $30 million interest-only senior term loan facility, maturing in full on June 29, 2025. Commencing June 29, 2016, the Company has the right to prepay the loan in whole or in part, in cash, without premium or penalty, upon written notice to the lender. Amounts prepaid under the Loan Agreement may not be reborrowed. The term loan outstanding under the Loan Agreement bears interest at a rate of 8% per annum. The Loan Agreement contains certain representations, warranties and covenants. The Loan Agreement also contains customary events of default, including but not limited to: nonpayment; material inaccuracy of representations and warranties; violations of covenants; cross-default to material indebtedness; certain material judgments; certain bankruptcies and liquidations; invalidity of the loan documents and related events; and a change of control (as defined in the Loan Agreement). At December 31, 2016 the unamortized loan issuance costs of $0.2 million are being amortized to interest expense over the term of the loan.
The benefit for income taxes consisted of the following (in thousands).
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Federal:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
—
|
|
|
$
|
20
|
|
|
$
|
228
|
|
Deferred
|
|
|
(16,024
|
)
|
|
|
(893
|
)
|
|
|
(19,098
|
)
|
|
|
|
(16,024
|
)
|
|
|
(873
|
)
|
|
|
(18,870
|
)
|
State:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
328
|
|
|
|
255
|
|
|
|
650
|
|
Deferred
|
|
|
(152
|
)
|
|
|
(24
|
)
|
|
|
(125
|
)
|
|
|
|
176
|
|
|
|
231
|
|
|
|
525
|
|
|
|
$
|
(15,848
|
)
|
|
$
|
(642
|
)
|
|
$
|
(18,345
|
)
|
60
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The benefit for income taxes differs from the amounts computed by applying the statutory federal corporate tax rate of 35% to (loss) income before income taxes as a result of
the following (in thousands).
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
(Benefit) provision for income taxes at statutory rate
|
|
$
|
(15,796
|
)
|
|
$
|
(900
|
)
|
|
$
|
3,403
|
|
Tax effect of:
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax-exempt investment income
|
|
|
(48
|
)
|
|
|
(22
|
)
|
|
|
(21
|
)
|
Change in the beginning of the period balance of the
valuation allowance for deferred tax assets allocated
to federal income taxes
|
|
|
(157
|
)
|
|
|
9
|
|
|
|
(22,427
|
)
|
Stock-based compensation
|
|
|
64
|
|
|
|
22
|
|
|
|
137
|
|
State income taxes, net of federal income tax benefit
and state valuation allowance
|
|
|
60
|
|
|
|
142
|
|
|
|
525
|
|
Other items
|
|
|
29
|
|
|
|
107
|
|
|
|
38
|
|
|
|
$
|
(15,848
|
)
|
|
$
|
(642
|
)
|
|
$
|
(18,345
|
)
|
The tax effects of temporary differences that give rise to the net deferred tax assets and liabilities are presented below (in thousands).
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
24,208
|
|
|
$
|
6,859
|
|
Stock-based compensation
|
|
|
404
|
|
|
|
421
|
|
Unearned premiums and loss and loss adjustment expense reserves
|
|
|
6,752
|
|
|
|
6,797
|
|
Goodwill and identifiable intangible assets
|
|
|
2,832
|
|
|
|
4,252
|
|
Alternative minimum tax (“AMT”) credit carryforwards
|
|
|
2,015
|
|
|
|
2,015
|
|
Accrued expenses and other nondeductible items
|
|
|
1,345
|
|
|
|
1,551
|
|
Other
|
|
|
3,619
|
|
|
|
3,528
|
|
|
|
|
41,175
|
|
|
|
25,423
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Deferred acquisition costs
|
|
|
(1,698
|
)
|
|
|
(1,928
|
)
|
Identifiable intangible assets
|
|
|
(1,872
|
)
|
|
|
(1,872
|
)
|
Net unrealized gain on investments
|
|
|
(73
|
)
|
|
|
(1,244
|
)
|
Other
|
|
|
(19
|
)
|
|
|
(332
|
)
|
|
|
|
(3,662
|
)
|
|
|
(5,376
|
)
|
Total net deferred tax asset
|
|
|
37,513
|
|
|
|
20,047
|
|
Less: Valuation allowance
|
|
|
(1,872
|
)
|
|
|
(1,746
|
)
|
Net deferred tax asset
|
|
$
|
35,641
|
|
|
$
|
18,301
|
|
The Company had a valuation allowance of $1.9 and $1.7 million at December 31, 2016 and 2015, respectively, relating to certain amounts that are more likely than not to be realized. In assessing our ability to realize the deferred tax asset (“DTA”), both positive and negative evidence are used to evaluate the allowance. Although the Company has incurred a pre-tax loss of $45.1 million which is a source of negative evidence, greater weight was placed on the Company’s 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 December 31, 2016, $24.2 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.
61
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Prior to December 31, 2014, the Company had a full valuation allowance against its deferred tax asset based
upon past negative evidence in the form of historical taxable losses. Based upon positive evidence from recent taxable income at the time and the Company’s then outlook for future profitability, the deferred tax valuation allowance for the year ended Dece
mber 31, 2014 was decreased by $22.4 million.
