FACO First Acceptance Corporation (QX)

First Acceptance Corporation (NYSE:FAC) today reported its financial results for the quarter and six months ended June 30, 2017.

Operating Results

Revenues for the three months ended June 30, 2017 decreased 11% to $91.4 million from $102.8 million in the same period in the prior year. Revenues for the six months ended June 30, 2017 decreased 10% to $179.5 million from $199.7 million in the same period in the prior year.

Loss before income taxes, for the three months ended June 30, 2017 was $1.5 million, compared with a loss before income taxes of $30.6 million for the three months ended June 30, 2016. Net loss for the three months ended June 30, 2017 was $0.9 million, compared with a net loss of $19.9 million for the three months ended June 30, 2016. For the three months ended June 30, 2017 and 2016, we recognized $0.2 million and $25.8 million, respectively, of unfavorable prior period loss and LAE development.

Income before income taxes, for the six months ended June 30, 2017 was $96 thousand, compared with a loss before income taxes of $39.0 million for the six months ended June 30, 2016. Net loss for the six months ended June 30, 2017 was $173 thousand, compared with a net loss of $25.4 million for the six months ended June 30, 2016. For the six months ended June 30, 2017, we recognized $0.6 million of favorable prior period loss and LAE development, and for the six months ended June 30, 2016, we recognized $31.0 million of unfavorable prior period loss and LAE development.      

President and Chief Executive Officer, Ken Russell, commented, “The uptick in our loss ratio stemming from a somewhat seasonal spike in claims volume cannot overshadow the progress we have made, and continue to make, in our risk management and claims handling. Our recent efforts have made us a stronger company, and we will continue to make necessary adjustments on a market-by-market basis. This quarter our revenues from all channels, as well as operating costs, have positively met our expected targets.  We continue to evaluate and make changes to our captive distribution model, focusing on increased sales of third-party insurance products. This, along with the many operational changes that have been implemented over the past two quarters demonstrate that we have not lost our focus on profitability, and remain optimistic about achieving positive results for the balance of the year.”

Loss Ratio. The loss ratio was 85.5% for the three months ended June 30, 2017, compared with 124.6% for the three months ended June 30, 2016. For the six months ended June 30, 2017, the loss ratio was 83.1% compared with 110.8% for the six months ended June 30, 2016. We experienced unfavorable development related to prior periods of $0.2 million for the three months ended June 30, 2017, and favorable development of $0.6 million for the six months ended June 30, 2017, compared with unfavorable development of $25.8 million and $31.0 million for the three and six months ended June 30, 2016.

The development for the three and six months ended June 30, 2017 was the net result of favorable LAE development related to bodily injury claims over multiple prior accident periods and unfavorable development on losses related to bodily injury severity related to the 2016 and 2017 accident years. The unfavorable development for the three and six months ended June 30, 2016 was the result of an increase in losses across all major coverages and over multiple prior accident periods. The primary causes of the unfavorable development were a sharp increase in bodily injury severity and a greater than usual amount of subsequent payments on previously closed claims.

Excluding the development related to prior periods, the loss ratio for the three months ended June 30, 2017 was 85.2% as compared with 81.4% for the preceding three months ended March 31, 2017. The primary causes for this higher loss ratio were increases in frequency across all major coverages and in bodily injury severity.

Excluding the development related to prior periods, the loss ratio for the six months ended June 30, 2017 was 83.5% as compared with 91.8% for the year ended December 31, 2016. We believe that this improvement in the loss ratio was the result of our aggressive rate and underwriting actions in addition to a moderate reduction in claims frequency.

Revenues. Premiums earned decreased by $7.4 million, or 9%, to $73.5 million for the three months ended June 30, 2017, from $80.9 million for the three months ended June 30, 2016. For the six months ended June 30, 2017, premiums earned decreased by $14.0 million, or 9%, to $143.3 million from $157.3 million for the six months ended June 30, 2016. These decreases were the result of a targeted decline in new policies written to eliminate unprofitable business through store closures, rate increases and the tightening of underwriting standards. These actions resulted in a 23% decrease in our year-over-year policies in force which was partially offset by a 17% year-over-year increase in our average in-force premium that was driven by our recent rate actions. The estimated effective rate increase attained over the last twelve months was 12%.

Commission and fee income decreased by $2.4 million, or 12%, to $16.8 million for the three months ended June 30, 2017, from $19.2 million for the three months ended June 30, 2016. For the six months ended June 30, 2017, commission and fee income decreased by $4.7 million, or 12%, to $34.1 million from $38.8 million for the six months ended June 30, 2016. This decrease was primarily the result of a decrease in monthly billing fees as a result of the previously-mentioned decline in the number of policies in force.