12.
|
Net (Loss) Income Per Share
|
Basic EPS are computed using the weighted average number of shares outstanding. Diluted EPS are computed using the weighted average number of shares outstanding adjusted for the incremental shares attributed to outstanding securities with a right to purchase or convert into common stock.
The following table sets forth the computation of basic and diluted net (loss) income per share (in thousands, except per share data).
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Net (loss) income
|
|
$
|
(29,282
|
)
|
|
$
|
(1,930
|
)
|
|
$
|
28,068
|
|
Weighted average common basic shares
|
|
|
41,085
|
|
|
|
41,030
|
|
|
|
40,985
|
|
Effect of dilutive securities
|
|
|
—
|
|
|
|
—
|
|
|
|
298
|
|
Weighted average common dilutive shares
|
|
|
41,085
|
|
|
|
41,030
|
|
|
|
41,283
|
|
Basic and diluted net (loss) income per share
|
|
$
|
(0.71
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
0.68
|
|
For the year ended December 31, 2016, the computation of diluted net income per share did not include options to purchase approximately 750 thousand shares, a dilutive effect of 127 thousand shares, and restricted stock units convertible into 169 thousand shares, a dilutive effect of 17 thousand shares, since their inclusion would have been anti-dilutive. Options to purchase 220 thousand shares for the year ended December 31, 2016 were not included in the computation of diluted net loss per share as their exercise prices were in excess of the average stock prices for the year.
For the year ended December 31, 2015, the computation of diluted net income per share did not include options to purchase approximately 825 thousand shares, a dilutive effect of 319 thousand shares, and restricted stock units convertible into 141 thousand shares, a dilutive effect of 26 thousand shares, since their inclusion would have been anti-dilutive. Options to purchase 260 thousand shares for the year ended December 31, 2015 were not included in the computation of diluted net loss per share as their exercise prices were in excess of the average stock prices for the year.
For the year ended December 31, 2014, the computation of diluted net income per share included exercisable options to purchase approximately 0.8 million shares that had a dilutive effect of 298 thousand shares. Options to purchase 295 thousand shares for the year ended December 31, 2014 were not included in the computation of diluted net income per share as their exercise prices were in excess of the average stock prices for the year.
13.
|
Concentrations of Credit Risk
|
At December 31, 2016, the Company had certain concentrations of credit risk with several financial institutions in the form of cash, cash equivalents, and restricted cash, which amounted to $118.7 million. For purposes of evaluating credit risk, the stability of financial institutions conducting business with the Company and the amount of available Federal Deposit Insurance Corporation insurance is periodically reviewed. If the financial institutions failed to completely perform under terms of the financial instruments, the exposure for credit loss would be the amount of the financial instruments less amounts covered by regulatory insurance.
62
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The Company primarily transacts business either directly with its policyholders or through independently-owned insurance agencie
s who write non-standard personal automobile insurance policies on behalf of the Company. Direct policyholders make payments directly to the Company. Balances due from policyholders are generally secured by the related unearned premium. The Company require
s a down payment at the time the policy is originated and subsequent scheduled payments are monitored in order to prevent the Company from providing coverage beyond the date for which payment has been received. If subsequent payments are not made timely, t
he policy is generally canceled at no loss to the Company. Policyholders whose premiums are written through the independent agencies make their payments to these agencies that in turn remit these payments to the Company. Balances due to the Company resulti
ng from premium payments made to these agencies are unsecured.
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 operations and comprehensive (loss) income in losses and loss adjustment expenses for bad faith claims and in insurance operating expenses for other lawsuits unless otherwise disclosed.
In 2015, in order to avoid lengthy and costly litigation, the Company and the plaintiffs involved entered into a stipulation of settlement providing for the release and dismissal of all asserted claims related to two cases involving alleged violations of the Fair Labor Standards Act in exchange for an aggregate payment $3.2 million. The total financial impact of this litigation on the Company, including the aggregate settlement payment, related payroll taxes and the Company’s legal costs in connection with the defense of the litigation, has been presented separately in the consolidated statements of operations and comprehensive (loss) income under the litigation settlement expense line item for all periods presented.
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 insurance segment includes the former Titan retail locations since their July 1, 2015 acquisition. See Note 18 for additional information on this business combination.
The following table presents selected financial data by business segment (in thousands).