Expense Ratio. The expense ratio was 16.0% for the three months ended June 30, 2017, compared with 14.8% for the three months ended June 30, 2016. For the six months ended June 30, 2017, the expense ratio was 16.3% compared with 14.6% for the six months ended June 30, 2016. The year-over-year increases in the expense ratio were primarily due to the decrease in premiums earned which resulted in a higher percentage of fixed expenses and the previously-mentioned decline in commission and fee income.

Combined Ratio. Overall, the combined ratio decreased to 101.5% for the three months ended June 30, 2017 from 139.4% for the three months ended June 30, 2016. For the six months ended June 30, 2017, the combined ratio decreased to 99.4% from 125.4% for the six months ended June 30, 2016.

Next Release of Financial Results

We currently plan to report our financial results for the quarter and nine months ending September 30, 2017 on November 7, 2017.

About First Acceptance Corporation

We are principally a retailer, servicer and underwriter of non-standard personal automobile insurance based in Nashville, Tennessee. Our insurance operations generate revenues from selling non-standard personal automobile insurance policies and related products in 16 states. We currently conduct our servicing and underwriting operations in 13 states and are licensed as an insurer in 13 additional states. Non-standard personal automobile insurance is made available to individuals because of their inability or unwillingness to obtain standard insurance coverage due to various factors, including payment history, payment preference, failure in the past to maintain continuous insurance coverage or driving record and/or vehicle type.

At June 30, 2017, we leased and operated 354 retail locations and a call center staffed with employee-agents. Our employee agents primarily sell non-standard personal automobile insurance products underwritten by us, as well as certain commissionable ancillary products. In most states, our employee-agents also sell a complementary insurance product providing personal property and liability coverage for renters underwritten by us. In addition, retail locations in some markets offer non-standard personal automobile insurance serviced and underwritten by other third-party insurance carriers for which we receive a commission. In addition to our retail locations, we are able to complete the entire sales process over the phone via our call center or through the internet via our consumer-based website or mobile platform. On a limited basis, we also sell our products through selected retail locations operated byindependent agents. Additional information about First Acceptance Corporation can be found online at www.acceptance.com.

This press release contains forward-looking statements. All statements made other than statements of historical fact are forward-looking statements. You can identify these statements from our use of the words “may,” “should,” “could,” “potential,” “continue,” “plan,” “forecast,” “estimate,” “project,” “believe,” “intent,” “anticipate,” “expect,” “target,” “is likely,” “will,” “view,” or the negative of these terms and similar expressions. These statements, which have been included in reliance on the “safe harbor” provisions of the federal securities laws, involve risks and uncertainties. Investors are hereby cautioned that these statements may be affected by important factors, including, among others, the factors set forth under the caption “Risk Factors” in Item 1A. of our Annual Report on Form 10-K for the year ended December 31, 2016 and in our other filings with the Securities and Exchange Commission. Actual operations and results may differ materially from the results discussed in the forward-looking statements. Except as required by law, we undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of newinformation, future developments or otherwise.

FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIESConsolidated Statements of Operations(in thousands, except per share data)
		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2017				2016				2017				2016
Revenues:
Premiums earned		$	73,459			$	80,850			$	143,272			$	157,257
Commission and fee income			16,824				19,183				34,052				38,764
Investment income			1,123				1,646				2,156				2,608
Gain on sale of foreclosed real estate			—				1,237				—				1,237
Net realized gains (losses) on investments, available-for-sale			5				(162	)			—				(164	)
			91,411				102,754				179,480				199,702
Costs and expenses:
Losses and loss adjustment expenses			62,806				100,765				119,086				174,184
Insurance operating expenses			27,879				30,314				55,935				59,961
Other operating expenses			267				283				538				563
Stock-based compensation			74				68				113				105
Depreciation			540				616				1,086				1,267
Amortization of identifiable intangibles assets			195				239				398				477
Interest expense			1,130				1,076				2,228				2,126
			92,891				133,361				179,384				238,683
(Loss) income before income taxes			(1,480	)			(30,607	)			96				(38,981	)
(Benefit) provision for income taxes			(577	)			(10,708	)			269				(13,577	)
Net loss		$	(903	)		$	(19,899	)		$	(173	)		$	(25,404	)
Net loss per share:
Basic		$	(0.02	)		$	(0.48	)		$	(0.00	)		$	(0.62	)
Diluted		$	(0.02	)		$	(0.48	)		$	(0.00	)		$	(0.62	)
Number of shares used to calculate net loss per share:
Basic			41,164				41,064				41,162				41,062
Diluted			41,164				41,064				41,162				41,062