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
|
|
$
|
388,323
|
|
|
$
|
331,828
|
|
|
$
|
263,133
|
|
Real estate and corporate
|
|
|
1,300
|
|
|
|
64
|
|
|
|
61
|
|
Consolidated total
|
|
$
|
389,623
|
|
|
$
|
331,892
|
|
|
$
|
263,194
|
|
(Loss) income before income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
|
|
$
|
(40,685
|
)
|
|
$
|
338
|
|
|
$
|
12,549
|
|
Real estate and corporate
|
|
|
(4,445
|
)
|
|
|
(2,910
|
)
|
|
|
(2,826
|
)
|
Consolidated total
|
|
$
|
(45,130
|
)
|
|
$
|
(2,572
|
)
|
|
$
|
9,723
|
|
63
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Total assets:
|
|
|
|
|
|
|
|
|
Insurance
|
|
$
|
354,008
|
|
|
$
|
373,475
|
|
Real estate and corporate
|
|
|
46,066
|
|
|
|
28,652
|
|
Consolidated total
|
|
$
|
400,074
|
|
|
$
|
402,127
|
|
16.
|
Statutory Financial Information and Accounting Policies
|
The statutory-basis financial statements of the Insurance Companies are prepared in accordance with accounting practices prescribed or permitted by the Department of Insurance in each respective state of domicile. Each state of domicile requires that insurance companies domiciled in the state prepare their statutory-basis financial statements in accordance with the National Association of Insurance Commissioners
Accounting Practices and Procedures Manual
subject to any deviations prescribed or permitted by the insurance commissioner in each state of domicile. The Insurance Companies are required to report their risk-based capital (“RBC”) each December 31. Failure to maintain an adequate RBC could subject the Insurance Companies to regulatory action and could restrict the payment of dividends. At December 31, 2016, the RBC levels of the Insurance Companies did not subject them to regulatory action other than monthly financial reporting to the Texas Department of Insurance.
At December 31, 2016 and 2015, on a consolidated statutory basis, the capital and surplus of the Insurance Companies was $58.9 million and $98.8 million, respectively. For the years ended December 31, 2016, 2015 and 2014, consolidated statutory net (loss) income of the Insurance Companies was ($52.0) million, ($7.3) million and $1.0 million, respectively.
The maximum amount of dividends which can be paid by First Acceptance Insurance Company, Inc. (“FAIC”) to the Company, without the prior approval of the Texas insurance commissioner, is limited to the greater of 10% of statutory capital and surplus at December 31
st
of the next preceding year or net income for the year. In addition, dividends may only be paid from unassigned funds (surplus) and an insurance company’s remaining surplus must be both reasonable in relation to its outstanding liabilities and adequate to its financial needs. At December 31, 2016, FAIC could not pay any dividends to the Company due to a negative unassigned surplus position.
17. 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 year ended December 31, 2016 were $112 thousand.
As further detailed in note 10, in June 2015, the Company borrowed $30 million from Diamond Family Investments, LP, an affiliate of Gerald J. Ford, the Company’s controlling stockholder, to finance the acquisition described in note 18.
18. 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. The results of the acquired retail locations have been included in the Company’s consolidated statement of operations and comprehensive (loss) income from the July 1,
2015 acquisition date.
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.
64
FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
19. 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 December 31, 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 December 31, 2016 had combined statutory capital and surplus of $58.9 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 year ended December 31, 2016, the insurance company subsidiaries experienced a reduction in combined statutory capital and surplus of $39.9 million, primarily as a result of unfavorable loss development. 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 minimum 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. Risk-based capital calculations are only made as of each December 31, and the three insurance company subsidiaries were each above the minimum regulatory company action levels as of December 31, 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 the insurance company subsidiaries of net premiums written for the last twelve months to statutory capital and surplus was 5.08-to-1 at December 31, 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.
20
.
|
Selected Quarterly Financial Data (unaudited)
|
Interim results are not necessarily indicative of fiscal year performance because of the impact of seasonal and short-term variations. Selected quarterly financial data is summarized as follows (in thousands, except per share data).
|
|
Total Revenues
|
|
|
(Loss) Income Before Income Taxes
|
|
|
Net (Loss) Income
|
|
|
Basic and Diluted Net (Loss) Income Per Share
|
|
Year Ended December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
$
|
87,806
|
|
|
$
|
(5,822
|
)
|
|
$
|
(3,545
|
)
|
|
$
|
(0.09
|
)
|
September 30, 2016
|
|
|
102,115
|
|
|
|
(327
|
)
|
|
|
(333
|
)
|
|
|
(0.01
|
)
|
June 30, 2016
|
|
|
102,754
|
|
|
|
(30,607
|
)
|
|
|
(19,899
|
)
|
|
|
(0.48
|
)
|
March 31, 2016
|
|
|
96,948
|
|
|
|
(8,374
|
)
|
|
|
(5,505
|
)
|
|
|
(0.13
|
)
|
Year Ended December 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
$
|
88,536
|
|
|
$
|
458
|
|
|
$
|
287
|
|
|
$
|
-
|
|
September 30, 2015
|
|
|
87,620
|
|
|
|
(4,524
|
)
|
|
|
(3,018
|
)
|
|
|
(0.07
|
)
|
June 30, 2015
|
|
|
80,631
|
|
|
|
690
|
|
|
|
315
|
|
|
|
0.01
|
|
March 31, 2015
|
|
|
75,105
|
|
|
|
804
|
|
|
|
486
|
|
|
|
0.01
|
|
Income before income taxes for the quarter ended June 30, 2016 included unfavorable loss development of $25.8 million.
Income before income taxes for the quarter ended September 31, 2015 included a $3.4 million litigation settlement.
65
FIRST ACCEPTANCE CORPORATION 10-K