 

FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIESConsolidated Balance Sheets(in thousands, except per share data)
		June 30,				December 31,
		2017				2016
		(Unaudited)
ASSETS
Investments, available-for-sale at fair value (amortized cost of $115,233 and  $117,902, respectively)		$	116,012			$	117,212
Cash, cash equivalents, and restricted cash			125,530				118,681
Premiums, fees, and commissions receivable, net of allowance of $378 and  $279, respectively			76,847				66,393
Deferred tax assets, net			34,784				35,641
Other investments			10,468				9,994
Other assets			5,753				6,078
Property and equipment, net			3,475				4,213
Deferred acquisition costs			5,332				4,852
Goodwill			29,384				29,384
Identifiable intangible assets, net			7,243				7,626
TOTAL ASSETS		$	414,828			$	400,074
LIABILITIES AND STOCKHOLDERS’ EQUITY
Loss and loss adjustment expense reserves		$	162,232			$	161,079
Unearned premiums and fees			91,644				78,861
Debentures payable			40,324				40,302
Term loan from principal stockholder			29,792				29,779
Accrued expenses			5,514				7,089
Other liabilities			11,701				10,476
Total liabilities			341,207				327,586
Stockholders’ equity:
Preferred stock, $.01 par value, 10,000 shares authorized			—				—
Common stock, $.01 par value, 75,000 shares authorized; 41,200 and 41,160 issued andoutstanding, respectively			412				412
Additional paid-in capital			457,898				457,750
Accumulated other comprehensive income, net of tax of $(486) and $(1,110), respectively			2,474				1,316
Accumulated deficit			(387,163	)			(386,990	)
Total stockholders’ equity			73,621				72,488
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	414,828			$	400,074

 

FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIESSupplemental Data(Unaudited)
PREMIUMS EARNED BY STATE
		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2017				2016				2017				2016
Gross premiums earned:
Georgia		$	17,402			$	16,271			$	33,663			$	31,328
Florida			10,761				12,176				21,012				23,785
Texas			8,252				11,266				16,796				21,883
Alabama			8,442				7,286				15,896				14,050
Ohio			7,707				8,094				15,012				15,690
South Carolina			5,281				7,352				10,231				13,946
Tennessee			5,275				5,107				10,023				9,988
Illinois			3,868				5,516				8,075				11,256
Indiana			2,492				2,395				4,810				4,672
Pennsylvania			2,395				2,575				4,646				4,993
Mississippi			1,115				1,043				2,078				2,038
California			420				—				734				—
Missouri			60				1,633				302				3,386
Virginia			96				251				206				465
Total gross premiums earned			73,566				80,965				143,484				157,480
Premiums ceded to reinsurer			(107	)			(115	)			(212	)			(223	)
Total net premiums earned		$	73,459			$	80,850			$	143,272			$	157,257

COMBINED RATIOS (INSURANCE OPERATIONS)
		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2017				2016				2017				2016
Loss			85.5	%			124.6	%			83.1	%			110.8	%
Expense			16.0	%			14.8	%			16.3	%			14.6	%
Combined			101.5	%			139.4	%			99.4	%			125.4	%

NUMBER OF RETAIL LOCATIONS    Retail location counts are based upon the date that a location commenced or ceased writing business.
		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2017				2016				2017				2016
Retail locations – beginning of period			355				414				355				440
Opened			—				2				—				4
Closed			(1	)			(6	)			(1	)			(34	)
Retail locations – end of period			354				410				354				410

 

FIRST ACCEPTANCE CORPORATION AND SUBSIDIARIES Supplemental Data (continued) (Unaudited)
RETAIL LOCATIONS BY STATE
		June 30,								December 31,
		2017				2016				2016				2015
Alabama			23				24				23				24
Arizona			10				10				10				10
California			47				48				47				48
Florida			34				34				34				39
Georgia			50				60				50				60
Illinois			38				41				39				61
Indiana			16				17				16				17
Mississippi			6				7				6				7
Missouri			—				9				—				9
Nevada			4				4				4				4
New Mexico			5				5				5				5
Ohio			27				27				27				27
Pennsylvania			11				13				11				14
South Carolina			15				23				15				24
Tennessee			23				23				23				23
Texas			45				65				45				68
Total			354				410				355				440

INVESTOR RELATIONS CONTACT: 
Michael J. Bodayle 
615.844.2885